Civil procedure--Supreme Court's Vaden decision regarding federal question jurisdiction does not apply to diversity jurisdiction--Northport Health Services of Arkansas, LLC v. Rutherford, 605 F.3d 483 (8th Cir. 2010).

Author:Picozzi, Joseph D.
 
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28 U.S.C. [section][section] 1331 and 1332(a) establish the scope whereby United States District Courts have original jurisdiction over disputes. (1) While [section] 1331 provides district courts with federal question jurisdiction, [section] 1332(a) provides district courts with original jurisdiction over actions between citizens of different states where the amount in controversy exceeds $75,000. (2) Although the statutes' plain language appear to be straightforward, determining whether federal question jurisdiction or diversity jurisdiction exists in petitions to the district courts pursuant to [section] 4 of the Federal Arbitration Act ("FAA") has proven to be the opposite. (3) In Northport Health Services of Arkansas, LLC v. Rutherford, (4) the United States Court of Appeals for the Eighth Circuit considered whether the Supreme Court's decision in Vaden, which settled a circuit split for determining federal question jurisdiction in [section] 4 petitions, applied to the determination of diversity jurisdiction in [section] 4 petitions. (5) The Eighth Circuit held that Vaden only addressed federal question jurisdiction and did not implicitly apply to diversity jurisdiction. (6)

Wayne Rutherford and Tresa Robinson ("representatives"), representing the estates of Donna Faye Snow and Isaac Rutherford, filed separate state tort law claims against Northport Health Services of Arkansas, LLC ("Northport") and two nursing home administrators in state court. (7) Northport, but not the nursing home administrators, subsequently filed federal actions to force arbitration under [section] 4 of the FAA. (8) Northport asserted that the federal district court had jurisdiction to compel arbitration based on diversity of citizenship. (9) The representatives did not contest the diversity of citizenship allegations and the federal district court granted Northport's petition to order arbitration. (10)

Subsequently, the Supreme Court made an important decision regarding the FAA in Vaden v. Discover Bank. (11) Based on the Vaden decision, the representatives moved to vacate the district court's order to compel arbitration. (12) The district court granted the representatives' motions based on the Supreme Court's reasoning in Vaden. (13) Northport appealed the district court's decision to vacate its original orders to compel arbitration. (14) Unpersuaded by the representatives' reasoning, the Eighth Circuit reversed the district court's decisions to vacate its earlier orders to compel arbitration. (15)

Title 9 of the United States Code enacts the Federal Arbitration Act. (16) Section 2 of Title 9 explains that a provision in a contract that is evidence of a party's transaction in commerce to settle a dispute arising out of such contract through arbitration "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (17) Although [section] 2 broadly allows parties to compel arbitration if there is a written provision in the contract, [section] 4 limits the federal district courts' abilities to enforce such arbitration agreements. (18) More specifically, [section] 4 requires a federal court to have jurisdiction to establish jurisdiction based on complete diversity or a federal question. (19)

Diversity jurisdiction rests on two issues: (1) whether there is diversity between the parties, and (2) whether the amount in controversy exceeds $75,000. (20) Before Vaden, all circuit courts determined the former issue by looking solely at the parties named in the [section] 4 petition to compel arbitration, regardless of any non-diverse parties in an underlying state action that are unnamed in the arbitration agreement. (21) Regarding the latter issue, courts universally examine the broader state court action to see if the "value at stake in the arbitration" exceeds $75,000 on its own. (22) Although all circuit courts agreed on how to determine diversity jurisdiction in FAA petitions to compel arbitration, prior to Vaden, a circuit split existed over how to determine federal question jurisdiction. (23) The majority of circuit courts held "that the text of FAA [section] 4 should not be interpreted to mean that a federal court has subject matter jurisdiction over an action to compel or stay arbitration merely because the underlying claim raises a federal question." (24) On the other hand, the Eleventh and Fourth Circuits ruled that [section] 4 actually directs the district court to "look through" the petition to the underlying claim when determining whether a federal question exists. (25)

After the Fourth Circuit's Vaden decision, the Supreme Court granted certiorari to resolve the circuit split. (26) The Roberts Court focused on "whether district courts, petitioned to order arbitration pursuant to [section] 4 of the FAA, may 'look through' the petition and examine the parties' underlying dispute to determine whether federal-question jurisdiction exists over the [section] 4 petition." (27) The Court held that federal courts should determine jurisdiction by "looking through" a [section] 4 arbitration petition to the underlying controversy between the parties. (28) By "looking through" the [section] 4 petition, a district court may only subject a defendant to [section] 1331 jurisdiction if the plaintiff's claim arises under federal law or may be characterized as arising under federal law. (29) The Court noted that the petitioner reasonably displayed that a [section] 4 petition to compel arbitration does not seek adjudication on the merits, and the purpose of [section] 4 is to have an arbitrator resolve the underlying dispute. (30) Despite the reasonableness of the petitioner's argument, the Court explained that because [section] 4 directs a district court to determine if it would have jurisdiction independent of the arbitration agreement--meaning jurisdiction must have grounds under [section][section] 1331 or 1332--the district court must look to the underlying dispute and not the [section] 4 petition dispute. (31)

In Rutherford, the United States Court of Appeals for the Eighth Circuit analyzed the Supreme Court's Vaden decision and other [section] 4 cases to determine whether the "look through" approach extends to subject matter jurisdiction based on diversity. (32) As an initial matter, the Eighth Circuit explained that Vaden did not directly control the issue at hand. (33) As such, the representatives' motions to vacate the district court's orders to compel arbitration distorted the Court's Vaden decision. (34) Additionally, the representatives misapplied the Eighth Circuit's decision in Advance America Servicing of Arkansas, Inc. v. McGinnis, (35) which adopted the "look through" approach to amount in controversy disputes. (36) While it's true that Vaden could have implicitly distinguished Advance America, the Eighth Circuit concluded that to do so would ignore the Supreme Court's Moses H. Cone decision--a case that "is factually on all fours with [this case]." (37)

Not only are courts reluctant "to assume that the Court implicitly overruled an earlier precedent," but the Eighth Circuit pointed to many clues in Vaden suggesting that the Court did not intend to overrule Moses H. Cone sub silentio. (38) The Eighth Circuit noted that the Vaden Court cited to Moses H. Cone approvingly, limited its analysis to the federal question issue, and cited to circuit cases that created the [section] 4 federal question dispute but not to the [section] 4 diversity jurisdiction cases. (39) So that its decision would not have the practical consequence of "severely contracting pre-existing [section] 4 diversity jurisdiction," the Supreme Court in Vaden limited its holding to the district courts "entertaining [section] 4 petitions ' only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.'" (40) Additionally, the Court in Vaden relied on the well-pleaded complaint rule--a traditional principle of federal question jurisdiction--in adopting the "look through" approach. (41) In light of Vaden's discussion of traditional principles, the Eighth Circuit noted that "[a] traditional principle of diversity jurisdiction is that it cannot be defeated by a non-diverse joint tortfeasor who is not a party to the federal action, unless that party is indispensable under Rule 19." (42) Ultimately, because the Eighth Circuit found that Vaden did not directly control, and its decision in Advance America was not overruled in light of Moses H. Cone, the court refused to extend Vaden to [section] 4 petitions based on diversity jurisdiction. (43)

While the representatives argued persuasively to extend Vaden to diversity jurisdiction, the Eighth Circuit's decision not to apply Vaden to Rutherford was supported with prudent reasoning...

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