Supreme Court Clarifies Federal Jurisdiction in Employment Arbitration Case

The U.S. Supreme Court recently limited when federal courts have the authority to confirm or vacate arbitration awards. The case is complex, but the ruling could affect employment-related arbitration disputes by expanding the role of state courts.

In Badgerow v. Walters, the high court was asked to decide whether a federal court can review an arbitration award when the only basis for federal jurisdiction is that the underlying dispute involved a federal question.

"This case involves a pretty obscure question about jurisdiction—the kind of question that understandably causes many non-lawyers' eyes to glaze over," said Chris Murray, an attorney with Ogletree Deakins in Indianapolis.

But the outcome has implications for businesses that use employment-related arbitration agreements. "Under the court's new decision, employers—and employees—will now more often be required to file their motions to confirm, modify or vacate arbitration awards in state rather than federal court," Murray explained.

Why does this matter to employers? Jesse Panuccio, an attorney with Boies Schiller Flexner in Washington, D.C., noted that employers generally tend to favor arbitration as an efficient and lower-cost method of resolving employment disputes. "Traditionally, state courts have been seen as more hostile to arbitration, so employers generally might favor federal court jurisdiction in these circumstances," he said.

Daniel Geyser, an attorney with Haynes Boone in Denver and Dallas, argued before the Supreme Court on behalf of the employee in the case. He said the decision helps clarify the jurisdictional rules for everyday filings under the Federal Arbitration Act (FAA). "This will help provide certainty—for employers and employees alike—in deciding where to litigate post-arbitration issues," he noted.

Here are some key points for employers to note about the ruling.

Background

The FAA was enacted in 1925 to give validity to arbitration as an enforceable alternative to litigation. In recent years, courts have consistently upheld arbitration agreements that apply to employment relationships, and the Supreme Court has maintained a "liberal federal policy favoring arbitration agreements" in its prior rulings. 

In many employment arbitration cases, a worker who signed a pre-dispute arbitration agreement decides post-dispute to take the claim to court, and therefore challenges the enforceability of the agreement. FAA Section 4 governs whether courts have jurisdiction to compel arbitration in such cases.

In Badgerow, the Supreme Court was asked to decide whether the analysis for Section 4 claims applies to claims brought under FAA Sections 9 and 10, which govern federal courts' jurisdiction to compel or vacate arbitration awards.

In this case, a fired employee had brought multiple claims in different forums, including arbitration, which were all dismissed. The employer ultimately asked a federal court to confirm dismissal of the claims. Then the employee filed a claim in state court against the company's principal operators, arguing that the arbitration award in their favor was obtained through fraudulent means and should be vacated.

The employee's state-court claim was removed to the federal court, and the 5th U.S. Circuit Court of Appeals ultimately affirmed that the federal court had the authority to hear the underlying claim—and therefore also had authority to confirm or vacate the arbitration award.

The employee petitioned the Supreme Court in an effort to proceed with her state-court claims.

Siding with the employee, the high court noted that Congress gives federal district courts jurisdiction over two main kinds of cases: lawsuits between citizens of different states with disputes valued at more than $75,000 and lawsuits "arising under" federal law.

In this case, the parties were from the same state. Additionally, "although the underlying termination dispute involved federal claims, the controversy at issue involved the enforceability of an arbitration award, which the court said is merely a contractual dispute that typically involves only state law," explained law firm Jackson Lewis. Thus, there was no jurisdiction based on a federal question. 

"In sum, the court held that there was no independent basis for federal jurisdiction and the district court should have remanded to the state court to review the award," Jackson Lewis said.

Employer Takeaways

"As a practical matter, many of the claims that employers deal with in arbitration are federal claims," Murray explained. These include claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and the Family and Medical Leave Act.

"In losing the option of going to federal court to confirm some arbitration awards, arbitration may become marginally less reliable," Murray said. "However, this new decision should not affect the overall benefits that many employers conclude they receive from using employment arbitration."

On behalf of the employee, Geyser argued that "there is no reason to clog the federal courts with hundreds (or thousands) of mundane FAA filings when state courts have proven more than capable in effectively doing the job."