Outsourcing Justice

Ninth Circuit Raises Fundamental Questions About the Meaning of Arbitration under the FAA

In Boardman v. Pacific Seafood Group, Nos. 15–35257, 15–35504 (9th Cir. May 3, 2016) (click here for a copy of the decision), the majority of a Ninth Circuit panel held that a dispute did not fall under the scope of a dispute resolution clause.  The original dispute, which was settled, involved a group of fisherman suing seafood processors for antitrust violations.  The settlement agreement contained a clause providing that if two defendant seafood processors entered into an exclusive marketing arrangement in the future, then the federal judge hearing the original case (or a magistrate judge) would decide whether the new marketing arrangement was anti-competitive.  After the settlement, the two seafood processors subsequently entered into a stock purchase agreement whereby one of the processors acquired the stock of the second processor.  The fisherman then challenged this stock purchase agreement in court as anticompetitive and in violation of the antitrust laws, and the defendant seafood processors moved to compel arbitration under the FAA.

The district court held, and two members of the Ninth Circuit’s panel affirmed, that the antitrust dispute about the new stock purchase agreement was not covered by the dispute resolution clause in the original settlement.  The judges reasoned that a stock purchase agreement is different from a marketing arrangement, which was the subject of the narrow dispute resolution clause.  The scope of the clause therefore did not cover the new dispute about the stock purchase agreement.

A Ninth Circuit judge, however, dissented in part and would have compelled the parties to arbitrate, believing that the dispute fell under the scope of the clause, especially considering the presumption in favor of arbitrability.

What I find interesting is the dissenting judge’s discussion of arbitration under the FAA.  The judge correctly notes that the FAA does not define arbitration, and the judge believed that arbitration simply requires an agreement to submit a dispute to a third party.   Under this definition, the dissenting judge found that the agreement to submit the dispute to the federal judge/magistrate is an arbitration agreement, and the dissenting judge proceeded with an analysis under the FAA.

I disagree with the dissenting judge’s analysis.  The FAA was intended to cover private arbitrators, not federal judges, sitting as decision-makers.  Parties cannot create federal subject matter jurisdiction through a contract.  The underlying dispute in this case happened to involve an antitrust claim, which would automatically trigger federal question jurisdiction, but suppose the underlying dispute involved a $500 contract claim.  A federal judge would be powerless to hear such a dispute involving state law.  Also, a judge serving as an arbitrator raises the same concerns addressed by the Third Circuit’s decision in Delaware Coalition v. Strine, involving Delaware’s failed attempt to create an arbitration system with sitting judges.

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