The U.S. Supreme Court significantly limited the jurisdiction of federal courts to confirm or vacate arbitral awards under Sections 9 and 10 of the Federal Arbitration Act (FAA) in Badgerow v. Walters. The Court confirmed its prior rulings that the FAA itself does not create subject matter jurisdiction and held that a federal court must have an “independent jurisdictional basis” to confirm or vacate an award. The impact of the ruling is significant and will result in parties turning to state courts for the confirmation of arbitral awards in ostensible federal question cases.

The case arises out of agreement requiring arbitration under the rules promulgated by FINRA (Financial Industry Regulatory Authority). Denise Badgerow contended her employer discriminated against her on the basis of gender and that she was fired in retaliation for her reporting of alleged securities violations by her employer. Badgerow initiated an arbitration against her employer’s principals, alleging unlawful termination. The arbitrators dismissed her claims, and Badgerow filed suit in Louisiana state court to vacate the arbitral award. The case was removed to federal court, and Badgerow moved to remand, arguing that the federal court lacked jurisdiction under Sections 9 and 10 of the FAA to vacate or confirm the award. The employer argued that the district court could rely on Vaden v. Discover Bank, 556 U.S. 49 (2009), to find jurisdiction. In Vaden, the Supreme Court held that in deciding whether there is a jurisdictional basis to decide a Section 4 petition to compel arbitration, a federal court can “look through” the petition to the “underlying substantive controversy” between the parties, even if that controversy is not before the court. Applying the Vaden “look-through” approach, the district court confirmed the award in favor of Badgerow’s employer, finding that it had jurisdiction because the underlying employment arbitration involved federal law claims. The Fifth Circuit affirmed the district court.

The Supreme Court reversed, holding that Vaden’s “look-through” approach does not apply to requests to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA. In assessing an application to confirm or vacate an arbitral award, a court “may look only to the application actually submitted to it in assessing its jurisdiction.” The ruling is predicated on the textual differences between Section 4 of the FAA, which authorizes courts to compel arbitration, and Sections 9 through 11 of the FAA relating to confirmation, vacation, or modification of arbitral awards. Section 4 states that a party can petition an order compelling arbitration in “any United States district court which, save for such agreement, would have jurisdiction … of a suit arising out of the controversy between the parties.” In contrast, there is no similar language in Sections 9 through 11. Justice Kagan, writing for the Court, noted that “Congress could have replicated Section 4’s look-through instructions in Sections 9 and 10” or “drafted a global look-through provision” applicable throughout the FAA. “But Congress did neither. And its decision governs.”

Justice Kagen also rejected the policy arguments advanced by the employer. While a “single, easy-to-apply jurisdictional test” that will produce “sensible” results is pragmatic, Justice Kagan wrote that it is not the function of the court to make public policy decisions to expand our jurisdiction, and “[w]e will not impose uniformity on the statute’s non-uniform jurisdictional rules.”

The ruling has broad implications in the arbitration setting. A party seeking to confirm, vacate, or modify an arbitral award in federal court must identify a grant of jurisdiction, apart from the FAA itself, conferring access to a federal forum. Parties will need to allege with precision the grounds for jurisdiction — either diversity of the parties or federal question jurisdiction — and the court will need to assess independently whether such jurisdiction exists. The result may expand the use of state courts to affirm, vacate, or modify a vast majority of arbitral awards, including arbitrations involving application of federal law, but it is the result dictated by the statutory language of the FAA.