On August 22, 2016, the US Court of Appeals for the Third Circuit held in Goldman v. Citigroup Global Markets, Inc. that a federal court may not look through a petition filed under Section 10 of the Federal Arbitration Act (FAA) (9 U.S.C. § 10) to determine if the underlying dispute raises a federal question ( (3d Cir. Aug. 22, 2016)).

Plaintiffs (the Goldmans) commenced a Financial Industry Regulatory Authority (FINRA) arbitration proceeding against the defendants, alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission, breach of fiduciary duty, breach of contract, and other claims. During the arbitration, the Goldmans also filed a civil action in federal district court, asserting breach of contract for the defendants' alleged failure to mediate. The Goldmans sought to stay the arbitration and have the defendants' counsel removed from the case. The district court denied this initial motion and two additional motions made before the arbitration award was finalized.

When the arbitration was completed, the Goldmans submitted a "refiled" motion to vacate the arbitration award. They argued that the court had jurisdiction to hear their petition, which alleged various abuses of the arbitration process, under Section 10 of the FAA. The defendants moved to dismiss for lack of jurisdiction, and the district court granted dismissal. The district court noted that the parties were not diverse and that the FAA did not grant federal subject matter jurisdiction. The district court ruled that the petition would therefore have to contain a basis for federal question jurisdiction on its face and found that it did not.

On appeal, the Third Circuit noted that the plaintiffs' motion did not, on its face, contain a basis for federal jurisdiction. The court then considered whether it would be permissible to "look through" the petition to consider whether the underlying claims presented a federal question. The court's precedent indicated that it would not be permissible (Virgin Islands Hous. Auth. v. Coastal Gen. Const. Servs. Corp., 27 F.3d 911 (3d Cir. 1994)). However, more recently, the US Supreme Court held in Vaden v. Discover Bank that a federal court may look through a petition under Section 4 of the FAA to determine whether it is based on an action arising under federal law. (556 U.S. 49 (2009)). After consideration, the Third Circuit held that Vaden did not apply to petitions under Section 10.

First, the Third Circuit noted that the Vaden decision confirmed that the FAA does not provide a federal cause of action. The court then looked at the text of Section 4, which allows a federal court to hear a petition in a case over which it would have jurisdiction "save for" the agreement to arbitrate. Additionally, the practical consequence of rejecting the ability to look through a Section 4 petition would be that only a Section 4 petitioner who had already filed a federal suit, and not a petitioner who had the ability to file a federal suit but who had not yet done so, could obtain relief from a federal court. The Third Circuit found that neither the text of Section 10, which does not contain the "save for" language, nor the practical consequences of failing to look through a Section 10 petition support the look-through approach. Finally, in considering public policy, the Third Circuit found that the reason for a petition to compel arbitration is to resolve the dispute through arbitration rather than going to court, so it would be contrary to the purpose of Section 4 to require the petitioner to first bring suit. On the other hand, when seeking to vacate the result of an arbitration that has already occurred, the movant is challenging the procedural propriety of the arbitration, which is unrelated to the subject matter of the underlying dispute. Therefore, the Third Circuit rejected the application of a look-through approach to a petition under Section 10 of the FAA. The court also rejected the plaintiffs' other arguments in favor of jurisdiction and affirmed the district court's dismissal of their suit.

Practitioners should be aware that there is a circuit split as to whether a federal court has subject matter jurisdiction to review or enforce an arbitration award simply because the underlying dispute at issue in the arbitration was federal. In ruling that the Supreme Court’s holding in Vaden applies only to petitions under Section 4 of the FAA, the Third Circuit joins the US Court of Appeals for the Seventh Circuit and adopts the Seventh Circuit's reasoning in Magruder v. Fid. Brokerage Servs. LLC, 818 F.3d 285 (7th Cir. 2016). The US Court of Appeals for the Second Circuit has disagreed, finding no justification for applying a look-through approach to Section 4, but not to Section 10, because such a distinction would enlarge jurisdiction under just one portion of the same jurisdictional statute (Doscher v. Sea Port Grp. Sec., LLC et. al., (2d Cir. Aug. 11, 2016)). For more information on the Doscher case, see Legal Update, District Courts May Apply Look-Through Approach to FAA Section 10 Petitions: Second Circuit.