Badgerow Strikes Again! Absence of Subject Matter Jurisdiction for Award Confirmation

Introduction. In Smartsky Networks, LLC v. DAG Wireless, Ltd. et al, ____ F.4th ____, 2024 WL 560717 (4th Cir. 2024), the United States Court of Appeals for the Fourth Circuit recently addressed the impact of the U.S. Supreme Court decision in Badgerow v. Walters, 596 U.S. 1 (2022), which concerned the scope (and limits) of a federal court’s subject matter jurisdiction to confirm an arbitration award under FAA §§9 and 10.

Background. For ease of reference, in this article the parties are referred to as “Smartsky Networks” (Appellee) and “DAG” (Appellant). Smartsky Networks sued the DAG group for breach of contract, trade secret misappropriation, and deceptive trade practices in the Middle District of North Carolina (Greensboro). Smartsky Networks then submitted an arbitration demand. Eventually all members of the DAG group submitted to arbitration on the claims filed against them by Smartsky Networks. The District Court stayed the lawsuit pending arbitration.

The arbitral tribunal eventually conducted a hearing, and then issued an award in favor of Smartsky Networks, which included recovery of monetary damages and imposition of a permanent injunction. Smartsky Networks then filed a motion to confirm and enforce the award in the District Court.

Issue Presented. Did the federal court in Greensboro have subject matter jurisdiction to confirm the arbitration award?

Lower Court’s Ruling. The District Court said “yes,” and confirmed the award. The DAG Group then appealed to the United States Court of Appeals for the Fourth Circuit.

Court’s Analysis. On appeal, the Fourth Circuit rejected the District Court’s confirmation of the award, concluding that in this case, the District Court lacked subject matter jurisdiction to do so.

The Court first recounted the standard established by the Supreme Court in Badgerow, focusing upon the criterion that for claims submitted to a federal court for award confirmation under FAA §§9 and 10, the “look-through” process to assess subject matter jurisdiction is not available, as it may be for matters arising under FAA §4. Scrutinizing the status of each of the parties, the Court then recounted the background of the proceedings, including Smartsky Networks’ submission of the arbitration award for confirmation; and the corresponding motions to vacate the award by the DAG Group.

The Court then utilized the principle that any party seeking to confirm or vacate an arbitration award is obligated to furnish an independent source of federal jurisdiction, since the FAA does not contain any such authority.

Smartsky Networks contended to the Court that the subject matter of the claims presented in the arbitration could be traced to claims under federal law, thus endowing the District Court with subject matter jurisdiction. The Court rebuffed this argument, pointing out that FAA §§ 9 and 10 motions to confirm or vacate are not motions in a pending action. Rather, they are separate actions independent of the original lawsuit filed and, thus, do not support federal jurisdiction. Instead, in keeping with the Supreme Court’s directive in Badgerow, the Smartsky Networks Court analyzed the lawsuit before it as a contract enforcement action, given that the parties ongoing business relationship issues and ongoing legal claims had all been resolved by the arbitral tribunal.

Thus, having rejected the “look through” approach the District Court utilized as prohibited by Badgerow, the Court then considered where else to look to assess jurisdiction. This led the Court to evaluate the application for relief itself. It found that neither the motion to confirm nor the motion to vacate alleged the applicability of any federal law other than Sections 9 and 10. Since the tribunal had resolved all other questions, there was no discernable federal source of subject matter jurisdiction. In other words, what had previously occurred before the District Court left no residue of “continuing jurisdiction.”

Since the parties did not otherwise identify any source of federal subject matter jurisdiction, the Court reversed the District Court’s decision.

Conclusion. As was anticipated at the time Badgerow was issued, unless litigants can identify a separate basis for federal subject matter jurisdiction when seeking arbitration award confirmation or vacatur, parties will have to seek such relief in a state court of competent jurisdiction. A recent example of the presence of subject matter jurisdiction to confirm an arbitration award in a federal court in accordance with the command of Badgerow can be found in Rabinowitz v. Kelman, 75 F.4th 73 (2d Cir. 2023). In that case, the Second Circuit determined that the party seeking confirmation had clearly pled and demonstrated the existence of diversity jurisdiction, thus endowing the District Court in that case with subject matter jurisdiction to confirm the award in question.

1 Mr. Schooler is former Board Member of the North American Branch of the Chartered Institute of Arbitrators, and the immediate Past Chair of its Texas Chapter.