United States: How To Compel Arbitration When Litigation Is Commenced In State Court

Last Updated: December 3 2018
Article by Todd Rosenbaum

In a previous post, we addressed what may happen when a defendant in federal litigation seeks to compel arbitration under Ch. 1 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, but the applicable arbitration agreement specifies a place of arbitration that is outside the geographic jurisdiction of the federal court. (See https://www.mintz.com/insights-center/viewpoints/2017-07-spectre-haunts-motions-compel-arbitration-venue.) But what approaches are available to a defendant when a plaintiff files suit in a state court, the claim is subject to an arbitration agreement, and the agreed place of arbitration is in a different state?

1. Recap of Suggested Approach in Federal Court

In brief, (1) federal district courts in the Fifth and Eleventh Circuits may compel arbitration in the place specified in the arbitration agreement, wherever that place may be; (2) district courts in the Ninth Circuit may compel arbitration within their own geographic jurisdictions, whatever the place specified in the arbitration agreement may be; and (3) the majority of federal courts may decline to compel arbitration at all if the agreed place is outside of their geographic districts. Hence, if litigation is commenced in a federal court outside the Fifth or Eleventh Circuits, we recommended first moving to transfer the case, under 28 U.S.C. § 1404(a), to the district containing the place of arbitration, and then moving to stay or dismiss the suit while compelling arbitration.

2. Similar Approach in State Court: Removal and Transfer

One obvious approach to the same end starting in state court requires one additional step. Where proper grounds exist, one could seek to remove a state court action to federal court, and then to follow the approach in federal court described above -- move to transfer the suit to a federal district court that would compel arbitration in the agreed place of arbitration. See, e.g., Hollis v. Fla. State Univ., 259 F.3d 1295, 1296 (11th Cir. 2001) ("A defendant dissatisfied with venue after removal may . . . seek a transfer to another division or district under federal law."); Thomas & Agnes Carvel Found. v. Carvel, 736 F. Supp. 2d 730, 754 n.25 (S.D.N.Y. 2010) (the defendant "could have moved to transfer [the] case to another federal district court after removal....") (citing PT United Can Co. Ltd. v. Crown Cork & Seal Co., Inc., 138 F.3d 65, 72-73 (2d Cir. 1998)).

In order to be able to remove a state court action to federal court, the defendant must establish federal subject-matter jurisdiction. See Henson v. Ciba-Geigy Corp., 261 F.3d 1065, 1071 (11th Cir. 2001) ("[28 U.S.C.] § 1441(a) authorizes removal only of actions "of which the district courts of the United States have original jurisdiction.... That phrase means that actions are not removable unless they 'originally could have been filed in federal court.'"), quoting Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987).

Because Ch. 1 of the FAA does not create independent federal question jurisdiction, establishing diversity jurisdiction or another basis for federal question jurisdiction is required for removal. See, e.g., M.C. Constr. Corp. v. Gray Co., 17 F. Supp. 2d 541, 545 (W.D. Va. 1998) (citing Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 26 n.32 (1983)). For example, in connection with a proceeding under Ch. 1 of the FAA, a proponent of removal may establish subject-matter jurisdiction by "looking through" to the complaint in the underlying action and determining whether the underlying substantive controversy implicates a federal question. Cf. Vaden v. Discover Bank, 556 U.S. 49, 62 (2009).

Following removal of the suit in question to federal court, and its transfer to a desirable federal court, a defendant can move simultaneously to compel arbitration and to stay or dismiss the litigation. Hodosh, Lyon & Hammer, Ltd. v. Barracuda Networks, Inc., 2016 U.S. Lexis 23263, at *9-10 (D.R.I. Jan. 4, 2016), citing Atl. Marine Constr. Co. v. United States Dist. Court W.D. Tex., 134 S. Ct. 568, 575 (2013). See also Am. Int'l Specialty Lines Ins. Co. v. A.T. Massey Coal Co., 628 F. Supp. 2d 674, 685 (E.D. Va. 2009).

3. Moving in State Court to Compel Arbitration

There is of course a more straightforward option: where possible, move to compel arbitration in the state court where the suit was commenced. For example, although federal courts situated in New York will not enforce an arbitration agreement that specifies a place of arbitration outside of New York, state courts in New York have been willing to compel arbitration outside the state's borders. Compare, e.g., J.P. Morgan Sec. v. La. Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70, 82-83 (S.D.N.Y. 2010) with Matter of Stroock & Stroock & Lavan, LLP v. Perlis, 2012 N.Y. Misc. LEXIS 6294 (Sup. Ct. N.Y. County Jan. 17, 2012) (granting petition to compel arbitration and allowing the American Arbitration Association to determine where the arbitration would proceed).

State courts in several other jurisdictions have done the same. See Peregrine Fins. & Sec. v. Hakahka, 338 Ill. App. 3d 197 (Ill. App. Ct. 2003) (reversing circuit court and compelling arbitration in Los Angeles, selected by the NASD, the arbitral body); DeWitt v. Al-Haddad, 1990 Tenn. App. LEXIS 289 (Tenn. App. Ct. 1990) (compelling arbitration where AAA Commercial Arbitration Rules contemplated that arbitration could potentially be held in Tennessee); EcoClean USA, Inc. v. Geneon Techs., LLC, 2017 Tex. App. LEXIS 11313, at *2 (Tex. Ct. App. Dec. 6, 2017) (reciting that California court compelled arbitration in San Antonio, as determined by the AAA). But see Porter v. United Servs. Auto Ass'n, 90 Cal. App. 4th 837, 840 (Cal. Ct. App. 2001) (trial court advised, but did not order, that the parties submit to arbitration in New Jersey).

On the other hand, courts in many other states have rejected this approach, refusing to compel arbitration outside their borders. See, e.g., Teltech, Inc. v. Teltech Communs., 115 S.W.3d 441, 445 (Mo. Ct. App. 2003) ("Missouri courts lack jurisdiction to compel arbitration under the [Uniform Arbitration Act] in this case because the arbitration specifies a state other than Missouri as the location of arbitration."); Concerned Riverchase Estate Owners v. Riverchase Estates Prop. Owners Ass'n, 2018 S.C. Unpub. LEXIS 12, *2 (S.C. Mar. 28, 2018) (affirming grant of motion to compel arbitration in South Carolina despite arbitration agreement specifying Texas as the locale of arbitration).

4. Defendant's "Plan C"

A defendant that is sued in a state whose courts are unwilling to compel arbitration outside its borders, and lacks a basis to remove the action to federal court, has one remaining option: it can simultaneously (a) seek a stay of the proceedings in the court where the lawsuit was initiated, and (b) file a petition to compel arbitration in a court of competent jurisdiction in the state where the agreed place of arbitration is located. See, e.g., MKJA, Inc. v. 123 Fit Franchising LLC, 191 Cal. App. 4th 643, 649 (Cal. Ct. App. 2011) (California court granted motion to stay action pending resolution of defendants' petition to compel arbitration, filed in Colorado court). If the motion to compel arbitration is granted, the defendant can seek dismissal of the stayed state court proceeding.

5. The Exceptional (and less problematic) Case: Subject to the NY Convention

In cases subject to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and thus to Ch. 2 of the FAA, 9 U.S.C. §§ 201, et seq. — i.e., those implicating an arbitration agreement involving at least one non-U.S. citizen, or where the agreement "involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states"— a party seeking removal does not need to establish federal subject-matter jurisdiction independent of the FAA because it is established by statute. See 9 U.S.C. §§ 205, 203; Republic of Ecuador v. Chevron Texaco Corp., 376 F. Supp. 2d 334, 347 (S.D.N.Y. 2005) (9 U.S.C. § 205 provides for removal to federal court "where the subject matter of an action or proceeding pending in a state court relates to an arbitration agreement or award falling under the Convention.")

Moreover, "[a] court having jurisdiction under [FAA Ch. 2] may direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States." 9 U.S.C. § 206.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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