InvestmentNews (April 4, 2022) – Petitions to confirm or vacate awards are now more likely to be heard in state courts, where judges tend to be more skeptical of arbitration than their federal counterparts.

Supreme Court ruling last week that will make it harder for participants in Finra arbitration to turn to a federal court to appeal decisions could create more uncertainty about arbitration awards.

Federal arbitration laws allow federal courts to “look through” the underlying matters of a dispute to determine whether to compel arbitration. In an 8-1 decision Thursday, the Supreme Court ruled that the “look-through” approach does not apply to petitions by arbitration participants to confirm or vacate arbitration awards.

The ruling makes it more likely that arbitration winners and losers will go to state courts in order to secure victories or overturn defeats. It’s rare to get an arbitration award vacated in federal court, where many brokerages have failed.

State court judges tend to be more critical and suspicious of arbitration than federal court judges, said Samuel Edwards, a partner at Shepherd Smith Edwards & Kantas. That could put more arbitration decisions in jeopardy.

“It decreases the predictability” of arbitration outcomes, Edwards said. “State court judges tend to be more skeptical of arbitration and are willing to challenge an arbitration award. More state court judges are willing to dig into the facts.”

Some states are more anti-arbitration than others, said George Friedman, editor-in-chief of the Securities Arbitration Alert. For instance, an arbitration party attacking an award might get a better reception in a California court, while a winner seeking to uphold an award might not.

“It depends on the state and whether the party is attempting to enforce or attack the award,” said Friedman, who recently wrote a blog post about the Supreme Court decision. “Some states are more friendly to arbitration than others. I don’t think it’s open season on arbitration awards. But this decision creates challenges that didn’t exist before last Thursday.”

Congress granted federal courts jurisdiction over cases that involve suits between citizens of different states over matters that are valued at more than $75,000 or that arise under federal law.

The “look-through” question in the Supreme Court case centers on a December 2018 decision by Financial Industry Regulatory Authority Inc. arbitrators to dismiss a claim by Denise Badgerow alleging that she was unlawfully terminated by Ameriprise Financial Services Inc.

Badgerow sought to have the decision vacated in a Louisiana state court. The Ameriprise affiliate for which she worked petitioned a federal court to confirm the award.

Badgerow filed to move the petition to state court, arguing that the federal court didn’t have jurisdiction. The federal court used the “look through” approach to assert its jurisdiction, a decision that was upheld by the Fifth Circuit Court of Appeals.

The Supreme Court reversed the lower court’s decision and remanded the case.

Writing for the majority, Justice Elena Kagan argued that Congress did not give federal courts jurisdiction over arbitration awards.

“Without that statutory instruction, a court may look only to the application actually submitted to it in assessing its jurisdiction,” the majority decision states.

From a practitioner’s standpoint, the decision won’t make a big impact on the Finra arbitration process, said Michael Edmiston, an attorney at Jonathan Evans & Associates.

“I don’t think it changes much because most people are going to state court to either confirm or vacate an arbitration award under a state’s arbitration act,” said Edmiston, who is president of the Public Investors Advocate Bar Association.