Subject matter jurisdiction ranks among the most fundamental issues that federal courts are called upon to adjudicate. As courts of limited jurisdiction, federal district courts may only exercise jurisdiction over a cause of action if there is a specific statutory basis, most commonly if a “federal question” is presented (28 U.S.C. § 1331), or if the parties are completely diverse and the amount in controversy exceeds $75,000 (28 U.S.C. § 1332). Unlike almost every other defense, lack of subject matter jurisdiction cannot be waived, and can be raised at any time in a proceeding, including on appeal or sua sponte by the court.
The Second Circuit recently expounded on the contours of federal question jurisdiction in two illuminating scenarios that straddle its outer edges: (1) an action asserting state law claims with embedded federal issues (Link Motion), and (2) a petition to confirm an arbitration award, where the underlying claims arose under federal law (Trustees of New York State).
Link Motion
Link Motion Inc. v. DLA Piper LLP (US), 103 F.4th 905 (2d Cir. 2024), involved a malpractice action, based on the law firm’s alleged failure to argue certain defenses (e.g., lack of standing) in a long-ended federal derivative action. Arguing that the action would require an evaluation of the merits of the federal defenses, the law firm removed the case (originally brought in New York Supreme Court) to federal court in the Southern District of New York. The district court, Judge Victor Marrero, agreed to hear the case, and ultimately dismissed it as untimely under New York’s three-year statute of limitations.
On appeal, the Second Circuit (Judges Raggi, Leval, and Bianco) vacated the district court’s judgment and ordered the case remanded back to state court. The quintessential “federal question” over which a federal court may exercise subject matter jurisdiction is one in which federal law creates the cause of action. Federal question jurisdiction, however, may also extend to a “special and small” category of state law claims that present “significant, disputed issues of federal law.” To qualify, the federal issue must be:
1.Necessarily raised;
2.Actually disputed;
3.Substantial; and
4.Capable of resolution without disrupting the federal-state balance approved by Congress.
In this case, there was no dispute that federal issues (the merits of federal defenses) were necessarily raised and actually disputed. The court, however, held that these issues were not sufficiently important to the federal system as a whole to warrant the exercise of jurisdiction. “Something more” was needed than a “backward-looking” evaluation of how “hypothetical” defenses would have played out in a singular malpractice action. Malpractice claims, moreover, are typically resolved in state court. States are generally responsible for maintaining professional standards and overseeing the conduct of the attorneys that they license. Regardless of the federal issues presented, this case properly belonged in state – not federal – court.
Trustees of New York State
Trustees of New York State Nurses Ass’n Pension Plan v. White Oak Global Advisors, LLC, 102 F.4th 572 (2d Cir. 2024), concerned a petition to confirm an arbitration award, where the claims arose under the federal Employee Retirement Income Security Act (ERISA). The trustees for an ERISA-governed retirement plan had brought claims for breach of fiduciary duty under ERISA in arbitration, pursuant to an arbitration agreement in the parties’ investment management agreement. The arbitrator sided with the trustees, awarding the plan a substantial disgorgement award, which the trustees sought to confirm in the Southern District of New York. The district court, Judge Kaplan, confirmed the award, prompting an appeal by the investment manager challenging the district court’s exercise of subject matter jurisdiction.
The Second Circuit (Judges Lynch and Park, with Judge Jessica Clarke of the Southern District of New York sitting by designation) affirmed the district court’s exercise of jurisdiction, but only in light of the petition’s uniquely federal character. The Federal Arbitration Act, the court noted, does not automatically confer federal jurisdiction over a petition to confirm, vacate, or modify an arbitration award. Courts may look to the federal nature of the underlying claims in assessing subject matter jurisdiction over a motion to compel arbitration. That same approach, however, does not apply to a petition to confirm, vacate, or modify, which must present an independent basis for federal jurisdiction that is clear on the “face of the petition.” Badgerow v. Walters, 596 U.S. 1 (2022).
The instant petition, the court ruled, met that jurisdictional bar. While arbitration agreements are typically creatures of state law, ERISA governed the parties’ arbitration agreement. ERISA § 404(b) requires plan fiduciaries to discharge their duties “in accordance with the documents and instruments governing the plan” – including, as here, an arbitration agreement found in an ERISA plan document. ERISA § 502(a)(3), moreover, allows civil actions to obtain “appropriate equitable relief . . . to enforce . . . the terms of the plan.” That is precisely what petitioners sought in this case: “equitable relief” (specific performance) to enforce a “term[] of the plan” (the arbitration agreement). ERISA itself (not state law) allowed petitioners to confirm their arbitration award in federal court.
Conclusion
Although a split decision in terms of allowing claims to proceed in federal court, the thrust of both Link Motion and Trustees of New York State was the limited scope of federal question jurisdiction. Under Link Motion, courts will look critically at attempts to obtain federal jurisdiction over state law claims based on embedded federal issues, reserving jurisdiction for the “small” number of claims presenting “substantial” issues deemed sufficiently important to the federal system as a whole (malpractice claims may rarely, if ever, qualify). And although ERISA arbitration agreements may be an exception, Trustees of New York State suggests an uphill battle for parties seeking to confirm, vacate, or modify most arbitration awards in federal court, absent complete diversity or a specific statutory entitlement. The court’s decisions reaffirm that federal district courts are courts of limited jurisdiction, while enlarging their toolkit for disposing of inapt cases amid ever-growing dockets and demands on judicial resources. The Second Circuit undoubtedly will have more to say on subject matter jurisdiction, in its various permutations, in cases to come.