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Application to Compel Arbitration | The Businessperson’s Federal Arbitration Act FAQ Guide III | The Nuts and Bolts of Pre-Award Federal Arbitration Act Practice under Sections 2, 3, and 4 (Part II)

April 22nd, 2020 Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Federal Courts, Federal Question, Gateway Disputes, Gateway Questions, Look Through, New York Arbitration Law (CPLR Article 75), Nuts & Bolts, Nuts & Bolts: Arbitration, Small Business B-2-B Arbitration, State Arbitration Statutes, Subject Matter Jurisdiction 1 Comment » By Philip J. Loree Jr.
compel arbitration

Today’s segment of the Businessperson’s Federal Arbitration ACT FAQ Guide focuses on the nuts and bolts of applying to compel arbitration under Section 4 of the Federal Arbitration Act.

The last installment addressed the following questions:

  1. What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?  
  2. How does Section 3 Work in Practice?

After discussing Section 4 generally and dividing the statute into five parts, this segment addresses an FAQ relating to the first of those five parts: “Under Section 4, who May Petition what Court when and for what?” Future segments will address FAQs relating to the other four parts of Section 4.  

Application to Compel Arbitration: Section 4 and its Component Parts

Section 4, which sometimes used in tandem with Section 3, but which is available as an independent remedy when a party simply refuses to arbitrate without attempting to litigate the allegedly arbitrable dispute, authorizes courts to compel parties to arbitrate the disputes they’ve promised to submit to arbitration.

Section 4 consists of 386 words jammed into a single paragraph and is thus a little daunting at first blush. It is easier to digest and follow if we divide it into subparagraphs or subsections, which we do below. The subsection letters and captions in bold are not part of the statute, but are added for ease of reference and clarity:  

[(a) Who may Petition what Court When and for What.] 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.

[(b) Notice and Service of Petition.] Five days’ notice in writing of such application shall be served upon the party in default. Service thereof shall be made in the manner provided by the Federal Rules of Civil Procedure.

[(c) Hearing Procedure and Venue.] The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed. If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

[(d) Jury Trial, where Applicable] If no jury trial be demanded by the party alleged to be in default, or if the matter in dispute is within admiralty jurisdiction, the court shall hear and determine such issue. Where such an issue is raised, the party alleged to be in default may, except in cases of admiralty, on or before the return day of the notice of application, demand a jury trial of such issue, and upon such demand the court shall make an order referring the issue or issues to a jury in the manner provided by the Federal Rules of Civil Procedure, or may specially call a jury for that purpose.

[(e) Disposition upon Trial.] If the jury find that no agreement in writing for arbitration was made or that there is no default in proceeding thereunder, the proceeding shall be dismissed. If the jury find that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.

9 U.S.C. § 4 (bold and bracketed text added).

Under Section 4, who May Petition what Court when and for what?

Application to Compel Arbitration: Petitioner Must be Aggrieved

What we refer to as “Section 4(a)” describes the basic requirements that must be met for a person to qualify for relief under Section 4. A petitioner must be “aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration. . . .”

The requirement that the agreement must be “written” simply reiterates Section 2’s requirement that arbitration agreements within its scope be “in writing.” 9 U.S.C. § 2; See, generally, Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 629-31 (2009).

The requirement that the petitioner be “aggrieved” by the “alleged failure, neglect, or refusal of another to arbitrate” is in most cases, fairly uncontroversial. Generally, parties either participate in arbitration or not, and if they do not, then the petitioner will be aggrieved.

But since when was life, let alone arbitration law, so simple?

There are, of course, circumstances where it is not so clear that the petitioner is aggrieved. One is where a party professes to be willing to proceed to arbitration but drags its proverbial feet. The proper remedy for that may be a motion under Section 5 of the Federal Arbitration Act, which authorizes courts to appoint arbitrators in appropriate, but that may not be so in every case, and an application to compel arbitration may be appropriate. (Section 5 of the Federal Arbitration Act will be addressed in a future segment.)

Another situation may be where the parties’ agreement provides a self-executing remedy that is triggered by the parties’ delay or refusal to comply with the arbitration agreement. Some arbitration agreements provide that a Party A, who is demanding arbitration, must appoint its party-appointed arbitrator on day X, and that Party B, the responding party, is required to appoint its party-appointed arbitrator by day Y. If Party B fails to timely appoint a party-appointed arbitrator, then Party A gets to select Party B’s arbitrator, and the two arbitrators go ahead and appoint an umpire.

Even assuming Party B decides not to arbitrate at all, courts have held that Party A is not aggrieved because the parties agreed that the arbitration could proceed in Party B’s absence, with Party A appointing not only its own party-appointed arbitrator, but also B’s arbitrator. See, e.g., Re Arbitration between A/S Ganger Rolf & Zeeland Transportation, Ltd., 191 F. Supp. 359, 362-63  (S.D.N.Y. 1961); Waterspring, S.A. v. Trans Mktg. Houston, 717 F. Supp. 181, 184-85 (S.D.N.Y. 1989); see also Corallo v. Merrick Cent. Carburetor, Inc., 733 F.2d 248, 251 n.1 (2d Cir. 1984).

If Party A moves to compel B to participate in the arbitration, the court will likely hold that Party A is not “aggrieved” within the meaning of Section 4.

That situation, of course, is a pretty bleak one for Party B, but one that Party B should have anticipated when it entered into the agreement. At the same time it can be a little risky for Party A, for if it turns out that Party A did not follow the terms of contract pertaining to the selection of the panel, then Party B may be able to vacate an award made against it. See A/S Ganger Rolf, 191 F. Supp. at 362-63; Waterspring,717 F. Supp. at 184-85.  

Application to Compel Arbitration: Petitioner may Petition Federal District Court if that Court would have Subject Matter Jurisdiction over the Underlying Controversy 

Section 4 says that an “aggrieved” petitioner “may petition any United States district court which, save for such [written arbitration] 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. . . .” 

This portion of Section 4 is important for at least three reasons. First, because it says a person “may petition” a “United States district court[,]” it suggests that Section 4 applies only in federal court.

As discussed in the last segment of this post, the substantive provisions of the Federal Arbitration Act apply in both state and federal court. But the U.S. Supreme Court has never determined whether Sections 3 or 4 apply in state court, and if so, to what extent. Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476-77 & n.6 (1989).

But whether or not Section 4 technically applies in both state and federal courts is not an issue that matters much in practice, because state arbitration laws typically provide for motions to compel arbitration. See, e.g., N.Y. Civ. Prac. Law & R. § 7503(a).

Second, and more importantly, this portion of Section 4 establishes that applications to compel arbitration made in federal court, and for that matter all other applications made under Chapter One of the Federal Arbitration Act in federal court, must have an independent basis for subject matter jurisdiction. Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).

In other words, the existence of an arbitration agreement falling under Section 2 of the Federal Arbitration Act does not, in and of itself, vest in a federal court federal question subject matter jurisdiction to decide controversies concerning that arbitration agreement, including applications under Chapter One of the Federal Arbitration Act. “As for jurisdiction over controversies touching arbitration,” the U.S. Supreme Court has explained, “the [Federal Arbitration] Act is something of an anomaly in the realm of federal legislation: It bestow[s] no federal jurisdiction but rather requir[es] [for access to a federal forum] an independent jurisdictional basis over the parties’ dispute.” Vaden, 556 U.S. at 59 (quotations and citations omitted; most bracketed material in original).

Keep in mind that there is an important exception to this rule. If an arbitration agreement falls under Chapter Two or Three of the Federal Arbitration Act—which implement the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Inter-American Convention on International Commercial Arbitration—then the federal courts will have subject matter jurisdiction over applications to enforce that arbitration agreement under Chapters One, Two, or Three of the Federal Arbitration Act, including applications to compel arbitration. (See here.)

Third, this portion of Section 4 demonstrates how and when a federal court will be deemed to have an independent basis for subject matter jurisdiction over an application to compel arbitration governed solely by Chapter One, or, for that matter, any other application made with respect to an arbitration agreement or award that falls under Chapter One only, and not under Chapters Two or Three.

The petitioner, Section 4 says, “may petition any United States district court which, save for such [written arbitration] 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. . . .” The Supreme Court has held that a federal court assessing its subject matter jurisdiction over such a petition must “look through” the petition and determine whether it would have subject matter jurisdiction over the underlying controversy that the petitioner claims is subject to arbitration. Vaden, 556 U.S. at 62-63.   

Let’s look at a straightforward example of how the “look through” approach works, putting aside for now how it works in more complex cases. Suppose A, a citizen of New York, and B, a citizen of New Jersey, enter into a contract under which A promises B it will provide certain landscaping services for a flat fee of $25,000. The contract contains an arbitration agreement falling under Section Two of the Federal Arbitration Act, a dispute arises, A demands arbitration, B refuses to arbitrate, and A files a petition to compel arbitration in federal district court in the district where the arbitration is supposed to take place.

If there were federal question subject matter jurisdiction over all applications to compel arbitration under Section 4 of the FAA, then there would be federal subject matter jurisdiction over A’s petition.

But Section 4 tells us the question is whether a federal court would have subject matter jurisdiction over the underlying dispute that A claims is subject to arbitration.

There is no federal statute that says disputes over the performance of landscaping contracts are governed by federal law and may be brought in federal court. Nor do such disputes fall under the federal court’s admiralty jurisdiction.

The only possible basis for federal court subject matter jurisdiction is diversity of citizenship, but that, too, fails. While A and B are citizens of different states, the amount in controversy does not exceed $75,000, exclusive of costs and interest, for there is only $25,000 in dispute. See 28 U.S.C. § 1332(a).

A is out of luck in federal court and must bring its application in a state court of competent jurisdiction. The Federal Arbitration Act’s substantive provisions would, of course, continue to apply in the state court proceeding.

Order Directing Arbitration Proceed in the Manner Provided for in Such Agreement

Section 4 says that our “aggrieved” petitioner may “petition. . . [a federal district court having subject matter jurisdiction] for an order directing that such arbitration proceed in the manner provided for in such agreement.”

This portion of Section 4 specifies the relief that a successful petitioner may obtain. It is uncontroversial except in one respect: What does “in the manner provided for in such agreement[]” mean?

As respects requirements for arbitration expressly and clearly stated in the agreement, such as arbitrator selection and qualification provisions, and as respects the scope of arbitrable issues contemplated by the agreement, that directive is probably clear enough.

In cases where the parties have clearly and unmistakably agreed to arbitrate arbitrability issues, and where questions of arbitrability must be resolved to determine whether the underlying merits must be submitted to arbitration, the order would direct the parties to arbitrate the arbitrability issues, and proceed to arbitration of the merits issues if the arbitrator determines them to be arbitrable. That, too, would be a direction to arbitrate “in the manner provided for in [the] agreement.”

But sometimes the “manner provided for in such agreement” may not be so clear. Whether, for example, arbitration proceeds on a classwide basis, or on an individualized basis, certainly concerns the “manner” in which arbitration should proceed.

All the federal circuit courts that have considered the issue have concluded that consent to class arbitration to be a question of arbitrability. See Robinson v. Home Owners Mgmt. Enters., No. 18-0504, slip op. at 14-15 & n.55 (Tex. Nov. 22, 2019) (citing cases).

Courts that consider class arbitration consent to be a question of arbitrability can be expected to compel arbitration on an individualized basis in the event one or more parties demand arbitration on a class-wide basis, the class-arbitration opponent applies for an order compelling individual arbitration, and the court agrees that the agreement does not clearly provide for class arbitration.

But there are issues that concern the “manner” of arbitration provided in the agreement that are considered to be matters of procedure and thus presumed to be arbitrable. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84-85 (2002). Courts will not (or at least should not) decide those issues on a motion to compel arbitration but direct the arbitrator to decide them. That approach is perfectly consistent with making “an order directing that . . . arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4.

FAQs concerning the other four parts of Section 4 will follow in future segments of this post.

Please note. . .

This guide, including the instalments that will follow in later posts, and prior instalments, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed simply to give clients, prospective clients, and other readers general information that will help 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.

This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they voluntarily elect to do so.

If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.

About the Author

Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 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 a former partner of the litigation departments of the New York City firms of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP).

Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.

Loree & Loree was recently selected by Expertise.com out of a group of 1,763 persons or firms reviewed as one of Expertise.com’s top 18 “Arbitrators & Mediators” in New York City for 2019, and now for 2020. (See here and here.)

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, this article, or any other legal-related matter, you can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.



         

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