Shearman & Sterling LLP | Securities Litigation Blog | Second Circuit Overrules Precedent, Holds That Courts May “Look Through” Petitions Challenging Arbitration Awards To Determine Jurisdiction<br >  
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  • Second Circuit Overrules Precedent, Holds That Courts May “Look Through” Petitions Challenging Arbitration Awards To Determine Jurisdiction

    On August 11, 2016, the Second Circuit overruled its own precedent and vacated an order of the United States District Court for the Southern District of New York that had dismissed a petition to vacate an arbitration award because the petition did not, on its face, present a federal question.  Doscher v. Sea Port Grp. Sec., LLC, —F.3d—, 2016 WL 4245427 (2d Cir. Aug. 11, 2016).  The Court held that when considering a petition challenging an arbitration award under section 10 of the Federal Arbitration Act (“FAA”), federal courts may “look through” the petition to the underlying dispute between the parties to determine whether the petition is predicated on an action arising under federal law.

    Petitioner, the former co-head of sales and trading for a broker-dealer, had commenced an arbitration against respondents, including his former employer, asserting employment-related and securities fraud claims.  The arbitration resulted in a partial award in petitioner’s favor.  Petitioner then challenged the award in federal court under section 10 of the FAA, arguing that the arbitration panel had disregarded applicable discovery rules of the Financial Industry Regulatory Authority (“FINRA”).  The district court concluded that the panel’s alleged violations of the FINRA rules did not constitute violations of federal law and that under the Second Circuit’s holding in Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000), it therefore lacked jurisdiction to entertain the petition, notwithstanding petitioner’s underlying securities fraud claims, because the petition did not on its face allege a manifest disregard of federal law.

    The Court agreed with the district court that the petition did not, on its face, establish federal question jurisdiction because the arbitration panel was not FINRA itself and was therefore not obliged to adhere to the FINRA rules in question.  Further jurisdictional analysis was warranted, however, in light of the U.S. Supreme Court’s decision in Vaden v. Discover Bank, 556 U.S. 49 (2009), which held that federal courts should “look through” to the underlying dispute when deciding whether federal question jurisdiction exists over a petition to compel arbitration pursuant to section 4 of the FAA.  The Court concluded that Vaden had abrogated Greenberg.  The Court reasoned that because Vaden requires courts in section 4 petitions to analyze underlying disputes for federal question jurisdiction, and because Vaden had also held that the FAA does not itself create jurisdiction, it would be inconsistent to adopt a “look through” approach under section 4 of the FAA but not utilize such an approach under section 10 of the FAA.  The Court also reasoned that permitting courts to “look through” petitions under section 10 of the FAA was consistent with Congress’s intention to promote arbitrations while also preserving the ability of federal courts to enforce the FAA’s remedies in cases that would be subject to federal jurisdiction absent arbitration.

    Because the district court had relied in Greenberg without assessing whether the parties’ underlying dispute arose under federal law, the Court remanded the petition to the district court to make that determination.
    CATEGORY: Jurisdiction