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As reported in SAA 2021-19 (May 20), the Supreme Court on May 17 granted Certiorari in a case involving application of the “look-through” standard. Here is the promised elaboration.

The Court will review Badgerow v. Walters975 F.3d 469 (5th Cir. 2020), a case we analyzed in SAA 2020-36 (Sep. 23). In the underlying case, the Fifth Circuit held that the District Court was correct when it applied the “look through” standard to determine that it could remove a state court action to vacate an Award. We borrow from our coverage in #36 to provide background on the case and issues.

The Case Below

A FINRA Panel rendered an Award denying AP Badgerow’s claims against Ameriprise and three “franchise advisors,” triggering a Petition to vacate by Badgerow in a Louisiana Trial Court. The Respondents then removed the case to federal court. Thereafter, the District Court confirmed the Award, finding no fraud in its procurement as Badgerow had alleged. Before the Fifth Circuit was whether the District Court acted properly in determining it had federal subject matter jurisdiction to support removal.

“Look Through” Standard Under FAA Section 4 Motions to Compel

Although the Federal Arbitration Act (“FAA”) does not confer federal subject matter jurisdiction, the Supreme Court in Vaden v. Discover Bank, 556 U.S. 49 (2009), held that jurisdiction over a FAA section 4 petition to compel arbitration is determined by the nature of the underlying dispute. This was based on FAA section 4 language providing that a motion to compel arbitration can be brought in “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.” The Vaden standard became known as the “look through” test.

Majority of Circuits Extend the Standard to Award Confirmation

Over the years, a majority of Circuits considering the question (First, Second, Fourth, and Fifth) have extended the “look-through” standard to post-award motions to confirm or vacate/modify. See, for example, Doscher v. Sea Port Group Securities, LLC, 832 F.3d 372 (2d Cir. 2016), where the Second Circuit extended Vaden’s “look through” jurisdictional test to motions to confirm (FAA section 10) or modify (FAA section 11) awards under the FAA. The Third and the Seventh Circuits have adopted a contrary view, limiting the look-through standard to actions to enforce PDAAs. See, for example, Goldman v. Citigroup Global Markets Inc., 834 F.3d 242 (3d Cir. 2016).

Applying the “Look Through” Standard Here

Applying the “look through” test to the underlying FINRA arbitration, the Fifth Circuit held that the District Court had federal subject matter jurisdiction to support removal of the vacatur action filed in State Court. Said the unanimous Opinion: “Applying the look-through analysis, we have held, first, that the district court correctly found that Badgerow’s Title VII declaratory judgment claim against Ameriprise in the FINRA arbitration was a federal-law claim. We have held, second, that all of Badgerow’s claims against the Principals and Ameriprise in the FINRA arbitration arose from the same common nucleus of operative fact, and that under the principle of supplemental jurisdiction, federal jurisdiction obtains over Badgerow’s state-law tortious interference and whistleblower claims. The district court therefore properly held that Badgerow’s federal claim against Ameriprise in the FINRA arbitration invested federal jurisdiction over Badgerow’s Louisiana petition to vacate the FINRA arbitration award as to the Principals.”

Issue Before SCOTUS

The issue identified for review in the granted Petition for Certiorari: “Whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA where the only basis for jurisdiction is that the underlying dispute involved a federal question.”

(ed: *Only the jurisdictional issue was before the Fifth Circuit, “not in any instance, the merits of the confirmation of the FINRA arbitration dismissal award.” **In our view, the split in the Circuits warranted the Cert. grant. ***Badgerow, No. 20-1143, is on page 2 of the Order List.)

This post first appeared on the Securities Arbitration Alert blog.  The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.

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