No error in refusing to ‘look through’ arbitration petition to defeat subject matter jurisdiction
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Wednesday, August 16, 2017

No error in refusing to ‘look through’ arbitration petition to defeat subject matter jurisdiction

By Kathleen Kapusta, J.D.

Rejecting an employee’s contention that the district court lacked subject matter jurisdiction over his former employer’s petition to compel arbitration under Section 4 of the Federal Arbitration Act due to a lack of complete diversity of citizenship, the Second Circuit refused to “look through” the petition to the underlying dispute as defined in his New Jersey lawsuit asserting various employment discrimination claims against the employer and an individual defendant. In a prior decision, the court explained, it previously rejected the “look through” approach, reasoning that Section 4 provides for jurisdiction over a controversy between “the parties,” which “most sensibly refers to those persons who are parties to the arbitration agreement – and who therefore can be named in the petition to compel arbitration” (Hermes of Paris, Inc., v. Swain, August 14, 2017, Lynch, G.).

After being fired from his job managing the company’s boutique store, the employee sued in New Jersey state court, alleging various employment discrimination claims against the employer and a coworker. Asserting federal jurisdiction based on diversity of citizenship, the company subsequently filed a petition in the district court to compel arbitration pursuant to Section 4 of the FAA. It named the employee as the only respondent and cited a dispute resolution protocol he purportedly signed before he was hired. The protocol provided that that “either you or [Hermes] may initiate final and binding arbitration” for “all legal and equitable claims . . . of whatever nature or kind . . . between you and [Hermes], its corporate parent . . ., their affiliates and subsidiaries and its and their owners, directors, officers, executives and employees. The district court granted the company’s petition in relevant part.

Look through approach. On appeal, the employee argued that the district court lacked subject matter jurisdiction due to a lack of complete diversity of citizenship. While he did not dispute that he and his employer—the parties to the petition to compel arbitration—were citizens of different states, he urged the court to “look through” the petition to the underlying dispute, as defined in his New Jersey lawsuit, and conclude that complete diversity was lacking because he and the coworker he had sued in that suit were both citizens of New Jersey.

Distajo. The Second Circuit, however, found this argument was foreclosed by its decision in Doctor’s Associates, Inc. v. Distajo, in which it rejected the look through approach asserted by the employee here. In Distajo, the court reasoned that Section 4 of the FAA provides for jurisdiction over a suit arising out of a controversy between “the parties,” which “most sensibly refers to those persons who are parties to the arbitration agreement – and who therefore can be named in the petition to compel arbitration.” Further, the Distajo court explained, requiring that the parties to the underlying dispute be completely diverse would fatally undermine the FAA because it would allow “a party resisting arbitration [to] defeat federal jurisdiction simply by suing someone from the same state, plus the party seeking to compel arbitration, in a separate lawsuit.” Further, said the court, all other Circuits to have addressed the issue have likewise rejected a look-through approach to assessing complete diversity for the purposes of evaluating whether a district court has diversity jurisdiction over an FAA petition.

Not overruled by Vaden. And while the employee argued that the Supreme Court’s ruling in Vaden v. Discover Bank requires that courts look through the petition to the underlying suit for purposes of determining whether complete diversity is satisfied, thus abrogating Distajo, the Second Circuit found this assertion was “simply incorrect.” Observing that Vaden dealt with the entirely different question of determining whether a district court has federal question jurisdiction over a petition to compel arbitration, the court here pointed out that “In contrast to the unanimous rejection by the Circuits of the look-through approach to assessing complete diversity for the purposes of diversity jurisdiction, the Courts of Appeals had split over whether to look to the underlying lawsuit in determining federal question jurisdiction.”

While the Vaden Court held that courts may look through Section 4 petitions to the underlying dispute to determine whether they are predicated on actions arising under federal law, nowhere did it address whether a look through approach should likewise apply where courts assert diversity jurisdiction over an FAA petition. Indeed, said the Second Circuit, the Court specifically noted that diversity of citizenship was not available as a jurisdictional basis for the petition at issue in Vaden, and expressly limited its endorsement of the look-through approach to the context of federal question jurisdiction, stating that it “approve[d] the ‘look through’ approach to this extent: A federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.”

Because Vaden did not overrule or undermine the Second Circuit’s precedent in Distajo, the employee’s challenge to the district court’s subject matter jurisdiction failed, said the court, noting that under Distajo complete diversity is measured by reference to the parties to the petition to compel arbitration, which in this case were completely diverse. Accordingly, the appeals court affirmed the decision of the court below.

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