To Litigate or Arbitrate: Can A Losing Party Choose Both?

By: Stephanie Durr

Given the ever-increasing litigation costs, parties often turn to alternative dispute resolution mechanisms, including arbitration.  Nevertheless, if a party suffers an adverse outcome in arbitration, can they turn to state court to relitigate their claims?  Denise Badgerow hopes the answer is yes. 

Earlier this month, the Supreme Court waded into the jurisdictional thicket regarding the Federal Arbitration Act (FAA).  In recent years, the Supreme Court’s decisions regarding the FAA have overturned lower courts’ refusal to enforce arbitration agreements.  Badgerow v. Walters, however, presented a novel legal issue discussing whether federal courts have subject matter jurisdiction to vacate an arbitration award when the only basis for jurisdiction is that the underlying dispute involved a federal question.

Keys to the Federal Courthouse: Subject Matter Jurisdiction

For a court to properly hear a case, it must have jurisdiction over both the subject of the case and the parties to the lawsuit. Subject matter jurisdiction determines whether a court can issue a valid judgment regarding the subject of the case.  According to Article III, Section 2 of the Constitution, federal courts have limited subject matter jurisdiction.  For a federal court to have subject matter jurisdiction, the case must involve (1) diversity of citizenship or (2) a federal question.

For a federal court to have subject matter jurisdiction based on diversity of citizenship, the case must be between “citizens of different states.”  Statutory law has limited this to grant jurisdiction when the case is between citizens of different states, and the matter in controversy exceeds $75,000.

For jurisdiction based on a federal question, the Constitution grants federal courts the power to hear cases “arising under [the] Constitution, the laws of the United States, and treaties made, or which shall be made, under their authority.”  Thus, plaintiffs seeking to establish jurisdiction based on a federal question must follow the “well-pleaded complaint” rule: allegations necessary for a plaintiff to state a proper claim must arise under federal law.

What Was Congress Thinking?: The Federal Arbitration Act’s Textual Contention

At the heart of Badgerow is the FAA’s textual difference between Section 4 and Sections 9 through 11.  Section 4 grants courts the power to compel arbitration, while Sections 9 through 11 discuss the provisions for confirming, vacating, or modifying an arbitration award.  For parties who have signed a pre-dispute arbitration agreement, Section 4 makes avoiding arbitration all but impossible. This section allows a party to file a motion to compel arbitration in “any United States district court which, save for such agreement, would have jurisdiction under title 28” (in other words, under the two types of jurisdiction discussed above). In Vaden v. Discover Bank, the Supreme Court relied on that language. It adopted a “look through” approach to determine whether a federal court would have subject matter jurisdiction over the motion.  Most notably, however, the Vaden Court held that the FAA does not grant jurisdiction, meaning it cannot be an alternative to either diversity jurisdiction or federal question jurisdiction.  Essentially, under Vaden, federal courts only have jurisdiction over the motion to compel if the court would have jurisdiction over the underlying controversy between the parties.   Accordingly, courts should “look through” the motion to compel arbitration to the underlying dispute to determine whether it involves diversity jurisdiction or federal question jurisdiction.

However, Sections 9, 10, and 11 of the FAA do not have the same jurisdictional threshold. Instead, these sections state that a party can move to confirm, vacate or modify the award in a court specified by the arbitration agreement itself.  Alternatively, a case can be brought in “the United States court in and for the district within which such award was made.”  This section also states that the court must confirm the award if it does not vacate or modify it.  Sections 10 and 11 provide detailed standards for vacating or modifying the award, respectively.

Although parsing the different languages may seem excessive, the difference is monumental for the “Denise Badgerows” of the world.  To understand why it is essential to discuss her case’s underlying controversy and procedural nuances.

Badgerow v. Walters: The Epitome of the Jurisdictional Thicket

In January 2014, REJ Properties, Inc. (REJ), a Louisiana-based independent franchise, hired Denise Badgerow as an associate financial advisor.  Badgerow held that role until July 2016, when the company terminated her. Badgerow contended she faced gender discrimination and was released for either reporting the discrimination or reporting securities violations committed by her employer.  Common among industry professionals, Badgerow’s employment contract contained an arbitration agreement under the rules promulgated by the Financial Industry Regulatory Authority (FINRA), a private organization regulating securities professionals.  That agreement is the subject of the instant litigation.

Badgerow first challenged her employer before the Equal Employment Opportunity Commission (EEOC).  Then, Badgerow initiated an arbitration agreement against the three principals of REJ, Greg Walters, Ray Trosclair, and Thomas Meyer (respondents in the instant case).  In the FINRA arbitration, Badgerow sought damages for tortious interference with a contract and violations of Louisiana’s whistleblower law.  Finally, Badgerow instituted a lawsuit in federal district court against her employer because the employer had not signed the arbitration agreement.  The EEOC, the arbitrator, and the federal judge dismissed Badgerow’s claims. 

The principals then filed a motion asking the federal court to confirm the arbitration award against Badgerow.  Before the court could grant the motion, Badgerow sued the three principals in a Louisiana state court, asking that court to vacate the arbitration award, but only regarding the whistleblower claim.  The principals removed that case to the federal court, considering the motion to confirm the award.  The federal court had to decide whether it had jurisdiction over Badgerow’s motion to vacate the award. 

The district analyzed the subject matter jurisdiction through Vaden’s “look-through approach” and held that jurisdiction exists if at least one of Badgerow’s claims in the FINRA arbitration arose under federal law.  Since her employment claim was predicated on federal employment law, it satisfied federal question jurisdiction even though the dismissal of that claim was not the claim Badgerow sought to vacate.  Thus, the district court found jurisdiction over Badgerow’s motion to vacate but ruled in favor of the principals and refused to vacate the award.   

The jurisdiction implications are significant: if the federal district court did not have subject matter jurisdiction over Badgerow’s motion, she would be free to return and persuade the state court to vacate the arbitration award.

Badgerow’s Plea: “Let Me Litigate!”

At oral arguments, Badgerow contended that the absence of the jurisdictional language in Sections 9 through 11 means that federal courts do not have jurisdiction over disputes arising under those sections of the statute.  Further, Badgerow argued that the express authorization of federal filings granted in Section 4 implies that federal filings are not generally available under Sections 9 through 11. By adopting this approach, the Supreme Court would deprive federal courts of the ability to confirm or vacate arbitration awards when the underlying controversy is based on a federal question, thus leaving federal statute interpretations up to state courts.

Justice Kagan took issue with Badgerow’s approach during oral arguments, contending that it would deprive federal courts of the ability to confirm or vacate awards based on federal law.  Similarly, Justice Breyer noted that this approach would allow a party to compel arbitration in federal court but deprive the party of the ability to confirm that award in federal court.

Ameriprise’s Defense: “You Agreed to Arbitrate!”

In a relatively straightforward idea, Anterprise argued that federal courts should supervise the arbitration process for disputes arising under federal law, including whether to confirm or vacate the awards granted by the arbitrators. 

In an amicus brief, the Chamber of Commerce argued it would be “perverse… to provide federal cradle-to-grave supervision of the arbitration process for purely state-law disputes with no federal connection other than the happenstance of diverse citizenship, while disputes involving claims created by federal law are left outside the detailed standards that Section 10 provides for deciding whether to confirm or vacate an award.” 

Chief Justice Roberts, however, questioned this “pervasive look-through approach.”  Justice Roberts expressed concerns that this approach would overload the federal dockets by federalizing more FAA actions and procedures.  Justice Kagan also pointed out that this approach notably lacked any textual basis outside of Section 4.  Adopting this approach would allow Section 4 to become a venue provision for the entire statute.

To Arbitrate or Litigate: Will that Still Remain the Question?

The implications for the Badgerow decision could be severe.  If the Court finds for Badgerow, it risks allowing employees to essentially relitigate their claims on the merits in state courts if the employee receives an adverse decision in the arbitration which would undermine the goal to reduce litigation costs for the parties.  This point is clearly illustrated in the case at bar: despite having an arbitration agreement, Ameriprise has borne the cost to litigate this dispute to the Supreme Court. 

On the other hand, finding for Ameriprise requires the Court to overturn Vaden and hold that Section 4 of the FAA grants jurisdiction. Justice Roberts expressed that this would federalize more FAA actions and risk further overloading federal dockets.  However, from a common-sense perspective, depriving federal courts of the ability to decide whether to confirm or vacate an arbitration award when the underlying dispute arises under federal law does appear to be counterintuitive. 

For the cynic, Badgerow’s argument seems like nothing more than a last-ditch effort to have her claims heard in a plaintiff-friendly forum, despite that the EEOC, the FINRA arbitrator, and a federal court judge dismissed her claims.  For the textualist, Congress’s failure to provide a jurisdictional threshold in Sections 9 through 11 should prevent the Supreme Court from creating one now. 

For now, we wait to see how the Supreme Court will decide the age-old question for Badgerow’s claims: to be or not to be?