Federal Arbitration Act and Diversity Jurisdiction — Determining the Amount in Controversy

Resolving a matter of first impression in the D.C. Circuit, Karsner v. Lothian, 532 F.3d 876 (D.C. Cir. 2008), adopts the “demand” approach to determining federal jurisdiction over arbitration proceedings brought pursuant to the Federal Arbitration Act:

Although the Federal Arbitration Act (FAA) constitutes federal law, "the Supreme Court has interpreted the statute as not itself bestowing jurisdiction on the federal district courts." *** Here, jurisdiction--if it exists--must be based on 28 U.S.C. § 1332(a)(1***. The parties' diversity of citizenship is clear but the amount in controversy requires us to consider a question of first impression in our Circuit.

Other circuits have used three different approaches to this question: the award, the demand and the remand approaches. Under the award approach, the amount in controversy is determined by the amount of the underlying arbitration award regardless of the amount sought. *** Pursuant to the demand approach, the amount in controversy is the amount sought in the underlying arbitration rather than the amount awarded. *** The remand approach appears to apply if the petition includes a request to remand and reopen the arbitration proceeding, in which case the amount in controversy is the amount sought in the underlying arbitration. ***

Of the three approaches, the award approach has the least appeal. The Sixth and Eleventh Circuits have followed the award approach, *** but in neither case was the petitioner seeking to reopen the arbitration and thus the court had no opportunity to consider the remand approach. Moreover, the Eleventh Circuit appears to have more recently adopted the remand approach, explaining that "a federal court has subject matter jurisdiction where a party seeking to vacate an arbitration award is also seeking a new arbitration hearing at which he will demand a sum which exceeds the amount in controversy for diversity jurisdiction purposes." *** While the award approach can work if the petitioner seeks confirmation of an arbitration award, it can also be inconsistent with the court's exercise of jurisdiction over a petition to compel arbitration. That is, the FAA provides that the district court has jurisdiction over a petition to compel if it "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." 9 U.S.C. § 4***. The award approach would apply two different jurisdictional tests depending on the action the petitioner seeks, resulting in jurisdiction over a petition to compel arbitration of a claim but not necessarily over a petition to confirm/vacate an arbitration award arising from the same claim.***

In contrast, the demand approach has merit and has recently been applied by two other circuit courts [First and Ninth]. *** [T]he demand approach is consistent with the court's jurisdiction over a petition to compel arbitration. The demand approach thus avoids the potential problem (under the award approach) that the court could compel arbitration but then lack jurisdiction to review the arbitration it ordered. Further, unlike the award approach, the demand approach permits the district court to exercise jurisdiction coextensive with the "diversity jurisdiction that would have otherwise been present if the case had been litigated rather than arbitrated." *** Accordingly, we adopt the demand approach and conclude that, because Lothian sought $ 104,638.00 plus punitive damages, fees and costs in arbitration, the $ 75,000-plus threshold for diversity jurisdiction is met.

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