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WBK Industry News - Litigation Developments

4th Circuit Clarifies Federal Jurisdiction Over Motion to Vacate or Modify Arbitration Award Under Federal Arbitration Act

The U.S. Court of Appeals for the Fourth Circuit recently held that federal subject-matter jurisdiction over a motion to vacate or modify an arbitration award under sections 10 or 11 of the Federal Arbitration Act (FAA), similar to a motion to compel arbitration under section 4 of the FAA, is determined by the nature of the underlying dispute.

The matter arose when an online service provider (OSP), at the request of police, provided the police with certain information about a subscriber.  After the OSP complied with the police’s request, the subscriber complained to the OSP that it had violated its privacy policy, as well as the federal Stored Communications Act, by providing information about the subscriber without a warrant, subpoena, or the subscriber’s consent.  The subscriber also complained that the OSP had, without his consent, deleted all his emails, causing him damages, for which he requested a settlement of $74,999.  The OSP denied the subscriber’s claims.

Under the terms of the OSP’s service agreement, by which the subscriber agreed to binding arbitration of all disputes between the subscriber and the OSP, the subscriber sought arbitration of his claims and the arbitrator denied the subscriber’s claims.  Subsequently, the subscriber filed a motion in federal district court, requesting that the arbitration award be vacated or nullified under sections 10 and 11 of the FAA.  The subscriber also alleged that upon vacation of the award, his damages would exceed $75,000.

For subject-matter jurisdiction over the motion, the subscriber relied on federal question jurisdiction and diversity jurisdiction.  The district court dismissed the motion concluding that the subscriber failed to demonstrate diversity jurisdiction under 28 U.S.C. § 1332 because the damage claim he had presented to the arbitrator was $74,999 and thus did not exceed $75,000, as required by § 1332(a).  The court did not address the subscriber’s invocation of federal-question jurisdiction.  The subscriber appealed the district court’s judgement.

The Fourth Circuit stated that when the parties to an arbitration agreement are of diverse citizenship and the amount in controversy exceeds $75,000, diversity jurisdiction would authorize a federal court to resolve disputes concerning the arbitration process, regardless of the nature of the underlying dispute.  When diversity jurisdiction does not exist, however, and the underlying dispute arises under federal law, the question of subject-matter jurisdiction becomes more complex.  Under one approach, courts in the Second, Fifth and Sixth Circuit have focused on the fact that arbitration is a product of contract and concluded that disputes under the FAA should be treated as contract disputes, which are normally resolved in state courts.  Under another approach, courts in the Fourth and Eleventh Circuit have focused on the nature of the underlying dispute, concluding that jurisdiction should be determined by whether the court would have jurisdiction over the dispute but for the arbitration agreement.

The U.S. Supreme Court partially weighed in on this split of authority in Vaden v. Discover Bank, 556 U.S. 49 (2009).  The Court held that, in determining whether federal-question jurisdiction exists over a petition to compel arbitration under section 4 of the FAA, the court should “look through” the section 4 petition to the underlying dispute and determine whether that dispute arises under federal law.  In reaching its conclusion, the Court relied on section 4’s language authorizing the filing of a petition to compel arbitration in “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.”  In short, the Court held that “a party seeking to compel arbitration may gain a federal court’s assistance” if the underlying controversy “could be litigated in federal court.”

Following Vaden, courts in the Third and Seventh Circuit have held that because Vaden applied the “look through” approach to section 4 petitions largely based on the unique “save for” language in section 4’s text, the “look through” approach should not apply to motions to confirm, modify, or vacate arbitration awards under sections 9, 10 and 11 of the FAA, as those sections do not contain the “save for” language.  Other courts in the First and Second Circuit, however, have reasoned that the difference in language is not dispositive and have held that the “look through” approach should apply to sections 9, 10 and 11 motions.

In this matter, the Fourth Circuit, after assessing the different approaches, joined the reasoning of the First and Second Circuit and concluded that if the district court would have jurisdiction over a section 4 petition, were one to be filed, it would have jurisdiction over sections 10 and 11 motions.  Accordingly, the court vacated the district court’s order of dismissal that was based on a lack of subject-matter jurisdiction and remanded to allow the district court to resolve the subscriber’s motion under sections 10 and 11 of the FAA.  The court explained that since the subscriber’s underlying claim arose out of alleged violations a federal statute, and since the subscriber’s claim could, absent the arbitration agreement, be litigated in federal court under its federal-question jurisdiction, controversies regarding the arbitration of the subscriber’s claim should likewise be resolved in federal court.

The full opinion can be found here.