Suit over arbitrator’s bias revived

Federal courts have the power to hear a motion to vacate or modify an arbitration award in any dispute where they would have the power to hear a motion to compel arbitration, the 4th U.S. Circuit Court of Appeals has ruled. It’s the first time the circuit has considered the issue, which has divided other federal circuits and may ultimately wind up before the U.S. Supreme Court.

The appeals court ordered a Virginia district court to reconsider a motion asking it to vacate a ruling in favor of America Online because an arbitrator for the American Arbitration Association was allegedly biased in AOL’s favor. The estate of Alvin Moore, who filed the initial lawsuit against AOL, alleges that AOL broke federal law when it handed his personal information over to local police investigators in Georgia without a warrant or Moore’s consent and deleted valuable information in his email account. The court had declined to hear the motion based on a lack of federal jurisdiction.

The appeals panel said in its Nov. 29 ruling that lower courts should “look through” the arbitration dispute and entertain motions to modify or vacate arbitration awards if they would have jurisdiction to hear the underlying dispute in the absence of an arbitration agreement.

Judge Paul Niemeyer, writing on behalf of a unanimous panel, said that questions of a federal court’s subject matter jurisdiction over arbitration disputes are more complex when a plaintiff fails to establish to diversity jurisdiction, as was the case with Moore’s dispute. Some federal circuits have found that because arbitration is the result of a contract, disputes should be resolved in state court because this is where such disputes are most often resolved. Other circuits have used the underlying nature of the disputes to determine jurisdiction.

The U.S. Supreme Court said in its 2009 decision in Vaden v. Discover Bank that courts should “look through” petitions to compel arbitration under Section 4 of the Federal Arbitration Act and look to the underlying dispute in order to decide jurisdictional questions. While some circuits have interpreted this ruling narrowly to only apply to Section 4, Niemeyer said the same approach should be applied to other sections of the FAA, including those which vacate or modify an arbitration result.

Niemeyer said that if a federal court has jurisdiction to compel arbitration, it follows logically that it would also have jurisdiction to call witnesses to the arbitration under Section 7 of the FAA and to vacate or amend an arbitration award under Sections 10 and 11.

The same “look through” approach should apply even when a motion to compel has not been filed, Niemeyer said, because having to file an extraneous motion to compel would be inefficient. While other courts have reasoned that the federal interest in compelling arbitration under Section 4 is greater than the federal interest in confirming, vacating, or modifying awards, Niemeyer disagreed.

“The issues addressed by §4 and §§9-11 are completely intertwined in carrying out Congress’s decision to provide a set of federal rules governing the arbitration process,” Niemeyer wrote.

Niemeyer said applying the “look through” approach only to Section 4 would create “a tension,” potentially leading to remedies in different courts during different stages of the same arbitration.

“Not only does our holding take the FAA as an integrated whole, rather than a collection of independent mechanisms, it also gives effect to the FAA’s purpose of favoring arbitration over litigation when arbitration has been agreed to,” Niemeyer wrote.

Stephen van Stempvoort of Miller Johnson in Grand Rapids, Michigan, represents the estate. Van Stempvoort said that there has been a great deal of federal litigation over jurisdictional issues in recent years because the FAA doesn’t establish clear jurisdiction in arbitration controversies.

Van Stempvoort said that the 4th Circuit’s ruling “harmonizes the federal-question jurisdictional analysis across the FAA” by applying the approach used in Vaden to each of the act’s provisions. In doing so, he said the court avoided “significant practice implications” that would have been caused by the opposite approach.

He said the court’s decision represents a boon for attorneys seeking to preserve post-arbitration access to the federal courts. While he agrees with the 4th Circuit’s reasoning in the opinion, he said he would be surprised if the issue didn’t show up in the Supreme Court “at some point down the road.”

Michael Stark and Tennille Checkovich of McGuire Woods in Richmond, Virginia did not respond to requests for comment.

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