Sixth Circuit Rules Allegations in a Complaint Challenging $0 Arbitration Award Control for Jurisdiction Purposes

By George Scoville | April 5, 2021

George Scoville

A new precedent from the United States Court of Appeals for the Sixth Circuit should give clients using arbitration agreements pause from celebrating too early when opponents win nothing in arbitration.

In a now-published opinion released just before the end of 2020, a unanimous panel of the United States Court of Appeals for the Sixth Circuit in Hale v. Morgan Stanley Smith Barney LLC, 982 F.3d 996 (6th Cir. 2020), clarified that, in diversity cases challenging $0 arbitration awards under § 10 of the Federal Arbitration Act, the amount in controversy required for federal subject-matter jurisdiction is measured by the allegations of a complaint filed in a federal district court—not by the zero amount of the arbitration award itself. As a result, even slam-dunk arbitration is not a salve to defendants who use arbitration agreements to minimize or avoid litigation expenses.

Richard Hale worked as a financial advisor at Morgan Stanley Smith Barney LLC for more than three decades but was disciplined several times between 2013 and 2016. He believed that the discipline was unwarranted, however, and he sought recovery of damages from his employer in arbitration. After the arbitrator heard testimony of eleven witnesses over four days’ time, Hale’s claims were dismissed, and he received no damage award.

When Hale filed a lawsuit in federal district court in Dayton, Ohio, Morgan Stanley moved to dismiss the case, contending that, because the arbitrator awarded him $0, Hale could not meet the minimum $75,000 amount-in-controversy requirement for diversity jurisdiction of the federal courts. Further, Morgan Stanley argued the Federal Arbitration Act provides no independent basis for federal subject-matter jurisdiction. So, according to Morgan Stanley, the Southern District of Ohio had no power to hear the case. The district court agreed and dismissed Hale’s case.

Hale appealed the dismissal, arguing that, because his complaint alleged that the arbitrator could have awarded him close to $15 million for his claims, his case easily cleared the $75,000 amount-in-controversy threshold for federal diversity jurisdiction. The Sixth Circuit agreed, reversed the trial court, and remanded the case for further proceedings.

The Hale case stands for the proposition that federal courts have federal subject-matter jurisdiction over actions that seek to vacate $0 arbitration awards as long as the complaint filed in district court alleges that the arbitrator could have awarded any sum greater than $75,000. Accordingly, clients invoking arbitration agreements should still be prepared to litigate in federal court—possibly all the way through discovery and summary judgment—even when an arbitrator dismisses an opponent’s claims in full and awards no damages.

See the opinion here

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