In Bakoss v Certain Underwriters at Lloyds of London, (2d Cir. Jan. 23, 2013), Mr. Imad John Bakoss (Bakoss) filed a claim in state court, seeking disability benefits under an insurance policy with Lloyds of London. The parties had entered into a Certificate of Insurance providing for payment of a fixed benefit to Bakoss in the event he became "permanently totally disabled." According to the Certificate, upon a request for benefits, each party had a right to have Bakoss examined by a physician of its choice to determine whether he was "permanently totally disabled." If the physicians disagreed about Bakoss' status, they were required to jointly select a third physician to make a final and binding decision (third-physician clause).

Lloyds removed the state action to the federal District Court for the Eastern District of New York, arguing that the third-physician clause was an arbitration agreement providing federal subject-matter jurisdiction under 28 U.S.C. § 1331, the New York Convention, and Article 2 of the FAA. Applying federal common law, the District Court held that the third-physician clause was an agreement to arbitrate capable of providing federal subject-matter jurisdiction under the FAA.

Bakoss appealed to the Second Circuit, arguing that, since the FAA does not supply a definition of "arbitration," the District Court should have looked to New York state law, rather than federal common law, to define the term. The Second Circuit held that federal common law governs the meaning of "arbitration" within the FAA because Congress intended national uniformity regarding the interpretation of the term. According to federal common law, contractual language that clearly manifests an intention by the parties to submit certain disputes to a specified third party for binding resolution can be considered "arbitration" for purposes of the FAA.

However, the Second Circuit acknowledged that other Circuits have reached differing conclusions, with the Sixth, Tenth and First Circuits applying federal common law and the Fifth and Ninth Circuits applying state law. The Second Circuit noted that the Circuits that apply federal common law have relied on Congressional intent to create a uniform national arbitration policy. By contrast, the Circuits that apply state law have "articulated few reasons for doing so."

The Second Circuit agreed with "the compelling analysis" of the Circuits that have followed federal law in defining the scope of "arbitration" under the FAA. Applying state law would create "a patchwork in which the FAA will mean one thing in one state and something else in another." Ultimately, the Second Circuit concluded that the District Court correctly applied federal common law in determining that the third-physician clause was an "arbitration" agreement under the FAA.

This case illustrates the importance of federal common law in interpreting the FAA. More specifically, the case highlights a Circuit split that may be ripe for resolution at the Supreme Court.