Chapter 19 - § 19.3 • SUBJECT MATTER JURISDICTION OF THE FEDERAL COURTS OVER ARBITRATION ISSUES

• Jurisdiction: Colorado

§ 19.3 • SUBJECT MATTER JURISDICTION OF THE FEDERAL COURTS OVER ARBITRATION ISSUES

"Subject matter jurisdiction is the power to hear and determine cases of the general class to which the proceedings in question belong."¹⁰

See generally Benson, "Application of the Federal Arbitration Act in State Court Proceedings," 43 Colo. Law. 33 (Dec. 2014); § 3.7.

§ 19.3.1—Subject Matter Jurisdiction Of The Federal District Courts

28 U.S.C. § 1331, Federal Question Jurisdiction

The Federal Arbitration Act (FAA) does not contain a general jurisdiction provision, and, as discussed above, does not confer federal court jurisdiction. The "general" jurisdiction of the federal district courts is defined in 28 U.S.C. §§ 1330, et seq. Generally, most claims brought in federal court can be done so only on the basis of diversity of citizenship of the parties or a federal question being in issue. It was early established generally that the application of the FAA does not create a federal question.¹¹

On the other hand, where a provision of the FAA is at issue, the determination of that issue is governed by federal law. When that provision is at issue before a federal court, if the requisite amount in controversy exists, there is federal question jurisdiction under 28 U.S.C. § 1331.¹²

In Vaden v. Discover Bank,¹³ the U.S. Supreme Court held that a federal court may "look through" an FAA § 4 petition (to compel arbitration) to the underlying complaint to determine whether the petition is predicated on a controversy that "arises under" federal law. This is an application of the "well-pleaded complaint" rule. If there is jurisdiction of the complaint, there is jurisdiction as to the petition. However, a federal court does not have jurisdiction over a § 4 petition based upon the counterclaim when the whole controversy between the parties does not qualify for federal court jurisdiction. Thus, § 4 provides that a party may petition to compel arbitration in "any United States district court which, save for such [arbitration] agreement, would have jurisdiction under Title 28 [§ 1330 or 1331], in a civil action. . . of the subject matter of a suit arising out of the controversy between the parties."

In Vaden, the U.S. Supreme Court attempted to define how to determine whether there is federal court jurisdiction over a motion to compel arbitration. The Court first noted certain long-established principles:

• The test ordinarily applied for determining whether a claim arises under federal law is whether a federal question appears on the face of the plaintiff's well-pleaded complaint; and
• The FAA does not supply an independent basis for jurisdiction. The Act says nothing about granting federal courts jurisdiction as to issues under or concerning the FAA.

The Supreme Court held that where one party had filed a complaint and the other party sought to compel arbitration thereof, a "federal court may 'look through' a § 4 petition and order arbitration if, 'save for [the arbitration] agreement,' the court would have jurisdiction over 'the [substantive] controversy between the parties.'"¹⁴ The five-member majority held that federal jurisdiction must be assessed from the face of the pre-existing complaint. Thus, the Court, in essence, applied the "well-pleaded" complaint rule, including the ancillary doctrines that defenses or counterclaims cannot be relied upon to establish federal jurisdiction under § 1331.

Thereafter, the Eleventh Circuit, in Community State Bank v. Strong,¹⁵ extended the Vaden decision to the circumstance where a § 4 petition to compel arbitration was filed but there was no complaint on file (a "freestanding" § 4 petition). The court concluded:

The Vaden court thus gives us one primary instruction for how to approach freestanding FAA petitions. "Whether or not the controversy between the parties is embodied in an existing suit, the relevant question remains the same: Would a federal court have jurisdiction over an action arising out of that full-bodied controversy?" In other words, the proper jurisdictional inquiry is whether either party to the § 4 petition "could file a federal-question suit" based on the parties' underlying dispute.
"[A] district court entertaining a § 4 petition" must decide for itself "what 'a suit' arising out of the allegedly arbitrable controversy would look like."¹⁶

In Comanche Indian Tribe of Oklahoma v. 49, L.L.C.¹⁷ the Tribe challenged the FAA's applicability to the motion to compel arbitration. Acknowledging that the FAA itself does not confer subject matter jurisdiction on the federal courts without independent jurisdictional basis, the Tenth Circuit found the Tribe's district court complaint was based in part on the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701, et seq., and 25 U.S.C. § 81. "Thus, the district court had jurisdiction under 28 U.S.C. § 1331 (federal question jurisdiction). Further . . . 9 U.S.C. § 4 does not require that [Defendant] 49 assert a separate and independent jurisdictional basis from that asserted by the Tribe." "Involving commerce" is the functional equivalent of the "affecting commerce" language of the Interstate Commerce Clause of the U.S. Constitution.

However, while the general rule established by the Supreme Court is that the court must look to the underlying substantive dispute between the parties to determine whether it has § 1331 federal question jurisdiction of a § 4 motion to compel, when the issue presented by the motion itself presents a federal question, i.e., under the FAA, there may be federal question jurisdiction.

For example, when the issue is whether the procedure that the parties agreed to constitutes "arbitration" under the FAA, and the court held that the meaning of "arbitration" under the FAA is governed by federal common law and not state law, removal of the case from state court to federal court is proper (28 U.S.C. § 1331 — federal question jurisdiction).¹⁸

This approach is similar to the case law upholding federal question jurisdiction when a question of federal law appears on the face of the complaint, and the state-created cause of action turns on a substantial question of federal law.¹⁹

Often, arbitration issues are in the federal court, without any meaningful statement as to the basis of federal court jurisdiction.²⁰

Some courts hold that a federal district court has federal question jurisdiction over a motion to vacate an award if the ground asserted for vacation is manifest disregard of federal law.²¹

A further limitation that may be perceived as jurisdictional is the requirement as to where a motion to compel arbitration must be filed. In Ansari v. Qwest Communications Corp.,²² the Tenth Circuit held that arbitration can be compelled only in the venue defined by the arbitration agreement for holding the arbitration, and only a court in that jurisdiction may so compel. Other federal courts take different approaches.²³ However, where the respondent files suit to enjoin the arbitration, the venue of which would be a different district, upon countermotion to compel arbitration being filed, the court may order arbitration in the district where venue lies.²⁴

A more nuanced analysis was provided by the Second Circuit in NASDAQ OMX Group, Inc. v. UBS Securities, LLC:²⁵ while the arbitration demand may assert only state-law claims, if they raise actual disputed issues of federal securities law, and the issues are of substantial importance to the federal system as a whole and exercise of federal jurisdiction will not disrupt any federal-state balance approved by Congress, there is federal jurisdiction to enjoin a party from pursuing arbitration.

28 U.S.C. § 1330, Diversity of Citizenship Jurisdiction

The Vaden decision was raised in the Eighth Circuit as to federal district court diversity jurisdiction. The representatives of two nursing home patients filed state court civil actions against the nursing home and two administrators. The nursing home moved, in federal court, to compel arbitration based on diversity between the nursing home and the representatives. After Vaden, the district court vacated its orders compelling arbitration because the underlying case...