Supreme Court narrows federal courts ability to find jurisdiction to enforce arbitration awards under the Federal Arbitration Act

The Federal Arbitration Act is a nationwide law that authorizes arbitration of a number of types of claims, including many employment claims, such as discrimination and retaliation lawsuits. In recent years, the Supreme Court has taken an increasingly strong view of enforcing arbitration agreements, including in the employment context. But does a federal or a state court enforce the resulting arbitration award? In other words, say, the parties to a dispute agree that they are bound by an arbitration agreement, and they take the matter to arbitration, where one party loses, then that party tries to file a fresh lawsuit in court, where does the winner go to say, “Hey, I just litigated this in arbitration, I won, I shouldn’t have to litigate it all over again, please, court, enforce the award I just received from the arbitrator”?

Section 9 of the FAA authorizes federal courts to enforce an arbitration award, but it does not give the federal court substantive jurisdiction, meaning, the federal court has the power to enforce the arbitration award but it, first, must have jurisdiction over the parties before it can exercise that power. Federal court jurisdiction is a bit unusual. Unlike state court jurisdiction, which exists pretty broadly in all 50 states, federal court jurisdiction is limited to what is called (1) “diversity” jurisdiction, when the parties are from different states and at least $75,000 is at-issue, and (2) “federal question” jurisdiction, when, wherever the parties are from and whatever amount is at-issue, there is at least one federal law at-issue.

The FAA as a statute clearly did not create its own substantive federal law that would give rise to a “federal question” in every enforcement action. In other words, Congress did not intend that the winner in arbitration under the FAA would always be able to go to a federal court to enforce its award, Congress left at least some such enforcement actions to state courts.

But what if the underlying claim is itself a federal law claim, does that underlying federal law bootstrap the case up into a matter of federal-question jurisdiction? That was the issue in a recent Supreme Court case decided today. In Badgerow v. Waters, the employee worked for a securities company, and as such was to mandatory arbitration under the FAA pursuant to Financial Industry Regulatory Authority requirements. When she asserted claims arising out of her employment, the claims were accordingly submitted to arbitration, which she lost. Refusing to accept the arbitration award, she believed “that fraud had tainted the arbitration proceeding” (quoting the Supreme Court), she sued the company in state court. The company went to federal court and asked it to enforce the arbitration award by blocking the state court lawsuit. In support of its assertion that the federal court had jurisdiction, the company argued the federal court could “look through” the paperwork to see that the underlying employment claims asserted by Badgerow included federal law claim issues, thus raising a federal question.

The Supreme Court held that the federal court could not “look through” the paperwork to find federal question jurisdiction. The Supreme Court noted that the company could still establish diversity jurisdiction.

Interestingly for practitioners, the Supreme Court reaffirmed its prior ruling that “look through” is permitted when a party is seeking to enforce the arbitration agreement. In other words, had Badgerow refused to arbitrate her claims, the company could have sued in federal court, and a federal court could have “looked through” the paperwork at her underlying claims to determine that she was asserting a federal question. That would have given that hypothetical federal court jurisdiction to enforce the arbitration agreement by ordering her to go to arbitration. However, the Supreme Court held the language in the FAA that permitted “look throughs” in cases seeking enforcement of arbitration agreements is not present for cases involving enforcement-vacation of arbitration awards.

The Supreme Court’s ruling was near unanimous, with just one dissent. The majority anticipated this limitation will not likely blunt the enforcement of arbitration agreements or arbitration awards. Indeed, it is arguably a relatively obscure procedural twist in the sense that lawsuits to enforce arbitration awards are relatively rare, and even rarer are those asserting fraud as grounds to vacate an arbitration award.  The decision does not suggest that the Supreme Court is backing away from enforcing arbitration agreements under the FAA.