Pursuant to section 4 of the Federal Arbitration Act, a party may petition a federal court for an order compelling another person to honor an arbitration agreement. However, federal courts are courts of limited subject matter jurisdiction, and section 4 contains jurisdictional limits. A party may file the petition to compel in a “United States district court which, save for such [arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” Thus, if two parties who previously entered into an arbitration agreement have a $5 breach of contract dispute, a federal district court would not have the power to enforce the arbitration agreement under the FAA because the court would not have subject matter jurisdiction of a “suit arising out of [the $5 breach of contract] controversy.”
In 2009, the Supreme Court addressed this jurisdictional language of section 4 in a case called Vaden v. Discover Bank (a case for which I submitted an amicus brief). A majority of the Supreme Court explained section 4 as follows:
“[W]e read §4 to convey that a party seeking to compel arbitration may gain a federal court’s assistance only if, ‘save for’ the agreement, the entire, actual ‘controversy between the parties,’ as they have framed it, could be litigated in federal court.”
The majority in Vaden stressed it was important to look at the “entire controversy” for purposes of the section 4 jurisdictional analysis, not just a small “slice” or “discrete aspect” of the entire controversy. (The dissent in Vaden focused its jurisdictional analysis on a federal law counterclaim filed in a state court action, not the entire controversy, which originated as a $10,000 breach of contract lawsuit in state court.)
The Eighth Circuit Court of Appeals recently considered the Supreme Court’s Vaden decision and the meaning of the jurisdictional language of section 4 of the FAA in a case called CMH Homes, Inc. v. Goodner, No. 12–3381 (8th Cir. Sept. 5, 2013) (click here to see a copy of the opinion). The plaintiffs filed a putative class action in Arkansas state court against various corporate defendants. The plaintiffs alleged the defendants violated Arkansas state law in connection with the sale and financing of manufactured homes. In order to avoid triggering federal subject matter jurisdiction, the plaintiffs stipulated they would not seek more than $75,000 in damages individually or on behalf of any class member, and not more than $4,999,999 for the class.
The corporate defendants removed the case to federal court and filed a petition in federal court pursuant to section 4 of the FAA to enforce an arbitration agreement in the plaintiffs’ home purchase contract. However, the district court denied the petition and remanded the case for lack of subject matter jurisdiction due to the plaintiffs’ stipulations.
The corporate defendants appealed the dismissal for lack of subject matter jurisdiction. Relying on older, pre-Vaden 8th Circuit precedent, the corporate parties argued that the amount in controversy should be the value at stake in the arbitration proceeding sought by the corporate parties’ petition to compel, not the possible state court award sought by the consumers. In other words, according to the corporate parties, the amount in controversy should be the value of the arbitration from the perspective of the party seeking to compel arbitration, not the value of the possible state court award sought by the party resisting arbitration.
The Eighth Circuit, interpreting Vaden, held that the amount in controversy for a section 4 petition should focus on the entire controversy between the parties, not the value of the arbitration to a petitioner who may seek to “recharacterize an existing controversy, or manufacture a new controversy.” The Eighth Circuit reasoned that the entire controversy was the putative class action filed in state court. Relying on the Supreme Court’s 2013 decision in Standard Fire, the Eighth Circuit found that the plaintiff’s amount in controversy stipulation regarding absent class members was not binding. The Eighth Circuit therefore vacated the district court’s dismissal and remanded the case to the district court so that the district court could consider whether the true amount in controversy for the class action satisfied the Class Action Fairness Act’s minimum jurisdictional threshold.