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Archive for the ‘Federal Arbitration Act Section 11’ Category

SmartSky: Fourth Circuit Says No Jurisdictional Anchor Post Badgerow

March 23rd, 2024 Application to Compel Arbitration, Application to Confirm, Application to Stay Litigation, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Confirmed, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Section 10, FAA Section 11, FAA Section 3, FAA Section 4, FAA Section 9, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 207, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Motion to Compel Arbitration, New York Convention, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Section 10, Section 11, Section 6, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Fourth Circuit 4 Comments »

SmartSky

 

Introduction

This post discusses the U.S. Court of Appeals for the Fourth Circuit’s recent decision in SmartSky Networks, LLC v. DAG Wireless, Ltd., ___ F.4th ___, No. 22-1253, slip op. (4th Cir. Feb. 13, 2024). SmartSky held that, under Badgerow v. Walters, 596 U.S. 1, 142 S. Ct. 1310 (2022), if a party makes a motion to confirm, vacate, or modify an award in an action over which the Court has federal-question subject matter jurisdiction, then it must nevertheless demonstrate that the Court would have had subject matter jurisdiction had the motion been brought as a standalone petition to confirm, vacate, or modify. That is so even if the Court has under Federal Arbitration Act (“FAA”) Section 3 stayed the action pending arbitration.

Suppose:

  1. A and B, both New York citizens, entered a contract containing an arbitration agreement;
  2. A and B become embroiled in a dispute that is governed by a federal statute;
  3. A sues B in federal court, properly invoking the federal court’s federal- question jurisdiction, 28 U.S.C. § 1331;
  4. B demands arbitration, and moves to compel arbitration under Section 4 and for a stay of litigation pending arbitration under Section 3;
  5. A unsuccessfully opposes the motion, the Court compels arbitration and grants a Section 3 stay of litigation pending arbitration.
  6. B ultimately obtains a $100,000 (exclusive of costs and interest) award in its favor and moves in the stayed action to confirm the award.
  7. A opposes the motion on the ground the court has no subject matter jurisdiction to confirm the award.

SmartSky would require the Court to dismiss A’s motion for lack of subject matter jurisdiction, even though A made the motion in an action over which the Court had subject matter jurisdiction, the Court had compelled the arbitration that resulted in the award, and the Court had stayed the action pending arbitration under Section 3.  There is no federal-question jurisdiction, and because both A and B are citizens of New York, no diversity jurisdiction.

According to SmartSky, the dismissal of the motion to confirm would be required by Badgerow.

Badgerow 

In Badgerow the Supreme Court of the United States (“SCOTUS”) held that a basis for subject-matter jurisdiction—independent from the FAA itself—must appear on the face of a standalone, petition to confirm or vacate an arbitration award and that independent basis cannot be established by “looking through” to the underlying arbitration proceeding that resulted in the award. See Badgerow, 142 S. Ct. at 1314, 1320.

Simply petitioning a court for relief under Sections 9, 10, 0r 11 of the Federal Arbitration Act (“FAA”) raises no federal question and does not confer on a court federal-question subject-matter jurisdiction, as strange as that might sound to the uninitiated. In the absence of a federal question appearing on the face of the freestanding petition—such as a claim for relief falling under Chapter Two of the FAA, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), see 9 U.S.C. §§ 202, 203; 28 U.S.C. § 1331, or one falling under Chapter Three, which implements or Inter-American Convention on International Commercial Arbitration (the “Inter-American Convention”), see 9 U.S.C. §§ 301, et seq.; 28 U.S.C. § 1331—the only possible basis for federal subject-matter jurisdiction over such a standalone petition is diversity of citizenship. See 28 U.S.C. § 1332(a).

If there is no diversity jurisdiction, and if the action does not concern an award falling under the New York or Inter-American Conventions, then the substantive provisions of Chapter One still apply but enforcement must be sought in state court. See Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (“Given the substantive supremacy of the FAA, but the Act’s nonjurisdictional cast, state courts have a prominent role to play as enforcers of agreements to arbitrate”).

A “Jurisdictional Anchor” Post-Badgerow?

The author explained in a recent Arbitration Law Forum post—Philip J. Loree Jr., Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards, Arbitration Law Forum (Nov. 13, 2023) (the “Jurisdictional Anchor Post”)— that Badgerow leaves unanswered an important question. It arises when—in a preexisting action over which the Court already has federal-question subject matter jurisdiction—a Court grants a motion made under Sections 4 and 3 of the FAA to compel arbitration and stay litigation, and a party subsequently moves in the same, stayed action to confirm, vacate, or modify an award resulting from the compelled arbitration. Does the Court in the stayed action have continuing subject matter jurisdiction to hear the parties’ motions to confirm or vacate the award, even though there is no independent basis for federal question or diversity jurisdiction? Can the existing but stayed federal-question lawsuit provide a “jurisdictional anchor” for the motions to confirm or vacate even though the Court would not, under Badgerow, have subject matter jurisdiction over those motions if either were brought as an independent, freestanding petition to confirm or vacate an award?

SmartSky, as we’ve seen, says the answer to those questions is no: the parties moving to confirm or vacate must establish an independent basis for subject matter jurisdiction even when the motion is brought in a pre-existing but stayed lawsuit over which the Court undisputedly had federal question  jurisdiction.

SmartSky has flatly rejected the “jurisdictional anchor” theory (a/k/a “anchor jurisdiction”), under which the answer would be yes: the parties do not have to establish an independent basis for subject matter jurisdiction because they are filing their motions in a preexisting  stayed action over which the Court has subject matter jurisdiction.

SmartSky Caused a Circuit Split Concerning the Viability of Anchor Jurisdiction 

SmartSky‘s conclusion directly conflicts with the only other post-Badgerow U.S. Circuit Court of Appeals decision to address anchor jurisdiction, Kinsella v. Baker Hughes Oilfield Operations, LLC, 66 F.4th 1099 (7th Cir. 2023). If we count pre-Badgerow cases, SmartSky also conflict with the pro-anchor-jurisdiction holdings of the Second, Fifth, Eighth, Ninth, Tenth, and Eleventh Circuits. Dodson Int’l Parts v. Williams Int’l Co., 12 F.4th 1212, 1227-28 (10th Cir. 2021) (citing cases).

SmartSky’s Petition for Rehearing and Rehearing En Banc

Arbitration proponent SmartSky has added to its legal team SCOTUS ace Daniel L. Geyser, Esq., Chair of Haynes and Boone, LLP‘s U.S. Supreme Court Practice,  and, with Mr. Geyser’s assistance, prepared and submitted a very well-written and persuasive Petition for Rehearing and Rehearing En Banc, which among other things, pointed out the Circuit conflicts which SmartSky has created with both pre- and post-Badgerow decisions and explained why SmartSky believes the Fourth Circuit misconstrued Badgerow and failed to adhere to settled subject-matter-jurisdiction principles. SmartSky, No. 22-1253, Dk. 77.

The Petition also pointed out that, even if SmartSky correctly construed Badgerow, there is an independent basis for jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) because two of the parties are foreign citizens, DAG Wireless LTD (“Wireless”) and David D. Gross.

Both of these persons are, according to SmartSky, identified on the face of the petition as Israeli citizens (Wireless was identified as an Israeli company and D. Gross as an Israeli resident).  Smartksy points out that the award therefore falls under the Convention and its enforcement raises a federal question. See 9 U.S.C. §§ 202, 203, & 207; 28 U.S.C. § 1331; 22-1253, Dk. 77 at 13-16.

On March 13, 2024, the Fourth Circuit denied the petition. 22-1253, Dk. 80. That raises the possibility that SmartSky might petition SCOTUS for certiorari, something that wouldn’t surprise the author given that Mr. Geyser has joined its team.  If SmartSky petitions for certiorari, SCOTUS will presumably have to consider whether the current split in the circuits warrants certiorari or whether it should wait until more circuits have ruled on the issue post-Badgerow.  

The author plans to submit to an ADR trade publication an article analyzing and critiquing  SmartSky in some detail. For now, we briefly summarize what transpired in SmartSky and the reasons the Court gave for its ruling. Continue Reading »

Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

November 13th, 2023 Amount in Controversy, Appellate Jurisdiction, Appellate Practice, Application to Compel Arbitration, Application to Confirm, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Confirmation of Awards, FAA Chapter 1, FAA Chapter 2, FAA Section 16, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Modify or Correct Award, Motion to Compel Arbitration, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 3 Stay of Litigation, Section 4, Section 5, Section 7, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

Jurisdictional Anchor | Subject Matter JurisdictionThe U.S. Supreme Court decision, Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here), requires that an independent basis for subject matter jurisdiction (usually diversity) must appear on the face of petitions to confirm, vacate, or modify arbitration awards, and, by extension, petitions to enforce arbitral subpoenas or appoint arbitrators. See Badgerow, 142 S. Ct. at 1314, 1320. That independent basis for subject matter jurisdiction cannot be established by “looking through” to the underlying arbitration proceeding. In other words, the federal court cannot base subject matter jurisdiction on whether the court would have had subject matter jurisdiction over the merits of the controversy had they been submitted it to court rather than to arbitration.  See Badgerow, 142 S. Ct. at 1314, 1320.

Badgerow does not change the rule that federal question jurisdiction over a Section 4 petition to compel arbitration can be established by “looking through” to the underlying dispute that is or is claimed to be subject to arbitration. 142 S. Ct. at 1314; see  Vaden v. Discover Bank, 556 U.S. 49, 53 (2009); Hermès of Paris, Inc. v. Swain, 867 F.3d 321, 324-26 (2d Cir. 2017) (diversity of citizenship not determined by “look through”).

Section 4 of the Federal Arbitration Act expressly authorizes a Court to exercise subject-matter jurisdiction on that basis: “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4; see Badgerow, 142 S. Ct. at 1317.

Unlike Section 4, Sections 5 (appointment of arbitrators), 7 (arbitral subpoena enforcement), 9 (confirmation of awards), 10 (vacatur of awards), and 11 (modification of awards), do not expressly authorize the exercise of subject matter jurisdiction on a “look through” basis.  See 142 S. Ct. at 1317-18; 9 U.S.C. §§ 4, 5, 7, 9, 10, & 11.

Badgerow, in the specific context of an action commenced by petition to vacate an award under FAA Section 10—which, in turn, prompted a cross-petition to confirm under FAA Section 9—held that the absence in Sections 9 and 10 of Section 4’s express language authorizing subject matter jurisdiction based on “look through” meant that Congress did not authorize “look through” subject matter jurisdiction for Section 9 and 10 claims (and presumably for claims seeking relief under Sections 5, 7, or 11). See 142 S. Ct. at 1319.

An independent basis for subject matter jurisdiction is required, and in the absence of a federal question appearing on the face of the petition (such as a claim for relief under Chapter Two of the FAA, see 9 U.S.C. § 203; 28 U.S.C. § 1331), the only possible basis for subject matter jurisdiction is diversity of citizenship. See 28 U.S.C. § 1332(a). And there could be no diversity jurisdiction in Badgerow because the parties to the petitions were citizens of the same state. See 142 S. Ct. at 1316.

Badgerow’s reasoning certainly applies to independent, summary proceedings in which the only relief sought is under the FAA. But does it apply with equal force where litigation on the merits of an arbitrable or allegedly arbitrable dispute has commenced, and the motion to compel arbitration is made by motion in the pending action, which is stayed pending arbitration? Can the stayed merits litigation act as what former Associate Justice Stephen G. Breyer, in his Badgerow dissent, referred to as a “jurisdictional anchor” for not only the motion to compel arbitration, but also other subsequent applications for pre- or post-award FAA relief relating to the arbitration?  See Badgerow, 142 S. Ct. at 1326 (Breyer, J., dissenting).

That is an open question in the Second Circuit after Badgerow, although pre-Badgerow the answer was yes. Let’s look at it more closely and try to get a sense of how the Second Circuit might rule on it considering Badgerow. Continue Reading »

Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

August 23rd, 2023 Amount in Controversy, Application to Compel Arbitration, Arbitration Law, Arbitration Practice and Procedure, Award Vacated, Awards, Challenging Arbitration Awards, Confirmation of Awards, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Look Through, or Modify Award, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 4, Section 5, Section 7, Section 9, United States Court of Appeals for the Eighth Circuit Comments Off on Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

Introduction

Subject Matter Jurisdiction | Petition to Confirm | Petition to Vacate The U.S. Court of Appeals for the Eighth Circuit recently decided a case that provides a good—and simple—example of how subject matter jurisdiction can be a trap for the unwary, especially for parties seeking to confirm or vacate arbitration awards under the Federal Arbitration Act (the “FAA”). In Prospect Funding Holdings (N.Y.) v. Ronald J. Palagi, P.C., No. 22-1871, slip op. (8th Cir. Aug. 7, 2023), the Eighth Circuit vacated a district court’s judgment vacating two arbitration awards because the petitioner failed to plead the citizenship of the parties and therefore could not establish the requisite independent basis for subject matter jurisdiction. But there was more to it than that. Continue Reading »

2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?

July 18th, 2022 Amount in Controversy, Applicability of Federal Arbitration Act, Application to Appoint Arbitrator, Application to Compel Arbitration, Application to Stay Litigation, Arbitrability, Arbitral Subpoenas, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Challenging Arbitration Agreements, Challenging Arbitration Awards, Equal Footing Principle, FAA Chapter 1, FAA Transportation Worker Exemption, Federal Arbitration Act Section 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Policy in Favor of Arbitration, Federal Question, Federal Subject Matter Jurisdiction, International Arbitration, International Judicial Assistance, Judicial Review of Arbitration Awards, Look Through, Modify or Correct Award, Moses Cone Principle, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Policy, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Presumption of Arbitrability, Richard D. Faulkner, Section 10, Section 11, Section 1782, Section 3 Stay of Litigation, Section 5, Section 6, Section 7, Section 9, Small Business B-2-B Arbitration, State Arbitration Law, Statutory Interpretation and Construction, Subject Matter Jurisdiction, Substantive Arbitrability, Textualism, United States Supreme Court, Vacatur, Waiver of Arbitration Comments Off on 2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?

Introduction: This Term’s SCOTUS Arbitration Cases 

SCOTUS FAA CasesThe 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power.  However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA).  

Three of the SCOTUS FAA Cases, Badgerow, Morgan, and Southwest Airlines signal SCOTUS’s apparent intention to construe strictly the Federal Arbitration Act’s text without indulging in any pro-arbitration presumptions or applying arbitration-specific rules intentionally encouraging arbitration-friendly outcomes. ZF Automotive, the 28 U.S.C. § 1782 judicial-assistance case also  employed a strict, textualist approach to interpreting 28 U.S.C. § 1782, used the FAA to help support its conclusion, and held that 28 U.S.C. § 1782 did not authorize U.S. district courts to provide judicial assistance to private arbitration panels sited abroad—an outcome not particularly solicitous of international arbitration. It is therefore at least indirectly supportive of the more textually oriented and arbitration-neutral approach SCOTUS appears to have endorsed with special force during the 2021 Term.  

The SCOTUS 2021 Term FAA Cases are not the first ones in which the Court applied textualist interpretations to the FAA. There are others. See, e.g., New Prime Inc. v. Oliveira, ___ U.S. ___, 139 S. Ct. 532 (2019) (discussed here and here). But common themes in three of those FAA Cases—echoed in ZF Automotive —suggest a marked trend by the Court to interpret the FAA in a less expansive manner that is not presumptively arbitration friendly. The expression of these common themes in four cases decided in a single term is particularly significant because Morgan, Southwest Airlines, and ZF Automotive were decided unanimously by all participating Justices and Badgerow was decided 8-1, with now retired Associate Justice Stephen G. Breyer dissenting.  

Many previous FAA SCOTUS decisions of the last three or four decades have been very indulgent of arbitration. The Court encouraged arbitration proliferation far beyond B-2-B commercial and industry arbitration between sophisticated and resource-laden entities of roughly equal bargaining power.  Arbitration was introduced into consumer and employment disputes and other disputes involving persons (including businesses) of vastly disparate resources and sophistication. SCOTUS made arbitration agreements readily enforceable, interpreted them expansively in favor of arbitration, limited defenses to arbitration agreements and awards, and promoted arbitration to make it, at least in the eyes of some, an attractive alternative to litigation. Critics challenged that view and assailed arbitration as “do it yourself court reform.”  The SCOTUS arbitration decisions developed and implemented an expansive federal policy in favor of arbitration and a presumption of arbitrability and championed a very pro-arbitration approach to arbitration law in general.  

That SCOTUS, the lower federal courts, and eventually even the skeptical state courts that are bound by its FAA decisions, have been solicitous and supportive of arbitration is unsurprising. The assumed (but not necessarily realized) benefits of arbitration have long been touted by academics and promoted by business and industry representatives.  Of course, courts have for many years recognized that arbitration helps reduce docket congestion, which was exacerbated by COVID and remains a problem today, even with the help of proliferated arbitration proceedings. Arbitral dispute resolution is also a very impressive business sector in and of itself, generating billions in revenues for law firms, arbitrators, and arbitration providers. It therefore has many proponents.  

But Badgerow, Morgan, Southwest Airlines, and ZF Automotive suggest that SCOTUS is rethinking its prior expansive, and highly-arbitration-friendly approach to the FAA and might be more willing to entertain seriously arguments for interpreting: (a) arbitration agreements less expansively, and more like ordinary contracts; and (b) Sections 10 and 11 of the FAA strictly according to their text and not in an exceedingly narrow manner designed to encourage, arbitration-award-favoring outcomes. These cases may also embolden lower courts, especially the state courts, to do the same. Continue Reading »

Foreign Awards | Post-Award Federal Arbitration Act Enforcement Litigation | Businessperson’s Federal Arbitration Act FAQ Guide

July 23rd, 2020 Arbitration Law, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 2, Federal Arbitration Act Section 207, Federal Arbitration Act Section 9, Foreign Arbitration Awards, Inter-American Convention on International Commercial Arbitration, International Arbitration, New York Convention, Nuts & Bolts, Nuts & Bolts: Arbitration, Panama Convention, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 9, Small Business B-2-B Arbitration 1 Comment »
foreign awards

In previous segments (here, here, here, and here) we discussed the confirmation of Chapter One Domestic Awards and Chapter Two Domestic Awards. This segment addresses foreign awards.

There are two types of foreign awards that are or may be governed by the Federal Arbitration Act: (a) awards made in the territory of a country that is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “Convention”), the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”), or both, which we refer to as Chapter Two Foreign Awards; and (b) awards that are made outside the United States in a country that is not a signatory to the New York or Panama Conventions, which we refer to as Chapter One Foreign Awards.

What are Chapter Two Foreign Awards?

Chapter Two Foreign Awards are awards that are made in the territory of a foreign state that is a signatory to the New York or Panama Conventions, and which otherwise falls under one or both of those Conventions.

Continue Reading »

The Federal Arbitration Act: a Businessperson’s FAQ Guide

January 15th, 2020 Applicability of Federal Arbitration Act, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Arbitration Providers, Arbitration Risks, Businessperson's FAQ Guide to the Federal Arbitration Act, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 1, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, First Principle - Consent not Coercion, Nuts & Bolts: Arbitration, Practice and Procedure, Repeat Players, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration 3 Comments »
Federal Arbitration Act | Text Added

This is the first in a series of posts that will pose and answer several important questions about the Federal Arbitration Act (the “Federal Arbitration Act” or “FAA”), and FAA practice and procedure. The Federal Arbitration Act is the federal statute that governs arbitration agreements that “affect commerce,” making them irrevocable, valid and enforceable to the same extent as contracts generally. It provides for the expedited enforcement (including the challenge) of arbitration awards, empowers arbitrators to issue hearing subpoenas that are enforceable in court against third parties, and authorizes Courts in appropriate circumstances to compel arbitration, stay litigation, and appoint arbitrators.

Chapter One of the Federal Arbitration Act, and the many court decisions construing it, constitute the main body of arbitration law governing arbitration agreements in contracts “affecting commerce.” That body of arbitration law also includes state law governing contracts generally as well as state arbitration law, where applicable. More on that another day.

Before addressing specific FAQs, we review why arbitration law is important and what small businesses can do to help protect themselves in today’s challenging arbitration environment. We next provide an overview of Chapter One of the Federal Arbitration Act, summarizing its provisions.

This guide, including the instalments that will follow in later posts, is not designed to be a comprehensive recitation of the rules and principles of arbitration law. It is designed simply to give clients, prospective clients, and other readers general information that will educate them about the legal challenges they may face and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.

Why is Federal Arbitration Act Arbitration Law Important and How can Small Businesses Protect Themselves in Today’s Challenging Arbitration Environment?

Arbitration can be a very effective way of resolving a wide range of disputes arising out of many legal and commercial relationships. It can benefit the parties if they make informed decisions about agreeing to it, craft their agreement accordingly, invest ample time and resources into the dispute-resolution process, proactively manage it, and make reasonable strategic and tactical decisions aimed at maximizing the odds of a beneficial outcome. It can benefit the courts and the general public by shifting to the private sector dispute-resolution costs that the public-sector (funded by tax payers) would otherwise bear.

Arbitration is not a perfect form of dispute resolution (and none is, including court litigation). That is so even when: (a) parties carefully draft their arbitration agreements and arbitrate in good faith; and (b) arbitrators, arbitration service providers and courts do their best to ensure the integrity, reliability, and cost-efficiency of the process and otherwise strive to protect the legitimate contractual expectations of the parties.

But at least over the last few decades or so, arbitration has, in the eyes of many, become a less attractive alternative to court litigation than it was intended to be, could be, and once was. One reason for the decline is because courts and arbitrators do not always enforce arbitration agreements in a way most likely to promote arbitration, even though they may believe in good faith that their decisions make arbitration a more attractive alternative to litigation.

The Arbitration Cottage Industry: Repeat Players versus Outsiders

Yet another reason is that arbitration has evolved into a cottage industry consisting of arbitration providers; and professional arbitrators (whether affiliated or not with one or more arbitration providers or arbitration societies). This industry serves (or is supposed to serve) relatively large businesses as well as smaller businesses, individuals, and consumers.

But it is a business that frequently pits repeat playersbusinesses which frequently use an arbitration provider’s services, usually because they regularly appoint in their arbitration agreements the arbitration provider as administratoragainst outsidersbusinesses or individuals who find themselves in an arbitrations administered by an arbitration provider before which they do not find themselves on a regular basis, usually because they either do not regularly appoint the arbitration provider as administrator in their arbitration agreements, or because they do not ordinarily agree to arbitrate in the first place.

Repeat players generate more revenue for arbitration providers and their stable of arbitrators over time than do outsiders. In theory that shouldn’t matter, for at least ostensibly, providers and arbitrators offer the market neutral dispute resolution services that are not supposed to favor repeat players, outsiders, or anyone else.

But economic realities can make that ostensible goal difficult to achieve in practice, even for exceedingly-well-intentioned providers and arbitrators. Those economic realities suggest an actual or potential conflict of interestthat is, a conflict between the provider’s and arbitrator’s interest in neutrality and their interest in an arbitration outcome that will not dissuade the repeat player from continuing regularly to use the provider’s services.

Businesses, particularly smaller business that are not arbitration provider repeat players, thus may find themselves in a challenging environment, one in which they probably did not anticipate being when they agreed to arbitrate. They are outsiders in an arbitration system that may be administered by an organization, and presided over by one or more arbitrators, who may consciously or unconsciously habor, or at least labor under, institutional predispositions that could tip the scales in favor of the repeat player and against the outsider.  

The potential for such free-floating institutional bias or predisposition ordinarily will not, without more, support an argument that the arbitrator has a material conflict of interest. The reasons that is so are, for present purposes, beyond the scope of this post, but irrespective of whether arbitration law provides or should provide any relief from such a conflict, the economic realities described pose risks for outsiders, whose odds of success on the merits might not be what they would otherwise be if the tables were turned, and they, not their adversaries, were the repeat players.

Outsiders who find themselves in arbitration disputes with repeat players need all the help they can get.

Arbitration Law: Limited Relief, Arcane Rules, and Traps for the Unwary

The nature of arbitration law itself poses other challenges with which businesses (including repeat players) must grapple. Arbitration law authorizes courts to provide only very limited relief to parties who claim to be the victims of arbitration-agreement violations, whether committed by arbitrators or by an adverse party.

To make matters worse it is not unusual for certain judges to interpret and apply arbitration law in a way that makes it all the more difficult to obtain relief, even when granting that relief would, in all likelihood, promote arbitration as an attractive alternative to litigation, which is the main objective of arbitration law.

For example, courts will sometimes confirm arbitration awards that should have been vacated even though the facts reveal that the arbitrators egregiously violated the parties’ arbitration agreement by exceeding their powers, being guilty of fraud, corruption, or evident partiality, or committing prejudicial procedural misconduct. Courts seem conciously or unconsciously to go out of their way to avoid recognizing such grave improprieties, perhaps because the public might perceive the outcome – a vacated arbitration award and an arbitration do over – as disfavoring arbitration. And that is so even though vacatur would, in all likelihood, promote arbitration by enforcing the parties’ arbitration agreement and protecting reasonable expectations of fundamental fairness.

The same kind of scenario may play out in the context of a pre-arbitration dispute about compelling arbitration and staying litigation pending arbitration. Believing in good faith that they are promoting arbitration, and perhaps desiring an outcome that appears to favor arbitration—such as one that compels arbitration and stays litigation pending arbitration—Courts sometimes determine persons have consented to arbitration in circumstances where a comprehensive examination of the facts and applicable law may indicate otherwise.

Arbitration law doctrines, rules, and procedures remain somewhat arcane even though arbitration disputes and arbitration-related litigation are fairly common. Consequently, outcomes and rationales are often counterintuitive, unless the lawyer has thorough knowledge of and experience with arbitration law. We’ll discuss some examples in later posts.

Even apart from that, arbitation law’s procedural rules are fraught with traps for the wary, which are, among other things, designed to encourage early forfeiture of defenses that might otherwise be raised in FAA litigation. Most, if not all, of these rules nevertheless serve purposes which at least arguably promote arbitration as a viable alternative to litigation. If your attorney doesn’t know the rules well or doesn’t follow them, then your interests may be in jeopordy.

Protecting your Interests in Arbitration and Arbitration-Related Litigation

How can you best protect your interests in the seemingly informal, but sometimes covertly hostile, arbitration environment? First, you must make sure that you are represented by an attorney who has abundent knowledge of and experience in arbitration law and in representing parties in arbitrations and in FAA litigation.

This can make a huge difference – the author has, over the years, encountered situations where another lawyer did not, for example, detect or adequately preserve for judicial review issues that may otherwise have provided a basis for vacating an adverse award. As a consequence, these parties lost the race before it even started, and ended up being saddled with arbitration awards that, in a more perfect world, they may have been able to vacate.  Needless to say, situations like this are far less likely to occur if experienced arbitration counsel been involved from the start.

If you are already represented by an attorney in your arbitration, but find yourself facing challenging FAA enforcement litigation, or the prospect of such litigation, then your interests are best suited by hiring skilled and experienced counsel who regularly handle such litigation. Depending on the circumstances, your own needs, and other considerations, you may wish to retain a new lawyer to handle the FAA litigation, while continuing to retain your current lawyer for purposes of handling the merits of the underlying arbitration (but making sure the FAA litigation lawyer is consulted at each step along the way to help preserve and enhance the record for future FAA litigation).

Second, you should work closely with that attorney, advising him or her of all matters pertinent to your claims and defenses, including matters that may be peculiar to your particular business or industry, including customs, practice, and usage. Always be an active part of your case and work only with attorneys who allow and encourage you to do that.  

Third, you should keep yourself informed about arbitration-law related matters, as well as the legal rules and principles that bear on the merits of your case. This series of posts addresses numerous basic questions concerning the Federal Arbitration Act, and thus should be a useful educational aid for that purpose.

An Overview of the Federal Arbitration Act and its Provisions

The judicial and arbitral enforcement of arbitration agreements that affect interstate commerce is governed by the Federal Arbitration Act (the “FAA”), a statute first enacted in 1925 as the “United States Arbitration Act.” As originally enacted, the FAA consisted of 15 provisions, section 14 of which Congress repealed in 1947, renumbering as Section 14 former Section 15.

In 1970 Congress designated those remaining 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”).

In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).

The majority of U.S. domestic arbitration disputes are decided under Chapter One of the FAA, 9 U.S.C. §§ 1-16. Of these 16 relatively sparse statutory provisions, Sections 1 through 14 have been on the statute books in largely the same form for about 95 years.

The provisions of Chapter One have not only been on the books for nearly 100 years, but they are fairly sparse, and certainly do not even come close to addressing expressly and comprehensively all of the many issues that may arise concerning the enforcement of arbitration agreements and awards.

Out of necessity, a robust body of judicial interpretations and applications of the provisions has arisen to attempt to address these problems. These interpretations and applications of the FAA often vary from one circuit court of appeals to the next, and the U.S. Supreme Court has, on many occasions over the last four decades (and even before) stepped in to resolve such circuit splits and attempt to make FAA law more uniform by developing and implementing various FAA rules and principals, a number of which were first created in cases arising out of Labor Management and Relations Act (“LMRA”)-governed labor arbitration cases.

But before delving into any of the gory details, let’s look at the domestic, commercial arbitration-law outline that Chapter One of the FAA provides. Our starting point is Section 2, which is sometimes referred to as the FAA’s “enforcement command.” 

The Federal Arbitration Act’s Enforcement Command: Section 2

Section 2 of the FAA is the provision that declares that arbitration agreements falling within its scope are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of of any contract.” 9 U.S.C. § 2.

It also tells us what arbitration agreements fall within the scope of Section 2 and the other provisions of FAA Chapter One: (a) “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof [;] or [(b)] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal. . . .” 9 U.S.C. § 2.

Section 2’s scope provision therefore, and as interpreted by the U.S. Supreme Court, applies to written pre-dispute arbitration agreements in: (a) “maritime contract[s]” (“Maritime Contracts”); or (b) “contract[s] evidencing a transaction involving commerce. . . .” (“Contracts Affecting Commerce”). It also applies to written post-dispute arbitration agreements “to settle by arbitration a controversy thereafter arising out of such [Maritime Contracts or Contracts Affecting Commerce], or the refusal to perform the whole or any part thereof. . . .” 9 U.S.C. § 2; see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-282 (1995); Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 55-58 (2003). As interpreted by the U.S. Supreme Court, Section 2’s use of the “word ‘involving,’ like ‘affecting,’ signals an intent to exercise Congress’ commerce power to the full.” Allied-Bruce, 513 U.S. at 277. More on that another day.

Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019).  Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and  citations omitted).    

Section 1 of the FAA : Definitions and an Exemption

Section 1 of the FAA provides some definitions and exempts from the FAA a fairly limited universe of agreements that would otherwise fall within the scope of the Act. See 9 U.S.C. § 1. As respects the exemption, Section 1 provides that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.

According to the United States Supreme Court, the exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing an employer-employee relationship, but also contracts establishing independent contractor relationships. New Prime Inc. v. Oliveira, 139 S. Ct. 532, 539-41, 544 (2019).

The Rest of the FAA

The other provisions of Chapter 1 implement the enforcement command by lending judicial support to the enforcement of arbitration agreements and awards. These are briefly summarized below:

  • Section 3 – Requires courts to stay litigation in favor of arbitration.
  • Section 4 – Provides for courts to compel arbitration.
  • Section 5 – Provides for courts to appoint arbitrators when there has been a default in the arbitrator selection process.
  • Section 6 – Provides that motion practice rules apply to applications made under the FAA, thereby expediting the judicial disposition of such applications. 
  • Section 7 – Provides for the judicial enforcement of certain arbitration subpoenas.
  • Section 8 – Provides that where the basis for federal subject matter jurisdiction is admiralty, then “the party claiming to be aggrieved may begin his proceeding [under the FAA]…by libel and seizure of the vessel or other property….” 9 U.S.C. § 8.
  • Section 9 – Provides for courts to confirm arbitration awards, that is, enter judgment upon them.
  • Section 10 – Authorizes courts to vacate arbitration awards in certain limited circumstances.
  • Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.
  • Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.
  • Section 13 – Specifies papers that must be filed with the clerk on motions to confirm, vacate, modify, or correct awards and provides that judgment entered on orders on such motions has the same force and effect of any other judgment entered by the court.
  • Section 14 – Specifies that agreements made as of the FAA’s 1925 effective date are subject to the FAA.
  • Section 15 – Provides that “Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”
  • Section 16 – Specifies when appeals may be taken from orders made under the FAA, and authorizing appeals from final decisions with respect to arbitration.

More to follow in future posts. . . .

You might also be interested in the following posts here, here, here, here, and here.

 

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law. L&L has added text to the photo.

Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction

May 13th, 2019 Amount in Controversy, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Look Through, Petition to Modify Award, Petition to Vacate Award, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction
Look Through

In Landau v. Eisenberg, ___ F.3d ___, No. 17-3963, slip op. (May 1, 2019) (per curiam), the U.S. Court of Appeals for the Second Circuit recently held that district courts must “look through” a Section 9 petition to confirm an arbitration award to determine whether the court has subject matter jurisdiction to adjudicate the petition. District courts must therefore ascertain whether the district court would, absent an arbitration agreement, have had subject matter jurisdiction over the underlying controversy that resulted in the arbitration, and ultimately the award.

While the Second Circuit ruled in a per curiam decision, the issue it decided was of first impression. But it followed on the heels of, and heavily relied on, Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 379-89 (2d Cir. 2016), which held that district courts should look through a Section 10 or 11 petition to ascertain the existence of federal subject matter jurisdiction. Doscher instructed federal courts to focus not on whether the Section 10 and 11 FAA award review and enforcement process presented substantial federal questions, but on the same thing they would have focused on had they been asked to compel arbitration of the controversy: whether the underlying controversy, in keeping with the well-pleaded complaint rule, would have been within the Court’s subject matter jurisdiction had it not been submitted to arbitration. See Doscher, 882 F.3d at 379-89.  

While Eisenberg and Doscher concerned the question whether federal-question subject matter jurisdiction exists over FAA Sections 9, 10, and 11 petitions, the reasoning of those cases also applies to the question whether there is federal subject matter jurisdiction over such petitions based on the diversity jurisdiction.

The Problem Addressed by Eisenberg and Doscher

Problem | Issue

The Federal Arbitration Act is “something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).

Section 4 of the FAA, which governs motions to compel arbitration, provides that to determine the “independent jurisdictional basis” the court must ascertain whether “save for such agreement, [the district court] would have jurisdiction. . . of the subject matter of a suit arising out of the controversy [claimed to be arbitrable][:]”

[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.


9 U.S.C. § 4 (emphasis added).

The Supreme Court held in Vaden that “§ 4 of the FAA does not enlarge federal court jurisdiction,” 556 U.S. at 66, and district courts must “look through” the petition to the controversy between the parties to ascertain whether the court had subject matter jurisdiction over the controversy. 556 U.S. at 62. District courts must therefore “assume the absence of the arbitration agreement and determine whether it would have jurisdiction under title 28 without it.” Id. at 63.

But section 4 of the FAA expressly specifies the circumstances under which a federal district court will have jurisdiction over an application to compel arbitration, whereas Sections 9, 10, and 11 of the FAA—which address applications to confirm, vacate, and modify awards—say nothing about subject matter jurisdiction. The availability of relief under those portions of the FAA is not conditioned on either the existence of a lawsuit over which the Court already has subject matter jurisdiction (and which may have been stayed pending arbitration under Section 3 of the FAA) or on a party having previously invoked the court’s jurisdiction by filing a proceeding to compel arbitration under Section 4.

Sections 9, 10, and 11 of the FAA do not in and of themselves vest jurisdiction in a district court simply because they are part of a federal statute—the FAA requires an independent basis for federal subject matter jurisdiction. But what determines subject matter jurisdiction, the nature of the petition to confirm, vacate, or modify the award, or the nature of the underlying dispute that ultimately resulted in the arbitration award?   

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