It is well-settled that the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et. seq., does not, by itself, confer a federal court with jurisdiction to hear a case. Instead, there must be an "independent jurisdictional basis" for the court to accept a case filed under the FAA. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008). Thus, for a party to bring an action under the FAA in federal court, the party must first establish the existence of either (1) federal question jurisdiction (28 U.S.C. § 1331) or (2) diversity jurisdiction (28 U.S.C. § 1332). In Vaden v. Discover Bank, 556 U.S. 49 (2009), the United States Supreme Court held that the text of 9 U.S.C. § 4 (the provision allowing a party to petition the court for a motion to compel arbitration), instructs the courts to "look through" the petition to the "underlying substantive controversy" between the parties to determine whether jurisdiction exists for the court to consider the petition. That is, if the underlying dispute raises a federal question or if the parties to the matter are diverse, then the court has jurisdiction to rule on the petition to compel arbitration—a seemingly straightforward and reasonable approach.
But what happens when the first time a party tries to enter the federal courthouse doors is when that party files an action to confirm or vacate an arbitration award under the FAA, Sections 9 or 10? Does the court "look through" the award to determine whether the "underlying substantive controversy" creates the required jurisdiction, just as it does when a petition to compel arbitration is filed under Section 4? On March 31, 2022, in Badgerow v. Walters, 596 U.S. __ (2022), the Supreme Court answered this question with an almost unanimous "no." (Justice Kagan wrote the opinion and only Justice Breyer dissented). The Court found that Sections 9 and 10 of the FAA "lack Section 4's distinctive language directing a look-through…Without that statutory instruction, a court may only look to the application actually submitted to it in assessing its jurisdiction." Id. at p. 2.
As the Supreme Court explained,
"In Vaden, this Court approved the look-through approach for a Section 4 petition, relying on that section's express language. Under Section 4, 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 phrase 'save for [the arbitration] agreement'… 'indicates that the district court should assume the absence of the arbitration agreement and determine whether [the court] 'would have jurisdiction…'without it'… 'The text of Section 4 refers us to 'the controversy between the parties'…. The 'controversy between the parties' [means] their 'underlying substantive controversy.'" Id. at page 2 of syllabus (citations omitted).
However, the Court found that "Sections 9 and 10, in addressing applications to confirm or vacate an arbitral award, contain none of the statutory language on which Vaden relied. Most notably, those provisions do not have Section 4's 'save for' clause…. So, under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply." Id. at p. 8. "Those bedrock principles [of statutory construction] prevent us from pulling look-through jurisdiction out of thin air—from somehow finding, without textual support, that federal courts may use the method to resolve various state-law-based, non-diverse Section 9 and 10 applications." Id. at p. 9. Indeed, the Court emphasized that "[t]he look-through method…is a jurisdictional outlier. For Congress to prescribe it by telling courts, a la Section 6, to treat FAA applications like motions in other kinds of litigation would be not just oblique but simply bizarre." Id. at p. 12.
The Supreme Court further rejected the policy arguments urged to treat Section 9 and 10 motions to confirm and vacate like Section 4 petitions to compel, including the argument that, if not, then it "will close the federal courthouse doors to many post-arbitration motions, even when they grow out of disputes raising exclusively federal claims." Id. at p. 13 (internal quotations and citations omitted). The Court said,
"however the pros and cons shake out, Congress has made its call…. [W]e can see why Congress chose to place fewer arbitration disputes in federal court…. The [Sections 9 and 10] applications go to state, rather than federal, courts when they raise claims between non-diverse parties involving state law….[T]hose claims may have originated in the arbitration of a federal-law dispute. But the underlying dispute is not now at issue. Rather, the application concerns the contractual rights provided in the arbitration agreement, generally covered by state law. And adjudication of such state-law contractual rights—as this Court has held in addressing a non-arbitration settlement of federal claims—typically belongs in state courts." Id. at pp. 14-15.
Justice Breyer dissented. "When interpreting a statute, it is often helpful to consider not simply the statute's literal words, but also the statute's purposes and the likely consequences of our interpretation. Otherwise, we risk adopting an interpretation that, even if consistent with text, creates unnecessary complexity and confusion." Id. at dissent p. 1. Justice Breyer elaborated on the many "curious practical consequences" of the majority's opinion, noting that the "majority has tried to split what is, or should be, a single jurisdictional atom—a single statute with connected parts, which parts give federal judges the power to facilitate a single arbitration proceeding from start to finish[.]" Id. at dissent p. 9. The majority opinion, Justice Breyer said, also is "at odds with what this Court has said about the purposes underlying the FAA" including the avoidance of unnecessarily complicating the law or breeding litigation from a statute that seeks to avoid it. Id. It also is at odds with the legislative history of the FAA which indicates "Congress' hope to avoid procedural complexity" and "parties' 'desire to avoid the delay and expense of litigation."' Id. at dissent p. 12.
The Court's opinion in Badgerow – refusing to use the look-through approach to determining jurisdiction to hear motions to confirm or vacate arbitration awards—will result in very few original actions to confirm or vacate awards in federal court, even if the underlying dispute involved federal questions. Still, if there is diversity, a party will be able to get through the federal courthouse doors. In addition, and as Justice Breyer pointed out in his dissent, if a federal court had jurisdiction to consider a petition to compel arbitration and retains that jurisdiction (as courts many times do, by either staying the proceeding or providing in its order compelling arbitration that it will retain jurisdiction), then that federal court should be able to consider the motion to confirm or vacate the award. Indeed, Justice Breyer wrote:
"it may be possible to eliminate some of these problems by using a federal-question lawsuit or Section 4 motion as a jurisdictional anchor. If a party to an arbitration agreement files a lawsuit in federal court but then is ordered to resolve the claims in arbitration, the federal court may stay the suit and possibly retain jurisdiction over related FAA motions. Similarly, some courts have held that if a federal court adjudicates a Section 4 motion to order arbitration, the court retains jurisdiction over any subsequent, related FAA motions." Dissent p. 8 (citations omitted).
The scenario described above is partly what happened in the Badgerow case in the district court, but there were other unusual facts and procedural tactics taken by the plaintiff that allowed the case to make its way to the Supreme Court, and the case clearly demonstrates the procedural complexities and the breeding of litigation which the FAA presumably was supposed to avoid.
The Supreme Court's opinion in Badgerow, however, provides very little in terms of telling the story of how the parties got there, but that context (which, by the way, in this author's opinion, paints a glaring picture of forum-shopping by the plaintiff Badgerow—cherry-picking claims and parties against whom those claims are made in arbitration, federal court, and state court) is important.
Plaintiff Denise Badgerow was a financial advisor for a company called REJ Properties, a company whose three principals were Gregory Walters, Thomas Meyer, and Roy Trosclair. These three individuals and principals of REJ Properties (Walters, Trosclair, and Meyer) were independent franchise advisors for (and affiliates of) Ameriprise Financial Services. As part of her job as a financial advisor, Badgerow signed multiple agreements with Ameriprise under which she agreed to arbitrate via FINRA any claims against Ameriprise and its affiliates, i.e., the principals of REJ Properties (Walter, Meyer, and Trosclair).
In September 2016, after being terminated from her employment by REJ Properties, pursuant to her arbitration agreements, Badgerow filed a Statement of Claim with FINRA against Ameriprise and the three principals of REJ Properties in their individual capacities—Gregory Walters, Thomas Meyer, and Roy Trosclair. Ameriprise and the three individual principals filed answers and signed submission agreements in December, 2016. Badgerow asserted the following causes of action in her 2016 Statement of Claim filed with FINRA:
"[against] non-party REJ Properties, Inc. d/b/a Walters, Meyers, Trosclair & Associates' ("Company") unwritten compensation agreement and payment method of commissions violated SEC and FINRA regulations; Claimant was fired in retaliation for reporting the Individual Respondents' conduct to Ameriprise in violation of Louisiana Law; non-party Company tortiously interfered with Claimant's employment agreement; and Claimant's employment agreement's non-compete and non-solicitation provisions are invalid and non-party Company tortiously interfered with Claimant's book of business after wrongful termination in violation of Louisiana's Unfair Trade Practices & Consumer Protection Law ("LUPTA") (emphasis added).
So, Badgerow alleged federal law claims against a non-party to the arbitration, her employer REJ Properties, and state law claims against the principals of her employer, Walters, Meyer, and Trosclair.
Meanwhile, despite the fact that an arbitration was pending against Ameriprise and the three individual principals of REJ Properties, in September 2017, Badgerow filed an action in federal court in the Eastern District of Louisiana against her employer REJ Properties d/b/a Walters, Meyer Trosclair & Associates and Ameriprise Financial Services alleging gender discrimination and retaliation under Title VII of the Civil Rights Act, 42 U.S.C. § 2000e, Title I of the Civil Rights Act of 1991, 42 U.S.C. § 1981, the Equal Pay Act, 29 U.S.C. § 206(d), Louisiana state laws prohibiting discrimination and retaliation, La. R.S. § 23:301, and federal and state laws prohibiting conspiracy. She asserted jurisdiction under §1331 (federal question). REJ Properties, plaintiff's employer, and Ameriprise both filed motions to compel arbitration pursuant to the FAA, 9 U.S.C. § 1 et. seq. Note, REJ properties was the "non-party company" in Badgerow's arbitration action and the principals of REJ Properties—Gregory Walters, Thomas Meyer, and Roy Trosclair—were not named as defendants and were never added as parties to Badgerow's original federal court action, even though she brought claims against them in the arbitration she herself initiated a year earlier. The district court noted that "[n]either Walters nor any of the other WMT principals have suggested that they should have been sued personally as Badgerow's employer."
On January 10, 2018, the district court granted Ameriprise's motion to compel arbitration of the claims asserted by Badgerow in her federal court complaint because Badgerow had multiple agreements requiring her to arbitrate her claims against Ameriprise—FINRA Form U4 and two separate agreements with Ameriprise. Those arbitration agreements required arbitration with Ameriprise and any of its affiliates. While Ameriprise did not have an affiliation agreement with REJ Properties, the three individuals and principals of REJ Properties (Walters, Trosclair, and Meyer) were independent franchise advisors for (and affiliates of) Ameriprise. The district court held that Badgerow's claims against Ameriprise would all be decided in the FINRA arbitration and "shall be stayed in this Court." As for REJ Properties' motion to compel, the court denied the motion because there was no agreement to arbitrate between Badgerow and REJ Properties (regardless of the individual principals' affiliation with Ameriprise); the court did, however, stay the proceedings against REJ Properties pending the outcome of the arbitration.
After the district court granted Ameriprise's motion to compel arbitration, in June, 2018, Badgerow filed a second and amended Statement of Claim with FINRA. According to the FINRA Arbitration Award (p. 2), Case Summary:
"In [her] Second Amended and Restated Statement of Claim, [Badgerow] added as a cause of action that Ameriprise was a joint employer and is jointly and severally liable for the actions of the Individual Respondents and non-party Company. The causes of action relate to Claimant's allegations that she was involuntarily terminated from her employment with non-party Company, a franchise of Ameriprise."
The arbitration hearing was held in August of 2018, and upon conclusion of that hearing, the FINRA panel granted Ameriprise's oral motion to dismiss because Badgerow did not prove Ameriprise was a joint employer. After further briefing, on December 27, 2018, the Panel also granted the motions to dismiss, with prejudice, of the Individual Respondents (the individual principals of REJ Properties) finding that Badgerow "did not: 1) establish liability of the Individual Respondents under the Louisiana Whistleblower Act; 2) prove a tortious interference with contract claim against the Individual Respondents; and 3) prove any claim against the Individual Respondents under the Louisiana Unfair Trade Practices Act or establish any other basis for recovery under the Amended and Restated Statement of Claim." p. 5 (emphasis added).
After the FINRA Panel issued this award, on February 15, 2019, REJ Properties (remember, the Non-Party Company in the arbitration) filed a motion in the federal district court to confirm the arbitration award. Ameriprise thereafter filed a response in support of REJ Properties' motion. On March 13, 2019, the district court entered an order denying REJ Properties' motion. As the court stated in denying the motion, "the FINRA arbitrators issued their award which dismissed all of Badgerow's claims against Ameriprise, Thomas Meyer, Ray Trosclair, and Gregory Walters with prejudice. The latter three individuals… are not parties to this litigation." (emphasis added). (Brief tangent here—Badgerow, it turns out, had filed a motion to amend her complaint to join the three individuals as defendants to the federal court case on January 8, 2019, after the FINRA panel issued its Award. After the magistrate judge requested Badgerow to make "additional briefing on the following three issues: (1) whether plaintiff's proposed claims are barred by res judicata in light of the FINRA Arbitration award; (2) whether the FINRA Arbitration award is entitled to collateral estoppel effect; and (3) whether plaintiff's justifications for filing the proposed amended complaint after the scheduling order deadline expired demonstrate 'good cause' under Fed. R. Civ. P. 16(b)(4)", Badgerow decided to withdraw the original motion to amend and go for a new amended pleading, but that was later stricken).
With respect to Ameriprise's response in support of REJ Properties' motion to confirm the award, the court stated that it
"expected Ameriprise to file a motion to confirm the arbitration award and seek dismissal with prejudice of all claims asserted against Ameriprise in this matter. But [REJ Properties] whom the Court already determined to have no rights with respect to the Ameriprise/Badgerow arbitration agreement(s), has filed the instant motion, and Ameriprise has filed a 'response in support.'
That the arbitration award in favor of Ameriprise will be confirmed and all claims against that defendant dismissed with prejudice is without question. But Ameriprise must move for that relief because the Court can discern no legal basis upon which [REJ Properties], a non-party to the arbitration, has standing to do it. Moreover, the Court is at a loss to understand what legitimate interest [REJ Properties] has in having the award confirmed." p. 2 (emphasis added).
The Court also noted that "the principals' interest (Meyer, Trosclair, and Walters) [was] easier to understand because they hope to prevail under res judicata to resist being joined as defendants in this case….The Court [however] cannot issue a final judgment in favor of individuals who are not before the Court." Id. Ameriprise eventually filed a motion to confirm the arbitration award on April 17, 2019, which the Court granted on June 12, 2019.
In confirming the arbitration award, the district court rejected Badgerow's arguments that the arbitration award should not be confirmed because the individual principals engaged in fraud and also found that Badgerow's attempt to attack the award was untimely given it was not filed within three months after the award was delivered. The district court called Badgerow's "fraud defense to confirmation of the award" "legally frivolous":
"The Court begins by noting that the 'smoking gun' that Badgerow recently received in discovery is actually a marketing or sales document produced by a vendor that sells the commission paying software/services to companies like [REJ Properties]…. It is utterly absurd to suggest that a marketing proposal that contained legal opinions formed by marketers trying to persuade companies to buy their product established an actual violation of law. Badgerow presented the facts of her case to the arbitrators and her attorneys argued the specific violations of the law that allegedly occurred. Badgerow did not prove her case. It is ludicrous to suggest that she failed to prove her claim because the arbitrators did not have the benefit of the assertions contained in a vendor's sales pitch or that those assertions establish that an actual violation of the law occurred. The documents upon which Badgerow hinges her fraud theory are irrelevant…." p. 4.
The district court also granted REJ Properties' Motion for Summary Judgment dismissing Badgerow's complaint with prejudice on May 29, 2019. With respect to some of Badgerow's claims, the district court had this to say:
"The conduct that Badgerow complains about is insufficient as a matter of law to support a gender-based claim for hostile work environment. First of all, regardless of how abusive or hostile Badgerow perceived her work environment to be, neither the comments from Meyer nor the 'bullying' of the other coworkers (who were female and not identified with any specificity) suggest any type of gender bias. Badgerow had been told from the beginning that many people at the WMT office did not like her, and she knew that Meyer and her female co-workers had a negative opinion about her because of the way that she treated other people. At times others found Badgerow to be discourteous and unprofessional and Badgerow knew this although she viewed it as other people just perceiving her differently. The comments and the co-workers' conduct are just as consistent (if not more so) with dislike for Badgerow as with gender discrimination and the former is not proscribed by law. Further, it is now clear that several of Badgerow's co-workers, both male and female, lobbied Walters to fire Badgerow because they believed that her treatment of others, which they at times perceived as being cruel, rude, disrespectful, and mocking, negatively affected the environment of the small office.
* * *
But because Badgerow believes that she did nothing wrong and that everyone else acted unjustly in disliking her, she surmises that by default their conduct could only be linked to her gender. Unlawful discrimination must be proven affirmatively, not by default, and Badgerow's subjective belief is insufficient to create a triable issue of fact.
* * *
There is no evidence whatsoever that Meyer's or anyone else's conduct at the office interfered with Badgerow's job performance. Badgerow not only rejects WMT's contention that her job performance was mediocre, she considered herself to be performing quite well at WMT. And Badgerow was hardly cowed by anyone's conduct at the office. She was comfortable confronting Meyer in person about his comments and getting 'in his face' to try to get him to explain himself. Although Badgerow alleged in her Complaint that she was driven to seek medical attention for depression, stress, and anxiety, no evidence of such was produced." pp. 9-11 (citations omitted).
(The 5th Circuit Court of Appeals would later affirm the district court's opinion on all counts except for Badgerow's retaliation claim, which the appeals court remanded back for trial. Badgerow v. REJ Props., 974 F.3d 610 (5th Cir. 2020)).
Despite these facts, and refusing to accept that FINRA and (as it turned out so too the federal district court) found her claims meritless, Badgerow decided to try the Louisiana state court. On May 6, 2019, while Ameriprise's motion to confirm the award and REJ Properties' motion for summary judgment was pending in federal court, Badgerow filed an "Action to Vacate Arbitration Award" in the Civil District Court for the Parish of Orleans, State of Louisiana, Case Number 19-4752, Division "M", naming as defendants only the individual principals of REJ Properties, Walters, Trosclair, and Meyer (who, again, were not defendants or parties to the federal court action). In this action, Badgerow asserted that the arbitration award should be vacated because these individuals committed fraud—the same arguments she raised in federal court in response to Ameriprise's motion to confirm the award. These three individuals (Walters, Meyer, and Trosclair) then removed the action to federal court, where it was eventually transferred to the same judge that presided over Badgerow's federal discrimination and retaliation case against Ameriprise and REJ Properties. The principals' removal action was the first time these three individuals tried to enter the federal courthouse doors.
While it is true in removal actions, the party removing the case must identify the subject matter jurisdiction allowing for the case to be in federal court, in the individual principals' removal papers, they make this question take center stage, making full-blown arguments on jurisdiction, including a long discussion of Vaden's "look-through" approach. Badgerow, as expected, filed a motion to remand, making the argument that Vaden's "look-through" approach does not apply to an action to confirm an arbitration award and that even if it did, the claims in the FINRA arbitration were Louisiana state law claims, not federal claims. This precipitated the district court's decision, Badgerow v. Walters, No. 19-10353, June 26, 2019 Orders and Reasons, in which the sole question to be decided was "whether it has subject matter jurisdiction over the removed action so as to grant the Principals' motion to confirm the award and enter final judgment in their favor."
In finding that it did have subject matter jurisdiction, the district court first acknowledged the split in authority over whether Vaden's look through approach in Section 4 of the FAA applied to actions filed under Section 10 and that the Fifth Circuit had not yet weighed in on the matter, but it ultimately agreed with the "persuasive reasoning" by other courts explaining why "the textual differences between the [FAA's] Section 4 and Section 10 do not militate against recognizing consistent principles for both sections." Id. at p. 4. The Court decided that it would "err on the side of assuming that the Fifth Circuit would apply the same jurisdictional standards to a motion to vacate an arbitration award that would apply to a motion to compel arbitration" (id.) because "Badgerow can raise this issue on appeal but if the Court remands this matter for lack of subject matter jurisdiction then the Principals will have no appeal option." Id. at fn 5. The district court went on:
"that said, Badgerow filed suit in state court relying on La. R.S. section 9:4210 to vacate the award. Badgerow's position is that the petition only involves state law because she only seeks to vacate the award with respect to the state law whistleblower claim. To the contrary, the award was based on state law as well as federal law because Badgerow included as part of the arbitration her joint employer claims that were grounded on federal employment law. This Court is persuaded that Badgerow cannot deprive the Court of subject matter jurisdiction over an action to vacate the award by stripping off a single state law claim as a basis for attacking the award." Id. at p. 5 (emphasis added).
Nonetheless, and as anticipated by the district court, Badgerow did appeal this decision, and the Fifth Circuit finally had a chance to weigh in on the question of whether the look-through approach applied to motions to confirm or vacate arbitration awards under the FAA when determining subject matter jurisdiction. In Badgerow v. Walters, 975 F.3d 469, 472 (5th Cir. 2020), the 5th Circuit made clear:
"On appeal, Badgerow, we repeat, challenges only the finding of federal subject-matter jurisdiction over her petition to vacate and the denial of remand, not, in any instance, the merits of the confirmation of the FINRA arbitration dismissal award, nor the dismissal on the merits of the removed petition to vacate. Stated differently, the only issue for our review is whether the district court properly found that it had jurisdiction to rule on the merits of the removed petition to vacate and properly denied remand."
The Fifth Circuit held that Vaden's look through approach applied to Badgerow's petition to vacate under Section 10 and that looking at the "whole controversy between the parties—not just a piece broken off from that controversy" demonstrates that Badgerow's whole controversy involves federal law claims such as would give the court subject matter jurisdiction. Id. at 474. Badgerow, thereafter, petitioned the United States Supreme Court to hear the case, and, well, as they say, the rest is history.
What now will happen with Badgerow's claims? Did Badgerow succeed on her forum-shopping? Badgerow's claims against Ameriprise are gone, with prejudice, given the FINRA arbitration award that was confirmed and not appealed. Badgerow's claims against REJ Properties are also gone, as the parties reached a settlement in March of 2021. Since the district court did not have subject matter jurisdiction to confirm the arbitration award and dismiss the claims against the individual principals, Badgerow's case to vacate the arbitration award should be remanded back to the state court where she filed it. The Louisiana state court presumably would then be the one to determine the merits (or lack thereof) of her motion to vacate, which will require review and analysis of SEC rules and regulations. Given that she has reached a settlement with REJ Properties, in the end this could well be moot (but that case remains pending and open on the docket, as least for now).
One thing is sure, the Supreme Court took a rather crazy case and has now interpreted the FAA in a way that severely limits the federal court's jurisdiction to hear a case brought under its provisions. In cases involving federal questions, such as discrimination and retaliation claims or claims involving complicated SEC rules and regulations, the likes of which were levied by Badgerow, the Supreme Court's decision now leaves those persons who accept their contractual obligations and submit to arbitration without being compelled to do so by a federal court (like Walters, Meyer, and Trosclair) in a particularly precarious spot. Win or lose, unless diversity exists, those parties will be subject to going to state court to take action on any arbitration award whether to confirm or vacate. This, in the end, just breeds uncertainty and continuing litigation, something which the FAA was supposed to avoid.