OPINION ANALYSIS

Justices craft jurisdictional framework for judicial supervision of arbitration

The Supreme Court’s decision Thursday in Badgerow v. Walters offers a comprehensive vision of the proper role of the federal courts in the arbitration process. All but Justice Stephen Breyer joined Justice Elena Kagan’s opinion, which narrowed the availability of federal jurisdiction over efforts to confirm or vacate arbitral awards.

The case arises under the Federal Arbitration Act, which does some things clearly – mandating the enforcement of pre-dispute arbitration agreements – but does other things obscurely, such as telling us which courts are supposed to implement the statutory commands. We know two things from the Supreme Court’s earlier decisions. First, the FAA does not generally give federal courts jurisdiction to hear cases that enforce the rules it provides. Second, from a recent decision (Vaden v. Discover Bank), we know how to assess jurisdiction at the opening stage of arbitration: a motion asking a court to compel arbitration. Under Vaden, federal courts “look through” the arbitration agreement to the underlying controversy. If that controversy is one over which federal courts have jurisdiction (a dispute under the Fair Labor Standards Act, for example), then federal courts have jurisdiction over any action to compel arbitration. If it is not, then only state courts have jurisdiction over any effort to compel arbitration.

Badgerow involved judicial supervision of the closing stage of arbitration: efforts to confirm, vacate, or modify an arbitral award. To illustrate with the facts of this case, Denise Badgerow formerly worked for a business partially owned by Greg Walters. After she was fired, she initiated an arbitration proceeding contending that she had been fired improperly, conforming to an employment agreement that required her to arbitrate that dispute. Because she claimed that the termination violated Title VII of the Civil Rights Act, a federal court would have had jurisdiction under Vaden over any action to compel arbitration; because Badgerow voluntarily sought arbitration, no such action was necessary.

After she lost the arbitration, Badgerow sued in Louisiana, asking a state court to vacate the arbitration award; Walters removed the suit to federal court and asked that court to confirm the award. The issue for the justices was whether the federal court had jurisdiction to decide whether the award should be confirmed or vacated. Kagan’s opinion holds that the federal court did not have jurisdiction.

Two key points drive Kagan’s opinion. The first is the unusual statutory language that drove the decision in Vaden. Vaden considered Section 4 of the FAA, which provides that it is proper to bring a motion to compel to any federal district court that, “save for [the arbitration] agreement, would have jurisdiction [over] a suit arising out of the controversy between the parties.” As explained above, the Supreme Court read that language to compel the district court to “look through” the petition to compel arbitration to base jurisdiction on the substance of the underlying dispute.

Badgerow, though, involved Sections 9 and 10 of the FAA, which describe procedures for confirming or vacating an arbitral award. Kagan notes that those sections “contain none of the statutory language on which Vaden relied.” Declining to “redline the FAA, importing Section 4’s consequential language into provisions containing nothing like it,” she notes that “Congress could have replicated Section 4’s look-through instruction in Sections 9 and 10,” or it “could have drafted a global look-through provision, applying th[at] approach throughout the FAA. But Congress did neither.” Kagan emphasizes that the “look-through rule” recognized in Vaden is “highly unusual” and “a jurisdictional outlier.” It is simply too much to pull look-through jurisdiction “out of thin air” and find “without textual support, that federal courts may use th[at] method to resolve … Section 9 and 10 applications.”

The second point, more practical than textual, is the distinction between the underlying controversy that the arbitration resolves (as compelled under Section 4) and the award that is the result of the arbitration (to be evaluated under Sections 9 and 10). That distinction is central to the vision that infuses Kagan’s opinion. Early on, she explains that an arbitration award, conceptually, is “no more than a contractual resolution of the parties’ dispute — a way of settling legal claims.” Among other things, that means that disputes about those awards should follow the rules for “quarrels about legal settlements,” which “typically involve only state law, like disagreements about other contracts.” That is so, she notes, “even [for] settlements of federal claims.”

For Kagan, that distinction explains “why Congress chose to place fewer arbitration disputes in federal court than Walters wishes.” She describes a “statutory plan” that provides a “normal – and sensible – judicial division of labor” for applications to confirm or vacate arbitral awards. Because “the underlying dispute is not now at issue” – even for “the arbitration of a federal-law dispute” – “the application concerns the contractual rights provided in the arbitration agreement,” which are “generally governed by state law” and typically belong[] in state courts.”

Her final point provides a historical gloss on the distinction between compelling arbitration (often in federal court under Vaden) and confirming or vacating arbitral awards (rarely to be in federal court after Badgerow). Earlier cases have recognized that “the ‘preeminent’ purpose of the FAA was to overcome some judges’ reluctance to enforce arbitration agreements when a party tried to sue in court instead,” but the Supreme Court “never detected a similar congressional worry about judges’ willingness to enforce arbitration awards already made.” Kagan suggests that the distinction supports the difference in outcomes between Vaden and Badgerow, as “Congress might well have thought an expansion of federal jurisdiction appropriate for petitions to compel alone,” leaving “[a]pplications about arbitral decisions [to] follow the normal rules.”