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 »
This second instalment of the Businessperson’s Federal Arbitration Act FAQ Guide addresses three threshold questions pertinent to the Federal Arbitration Act (the “FAA” or “Federal Arbitration Act”):
1. Does Chapter 1 of the FAA apply to my arbitration agreement?
2. Assuming it does, will a federal district court have subject matter jurisdiction over FAA litigation concerning the agreement or any awards made under it?
3. Does the Federal Arbitration Act apply in state court?
Does Chapter 1 of the FAA Apply to My Arbitration Agreement?
If your written arbitration agreement is contained in a maritime contract or a contract affecting commerce, or concerns a dispute arising out of such a contract, then it falls under Chapter 1 of the Federal Arbitration Act, unless it falls within Section 1’s exemption for contracts of employment of transportation workers engaged in interstate commerce. (See here.) It may also fall under Chapters 2 or 3 of the FAA, which implement the New York and Panama Conventions.
In our first instalment of this FAQ guide (here) we explained that Federal Arbitration Act Section 2, 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).
Section 2’s requirement that an arbitration agreement be “written” seems simple enough, and, for the most part, it is, at least in wholly domestic arbitrations to which Chapters 2 or 3 of the FAA do not concurrently apply. But there are some caveats.
First, just because a contract is required to be “written” doesn’t necessarily mean the arbitration agreement must be signed. The arbitration agreement between the parties need only be in writing, although the arbitration-agreement proponent would need to show that the parties assented to the writing.
For example, suppose A agrees to provide services for B and further agrees that any disputes arising out of or relating to their agreement will be submitted to arbitration. A and B proceed to memorialize their agreement in a writing, including the agreement to arbitrate, spelling out the essential terms of their agreement. While the writing is not signed or initialed, both parties agree that it reflects the essential terms of the parties’ bargain. The written memorialization of the agreement is sufficient to establish a “written” agreement, even though it is not signed by the party opposing its enforcement.
Second, provided there is a written agreement between at least two parties, persons who are not parties to that agreement (“nonparties”) may, in appropriate circumstances, enforce the agreement or be bound by it if general principles of state law permit that result. Such general principles include “‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel[.] . . .’” . Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009) (citations omitted). This Term the United States Supreme Court is to determine whether such principles apply in cases governed by Chapter 2.
As respects whether a “contract” “evidenc[es] a transaction involving commerce,” the U.S. Supreme Court has interpreted Section 2 broadly to mean the Federal Arbitration Act applies to arbitration agreements in contracts or transactions that “affect” commerce, that is, to any contract or transaction that Congress could regulate in the full exercise of its Commerce Clause powers. See Allied-Bruce, 513 U.S. at 281-82; U.S. Const. Art. I, § 8, Cl. 3 (giving Congress power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes”).
Whether a contract “affects” commerce depends on the facts concerning, among other things, the parties, the contract’s subject matter, and the actual or contemplated transactions constituting the contract’s performance or contemplated performance. See Alafabco, 539 U.S. at 56-57. A party does not have to demonstrate that the contract has a “specific” or “substantial” “effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice subject to federal control.” Id. (citations and quotations omitted). The question is whether the “aggregate economic activity in question” “bear[s] on interstate commerce in a substantial way.” Id. at 57.
Assuming that Chapter 1 of the FAA Applies to my Arbitration Agreement, Will a Federal District Court have Subject Matter jurisdiction over FAA Litigation Concerning the Agreement or any Awards Made under it?
Not necessarily. Unless an arbitration agreement also falls under Chapters 2 or 3 of the FAA, then there must be an independent basis for federal subject matter jurisdiction.
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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 »
