Recently, the Second Circuit definitively held that federal common law, not state law, provides the meaning of “arbitration” under the Federal Arbitration Act. In the case, Bakoss and Lloyds entered into a disability insurance certificate which constituted a contract. The contract provided that each party would select its own physician to determine whether the insured was totally disabled and, in the case, the two physicians disagreed; a third physician chosen by the two would make a binding determination as to disability. After coverage was denied, Bakoss filed suit in state court. Lloyds removed the case asserting federal jurisdiction under the FAA and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which, unlike the FAA, provides an independent basis for federal jurisdiction.
The trial court looked to federal case law in determining that the dispute resolution provision regarding total disability constituted an arbitration agreement and thus held that it had jurisdiction to adjudicate the dispute over coverage under the Convention and FAA. The trial court also granted summary judgment on the merits to Lloyds. Bakoss appealed, arguing that the dispute resolution procedure was not an arbitration agreement under state law. The Second Circuit affirmed, holding that “arbitration” under the FAA is defined by federal common law; it also affirmed the grant of summary judgment to Lloyds on the merits. As discussed in the opinion, some federal courts of appeal have held that state law supplies the definition of “arbitration” and others apply federal law. , No. 11-4371 (2d. Cir. Jan. 23, 2013).