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Ninth Circuit:
No Jurisdiction to Confirm Arbitration Award of Zero Dollars
By a MetNews Staff Writer
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CRISTINA BALAN claimant |
The Ninth U.S. Circuit Court of Appeals held yesterday that federal courts lack authority to hear a petition, filed by Tesla Motors Inc. and its chief executive officer, Elon Musk, seeking to confirm an arbitration decree dismissing all claims filed against them in a defamation action filed by a former employee, saying diversity jurisdiction does not lie over “zero-dollar” awards.
At issue is whether the court may “look through” the face of the petition to the underlying action after the 2022 U.S. Supreme Court decision in Badgerow v. Walters, in which the court held that the facts establishing jurisdiction must be present within the four corners of a request made under 9 U.S.C. §9, part of the Federal Arbitration Act (“FAA”).
That section provides that, if certain conditions are met, an application seeking an order confirming the award “may be made to the United States court in and for the district within which such award was made.”
In Badgerow, the high court reversed an order confirming an award where the lower court found jurisdiction based on the federal law claims asserted in the underlying action. The opinion distinguishes case law holding that courts may “look through” to the original controversy for purposes of petitions seeking to compel arbitration under §4 of the FAA, saying that provision, unlike §9, specifically contemplates looking to the subject matter at the heart of the dispute.
Yesterday’s opinion, authored by Circuit Judge Lawrence VanDyke and joined in by Circuit Judges Daniel P. Collins and Salvador Mendoza Jr., reverses an order confirming the award issued by District Court Judge Haywood S. Gilliam Jr. of the Northern District of California.
VanDyke said that the only possible jurisdiction in the case, which involved state-law defamation claims, was diversity jurisdiction which requires that the suit be between citizens of different states and the “amount in controversy” exceed $75,000, a threshold Tesla and Musk fail to meet in their petition seeking to confirm what amounted to a non-award.
Former Engineer
Appealing Gilliam’s confirmation was Cristina Balan, a former automotive design engineer at Tesla, who claims that at one point she was so valued that her name was engraved on the company’s vehicle battery modules.
Balan, a citizen of Washington state, sued the electric-car giant, based at the time in Palo Alto, for wrongful termination after she was allegedly forced to resign in 2014 when she raised concerns about floormats that she says tended to curl, potentially causing braking interference. That lawsuit preceded the one that spawned the appeal decided yesterday.
Her case was shunted by the court to arbitration before JAMS in San Francisco, pursuant to a provision in an arbitration agreement. Before Balan was awarded more than $320,000 in that matter, HuffPost, formerly known as Huffington Post, ran her story in a 2017 piece (which has since been scrubbed from the Internet).
Tesla’s then-director of communications, Dave Arnold, contacted the publication, which agreed to run the automaker’s side of the story. The company’s statement, published on Sept. 11, 2017, accused Balan of misconduct, saying, in part:
“Ms. Balan spent company time working on a ‘secret project’ without her manager’s approval and booked an unapproved trip to New York at Tesla’s expense to visit a potential supplier for her own personally-created project. She also illegally recorded internal conversations within Tesla without anyone’s permission, which is clearly criminal conduct.”
Defamation Action
On Jan. 15, 2019, she sued for defamation in the Western District of Washington based on the published statement.
After the entirety of Balan’s complaint was found to be subject to an arbitration employment agreement between the parties, Balan amended her arbitration demand in 2021, adding Musk as a new party and asserting a separate defamation claim against him based on public comments he purportedly made about her in 2019.
The case was assigned to JAMS arbitrator Richard McAdams, who retired from the Sixth District Court of Appeal in 2011. McAdams found that California’s one-year statute of limitations for defamation causes of action applied, not the more lenient Washington state rules, and, as such, her claims were time-barred.
He issued an award in favor of the defendants. Tesla and Musk sought confirmation of the award in the Northern District of California; on Sept. 26, 2022, Gilliam granted the petition.
Face of Petition
VanDyke wrote:
“Because a ‘look through’ approach is prohibited under Badgerow, the facts establishing a jurisdictional basis must be present on the face of the application or petition to confirm an arbitration award….Put differently, facts establishing that the amount in controversy exceeds $75,000 must be present on the face of a Section 9 petition to confirm an arbitration award before a district court can assert diversity jurisdiction over the action.”
Saying “[t]hat requirement is not satisfied in this case,” he opined that “a petition to confirm a zero-dollar award cannot support the amount in controversy requirement” and “the district court did not have subject matter jurisdiction.”
Tesla and Musk argue that federal jurisdiction continues under §3, which governs stays in federal court proceedings during the pendency of an arbitration. They acknowledge that the underlying case was dismissed on June 16, 2022, by Senior District Court Judge Marsha J. Pechman of the Western District of Washington upon their request to “dismiss or stay” the action following the referral to arbitration, but say the dismissal without prejudice—the federal analogue of a Califormia court’s sustaining of a demurrer with leave to amend—was in error.
The defendants point to the U.S. Supreme Court case of Smith v. Spizzirri, decided last year, which held that, under §3, when “a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss.”
Even With Hindsight
Rejecting that argument, VanDyke wrote:
“[E]ven if we now know with the hindsight of Spizzirri that the district court should have stayed the case, it didn’t—the court dismissed it. Tesla never contested the dismissal and never appealed the issue. Because Tesla never appealed the dismissal, even assuming Tesla is correct that the dismissal was error under Spizzirri, that unappealed and now-binding judgment was a dismissal, not a stay.”
He added:
“The upshot is that Tesla’s attempt to characterize this case as a Section 3 case involving a stay is simply incorrect. It is a Section 9 case. It is therefore controlled by Badgerow’s instruction that the facts establishing a jurisdictional basis must be present on the face of the petition to confirm the arbitration award….Here, the face of the petition reflects the zero-dollar arbitration award, far short of the $75,000 amount-in-controversy requirement needed to establish diversity jurisdiction.”
The case is Tesla Motors Inc. v. Balan, 22-16623.
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