Supreme Court Ruling Resolves Workplace Arbitration Dispute

In a discrimination case originally filed in district court by a hotel employee, the court retained jurisdiction under the Federal Arbitration Act (FAA) over the claims after they were “stayed” for arbitration, the U.S. Supreme Court ruled May 14. The litigation was complicated by a lower court split over jurisdiction, a split the Supreme Court resolved.

Termination During Pandemic Challenged

Adrian Jules worked from 2017 to 2020 at the Chateau Marmont Hotel in Los Angeles. In March 2020, the hotel terminated Jules, citing staffing issues related to the COVID-19 pandemic.  

Jules sued in a federal district court in New York, where several defendants lived, alleging that the defendants unlawfully discriminated against him in violation of federal and state law.

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However, Jules had signed an arbitration agreement before beginning work at the hotel. The agreement stated that any disputes related to his employment or termination that could not be resolved by negotiation or mediation must be resolved by arbitration. Citing this agreement, the defendants moved to stay federal proceedings pending arbitration under Section 3 of the FAA.

Arbitration Award Affirmed by Lower Courts

In 2023, an arbitrator issued a final award ruling against Jules on all claims. In addition, the arbitrator awarded about $34,500 in sanctions to the defendants based on Jules’ and his attorney’s misconduct, including Jules’ refusal to participate in the arbitral hearing on the claims.

Back in the district court, before the same court that had previously stayed Jules’ claims pending arbitration, the defendants moved to confirm the award under Section 9 of the FAA.

Jules opposed confirmation while moving to vacate the arbitral award under Section 10 of the FAA. Jules argued that under the Supreme Court’s ruling in Badgerow v. Walters, the district court lacked jurisdiction to confirm the award because the Section 9 and Section 10 motions did not present federal questions or satisfy the requirements for “diversity jurisdiction.”

But the district court confirmed the arbitral award and the 2nd U.S. Circuit Court of Appeals affirmed. Jules then appealed the 2nd Circuit’s conclusion that Badgerow’s holding is limited to “freestanding” Section 9 and Section 10 applications without a pre-existing federal lawsuit.

The Supreme Court decided to review the case in light of a split that existed in the appeals courts. Two other courts of appeals had agreed with the 2nd Circuit, but the 4th Circuit had ruled that Badgerow’s holding applied to all Section 9 and Section 10 motions, regardless of whether claims were filed in federal court before they were resolved in arbitration.

Supreme Court Opinion

In a unanimous decision written by Justice Sonia Sotomayor, the Supreme Court affirmed the 2nd Circuit decision. 

“This case asks whether a federal court with pre-existing jurisdiction over claims that it stayed pending arbitration under Section 3 can adjudicate a Section 9 or Section 10 motion even if that motion does not present, on its face, an independent basis for federal jurisdiction. The answer is yes,” Sotomayor wrote for the court.

An FAA motion can arrive in federal court in one of two ways, the Supreme Court noted. Sometimes, such as in this case, one party files a federal lawsuit and the other responds by arguing that the dispute is arbitrable and so should not go forward in court. 

In other cases, a freestanding FAA motion can arrive in federal court outside of any pre-existing federal case. For example, the parties may proceed directly to arbitration under their contract but need assistance enforcing a subpoena, and so apply to a court for aid under Section 7 of the FAA. Or one party may refuse to respond to an out-of-court arbitration demand, and the other side may seek an order compelling arbitration under Section 4.

“Regardless of how an FAA dispute begins, federal jurisdiction is not always a foregone conclusion. For a federal court to have jurisdiction over an arbitral dispute, it is not enough that the dispute implicates the FAA,” the Supreme Court wrote. “That is because the FAA is something of an anomaly in the realm of federal legislation. Although the FAA is a federal statute that provides federal standards, it does not itself create federal jurisdiction.” Instead, a federal court must have an independent jurisdictional basis for granting FAA relief.

In Vaden v. Discover Bank, the Supreme Court held that Section 4 permits courts to assert jurisdiction by “looking through” a motion to compel arbitration to the underlying dispute.

But in Badgerow, the court held that this look-through approach did not apply to freestanding motions to confirm or vacate arbitral awards under Sections 9 or 10. The look-through approach is a “highly unusual jurisdictional outlier,” the court said.

In Jules’ case, the district court had original jurisdiction. “It was this very jurisdiction that authorized the court to adjudicate the arbitrability of Jules’ claims under the parties’ contract to begin with, before staying litigation pending arbitration. Nothing in the FAA eliminated that jurisdiction while the parties arbitrated,” the Supreme Court said. “The [district] court had federal question subject matter jurisdiction and never lost it.”

There is an obvious place to look for jurisdiction in this case: the original claims themselves, the Supreme Court said.

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“The FAA requires a stay, rather than dismissal, so that a court that has granted a Section 3 stay can superintend the arbitration to the end,” the Supreme Court said. “On Jules’ theory, however, things would fall apart.”  

The defendants are not seeking any highly unusual look-through rule, the Supreme Court added. “Instead, the court in this case secured federal jurisdiction, in one of the most usual ways imaginable, based on the federal claims Jules filed in federal court under 28 U.S.C. Section 1331.”

This case is Jules v. Andre Balazs Properties.