Insurance and reinsurance arbitrations are often governed by the Federal Arbitration Act (“FAA”). Enforcement of arbitration rights under the FAA, however, may take place in either federal or state courts. To proceed in federal court, subject matter jurisdiction must exist. In a recent case, the United States Supreme Court addressed an open question concerning whether subject matter jurisdiction existed on competing applications to vacate and confirm an arbitration award so that the federal district court could hear the dispute.
In Bagerow v. Walters, 596 U.S. ___ (2022), an employment arbitration took place and the employee sought to vacate the arbitration award in state court. The employer removed the matter to federal district court and sought to confirm the award. The employee moved to dismiss the case for lack of subject matter jurisdiction and sought a remand to state court. The district court denied the motion and the Fifth Circuit Court of Appeals affirmed. The Supreme Court granted certiorari and reversed and remanded the matter.
So what’s the big deal you may ask. The courts have long held that even though the FAA is a federal statute and authorizes the federal courts to address arbitration issues, the statute itself does not have a provision that creates federal subject matter jurisdiction in the federal courts. So unless there is diversity of citizenship (not an issue in this case) or some other independent basis for federal jurisdiction, the matter cannot be heard in federal court.
Over the years, the courts have developed what some have called a “look-through” standard for finding federal jurisdiction on a petition to compel arbitration under Section 4 of the FAA. What that means is if the underlying dispute presents a federal question, then the federal district court has jurisdiction to hear the petition to compel arbitration. The courts found that the language of Section 4 allows for this “look-through.” See Vaden v. Discover Bank, 556 U.S. 49 (2009). As the court stated, the language in Section 4 provides that a party to an arbitration agreement may petition for an order to compel arbitration in a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties.” The “save” language allows for the “look-through” to determine if the underlying controversy would otherwise have federal subject matter jurisdiction.
In this case, the Supreme Court held that Sections 9 and 10 of the FAA, the provisions to confirm or vacate an arbitration award, did not have the same language as Section 4 and, therefore, there was no basis to conclude that jurisdiction could be determined based on the “look-through” methodology. The Court found that where Congress placed language in one part of the statute and did not include that language in another part of a statute, the lack of inclusion was intentional.
What this means is that for petitions to confirm or vacate an arbitration award under the FAA, the parties will have to go to state court unless there is an independent basis for federal jurisdiction. In many insurance disputes and in most reinsurance disputes this is not an issue because, in reinsurance in particular, there is diversity of citizenship. But where there is no diversity of citizenship, which happens more frequently with insurance disputes, then without an independent basis for federal jurisdiction, petitions to confirm or vacate will have to be made in state court.