Litigating Arbitration Awards: Federal Courts Decline to Punch the Jurisdictional Ticket

Over two years ago, the United States Supreme Court divested the federal courts of jurisdiction over all but a few disputes concerning the confirmation or vacation of arbitration awards. Since then, the federal appellate courts have further chipped at the contours of their subject matter jurisdiction, essentially delegating enforcement of arbitral awards to the states.

In Badgerow v. Walters, 596 U.S. 1 (2022), the Supreme Court held that once an arbitration proceeding is complete, and a decision and award issued, litigating the award’s enforceability amounts to no more than a garden variety contract claim for breach of a settlement agreement.[1] The Court reasoned that because contract claims are generally creatures of state law, absent diversity of citizenship, federal courts lack jurisdiction to confirm or vacate arbitral awards, even where the underlying dispute involves federal claims.[2]

Prior to Badgerow, the standard for determining federal jurisdiction over arbitrable claims had been a “look-through” analysis set forth by the Supreme Court in Vaden v. Discover Bank, 556 U.S. 49 (2009). Developed in response to motions to compel arbitration brought under Section 4 of the Federal Arbitration Act (the “FAA”), the look-through approach pierced the motion to compel by seeing through it to the parties’ underlying claims, and considering whether, save for the alleged arbitration agreement, a federal court would have had jurisdiction over such claims, either because they posed a question of federal law or because there was diversity of citizenship.[3] If the underlying controversy fell within federal jurisdiction, then the court had jurisdiction to rule on the motion to compel arbitration.[4] The impact of the look-through approach was to cast a wide net in bringing arbitrable cases to federal court.

The circuit courts were divided as to whether this look-through approach governing motions to compel under Section 4 of the FAA was equally applicable to petitions to confirm or vacate under Sections 9 and 10, respectively, of the FAA.[5] Resolving the split, the Supreme Court held in Badgerow that the look-through approach should not be applied on petitions to confirm or vacate awards. Instead, to obtain federal jurisdiction, the “face of the petition” must contain an “independent jurisdictional basis.”[6] No such independent jurisdictional basis existed in Badgerow because although the underlying arbitration dispute alleged unlawful termination under federal employment law, the petition to confirm the award was solely over whether fraud had tainted the arbitration proceeding, which the Supreme Court held is purely a question of state law.[7] Thus, without diversity of citizenship, there was no entryway to federal court.[8]

In doing away with the look-through approach, the Supreme Court emphasized the “judicial division of labor” between federal and state courts in implementing the FAA.[9] The reason supporting the enlarged role of state courts on enforcement applications is that after an arbitrator has adjudicated the underlying dispute and rendered an award, it is irrelevant whether that dispute ever presented a federal question. In the aftermath of its adjudication, litigation over the award “is no more than a contractual resolution of the parties’ dispute — a way of settling legal claims,”[10] which is squarely within the purview of state courts.

Badgerow’s Repercussions: More Limits on Federal Jurisdiction

Relying on Badgerow, courts have continued to constrict federal jurisdiction over enforcement applications. In SmartSky Networks, LLC v. DAG Wireless, LTD., 93 F.4th 175 (4th Cir. 2024), the Fourth Circuit recently held that even where a claim is originally brought in federal court, and subsequently stayed because it is subject to arbitration, the federal court does not have “continuing jurisdiction” when it comes to enforcement of the arbitration award.[11] In another recent case, Friedler v. Stifel, Nicolaus, & Co., Inc., 108 F.4th 241 (4th Cir. 2024), the Fourth Circuit also held that even where the grounds for a petition to vacate an award is manifest disregard of federal securities laws, this alone does not justify the exercise of federal jurisdiction. These two cases are discussed below.

Enforcement Applications on Claims Originally Brought in Federal Court

A notable fact of Badgerow was that federal jurisdiction was sought for the first time only on the enforcement application. The original employment dispute was not brought in federal court, but was submitted to arbitration at the outset because of a clause in the employment contract. By contrast, in SmartSky Networks, LLC v. DAG Wireless, LTD., 93 F.4th 175 (4th Cir. 2024), the underlying action was initiated in federal court, the basis for subject matter jurisdiction being a federal trade secret statutory claim.[12] However, because of an arbitration clause in the parties’ agreement, a motion to compel arbitration followed, and the case was stayed pending arbitration. After the arbitration panel heard the dispute and issued a final award, the respective parties moved to confirm and vacate that award in the same federal court where the underlying action had first been brought.

The threshold question on the motions to confirm and vacate was whether the federal court’s retention of jurisdiction while the arbitration was pending gave it an independent jurisdictional basis under Badgerow to rule on the motions. The District Court correctly noted that the circumstances of Badgerow were plainly different, the case there not having originated in federal court. Considering this distinction significant, the District Court held that the federal court did have jurisdiction over the enforcement applications because “[i]t would be a strange interpretation of the FAA that a federal court, which has subject matter jurisdiction over claims that it subsequently refers to arbitration, is deprived of its jurisdiction to confirm or vacate the arbitration award.”[13]

The Fourth Circuit disagreed. The court held that by the time it came to enforcing the award, the parties were no longer litigating their business relationship, the claims arising from that relationship — including the federal trade secret ones — having been resolved by the arbitration panel.[14] All that was left was a contract dispute among the parties over enforcement of the award. That the federal court had jurisdiction over the original action was of no moment. The Fourth Circuit held that Badgerow does not distinguish between a freestanding application for confirmation of the award, as was the case in Badgerow, versus an application filed in a previously stayed federal action, as was the case in SmartSky.[15]

In other words, a federal claim is not a “jurisdictional anchor” for the district court to retain or continue jurisdiction over claims that it refers to arbitration.[16] As with freestanding applications for confirmation or vacation, an independent jurisdictional basis must be demonstrated to gain access to federal court.

Manifest Disregard of Federal Law

One might expect that a vacation petition alleging manifest disregard of federal securities law by the arbitrator confers subject matter jurisdiction. Evaluating the petition would necessarily require the court to opine on the proper interpretation of the Securities Exchange Act (the “SEC Act”), and then to determine if the arbitrator manifestly disregarded it. Indeed, pre-Badgerow, the Second Circuit, addressing this very issue, held that a petition to vacate claiming manifest disregard of the SEC Act “so immerses the federal court in questions of federal law and their proper application that federal question subject matter jurisdiction is present.”[17]

However, in the wake of Badgerow, the court in Friedler v. Stifel, Nicolaus, & Co., Inc., 108 F.4th 241 (4th Cir. 2024) reached a different conclusion. Holding that manifest disregard of the law did not provide an independent basis for federal jurisdiction, Friedler began with the principle that judicial review of arbitration awards is “severely circumscribed,” a court’s only focus being whether the arbitrator “did his job — not whether he did it well, correctly, or reasonably.”[18] Minimal judicial scrutiny of an arbitrator’s interpretation of the law effectuates parties’ freedom to contract, as parties who agree in advance to submit their disputes to arbitration “assume the risk that the arbitrator may interpret the law in a way with which they disagree.”[19] Given that a court’s review of an arbitrator’s interpretation of the law must be fairly cursory, manifest disregard of federal law is not a sufficiently “substantial” issue to present a federal question on a vacation application.[20] Rather, the issue is best resolved by the state courts, which can rely on federal precedents interpreting the SEC Act to determine if the arbitrator manifestly disregarded it.

This is not to say that an arbitrator’s interpretation of federal statutes is absolutely immune from federal court review. Friedler itself recognized that certain statutes expressly authorize federal courts to enforce or vacate arbitral awards, one being the Labor Management Relations Act (the “LMRA”) which confers federal jurisdiction over “s]uits for violation of contracts between an employer and a labor organization.”[21] In light of the LMRA’s statutory grant of jurisdiction, the Sixth Circuit held, just a few months after Badgerow was decided, that because an enforcement application over the refusal to comply with a labor arbitration award is simply a contract dispute between an employer and a labor organization, it belongs in federal court pursuant to the LMRA.[22]

The SEC Act, however, has no similar grant of jurisdiction. Moreover, Friedler emphasized that a “federal general common law” does not exist under our constitutional framework, most regulatory authority being left to the states.[23]  In the absence of a federal common law, manifest disregard of a federal statute should not be used as a vehicle to manufacture a federal common law cause of action as a jurisdictional gateway.[24] To hold otherwise would open the door Badgerow closed by allowing entry to federal court every time a party is displeased with how an arbitrator applied federal law.[25] As the court in Friedler held, “[w]e decline to punch that ticket.”[26]

Conclusion: Contracting Into Federal Court? Proceed With Caution

For a variety of reasons, practitioners may prefer to bring their enforcement disputes in a federal forum. Yet without complete diversity of citizenship, this is now likely not possible.

Nevertheless, an analysis of Badgerow yields a potential solution to overcoming the jurisdictional hurdle. Badgerow instructs that subject matter jurisdiction over enforcement of an arbitration award turns on the law governing the contractual rights provided in the arbitration agreement, as opposed to the law governing the underlying claims.[27] Following this reasoning, pre-litigation, parties might consider incorporating a contractual forum selection clause into their arbitration agreement that calls for petitions to confirm or vacate the arbitration award to be brought in federal court. Using such a clause to create an independent federal jurisdictional basis hews closely to Badgerow’s central tenet, which is that in a battle over enforcement, the contract is key.

However, while a choice of forum clause may appear a judicially sanctioned work-around of Badgerow’s and the Fourth Circuit’s restrictions on jurisdiction, practitioners should be mindful that, outside the arbitration context, courts have held that a forum selection clause cannot by itself grant federal jurisdiction, where neither diversity of citizenship nor a federal question exists.[28] Per these authorities, subject matter jurisdiction is not bestowed just because the parties say it is in their contract.[29]

With forum selection clauses off the table, we are left with the “judicial division of labor” handed down in Badgerow and its progeny. Going forward, this means that much of the work of enforcement is now in the hands of the state courts.

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[1]Badgerow v. Walters, 596 U.S. 1, 9 (2022).

[2]Id.

[3]Id. at 4-6 (citing Vaden v. Discover Bank, 556 U.S. 49 (2009)).

[4]Id. at 5.

[5]Id. at 7 (citing Quezada v. Bechtel OG&C Constr. Servs., Inc., 946 F.3d 837, 843 (5th Cir. 2020) (look-through approach applied to applications to confirm, vacate, or modify arbitral awards); Ortiz-Espinosa v. BBVA Securities of P. R., Inc., 852 F.3d 36, 47 (1st Cir. 2017) (same); Doscher v. Sea Port Group Securities, LLC, 832 F.3d 372, 381–388 (2d Cir. 2016) (same); McCormick v. America Online, Inc., 909 F.3d 677, 680–684 (4th Cir. 2018) (same); Goldman v. Citigroup Global Markets Inc., 834 F.3d 242, 252–255 (3d Cir. 2016) (look-through approach does not apply to applications to confirm, vacate, or modify arbitral awards) (emphasis added); Magruder v. Fidelity Brokerage Servs., 818 F.3d 285, 287–289 (7th Cir. 2016) (same)).

[6]Id. at 9.

[7]Id. at 6, 9.

[8]The look-through approach still governs motion to compel arbitration brought under Section 4 of the FAA.

[9]Id. at 18.

[10]Id. at 9.

[11]SmartSky Networks, LLC v. DAG Wireless, LTD., 93 F.4th 175, 185 (4th Cir. 2024).

[12]Id. at 178.

[13]SmartSky Networks, LLC v. Wireless Sys. Sols., LLC, 630 F. Supp. 3d 718, 726–27 (M.D.N.C. 2022).

[14]SmartSky, 93 F.4th at 182.

[15]Id. at 184.

[16]Id.

[17]Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000).

[18]Friedler v. Stifel, Nicolaus, & Co., Inc., 108 F.4th 241, 246 (4th Cir. 2024).

[19]Id.

[20]Id. at 247.

[21]Id. at 247-48 (citing 29 U.S.C.A. § 185 (a)).

[22]Greenhouse Holdings, LLC v. Int’l Union of Painters & Allied Trades Dist. Council 91, 43 F.4th 628, 631 (6th Cir. 2022).

[23]Friedler, 108 F.4th at 249.

[24]Id. at 248-50.

[25]Id. at 250.

[26]Id.

[27]Badgerow, 596 U.S. at 18.

[28]USP Maryland, Inc. v. Raley, 2024 WL 894887, at *2 (D. Del. Mar. 1, 2024); Capitol Hotel Assocs., L.P., L.L.P. v. Signature Special Events Servs., Inc., 2008 WL 11432090, at *3 (E.D.N.C. Feb. 11, 2008) (“forum selection clauses do not govern federal jurisdiction”).

[29]See also Licensed Prac. Nurses, Technicians & Health Care Workers of New York, Inc. v. Ulysses Cruises, Inc., 131 F. Supp. 2d 393, 402–03 (S.D.N.Y. 2000) (“Private parties cannot defeat the subject matter jurisdiction of the federal courts by means of a forum-selection clause, any more than they could, by the same means, confer such jurisdiction on this court in a case in which diversity or a federal question were lacking.”) (emphasis in original).