Appellants brought an arbitration against Appellees, asserting claims under both federal and Puerto Rico law for violations of Section 10(b) of the Securities Exchange Act, Rule 10b-5 of the Securities Exchange Commission, and the securities laws of Puerto Rico. Appellants ultimately lost that arbitration and subsequently filed a complaint in the Puerto Rico Court of First Instance requesting that the court vacate or modify the arbitration award.
In this petition, Appellants invoked the Puerto Rico Arbitration Act (“PRAA”), 32 L.P.R.A. § 3201 et seq., rather than the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., and alleged several errors by the arbitrators, including that the arbitrators were biased against the Appellants and had refused to hear relevant evidence. Appellees removed the case to the U.S. District Court for the District of Puerto Rico, asserting that the district court had federal question jurisdiction. Appellants, in turn, moved to remand the case to Puerto Rico state court.
The district court denied Appellants’ remand motion, applying the “look-through” approach and reasoning that the underlying claims in the arbitration were based on federal securities laws and that the district court would have had jurisdiction if the claims had been filed in district court. The district court subsequently denied Appellants’ petition to vacate or modify the arbitration award and affirmed the award. Appellants appealed the district court’s decision, in part, contesting its use of the look-though approach in determining federal question jurisdiction.
The First Circuit affirmed, holding, amongst other things, that the “look-through” approach was the proper test for determining federal question jurisdiction in the context of motions to vacate or modify an arbitration award. In reaching this holding, the court first concluded that the FAA (and specifically Sections 9 through 11) applied to the arbitration at issue because: (1) the relevant agreement related to a maritime transaction or transaction involving commerce, and (2) Appellants had made no showing that the parties had contemplated enforcement under the PRAA rather than the FAA.
Analyzing the federal question issue through the lens of the FAA, the court initially observed that the U.S. Supreme Court had previously determined that the FAA adopted the look-through approach with respect to petitions to compel arbitration under Section 4 of the act. The court then noted that the differences in statutory text between Section 4 and Sections 9 through 11 were not enough to compel a holding that the sections be interpreted differently.
The court additionally reasoned that the FAA articulated a clear intent to give federal courts an important role in enforcing arbitration agreements post-award and that the look-through approach was the only approach that would viably provide broad federal jurisdiction in such cases. The court added that the look-through approach would offer a unitary jurisdictional test to the FAA, which was an objective endorsed across several cases. Moreover, the court determined that application of the look-through approach avoided the potential inconsistencies that may result from having actions in federal court compelling arbitration and then subsequently remitting those litigants to state court for post-award enforcement proceedings. Finally, the court noted that a reviewing court in post-arbitration proceedings may be called upon to answer questions implicating federal law, and it would be particularly strange to deny a federal forum in instances, like the case at issue, where the underlying claims are those which the federal district courts would normally have exclusive jurisdiction.
Ortiz-Espinosa v. BBVA Securities of Puerto Rico, Inc., No. 16-1122 (1st Cir. Jan. 20, 2017) [click for opinion]
A version of this post originally appeared in the March 2017 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.