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The Demand Approach: Fifth Circuit clarifies that arbitration demand, not award, determines amount in controversy

In a case of first impression for the U.S. Court of Appeals for the Fifth Circuit, the court held that in a proceeding to confirm an arbitral award under the Federal Arbitration Act (FAA), the amount of the demand in arbitration determined whether the $75,000 amount-in-controversy threshold was met for diversity of citizenship jurisdiction. If the demand in arbitration was for more than $75,000, the amount-in-controversy requirement was met – even though the actual amount awarded by the arbitrator(s) could have been less than $75,000.

Other circuits, and courts within the Fifth Circuit, have taken differing approaches. The three approaches used are the demand approach, the award approach, and the remand approach. The demand approach looks to the amount sought in the arbitration demand (essentially the complaint in arbitration). The award approach looks to the actual amount awarded by the arbitrator or arbitration panel. The remand approach has been applied where the movant seeks to reopen the arbitration, in which case the amount in controversy is the amount sought in the arbitration (making the remand approach the functional equivalent of the demand approach).

The Fifth Circuit reasoned that the demand approach “recognizes the true scope of the controversy between the parties.” The demand approach also reduces inconsistencies in the federal courts’ jurisdiction over arbitration proceedings, the court said. Under the demand approach, the amount in controversy is decided the same way in arbitration confirmation proceedings as it is in litigation, viz., by looking to the claimant’s pleadings.

This decision likely widens the jurisdictional gate for parties wanting to confirm an arbitral award. For example, if a claimant demanded $100,000,000 in the arbitration, but the award was for less than $75,000, under the award approach, the amount in controversy requirement would not be met and the federal courts would not have subject matter jurisdiction. Under the demand approach, the amount-in-controversy requirement is met, and provided there is diversity of citizenship, the federal courts can exercise jurisdiction to confirm the award.

Another interesting example is where the claimant in arbitration seeks, say, a billion dollars in arbitration, and the respondent (the defendant in arbitration) submits a counterclaim for attorneys’ fees and costs, but for less than $75,000. If the arbitrator awards the claimant nothing, but finds for the respondent/counter-claimant and awards it less than $75,000 in attorneys’ fees and costs, the counter-claimant will have met the amount-in-controversy requirement when seeking to confirm that award.

The time for Pershing, L.L.C. to ask for a rehearing en banc has passed, but the company has until July 5, 2016, to petition the US Supreme Court for a writ of certiorari. Given that other circuits take differing approaches, e.g., the Sixth Circuit and Eleventh Circuit apply the award approach, the high court may be inclined to resolve the circuit split. Stay tuned.

John H. Dollarhide