U.S. Supreme Court Considering Petition for Certiorari in Dispute Over How to Define “Arbitration”

A petition for certiorari in an arbitration case that was decided earlier this year by the Second Circuit Court of Appeals is currently being considered by the United States Supreme Court.  In Bakoss v. Certain Underwriters at Lloyds of London, No. 12-1429, the appeals court held that the meaning of the term “arbitration” under the Federal Arbitration Act (FAA) was defined by federal common law.  Previously, both the Fifth and Ninth Circuits have held that state law should be used to define the term “arbitration,” while the First and Tenth Circuits found that federal common law should be used.

In the case, Bakoss sought to collect on a permanent disability insurance policy he purchased from Lloyd’s of London in a New York state court.  As part of the insurance contract, the insurer was provided with the right to name a physician to provide a second opinion regarding any disability claims.  If the insured’s doctor and Lloyds of London’s physician disagreed, then the two doctors were tasked with jointly selecting a third physician to evaluate the insured’s condition.  Under the contract, the opinion of the third physician was binding on both parties.

When Lloyds sought to remove the case to federal court, the company claimed that the physician clause constitutes an arbitration agreement under the FAA.  According to Lloyds, this provided a federal court with subject matter jurisdiction over the dispute.  The state court agreed and the case was removed to the Eastern District of New York.  After examining federal law, a federal district court judge determined that the physician clause was an agreement to arbitrate.  Bakoss appealed the district court’s decision by arguing the federal court lacked subject matter jurisdiction over the dispute.  According to Bakoss, the court should have instead looked to state law in order to properly define arbitration.

After noting the current split at the Circuit level, the Second Circuit held that “federal common law provides the definition of ‘arbitration’ under the FAA.”  According to the court, “Congress intended national uniformity regarding the interpretation of the term ‘arbitration,’ and therefore federal common law governs.  A petition for a writ of certiorari to resolve the Circuit split was filed with the high court on June 7, 2013 and a response is expected by July 11th.

Please stay tuned to Disputing for more on this interesting case!