Securities Litigation

Within weeks, the Second and Third Circuits reached opposite conclusions over federal jurisdiction to confirm, modify or vacate arbitration awards. The Second Circuit now allows courts to look through the face of the petition to assess the federal-question jurisdictional merit of the underlying dispute; the Third Circuit doesn't (along with the DC and Seventh Circuits).

In 2009, the Supreme Court held the text of Section 4 of the Federal Arbitration Act required "look-through" assessment of the underlying dispute in motions to compel arbitration, based on the statute's text:

"A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement."

9 U.S.C. § 4 (emphasis added). See Vaden v. Discover Bank, 556 U.S. 49 (2009). But Section 10 for motions to vacate (or modify) awards doesn't have the same structure:

"The United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration…."

Neither does Section 9, which authorizes confirmation of awards.

The Second Circuit opted for consistency, saying Vaden changed the game - and compelled over-ruling prior Circuit precedent that prohibited look-through jurisdiction. Its opinion is Doscher v. Sea Port Group Securities, LLC, No. 15-2814 (2^nd Cir. Aug. 11, 2016), here.

The Third Circuit read Vaden differently and cared little for the consistency argument. The Third Circuit also distinguished prior Circuit precedent (seeming to allow "look through") as a non-precedential "drive-by jurisdictional ruling." Goldman v. Citigroup Global Markets, Inc., No. 15-2345 (3^rd Cir., Aug. 22, 2016), here.

The issue doesn't arise when federal jurisdiction is based upon diversity or the parties file their post-arbitration motions in state courts.

Both cases involved challenges to awards for "manifest disregard" of the law by arbitrators - a once prevalent basis for vacatur that was cast in doubt by the Supreme Court's 2008 Hall Street decision and lingers in only a few circuits. The Second, Fourth, Sixth and Ninth Circuits have not fully foreclosed the argument; the First, Fifth, Seventh, Eighth and Eleventh Circuits have held it precluded by Hall Street.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2016 by Thomas K. Potter, III (all rights reserved).