A recent decision of the US Court of Appeals for the Eighth Circuit complicates the question of whether a federal court has subject matter jurisdiction to compel arbitration of a dispute pending in state court. In some instances, jurisdiction depends on the content of the state court complaint and in others it depends on the contents of the federal petition to compel arbitration. Parties that want arbitration must prepare to address all of the separate inquiries if they want relief from a federal court. Alternatively, parties can petition a state court to compel arbitration.

The Federal Arbitration Act (FAA) makes arbitration agreements binding and enforceable in federal and state court. However, in most cases the FAA does not provide federal courts with subject matter jurisdiction. A party that wants a federal court to order arbitration must find an independent jurisdictional basis. (9 U.S.C. §§ 1-16; 201-208; 301-307.)

For information about subject matter jurisdiction, see Practice Note, Commencing a Federal Lawsuit: Initial Considerations: Confirm that the Plaintiff May Sue in Federal Court.

In determining whether federal question jurisdiction exists for a petition to compel arbitration under section 4 of the FAA, federal courts may "look through" the petition and examine the underlying dispute between the parties. Where the parties' dispute is already being litigated in state court, the underlying dispute is defined by the state court complaint. (Vaden v. Discover Bank, 556 U.S. 49 (2009).)

However, the Supreme Court's look-through analysis was not generally applied to diversity jurisdiction cases. Most of the courts applying Vaden considered it limited to federal question cases. (Garner v. BankPlus, 484 B.R. 134, 139-40 (S.D. Miss. 2012) (collecting cases); but see Cytec Indus., Inc. v. Powell, 630 F. Supp. 2d 680, 686 n.2 (N.D. W. Va. 2009) (suggesting in dicta that the reasoning of Vaden could apply to diversity cases).)

The leading case for reading Vaden narrowly was an Eighth Circuit opinion. That opinion stated that the Supreme Court had restricted Vaden's holding to federal question cases. In contrast, an earlier Supreme Court case involving diversity jurisdiction had not looked through the arbitration petition even though the underlying state court action included a non-diverse party who would have precluded federal jurisdiction. Concluding that the Supreme Court had not silently overruled its earlier opinion, the Eighth Circuit refused to apply Vaden in a diversity case. (Northport Health Servs. of Ark., LLC v. Rutherford, 605 F.3d 483 (8th Cir. 2010).)

Now, however, the Eighth Circuit has read its own precedent narrowly and used a look-through analysis for at least part of the diversity jurisdiction inquiry (CMH Homes, Inc. v. Goodner, No. 12-3381, (8th Cir. Sept. 5, 2013)).

In CMH Homes, the Goodners filed a putative class action in Arkansas state court against several defendants (collectively CMH). CMH removed the putative class action to federal district court under the Class Action Fairness Act of 2005 (CAFA) and petitioned the federal district court to compel arbitration under the parties' contract.

For information about removal, see Practice Note Overview, Removal: Overview. For information about jurisdiction under CAFA, see CAFA Jurisdiction Comparison Chart. For information about compelling arbitration under the FAA, see Practice Note, Understanding the Federal Arbitration Act and Practice Note, Compelling Arbitration in US Federal Courts.

The district court granted the Goodners' motion to remand the case to state court and dismissed the petition to compel arbitration for lack of subject matter jurisdiction. CMH appealed the dismissal of its arbitration petition.

The Eighth Circuit agreed with the district court that the jurisdictional inquiry required looking through the arbitration petition to the underlying state court complaint. The circuit court concluded that Vaden's reasoning applied to the amount in controversy requirement for diversity jurisdiction.

The circuit court distinguished its decision in Rutherford and the Supreme Court case on which Rutherford relied because those cases involved the diversity of citizenship requirement, not the amount in controversy requirement. The two requirements are separate and motivated by separate policy concerns. The court concluded that the differences are sufficient to bring the amount in controversy within the scope of Vaden while leaving the diversity of citizenship outside.

Although the Eighth Circuit agreed with the district court's look-through analysis, it vacated the district court's finding of jurisdiction and remanded for a reexamination of the amount in controversy under an intervening Supreme Court opinion about CAFA's jurisdictional requirements (see Legal Update: Supreme Court: CAFA Jurisdiction Not Defeated by Named Plaintiff's Stipulation to Seek Less than $5 Million).

In light of CMH Homes, and the absence of guidance from other federal circuit courts, parties petitioning a federal court for arbitration of a dispute already pending in state court must separately examine each component of jurisdiction. If alleging federal question jurisdiction, counsel must be mindful of the state court complaint. If alleging diversity jurisdiction, counsel must consider both the state court complaint and the federal arbitration petition. Even if counsel can draft the arbitration petition to satisfy the diversity of citizenship requirements, the state court complaint may make it difficult, if not impossible, to satisfy the amount in controversy requirement.

Counsel should also consider whether it is worth seeking relief in federal court at all. The FAA requires state courts, which tend to have broad subject matter jurisdiction, to enforce arbitration agreements. Even if the procedures of the FAA do not apply in state court, many states have analogous statutes. (Vaden, 556 US. at 71.) Petitioning the state court to compel arbitration may avoid the time and expense of ancillary litigation over whether a federal court has jurisdiction to consider the request for arbitration.

For information about arbitration law in state courts, see Practice Note, Understanding US Arbitration Law.