Securities Litigation Commentator

Bass, Berry & Sims attorney Chris Lazarini examined how the Second Circuit eliminated inconsistencies in how subject matter jurisdiction is established in matters brought under the Federal Arbitration Act (FAA) by applying the "look through" approach regardless whether the petition is based on FAA §4 (petition to compel) or FAA §10 (petition to vacate).

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Doscher vs. Sea Port Group Secs., LLC, No. 15-2814 (2nd Cir., 8/11/16)

In the Second Circuit, federal courts may find subject matter jurisdiction in arbitration matters where a federal question is stated on the face of a petition brought under the Federal Arbitration Act or by "looking through" the petition to determine whether a federal question is stated in the underlying claims.

Plaintiff appeals from the dismissal of his petition to vacate a FINRA arbitration Award (FINRA #13-01857 (NYC, 10/22/14)). The district court, relying on Second Circuit precedent, held (SLA 2015-31) that it could not find subject matter jurisdiction by "looking through" Plaintiff's petition to vacate brought under §10 of the FAA. Rather, subject matter jurisdiction existed only if the §10 petition stated a substantial federal question on its face, but the court found none. Seemingly inviting an appeal, the court questioned whether a different result was required by the United States Supreme Court decision in Vaden v. Discovery Bank, 556 U.S. 49 (2009) (holding that federal courts considering petitions to compel arbitration under §4 of the FAA may look through the petition and find subject matter jurisdiction in the underlying claims), but cautioned that it could not contradict Circuit precedent.

On appeal, the Second Circuit first confirms the district court's finding that the arbitration panel's alleged violation of FINRA's discovery rules does not itself raise a federal question on which jurisdiction would lie. Absent a facial federal question, the Court revisits its precedent on the "look through" approach in the wake of Vaden, and thoroughly examines whether that precedent is inconsistent with Vaden. The Court recognizes the tension between allowing a "look through" in a §4 petition to compel, while disallowing it in a §10 petition to vacate, and concludes that the more consistent interpretation of the FAA as a whole construes the differing language in §§ 4 and 10 as defining remedies, but signaling nothing about jurisdiction. In this way, the Court concludes, the ordinary jurisdictional inquiry under §1331 (the general jurisdiction statute) allows courts to look to the underlying substantive dispute for jurisdiction regardless of the FAA section at issue. The result, the Court notes, is well suited to Congress' intent to favor arbitration by constraining the role of federal courts where an agreement to arbitrate exists, without displacing the courts' ability to enforce the remedies Congress created in the FAA.

Finally, the Court explains that applying the "look through" approach prevents the absurdity of an interpretation that permits parties to file motions to compel in federal court where the underlying dispute raises a federal question, but precludes them from seeking the same federal court's aid under the FAA's other provisions. Such an inconsistency, the Court states, encourages parties to lock in jurisdiction by filing a federal suit to secure jurisdiction, then moving for a stay pending compulsory arbitration, and returning to the federal court if disputes arise over arbitrators, subpoenas, or awards. The Court describes this practice as the "height of absurdity," which can be avoided by consistent application of the "look through" approach across the FAA. Having undertaken this analysis, the Court concludes that Vaden is fundamentally inconsistent with its prior position, overrules its precedent, and remands the case to the district court for additional proceedings.

It is doubtful Plaintiff will prevail in obtaining vacatur of the Award, because courts generally do not second-guess arbitrators' decisions regarding discovery and admission or exclusion of evidence.