Friday, June 12, 1998
Jurisdiction to Alter Arbitration Awards Rejected
By ROBERT A. HOLTZMAN
The writer is of counsel to Loeb & Loeb LLP. He is an arbitrator and mediator and member of the American Arbitration Association's Large Complex Case and Law Practice Dispute Resolution Panels.
Let me propound a hypothetical case that could well be presented to any of us today, the current emphasis on arbitration as a dispute resolution mechanism.
Your client, a California resident, is party to a contract with another California resident which involves goods or services moving in interstate commerce. A dispute has arisen between the parties relating to performance of the contract. The contract contains a standard arbitration clause and the other side has invoked arbitration. You agreed that arbitration is proper, go through the process, and your client loses. Reviewing the record, you conclude that you have good grounds to correct, modify or vacate the arbitration award.
You are aware that the United States Supreme Court has come down with an impressive series of decisions applying the Federal Arbitration Act (9 U.S.C. Secs. l, et seq.) ("the FAA") to some seemingly local transactions on the ground that interstate commerce was "involved" within the meaning of 9 U.S.C. Sec. 2. You remember that the FAA was held controlling over contrary state law in Southland Corp. v. Keating fn.1; Allied-Bruce Terminix Cos. v. Dobson. fn.2; Doctor's Associates v. Casarotto fn.3; and Mastrobuono v. Shearson Lehman Hutton fn.4.
You look at Sec. 10 of the FAA and see that it provides that "...the United States court in and for the district wherein the award was made may make an order vacating the award upon application of any party to the arbitration..." in various circumstances that you consider applicable to your case. You see similar language in Sec. 11 authorizing the U.S. District Court to modify or correct defective awards. So you file a motion in the U.S. District Court conforming to Secs. 12 and 13 and await a hearing.
Surprise! Motion to dismiss for lack of subject matter jurisdiction. Greater surprise!! Motion granted. And if by this time you are beyond the 100-day period for serving and filing a state court petition to vacate or correct or under C.C.P. Sec. 1288, you may have reason for concern. fn.5
The above scenario is essentially that recently presented to the 11th Circuit in Baltin v. Alaron Trading Corporation, 128 F.3d 1466, 1997 W.L. 705843 (11th Cir. 1997). The Baltins had contracted with Alaron's predecessor for brokerage services. The contract contained a standard arbitration clause. A dispute arose over an allegedly unauthorized trade on the account. The broker sued; the Baltins invoked the arbitration clause and obtained a state court order staying the lawsuit and compelling arbitration. The matter proceeded to arbitration and Alaron received a $36,274.69 award. The Baltins then commenced a federal court proceeding to vacate, modify or correct the award pursuant to FAA Secs. 10 and 11 (9 U.S.C. Secs. 10, 11). Alaron moved successfully to dismiss for improper venue. The Baltins appealed, contending inter alia that the district court had exclusive jurisdiction and that entry of the dismissal after they could no longer proceed in state court violated their due process rights.
The Court of Appeals reviewed the question of subject matter jurisdiction sua sponte and concluded that the district court lacked such jurisdiction. Sections 10 and 11, it held, do not in themselves confer subject matter jurisdiction. Some other basis for federal court jurisdiction must exist and the Baltins neither pleaded nor established it. No federal question existed. The FAA does not create independent federal question jurisdiction under 28 U.S.C. Sec. 1331. While diversity of citizenship might exist, the minimum amount in controversy required by 28 U.S.C. Sec. 1332 did not exist as a matter of legal certainty. The dismissal of the petition was therefore affirmed, not on the ground stated by the district court, but rather for lack of jurisdiction over the subject matter.
Although one might think otherwise given the broad policy expressions in the cases cited above and the language of the FAA itself, Baltin is plainly consistent with an overwhelming and seemingly unbroken line of cases in many circuits and with repeated dicta by the United States Supreme Court. The courts have held consistently that neither Sec. 4 authorizing petitions to compel arbitration, Sec. 9 authorizing petitions to confirm awards, Sec.10 authorizing petitions to vacate, nor Sec.11 authorizing petitions to modify or correct are justiciable in the federal courts absent an independent basis for federal jurisdiction and that the FAA does not in itself confer such jurisdiction. The situation was apply described by the United States Supreme Court in Moses H. Cohn Hospital v. Mercury Constr., 460 U.S. 1, 74 L.Ed.2d 765, 103 S.C. 927 (1983), as follows:
"...The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U.S.C. Secs. 1331...or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue....Section 3 likewise limits the federal courts to the extent that a federal court cannot stay a suit pending before it unless there is such a suit in existence. Nevertheless, although enforcement of the Act is left in large part to the state courts, it nevertheless represents federal policy to be vindicated by the federal courts where otherwise appropriate..."
460 U.S. at 25 n. 32, 74 L.Ed.2d at 786 n. 32. See also Southland Corp. v. Keating, supra, 465 U.S. at 15 n. 9,79L.Ed.2 at 15n. 9.
On the same grounds, the Ninth Circuit affirmed an order of the district court dismissing a petition to confirm an arbitration award under FAA Sec. 9, General Atomic Co. v. United Nuclear Corp., 655 F.2d 968 (9th Cir. 1981). The Eighth Circuit recognized that a contrary result was appropriate where the independent basis for federal jurisdiction, in this case diversity of citizenship, was shown. Stroh Container Co. v. Delphi Industries. Inc., 783 F.2d 743, 747-748 n. 7 (8th Cir. 1986). The Second Circuit rejected an effort to predicate jurisdiction on FAA Sec. 10 in Harry Hoffman Printing v. Graphic Com. Local 261, 912 F.2d 608, 611 (2d Cir. 1990), cited as controlling in Baltin, 1997 W.L. 705843 at p. 4. Myriad other cases to the same effect are cited in the above authorities.
Petrie v. The Pacific Stock Exchange, Inc., No. C-97-0927 MPH (N.D. Ca. 1997), reported at 1997 CCH Fed.Sec.L.Rep. ª99,575, provides a factual twist to the usual proceeding to compel arbitration. There the arbitration was stayed by the panel chairperson pending the outcome of a state court action. The claimants commenced a separate state court action against the Stock Exchange as the arbitration tribunal, seeking specific performance of its alleged contractual agreement to proceed with the arbitration. The Exchange removed the case to the district court on federal question jurisdictional grounds. It contended that federal rights were implicated because the Exchange rules upon which claimants relied were promulgated under the authority of sections 19 and l 9(b) of the Securities Exchange Act (15 U.S.C. Secs. 78s, 78t) and approved by the SEC. District Judge Patel remanded the case to the state court for lack of jurisdiction, holding that the application of these provisions of the Securities Act did not create a substantial question of federal law.
One might argue that this structure is more than just anomalous; it seemingly ignores the plain meaning of the statutory language. Granted that FAA Sec. 3, relating to motions to stay, deals with actions already pending in the district court, jurisdiction presumably having been established. And Sec. 4, dealing with petitions to compel arbitration, is limited by its terms to disputes where but for the agreement to arbitrate the court would have jurisdiction over a lawsuit based upon them. FAA Secs. 9, 10 and 11 contain no such limiting language and are subject to no such necessary implication. Section 9, for example, says that "[i]f the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then . . . any party to the arbitration may apply to the court so specified for an order confirming the award .... If no court is specified in the agreement of the parties, then such application may be made to the United States court in and for the district within which such award was made ...." Granted also that this is not typical language conferring jurisdiction upon United States courts. But what else can it mean? I protest in vain. The rule excluding jurisdiction is well settled and near universal. It creates a trap for the unwary litigator who reads only the statutes and not the cases which have interpreted them.
1. 465 U.S. 1,79 L.Ed.2d 1,104 S.Ct.852 (1984) (franchisor-franchisee case; court invalidated anti-arbitration provision of California Franchise Investment Act). Return to text
2. 513 U.S. 265, 130 L.Ed.2d 753, 115 S.Ct. 834 (1995) (dispute between homeowners and pest control company; court invalidated Alabama anti-arbitration statutes). Return to text
3. 517 U.S. 681, 134 L.Ed.2d 902, 116 S.Ct. 1652 (1996) (dispute under standard franchise agreement for operation of a Subway sandwich shop in Montana; state statute restricting arbitration invalidated). Return to text
4. 514 U.S. 52, 131 L.Ed.2d 76, 115 S.Ct. 1212 (1995) (dispute between securities broker and customer; agreement otherwise permitting recovery of punitive damages upheld notwithstanding choice of New York law denying such recovery in arbitration on ground FAA ensures enforcement of agreement according to its terms). Return to text
5. The equitable tolling doctrine has been applied to toll state statutes of limitations where a plaintiff mistakenly but in good faith sought to pursue state causes of action in federal court and the defendant received timely notice of the federal actions and had the opportunity to prepare a defense. Addison v. California, 21 Cal.3d 313, 146 Cal.Rptr. 224, 578 P.2d 941 (1978); Nichols v. Canoga Industries, 83 Cal.App.3d 956, 148 Cal.Rptr. 459 (1978); but see Garabedian v. Skochko, 232 Cal.App.3d 836, 283 Cal.Rptr. 802 (1991). No case has been found applying the doctrine to avoid the bar of C.C.P. Sec. 1288 where a claimant mistakenly sought confirmation in federal court. But see Shepherd v. Greene, 185 Cal.App.3d 989, 230 Cal.Rptr. 233 (1986), tolling the bar of Sec. 1288 during pendency of state court action although case dismissed for failure to state a cause of action. Return to text