Outsourcing Justice

Fifth Circuit Addresses Thorny Issues of Subject Matter Jurisdiction and Confirmation of an Award

The Fifth Circuit recently issued a decision regarding how to assess subject matter jurisdiction in connection with the confirmation of an arbitrator’s award.  See Pershing LLC v. Kiebach, No. 15–30396 (5th Cir. Apr. 6, 2016) (click here for a copy of the decision).

The investor plaintiffs originally sought $80 million in damages in an arbitration involving allegations of a Ponzi scheme.  The arbitration panel rejected the plaintiffs’ claims, but awarded the plaintiffs $10,000 in compensation for arbitration-related expenses.  The broker defendant then filed a motion to confirm the $10,000 award in federal court.  Does the federal court have subject matter jurisdiction to confirm the $10,000 award, in light of the $75,000 amount in controversy requirement for diversity jurisdiction?  Yes, according to the Fifth Circuit, because the plaintiff’s original demand in arbitration satisfied the amount in controversy requirement.

The Fifth Circuit recognized that other courts have generally used two different approaches when analyzing subject matter jurisdiction in this context– either a “demand” approach (where the amount in controversy is the amount originally sought in the underlying arbitration) or an “award” approach (where the amount in controversy is the amount of the award sought to be confirmed).

The Fifth Circuit adopted the “demand” approach, and because the demand here was originally for $80 million, the district court has subject matter jurisdiction to confirm the $10,000 award arising from this arbitration.  The Fifth Circuit reasoned that the demand approach is consistent with the analysis of subject matter jurisdiction for proceedings to compel arbitration.  Also, this demand approach is consistent with the analysis of subject matter jurisdiction had the dispute been fully litigated in court instead of arbitrated.

There is a very interesting concurring opinion, where the concurring judge agreed with the finding of subject matter jurisdiction here, but the concurring judge advocated for a more nuanced, case-by-case approach to determine subject matter jurisdiction.  The concurring judge believed it was a mistake to adopt the “demand” approach as a universal rule; such a universal rule would be overly-simplistic and failed to take into account other factors that could exist when confirming or vacating an award.  For example, if a losing respondent desired to vacate a $20,000 award, then perhaps only $20,000 or the amount of the award may be at issue.  But if a party desired to vacate a $20,000 award, and seek $100,000 in a new arbitration, the amount in controversy may be satisfied based on the value of the request for a new arbitration proceeding.  The concurring judge believed that, depending on the particular facts of a case, the amount of the arbitration award may represent the most accurate determination of the amount in controversy in certain cases.  Thus, it was a mistake to adopt a demand approach as a universal rule for all cases.

Another interesting problem, not really addressed by the Fifth Circuit in this case, is what happens if the underlying claim involves a federal question claim, such as a federal civil rights dispute for $50,000.  Would a court asked to confirm a $50,000 arbitral award have subject matter jurisdiction?  Subject matter jurisdiction would probably depend on how a court conceptualizes the award.  If the award is merely viewed as representing a contract between the parties, stripped of the federal question nature of the original dispute, then the court would probably deny subject matter jurisdiction to confirm the award.  However, if the court conceptualizes arbitration as the process to resolve the federal civil rights claim, and the arbitral award is the culmination of this process, then the court would probably find subject matter jurisdiction to confirm the $50,000 award in the civil rights dispute.

 

 

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