Friedler v. Stifel

108 F.4th 241

Stanley FRIEDLER, M.D.; Gail Friedler; Richard Friedler; Milan Wister, M.D.; Amy Wister;Philip Kontis, M.D.; Cindy Kontis; Gordon Boone Petitioners - Appellants, v. STIFEL, NICOLAUS, & COMPANY, INC.; Coleman Joseph Devlin, Respondents - Appellees.

No. 22-1895

United States Court of Appeals, Fourth Circuit

Argued: May 8, 2024

Decided: July 18, 2024

Appeal from the United States District Court for the District of Maryland, at Baltimore. Stephanie A. Gallagher, District Judge. (1:22-cv-00752-SAG)

ARGUED: Marc Seldin Rosen, LAW OFFICES OF MARC SELDIN ROSEN, LLC, Sparks, Maryland, for Appellants. Edwin A. Zipf, BRESSLER, AMERY & ROSS, Florham Park, New Jersey, for Appellees. ON BRIEF: Daniel J. Miller, Kevin D. Stern, MILLER STERN LAWYERS, LLC, Baltimore, Maryland, for Appellants. Daniel J. Donovan, Priscilla A. Donovan, DONOVAN & RAINIE, LLC, Ellicott City, Maryland, for Appellees.

Before DIAZ, Chief Judge, WILKINSON, Circuit Judge, and MOTZ, Senior Circuit Judge.

Vacated and remanded by published opinion. Chief Judge Diaz wrote the opinion in which Judge Wilkinson and Senior Judge Motz joined. Judge Wilkinson wrote a concurring opinion.

DIAZ, Chief Judge:

Petitioners seek to vacate an arbitration award entered against them arising out of a dispute over the management of their brokerage accounts. They claim that the arbitrators manifestly disregarded the law in resolving the dispute. The district court denied the petition, finding that it didn't meet this difficult standard.

Until recently, we understood federal jurisdiction to lie over petitions to vacate arbitration awards if a federal court would have had jurisdiction over the underlying dispute. McCormick v. Am. Online Inc., 909 F.3d 677, 683 (4th Cir. 2018). But in Badgerow v. Walters, the Supreme Court rejected that approach and held that the face of the petition must contain an independent jurisdictional basis beyond the Federal Arbitration Act ("FAA") itself. 596 U.S. 1, 9, 142 S.Ct. 1310, 212 L.Ed.2d 355 (2022). Because no such jurisdictional basis exists here, we vacate the district court's judgment and remand with instructions to dismiss the petition for lack of jurisdiction.

I.

A.

In 2010, Petitioners Stanley Friedler, Gail Friedler, Richard Friedler, Milan Wister, Amy Wister, Philip Konits, Cindy Konits, and Gordon Boone opened brokerage accounts with Stifel, Nicolaus & Company that were to be managed by Stifel employee Coleman Devlin. Petitioners were ultimately unhappy with Devlin's performance and filed a claim for arbitration with the Financial Industry Regulatory Authority ("FINRA") seeking damages for Devlin's alleged mismanagement of their accounts. They asserted various claims against Devlin and Stifel, including negligence, breach of contract, breach of fiduciary duty, negligent supervision, and violations of state and federal securities laws.

Over nearly two years and more than twenty hearing sessions, the arbitration panel heard evidence and argument from the parties. At the end of the proceedings, the panel issued a two-sentence award for Stifel and Devlin. Because the parties didn't jointly request an "explained decision" in accordance with FINRA rules, FINRA Rule 12904(g), the panel didn't provide a detailed written explanation for the award.

B.

Petitioners then moved to vacate the arbitration award in federal court on the ground that the arbitration panel manifestly disregarded the law, including federal securities law. The petition asserted that the district court had federal question jurisdiction under 28 U.S.C. § 1331 based on the FAA and the Securities Exchange Act ("SEC Act"), and supplemental jurisdiction over the state-law claims.

At the time the petition was filed, our precedent held that a federal court had jurisdiction to review a motion to vacate an arbitration award if it would have had jurisdiction over the underlying dispute. McCormick, 909 F.3d at 683. This was commonly known as the "look-through" approach, as a federal court would have jurisdiction if it "look[ed] through" the petition to the underlying dispute and decided it had jurisdiction over those claims. Id. (quoting Vaden v. Discover Bank, 556 U.S. 49, 62, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009)).

C.

Three days after Petitioners moved to vacate the award, the Supreme Court decided Badgerow, 596 U.S. 1, 142 S.Ct. 1310, 212 L.Ed.2d 355. There, Badgerow sought to vacate an arbitration award entered against her arising out of her allegedly wrongful termination by her employer. Id. at 5, 142 S.Ct. 1310. And she did so on the ground that there was fraud in the arbitral proceeding. Id. Her employer removed the case to federal court and, relying on the "look-through" approach, the district court denied Badgerow's motion to remand because the underlying dispute asserted federal employment law claims. Id. at 5-6, 142 S.Ct. 1310.

Noting the textual differences between provisions of the FAA,¹ the Supreme Court disagreed and held that the "look-through" approach applies only to petitions to compel arbitration under Section 4 of the FAA, but not motions to confirm or vacate arbitration awards under Sections 9 and 10. Id. at 5, 11, 142 S.Ct. 1310. Instead, the Court explained that a party seeking to vacate an arbitration award in federal court "must identify a grant of jurisdiction, apart from Section 10 itself, conferring access to a federal forum," such as diversity or federal-question jurisdiction. Id. at 8, 142 S.Ct. 1310 (cleaned up). And the Court explained that Badgerow's petition didn't do that because it wasn't disputing "the legality of Badgerow's firing," but rather the "enforceability of an arbitral award." Id. at 9, 142 S.Ct. 1310. Because that's "no more than a contractual resolution of the parties' dispute" governed by state law, the Court reasoned that the petition didn't raise a federal question. Id.

D.

Without addressing jurisdiction, the district court here denied Petitioners' motion to vacate the award. It held that Petitioners "d[id] not come close" to establishing that the panel manifestly disregarded the law, but rather "vociferously reargue[d] the case they presented during the arbitration, both as to the facts and the law." Friedler v. Stifel, Nicolaus & Co., No. 1:22-cv-752, 2022 WL 3027860, at *2 (D. Md. Aug. 1, 2022). And it noted that "nothing about the panel's cursory decision suggests any intentional disregard of applicable legal standards." Id. The district court explained that the petition itself "illustrate[d] the myriad factual and legal disputes," including the "standards for determining suitability [of an investment], the nature of the fiduciary duties owed, and the proper method of calculating damages." Id. at *3.

Petitioners appeal that order. We ordered supplemental briefing in light of Badgerow. Both parties insist that we have jurisdiction to consider the petition on the ground that it asserts that the panel manifestly disregarded federal securities law. We disagree.

We have an "independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party." Arbaugh v. Y & H Corp., 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006). So we begin—and end—with that question. And because we conclude that a petition to vacate on the ground that the arbitration panel manifestly disregarded federal law doesn't confer jurisdiction, we vacate the district court's order and remand with instructions to dismiss the petition for lack of jurisdiction.

II.

A.

The FAA is an "anomaly in the field of federal-court jurisdiction" because it "creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate," but doesn't "create any independent federal-question jurisdiction." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). As a result, "enforcement of the Act is left in large part to the state courts." Id.

Fifteen years ago, however, the Supreme Court held that when presented with a petition to compel arbitration under Section 4 of the FAA, a federal court may assess jurisdiction by "look[ing] through" the petition to see whether it would have jurisdiction over the underlying dispute. Vaden, 556 U.S. at 62, 129 S.Ct. 1262. We later adopted the same approach for petitions to vacate arbitration awards under Section 10. McCormick, 909 F.3d at 683.

But Badgerow abrogated our approach to jurisdiction over Section 10 petitions. Rather than "looking through" to the underlying claims, Badgerow instructs that we should look to the "face of the application" for an "independent jurisdictional basis." 596 U.S. at 9, 142 S.Ct. 1310. And if the petition alleges that "federal law (beyond Section 9 or 10 itself) entitles the applicant to relief, then § 1331 gives the court federal-question jurisdiction." Id.

Seizing on this language, both parties contend that because the "face of the petition" asserts that the arbitration panel manifestly disregarded federal securities laws, the district court had federal-question jurisdiction over the dispute under § 1331.

We can't agree. A petition to vacate an arbitration award doesn't raise the merits of the underlying claim, but rather the "enforceability of an arbitral award," which is "no more than a contractual resolution of the parties' dispute." Id. at 9, 142 S.Ct. 1310; see also SmartSky Networks, LLC v. DAG Wireless, Ltd., 93 F.4th 175, 182 (4th Cir. 2024) ("At the time the parties filed their respective Section 9 and 10 applications, they were no longer litigating over their fraught business relationship—those issues and claims had been resolved by the Tribunal. Instead, the parties' dispute focused on the enforceability of the arbitral award.").

The parties suggest that Badgerow is distinguishable on the ground that it involved a claim that the award should be vacated because of fraud, rather than a manifest disregard of federal law. But we think the...