Badgerow v. Walters

Issues 

Do federal courts have jurisdiction to decide post-award arbitration claims when subject-matter jurisdiction is based solely on an undisputed federal claim?

Oral argument: 
November 2, 2021

This case asks the Supreme Court to determine to what extent proceedings to vacate or enforce an award under the Federal Arbitration Act (“FAA”) belong in federal court. The Supreme Court has previously decided that motions to compel arbitration can be heard in federal court if there is a federal question when the court “looks through” to the underlying claim. Denise Badgerow contends that the Supreme Court’s look-through approach does not apply to post-award proceedings; in her view, a plain reading of the FAA deprives federal district courts of jurisdiction to adjudicate post-award claims. Walters counters that federal district courts have subject-matter jurisdiction in such instances, and that a motion to vacate an arbitration award does not deprive federal courts of subject-matter jurisdiction over underlying controversies. The outcome of this case has serious implications for future parties to arbitration proceedings under the FAA and for the federal district courts’ authority to enforce arbitration awards.

Questions as Framed for the Court by the Parties 

Whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act when the only basis for jurisdiction is that the underlying dispute involved a federal question.

Facts 

From January 2014 to July 2016, Denise A. Badgerow worked as an associate financial advisor for REJ Properties, Inc (“REJ”). Badgerow v. Walters at 2. REJ is a Louisiana corporation whose three principals, the Respondents (collectively “Walters”), acted as franchise advisors for Ameriprise Financial, Inc. (“Ameriprise”). Id. While Badgerow worked at REJ, she signed an arbitration agreement appertaining to all potential claims against REJ, Ameriprise, and their affiliates. Id.

After REJ terminated Badgerow’s employment in 2016, she initiated an arbitration proceeding against Walters and Ameriprise before the Financial Industry Regulation Authority (“FINRA”). Id. at 2-3. Badgerow sought tort damages against Walters and the other REJ principals for tortious interference and for allegedly violating Louisiana’s “whistleblower” statute. Id. at 3. Badgerow also made a claim for declaratory judgment under Title VII of the Civil Rights Act of 1964 (“Title VII”) against Ameriprise. Id. In making a Title VII claim, Badgerow sought to hold Ameriprise jointly liable for the acts of REJ and Walters. Id. In December 2018, the FINRA panel dismissed Badgerow’s claims against Walters and Ameriprise with prejudice. Id.

In May 2019, Badgerow filed a petition in Louisiana state court to vacate FINRA’s dismissal of her claims against Walters, alleging that Walters committed fraud on the arbitration panel. Id. In response, Walters removed the Louisiana state court action to the United States District Court for the Eastern District of Louisiana (“District Court”) and filed a motion with the District Court to confirm the FINRA panel’s dismissal of Badgerow’s claims. Id. Preferring a state court forum, Badgerow moved to remand, asserting that the District Court lacked federal subject-matter jurisdiction to decide the petition to vacate. Id.

The District Court denied Badgerow’s motion, concluding that it had subject-matter jurisdiction over the case. Id. In so holding, the District Court used the United States Supreme Court’s (“Supreme Court”) look-through approach, which assists trial courts with determining whether there is federal jurisdiction in arbitration actions under Section 4 of the Federal Arbitration Act (“FAA”). Id. at 5. Under the look-through approach, federal courts look to the claims underlying the dispute to determine whether the case could have been litigated in federal court if the arbitration agreement did not exist. Id. If the underlying claims could have been decided in federal court, subject-matter jurisdiction exists. Id. The District Court reasoned that Badgerow’s Title VII claim against Ameriprise conferred federal subject-matter jurisdiction because, even though Ameriprise was not a named party in Badgerow’s motion to vacate, her federal claim remained part of the “whole controversy.” Id. at 5-6. The District Court also held that Walters had not committed fraud on the FINRA arbitration panel, denied Badgerow’s petition to vacate the judgment, and affirmed the award. Id.

Badgerow appealed to the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”). Id. The only issue before the Fifth Circuit was whether the District Court had subject-matter jurisdiction over Badgerow’s petition to vacate the award and, by implication, whether the District Court could deny her motion to remand the case back to Louisiana state court. Id. at 4. The Fifth Circuit, also applying the Supreme Court’s look-through approach, found that Badgerow’s claims against Ameriprise and Walters shared the same set of common facts. Id. at 6-7. Looking at the “full-bodied controversy,” the Fifth Circuit held that Badgerow’s federal claim against Ameriprise sufficiently bestowed federal subject-matter jurisdiction. Id. at 8. The Fifth Circuit also found Badgerow’s state law claims against Walters fell under 28 U.S.C. § 1367(a), the federal court’s supplemental jurisdiction. Id. The Fifth Circuit affirmed the District Court’s finding of jurisdiction and its denial of Badgerow’s motion for remand. Id. at 8-9.

The Supreme Court granted Badgerow certiorari on May 17, 2021. Brief for Petitioner, Badgerow at 1.

Analysis 

INTERPRETING SECTIONS 9 AND 10 OF THE FEDERAL ARBITRATION ACT

Petitioner Badgerow argues that the Supreme Court should read Section 9 and Section 10 of the FAA according to the plain meaning of the text, not by importing the look-through approach used in FAA Section 4 proceedings. Brief for Petitioner, Badgerow at 16. In crafting the look-through approach in Vaden v. Discover Bank, the Supreme Court relied on the language of Section 4, which allows a party to file in “any United States district court which, save for such agreement, would have jurisdiction under Title 28,” in order to compel arbitration. Id. at 1a. The Supreme Court interpreted “save for such agreement” to mean that a district court must have federal subject matter jurisdiction over the underlying dispute. Id. at 16. Because Sections 9 and 10 of the FAA do not include the “save for such agreement” language, Badgerow contends that the Court must use a different approach for those sections so as to not render Section 4’s “save-for” clause surplusage. Id. at 18.

By contrast, Respondent Walters maintains that approaching Section 9 and 10 suits differently than Section 4 suits would create an unworkable standard. Brief for Respondents, Walters at 27. They argue that extending the Section 4 look-through approach to Sections 9 and 10 would simplify jurisdictional rules and thus promote predictability and judicial economy. Id. According to Walters, district courts already frequently assess whether there is federal subject matter jurisdiction over an underlying claim, and there is a “deep body of caselaw [sic]” to help the district courts make such decisions. Id. Thus, they contend that Badgerow’s approach would breed excessive litigation over “threshold jurisdictional issues.” Id. at 28.

UNDERLYING ARBITRATION VS. FREESTANDING CONTRACTUAL CLAIM

While Badgerow concedes that her underlying claim does raise a federal question, she maintains that the subsequent dispute over the arbitration award does not. Brief for Petitioner, Badgerow at 21. Badgerow characterizes the arbitration award as akin to an “out-of-court settlement” which requires a contractual resolution. Id. at 13, 22. Thus, Badgerow contends that once the arbitration has reached the award stage, any challenge to the award needs an “independent jurisdictional basis” to be litigated in federal court. Id. at 21. According to Badgerow, the proper forum for a post-arbitration controversy with no independent federal jurisdiction is in state court. Id. at 22.

Walters counters by asserting that the arbitration award is part of the same underlying arbitration controversy. Brief for Respondents, Walters at 27. They argue that Sections 4, 9 and 10 of the FAA are describing venue requirements for the Federal District Court to hear a dispute over an arbitration claim, rather than jurisdictional requirements. Id. at 23. In support of this proposition, Walters points to the lack of standard jurisdiction-granting language, such as “district courts shall have original jurisdiction” over the type of controversy. Id. Instead, Walters argues that because the district court has federal subject matter jurisdiction over Badgerow’s Title VII claim, it also has supplemental jurisdiction over the state law claims arising from the same “common nucleus of operative fact.” Id.; United Mine Workers of America v. Gibbs at 383. Walters further contends that even if Badgerow’s characterization of the post-arbitration controversy is correct, the federal court would nevertheless have subject matter jurisdiction under 28 U.S.C.§ 1337 because the motion to vacate “aris[es] under” an “Act of Congress regulating commerce.” Id. at 29, 30.

PURPOSE AND SCOPE OF THE FEDERAL ARBITRATION ACT

Badgerow argues that the purpose of the FAA is to “overcome courts’ refusals to enforce” arbitration agreements. Brief for Petitioner, Badgerow at 24. Badgerow contends that that rationale is inapplicable in this context, however, as courts are not as hesitant to “enforce or review post-arbitration awards” as they are to enforce arbitration agreements. Id. Consequentially, Badgerow urges that her reading of the FAA is consistent with Congress’s intent to expand federal jurisdiction specifically for Section 4 motions (to compel arbitration), but not for Sections 9 and 10 motions (to enforce or vacate arbitration awards). Id.

Badgerow also points to the longstanding FAA jurisprudence predating Vaden that did not apply the look-through approach to Section 10 motions to vacate arbitration awards. Id. at 25. Badgerow insists that despite this historical practice, arbitration has always remained a “viable means of resolving [parties’] disputes,” thus advancing Congressional intent. Id. at 26. Furthermore, according to Badgerow, state courts have “administer[ed] arbitration rights for decades.” Id. at 25. She argues that because Congress has not expanded federal FAA jurisdiction in the face of the state court administration, Congress’s inaction serves as further evidence that Congress intended for state courts to continue their historical role. Id.

Walters counters that Badgerow’s interpretation would “close the federal courthouse doors” to many motions based on the FAA, such as those between non-diverse parties. Brief for Respondents, Walters at 37. They point to Badgerow’s concession that her interpretation would relegate non-diverse parties to state court. Id. Thus, Walters argues that this would impede Congress’s intent in allowing FAA suits to be filed in federal courts. Id. In particular, Walters points to the language of Sections 3, 4, 7, 9, 10, and 11, which refer to FAA suits in United States courts. Id.

According to Walters, Badgerow’s interpretation could undermine the Congressional intent of promoting “streamlined dispute resolution” through arbitration. Id. at 42. They argue that Badgerow’s interpretation could render compelled arbitration meaningless if there is no “enforceable award on the back end.” Id. at 45. In support of this contention, they point to certain state laws that allow a state court to vacate an arbitration award based on a “reassessment of the legal and factual issues” before the arbitration panel. Id. at 46. Thus, Walters urges that relegating motions to enforce or vacate arbitration awards to state court would contravene the Congressional purpose of the FAA. Id.

Discussion 

STATE COURTS AND THE FAA

Badgerow posits that state courts have consistently played an important role in enforcing arbitration awards. Brief for Petitioner, Badgerow at 25. Badgerow asserts that state courts can be relied on to adjudicate at the post-award stage of arbitration disputes. Id. at 24. Moreover, Badgerow points out that state courts take the same or a very similar approach to the FAA regarding confirming or vacating arbitration awards as do federal courts. Id. at 25. Badgerow highlights that state courts have “faithfully” enforced arbitration rights for years, and therefore there is no apparent advantage to reallocating authority over arbitration cases to federal courts. Id. Badgerow concludes that there is no reason to burden federal courts with banal FAA fillings when state courts can competently adjudicate post-award arbitration claims. Reply Brief for Petitioner, Badgerow at 21.

Professor Imre Stephen Szalai (“Professor Szalai”), an arbitration scholar, in support of Walters, counters that Congress never intended for the FAA, a wholly unified federal statute, to be enforced in state courts. Brief of Amicus Curiae Imre Stephen Szalai, in support of Walters at 11-12. Professor Szalai further clarifies that Congress, when it drafted the FAA in 1924, did not contemplate state courts taking a significant role in confirming or vacating arbitration awards. Id. at 13. Professor Szalai highlights that some state courts have declined to adjudicate post-award arbitration decisions because those state courts concluded that the FAA’s provisions for post-award judicial review are directed solely at federal courts. Id.

FAIRNESS TO THE PARTIES AND THE LOOK-THROUGH APPROACH

Badgerow asserts that restricting the applicability of the look-through approach creates administrative simplicity because the look-through approach requires jurisdictional analysis beyond a facial read of the pleadings. Reply Brief for Petitioner, Badgerow at 19. Badgerow rejects Walters’ assertion that eschewing the look-through approach in post-award proceedings would create opportunities for gamesmanship and overly complicate judicial administration over arbitration proceedings. Id. at 19-20. Badgerow stresses that Walters failed to provide any evidence or research to support their assertion that, without the look-through approach, “savvy parties” would have a competitive advantage in post-arbitration litigation. Id. 20-21.

The Securities Industry and Financial Markets Association (“Association”), in support of Walters, responds that the look-through approach reflects a judicial policy preference for enforcing arbitration agreements. Brief of Amicus Curiae Securities Industry and Financial Markets Association, in support of Walters at 17-18. The Association argues that parties like Badgerow wrongly assume that they can avoid the FAA’s policy preference for enforcing arbitration agreements, as well as the decisions of arbitration panels, by litigating the enforcement of arbitration awards in state courts. Id. at 18. Regardless of whether such an assumption has any substance, the Association stresses there will likely be negative consequences as a result—namely gamesmanship and parties disproportionately bringing post-award motions in state courts. Id. The Association reasons that the look-through approach is fair to all parties in the arbitration process because litigants, at the outset, will know whether federal jurisdiction exists. Id.

Conclusion 

Acknowledgments