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Archive for the ‘Federal Arbitration Act Section 203’ 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 No 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 »

Ninth Circuit Clarifies Arbitral Summons Jurisdiction and Venue under New York Convention

August 19th, 2022 Application to Enforce Arbitral Summons, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, FAA Chapter 1, FAA Chapter 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 201, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 204, Federal Arbitration Act Section 7, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, International Arbitration, New York Convention, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Enforce Arbitral Summons, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 7, Statutory Interpretation and Construction, Subject Matter Jurisdiction, Subpoenas, United States Court of Appeals for the Ninth Circuit, United States Supreme Court, Venue Comments Off on Ninth Circuit Clarifies Arbitral Summons Jurisdiction and Venue under New York Convention

Summons | Petition to EnforceThe United States Court of Appeals for the Ninth Circuit recently provided useful guidance on what might be described as the arcane of the arcane: arbitral summons or subpoena practice in cases governed by Chapter Two of the Federal Arbitration Act, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention” or the “New York Convention”). See 9 U.S.C. § 201, 202. We’ve discussed arbitral summons practice in domestic cases—itself an arcane subject— in posts published in 2020, here, here, and here.

In Jones Day v. Orrick, Herrington & Sutcliffe, LLP, No. 21-16642, slip op. (9th Cir. Aug. 1, 2022), the Court made important rulings concerning (a) federal court subject matter jurisdiction over a Chapter One arbitral summons in a case governed by Chapter Two of the FAA, and (b) proper venue for enforcing an arbitral summons in a case where the third-party witness is not subject to personal jurisdiction in the district embracing the seat of the arbitration.

Yes, these rulings may appear arcane, but they are highly relevant to those who arbitrate cases falling under the New York Convention, especially cases involving arbitrations sited in the U.S. where one or more parties are citizens of foreign states, or where the agreement or award arises out of a commercial, legal “relationship involving property located outside the U.S., envisages performance or enforcement abroad, or has some other reasonable relationship with one or more foreign states.” See 9 U.S.C. § 202.

Background

Jones Day arose out of an arbitration between a law firm (the “Firm”) and a former partner, a German national (the “Former Partner”), who was based in Paris, and left Jones Day to join another firm (the “Competitor Firm”). The arbitration agreement designated Washington, D.C. as the arbitration situs. The parties’ arbitration agreement fell under the Convention. See 9 U.S.C. § 202.

The Firm requested the arbitrator to issue a subpoena or summons to the Competitor Firm, requiring it to appear before the arbitrator in Washington, D.C. and produce documents.

When the Competitor Firm did not appear and produce documents, the Firm attempted to enforce the subpoena in the Superior Court for the District of Columbia, but the D.C. court dismissed the proceeding for lack of personal jurisdiction. The Competitor Firm had its principal place of business in San Francisco and was apparently not amenable to personal jurisdiction in the District of Columbia.

The Court also ruled that, under Section 7 of the Federal Arbitration Act, the Competitor Firm was required to enforce the arbitral summons in a United States Federal District Court.

The Firm then persuaded the Arbitrator to issue revised subpoenas requiring two of the Competitor Firm’s partners, who resided in the Northern District of California, to appear before the Arbitrator in San Jose, California, which is within the Northern District of California.

When the Competitor Firm refused to comply with the revised arbitral summons, the Firm commenced an action in the United States District Court for the Northern District of California against the Competitor Firm and the two summonsed partners.

The district court denied the application on the ground that it had no authority to enforce the summonses because under Section 7 of the FAA (a) the only court that can enforce an arbitral summons is the court in which the arbitrator sits; (b) Washington D.C. was the designated arbitration situs; and (c) the arbitrator can “sit” in one location only, here Washington, D.C. Having denied the application on improper venue grounds, the district court declined to decide whether it had federal subject matter jurisdiction over the application.

Ninth Circuit Determines the District Court had Subject Matter Jurisdiction to Enforce the Arbitral Summons

The Court engaged in a textual analysis of Chapter Two to determine whether there was subject matter jurisdiction over the petition. Section 203, the Court explained, confers on federal courts original subject matter jurisdiction, irrespective of the amount in controversy, over “[a]n action or proceeding falling under the Convention.” 9 U.S.C. § 203; Jones Day, slip op. at 6.

The parties did not dispute, and the Court held, that the application to enforce the summons was an “action or proceeding.” There was also no question that the parties’ arbitration agreement “fall[s] under the Convention” within the meaning of 9 U.S.C. § 202; slip op. at 6.

The question was whether the “action or proceeding” to enforce arbitral summons falls under the Convention. The Competitor urged that “because Congress ‘conspicuously’ did not include [in Chapter Two] a provision regarding petitions to enforce an arbitral summons, such a petition is not an action or a proceeding encompassed under § 203.” Slip op. at 7. To the contrary, said the Competitor Firm, Chapter Two expressly authorizes only three actions or proceedings: (a) “orders to compel arbitration, 9 U.S.C. § 206[; (b)] appointments of arbitrators in accordance with an arbitration agreement, id.[; and (c)]. . . orders confirming arbitration awards, 9 U.S.C. § 207.” Slip op. at 7.

The Competitor attempted to support its argument by arguing that “‘fall under’ means to be ‘listed or classified as’ or ‘included in’. . . .” Slip op. at 7 (quoting Webster’s New World Dictionary and MacMillan Contemporary Dictionary).

The Court, however, rejected that argument, explaining that “dictionaries from around 1970” (Chapter Two’s enactment date) “embrace a broader definition of ‘fall under’. . . .” Slip op. at 7 (quoting Compact Edition of the Oxford English Dictionary Vol. I 955 (1971) (the “Compact Edition”) and Oxford Dictionary of Current Idiomatic English Vol. I 102 (1975) (“Oxford Idiomatic”). Those dictionaries defined “fall under” as “‘[t]o be brought under the operation or scope of, be subject to’[,]” slip op. at 7 (quoting Compact Edition), and to “‘be classified as, be placed within a certain category[.]’” Slip op. at 7 (quoting Oxford Idiomatic).

The Court’s Arbitral Summons Subject Matter Jurisdiction Conclusion is Further Supported by the Convention’s and Chapter Two’s Structure 

 The Court found further support in the Convention’s and Chapter Two’s structure suggesting that to “fall under” the Convention, specific actions or proceedings need not be explicitly stated in the Convention or Chapter Two.

The Court relied heavily on the U.S. Supreme Court’s 2020 decision in G.E. Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020), in which “the [U.S. Supreme] Court determined that the domestic doctrine of equitable estoppel, which permits the enforcement of arbitration agreements against nonsignatories, does not conflict with the Convention, and so is applicable in international arbitrations.” Slip op. at 8 (citations omitted).

Outokumpu concerned Article II(3) of the Convention, which provides that “courts of a contracting state ‘shall. . . refer the parties to arbitration.” Convention, Art. II(3). The arbitration challenger in Outokumpu argued that Article II(3) authorized Courts to refer only signatory “parties” to the arbitration, and did not permit courts to use the equitable estoppel doctrine to refer nonsignatories to arbitration.

Outokumpu reasoned that Convention “Article II(3) does not preclude application of the domestic doctrine of equitable estoppel because it ‘contains no exclusionary language; it does not state that arbitration agreements shall be enforced only in the identified circumstances.’” Jones Day, slip op. at 8 (quoting Outokumpu, 140 S. Ct. at 1645)  (emphasis in original). The Supreme Court, explained the Ninth Circuit, “viewed a counter interpretation inappropriate because ‘the provisions of Article II contemplate the use of domestic doctrines to fills gaps in the Convention.’” Slip op. at 8 (quoting Outokumpu, 140 S. Ct. at 1645). The Supreme Court therefore “did not ‘read the nonexclusive language of [Article II(3) of the Convention] to set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements.’” Slip op. at 8-9 (quoting Outokumpu, 140 S. Ct. at 1645; bracketed material in original).

The Ninth Circuit said the Supreme Court’s analysis applied equally to the question whether the Convention or Chapter Two of the FAA contemplated a petition to enforce an arbitral summons. Slip op. at 9. “There is[,]” said the Ninth Circuit, “no language in [Chapter Two or the Convention]. . . that limits the tools that may be utilized in international arbitrations in ways domestic arbitrations are not so limited.” Slip op. at 9.

The Ninth Circuit concluded that the Competitor Firm’s “argument that the only permissible judicial actions or proceedings are those explicitly listed in Chapter Two . . . runs afoul of Chapter Two and the Convention’s plain language, structure, and objectives.” Slip op. at 9. The Court said the only limitation in the Convention or Chapter Two is 9 U.S.C. § 208, “which as the Supreme Court noted in [Outokumpu]. . . , disallows only those processes provided for in domestic arbitrations under Chapter One that conflict with Chapter Two of the Convention.” Slip op. at 9 (citations omitted). But enforcement of an arbitral summons does not conflict with Convention or Chapter Two—such enforcement “only aids in the arbitration process.” Slip op. at 9. 

The Court’s Arbitral Summons Subject Matter Jurisdiction Conclusion is Further Supported by Section 205, Chapter Two’s Removal Jurisdiction Provision

The Court found further support for its subject matter jurisdiction conclusion in Section 205 of the FAA, which concerns the removal jurisdiction of federal court in Chapter Two cases.

Section 205 states that “[w]here the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending.” 9 U.S.C. § 205. Significantly, a district court’s removal jurisdiction is triggered when the subject matter of the state court action or proceeding “relates toan “agreement or award falling under the Convention.” 9 U.S.C. § 205 (emphasis added). See Jones Day, slip op. at 9-10.

As the Ninth Circuit astutely observed, “[i]f ‘falling under’ in § 203 is not deemed at least as coextensive with ‘relates to’ in § 205, then that would mean Congress intended the district courts to have a narrower scope of original jurisdiction than removal jurisdiction in enforcing international arbitration awards.” Slip op. at 10 (quoting 9 U.S.C. § 205). But, said the Court, inferring such an intent would contravene “the very purpose of the Convention and the Chapter Two implementing procedures[,]” which “is to encourage arbitration and to authorize district courts to take actions necessary to ensure that the parties’ underlying controversy is successfully resolved through arbitration.” See slip op. at 10 (citation and quotation omitted).

As the Ninth Circuit explained, imputing such an intent would lead to strange results: “The irony of [the Competitor Firm’s]. . . contrary position is that, in this very case where it asserts the Northern District of California lacks original jurisdiction, the same court would have had removal jurisdiction under FAA § 205 had Jones  Day filed its petition to enforce the summons in San Francisco Superior Court.” Slip op. at 10.

The Competitor Firm could, said the Court, in this case have removed the case to federal court for purpose of “opposing enforcement” of the arbitrator’s summons. Slip op. at 10. The Ninth Circuit said “[t]his would be an absurd result, especially in light of congressional policy to enforce arbitration-not resist it-and the proceedings that further arbitration of international disputes.” Slip op. at 10 (citing 9 U.S.C. §§ 206, 207).

The Court then exhaustively discussed cases from the Fifth, Second, and Eleventh Circuit that supported its conclusion that “falling under” in Section 203 and “relate to” in Section 205 have “the same meaning for purposes of articulating the federal courts’ original jurisdiction in § 203.” Slip op. at 11 & 9-13; see Stemcor USA Inc. v. CIA Siderurgica do Para Cosipar, 927 F.3d 906 (5th Cir. 2019); Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012); Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int’l GmbH, 921 F.3d 1291, 1299 (11th Cir. 2019). These cases “expansive[ly]” construed Section 203, and the Court formulated from them a two-part test for determining if under the Convention and Chapter Two a federal court has original jurisdiction over an action or proceeding.

The Ninth Circuit’s Test for Whether a Federal District Court has Original Jurisdiction under Section 203 over an Action or Proceeding to Enforce an Arbitral Summons

Drawing from its interpretation of Section 203 and 205, and cases construing those provisions, the Court held “that a federal court has original jurisdiction over an action or proceeding if two requirements are met: (1) there is an underlying arbitration agreement or award that falls under the Convention, and (2) the action or proceeding relates to that arbitration agreement or award.” Slip op. at 13. The Court further explained that, “for purposes of the second requirement, we adopt the meaning of ‘relates to,’ which we previously defined for purposes of § 205, as whether the proceeding ‘could conceivably affect the outcome of the plaintiff’s case.” Slip op. at 13 (quoting Infuturia Global Ltd. v. Sequus Pharms., Inc., 631 F.3d 1133, 1138 (9th Cir. 2011) (emphasis in original; internal citation omitted)).

The Ninth Circuit Concludes that the District Court had Subject Matter Jurisdiction over the Arbitral Summons Enforcement Petition 

The Ninth Circuit had no difficulty finding that the district court had subject matter jurisdiction. First, the case unquestionably involved an arbitration agreement “falling under” the Convention because it involved an “arbitration agreement between [the Firm], an international law firm residing for jurisdictional purposes in Washington D.C., and its former non-U.S. citizen partner. . . .” Slip op. at 14; see 9 U.S.C. § 202 (defining agreements and awards falling under the Convention).

Second, the arbitral summons petition ” relates to the underlying arbitration agreement, as the arbitrator determined that evidence [to be] adduced. . . may be material to resolving the dispute.” Slip op. at 14.

As respects the “relates to” requirement, the Court went a step further and declared that the Section 7 arbitral summons enforcement proceedings were “[n]ot only. . . ‘related to’ an arbitration agreement falling under the Convention[]” but were “necessary ancillary proceedings that ensure the proper functioning of the underlying arbitration.” Slip op. 14. They present to the Court an “aspect of enforcing the parties’ agreement to arbitrate. . .”—“the enjoyment of a key procedural attribute of the arbitration the parties bargained for.” Slip op. at 15 (quotation and citation omitted). “Recognizing and enforcing arbitration agreements includes[,]” said the Ninth Circuit, “facilitating the arbitration process and providing arbitrators—in both domestic and international arbitrations—with access to the ancillary actions and proceedings necessary to arrive at an arbitration award.” Slip op. at 15-16. And that “includes arbitral subpoenas and their enforcement.” Slip op. at 15-16.

Venue was Proper in the Northern District of California

Section 204 of the FAA did not authorize venue in the Northern District of California and therefore the question was whether Section 204 was exclusive or permissive. If exclusive, venue would be improper. If permissive, venue would be proper if authorized by the General Venue Statute, 28 U.S.C. § 1391.

The Court held that Section 204 was permissive and venue was proper under the General Venue Statute. The district court held that venue did not lie in the Northern District of California because (a) [Chapter One,] Section 7 of the FAA “provides for enforcement of an arbitral summons in the ‘district in which such arbitrators, or a majority of them are sitting[,]” slip op. at 19 (quoting 9 U.S.C. § 7); (b) “Washington D.C. [, rather than a place within the Northern District of California,] is the ‘seat of the underlying arbitration,’” and, accordingly, (c) “[the district court]. . . lacked jurisdiction to enforce the summons.” Slip op. at 19.

But putting aside the parties’ dispute about whether Section 7 provides for venue, and if so where, FAA Section 204 provides for venue in actions and proceedings falling under the Convention. The district court did not consider that provision, including whether Section 204 is exclusive or permissive. See slip op. at 19 & n.4.

Convention Venue Statute: FAA Section 204

Section 204, entitled “Venue,” states that “[a]n action or proceeding over which the district courts have jurisdiction pursuant to section 203 of this title may be brought in any such court in which save for the arbitration agreement an action or proceeding with respect to the controversy between the parties could be brought, or in such court for the district and division which embraces the place designated in the agreement as the place of arbitration if such place is within the United States.” 9 U.S.C. § 204.

Although the Court did not discuss them, there are two reasons why Section 204 did not authorize venue over the proceeding. First, an “action or proceeding with respect to the controversy between the parties” to the arbitration agreement—i.e., between the Firm and the Former Partner—would not have been properly venued in the Northern District of California. The Court did not consider whether Section 204 might be interpreted to authorize venue based on the arbitral summons enforcement controversy between the Firm and the Competitor Firm.

Second, even though the Firm followed the usual procedure of having the arbitrator convene a hearing in a district in which the witness would be within the enforcing court’s subpoena power, Section 204 provides for venue based on where the arbitrators are sitting only in cases where the arbitrators are sitting “in the place designated in the agreement as the place of arbitration. . . .” 9 U.S.C. § 204. Washington, D.C. was the place designated in the parties’ agreement as the arbitration situs, and obviously Washington, D.C. is not in the Northern District of California.

Whether Section 204 is a Mandatory or Permissive Venue Statute

Because Section 204 did not provide for venue, the issue boiled down to whether Section 204 is a mandatory venue provision or a permissive one. The Court held that Section 204 was permissive, and that venue was therefore proper under the General Venue Statute, 28 U.S.C. § 1391, because the Competitor Firm’s principal place of business was within the Northern District of California. See slip op. at 20.

First, the Court discussed how Section 1391 was intended to ensure that, if there was personal jurisdiction over a defendant, venue would always be proper in some district. Absent evidence that Congress intended to restrict the broad scope of venue provided by Section 1391, another federal statute providing for venue will be construed to be permissive, not mandatory. Slip op. at 16-17.

Second, the Court found that “[n]othing in the text of § 204 indicates that Congress intended. . . [Section 204] to be exclusive or restrictively applied.” Slip op. 17. Section 204, the sole venue provision in FAA Chapter Two, is  silent about the General Venue Statute, and uses the permissive language “‘may be brought’ to describe the additional authorized venues.” Slip op. at 17 (quoting 9 U.S.C. § 204).

Third, the Court explained that Cortez Byrd Chips, Inc. v. Bill Harbert Constr. Co., 529 U.S. 193 (2000) “inform[ed]” its “reading of § 204.” Slip op. at 17. Cortez Byrd addressed whether the venue provisions of Sections 9, 10, and 11 of FAA Chapter One—which authorize venue for post-award litigation in the district where the award was made—were mandatory or permissive. Slip op. at 17-18.

Cortez Byrd held that the venue provisions of FAA Sections 9, 10, and 11 were permissive and that the venue for post-award litigation was proper as long as it was proper under those sections or under the General Venue Statute. Slip op. at 17-18 (citing Cortez Byrd, 529 U.S. at 199-200, 204). When the FAA was enacted in 1925 the General Venue Statute had a more limited scope, providing for venue only in the district where the defendant resided. Slip op. at 18.

The venue provisions in FAA Sections 9, 10, and 11 expanded the scope of the then-in-effect General Venue Statute, authorizing venue in the district where the award was made. The U.S. Supreme Court reasoned that “‘[t]he enactment of the special venue provisions in the FAA thus had an obviously liberalizing effect, undiminished by any suggestion, textual or otherwise, that Congress meant simultaneously to foreclose a suit where the defendant resided.’” Slip op. at 17-18 (quoting Cortez Byrd, 529 U.S. at 200).

Fourth, the Court explained that in Textile Unlimited, Inc. v. A. BMH & Co., Inc., 240 F.3d 781 (9th Cir. 2001) it had “expanded” the Cortez Byrd rationale by holding that “the FAA venue provision in 9 U.S.C. § 4, governing actions to compel arbitration, is likewise permissive rather than exclusive.” Slip op. at 18. “We understood Cortez Byrd[,]” said the Court, “to instruct us to ‘weave the various venue strands of the [Federal Arbitration] Act together into a seamless fabric which does not clash with other federal venue statutes.’” Slip op. at 18 (quoting Textile Unlimited, 240 F.3d at 784).

Fifth, the Court rejected the Competitor Firm’s argument that FAA Section 201 transformed Section 204 into a mandatory venue provision. Slip op. at 19-20. Section 201 states the “Convention. . .  shall be enforced in the United States courts in accordance with this chapter.” 9 U.S.C. § 201.

The Competitor Firm argued that the term “shall” in Section 201 rendered Section 204’s venue provision mandatory. The Competitor Firm relied on Johnson v. Payless Drug Stores Nw., Inc., 950 F.2d 586 (9th Cir. 1991), which held in a Title VII case that 42 U.S.C. § 2000e-5(f) was a mandatory venue provision that superseded the General Venue Statute. But the Court explained that “Title VII. . . expressly provided that the venue ‘provisions of section 2000e-5(f) . . . shall govern’ employment discrimination actions.” ” Slip op. at 19-20 (quoting Johnson, 950 F.2d at 587). Johnson therefore concluded that the “language [of 42 U.S.C. § 2000-e-16(d)] ‘is mandatory.’” Slip op. at 19-20 (quoting Johnson, 950 F.2d at 587).

The Ninth Circuit distinguished the explicit statutory command of 42 U.S.C. § 2000e-16(d) from Section 204’s language, which it deemed not to be mandatory. Slip op. at 20.

Because the Court had subject matter jurisdiction, the parties did not dispute that venue was proper under the General Venue Statute, and because there were no other challenges to the petitions, the Ninth Circuit reversed the district court and remanded “with instructions to enforce . . . [the Firm’s] petitions to compel [the Competitor Firm] and its partners to comply with the arbitral summonses.” Slip op. at 20-21.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district and federal appellate courts.

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