Amount in Controversy Not a Barrier to Federal Court Review of Arbitration Award

In Pershing, LLC v. Kiebach, 2016 WL 1375874 (5th Cir. April 6, 2016), the 5th Circuit considered an interlocutory appeal whether the district court properly exercised jurisdiction over a case that involved an arbitration award of only $10,000.  The 5th Circuit "adopting the better reasoned approach" concluded yes.

The underlying matter concerned an alleged Ponzi scheme.  Investors (Kiebach and others) claimed that a clearing broker agent of Pershing failed to disclose adverse financial information causing them $80 million in damages.  After a two week hearing, a Financial Industry Regulatory Authority ("FINRA") panel found against the investors' claims, but awarded them $10,000 in compensation for "certain arbitration-related expenses." Pershing filed a motion to confirm the arbitration award in federal court pursuant to the Federal Arbitration Act ("FAA").  The investors moved to dismiss because, although the parties were diverse, the amount in controversy was only $10,000, not the threshold amount of greater than $75,000.

Noting that federal courts diverge, the 5th Circuit observed that the "courts that have confronted this issue generally follow one of two approaches—the award approach or the demand approach."  As the name would suggest, the "award approach" determines the amount in controversy based on the "underlying arbitration award regardless of the amount sought."  In contrast, the "demand approach" ties the amount in controversy to "amount sought in the underlying arbitration." Based on the Investors' arbitration demand of $80 million, the district court had decided that the $75,000 amount in controversy was met.  The 5th Circuit agreed.

The 5th Circuit's rationale relied three points.  "First, the demand approach recognizes the true scope of the controversy between the parties."  The Court observed that the Investors were likely opposing the confirmation of the award because they were not satisfied with $10,000 on their original $80 million claim.  Second, "the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy." Essentially using the award approach would result in two different jurisdictional outcomes at the beginning of the arbitration and at the end.  In other words, a motion to compel arbitration, based on the amount claimed (if more than $75,000), could be heard by the court.  But then, for the exact same case, the motion to confirm the later arbitration award (if ultimately less than $75,000) could not be heard by the court.  This dichotomy is irrational and would possibly promote "gamesmanship" of filing motions for arbitration at the start of the case in order to "to preserve their right to a federal forum for review of the eventual award."  The third rationale for using demand approach was that the jurisdictional outcome would be the same had the case been arbitrated or litigated. 

The concurring opinion pointed out that while the demand approach was appropriate in this case, it was not "necessary or advisable to adopt any such general approach" for all cases going forward.  Rather the concurring judge believed the better approach was to take each matter on a case-by-case basis on its facts.