Court Opinion

ID: 5125049
Source: CourtListenerOpinion
Date Created: 2021-11-10 19:00:37.54243+00
Date Added: 2024-06-11T08:22:46.951794
License: Public Domain

Case: 21-10023     Document: 00516088427         Page: 1    Date Filed: 11/10/2021

           United States Court of Appeals
                for the Fifth Circuit
                                                                     United States Court of Appeals
                                                                              Fifth Circuit

                                                                            FILED
                                                                   November 10, 2021
                                  No. 21-10023                         Lyle W. Cayce
                                                                            Clerk

   ADT, L.L.C.,

                                                           Plaintiff—Appellant,

                                      versus

   Kamala Richmond; Darryl Richmond,
   Individually and as next friend of D.R., J.R. and E.R., minors,

                                                        Defendants—Appellees.

                  Appeal from the United States District Court
                      for the Northern District of Texas
                               No. 4:20-CV-759

   Before King, Smith, and Haynes, Circuit Judges.
   Jerry E. Smith, Circuit Judge:
         Federal courts can enforce an arbitration agreement only if they could
   hear the underlying “controversy between the parties.” 9 U.S.C. § 4. In
   Vaden v. Discover Bank, 556 U.S. 49 (2009), the Court told us to define that
   “controversy” by looking to the whole dispute, including any state-court
   pleadings. The question here is whether we must define the “parties” that
   way, too. Because the statute makes clear that we may not, we vacate the
   dismissal and remand.
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                                     No. 21-10023

                                          I.
          Telesforo Aviles worked for ADT, L.L.C., installing security systems
   in customers’ homes. After a decade of service, Aviles began spying on cus-
   tomers using the cameras he had installed.
          ADT discovered Aviles’s misconduct, fired him, and reported him to
   the authorities. But by then, Aviles had spied on more than two hundred
   customers, accessing some accounts hundreds of times.
          Kamala Richmond and her family are citizens of Texas. They say they
   were among Aviles’s victims. After Aviles’s conduct became known, the
   Richmonds sued Aviles and ADT in Texas state court on sundry state-law
   claims, seeking more than $1 million in damages. But the Richmonds’ con-
   tract with ADT contained an arbitration clause. To enforce that clause, ADT
   brought this federal suit under § 4 of the Federal Arbitration Act. ADT
   premised jurisdiction on the complete diversity between the Richmonds and
   ADT, which is a citizen of Florida and Delaware.
          A federal court can hear a suit to compel arbitration only if it could
   hear “a suit arising out of the controversy between the parties.” 9 U.S.C.
   § 4. To define that “controversy,” a federal court must “look through” the
   § 4 petition “to the parties’ underlying substantive controversy.” Vaden,
   556 U.S. at 62. If a federal court could hear a suit arising from that “whole
   controversy,” id. at 67, then that court can hear the § 4 suit, id. at 70.
          Applying Vaden, the district court looked through ADT’s federal suit
   to the Richmonds’ state-court complaint, which named Aviles and ADT as
   defendants. From that, the court concluded that the “whole controversy”
   included Aviles, ADT, and the Richmonds. But those parties lacked diver-
   sity of citizenship because Aviles, like the Richmonds, is from Texas. See
   28 U.S.C. § 1332(a)(1). On that ground, the court dismissed ADT’s suit for
   want of diversity jurisdiction.

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          ADT asks us to revive its suit. ADT says that Vaden doesn’t extend
   to diversity of citizenship and that every federal circuit to consider the
   question agrees. The Richmonds acknowledge the weight of opposing
   authority but contend that Vaden requires affirmance. Although neither side
   stresses § 4’s text, it resolves this case.

                                           II.
          Vaden tells us to look to the “whole controversy,” not just the petition
   to compel arbitration, to define the controversy over which the petition
   asserts federal jurisdiction. See Vaden, 556 U.S. at 67. The district court went
   a step further: It applied Vaden’s look-through test to define the “parties”
   to that controversy. That was error, so we vacate the dismissal and remand.

                                           A.
          Section 4 is clear: The only controversy that bears on our jurisdiction
   is “the controversy between the parties.” 9 U.S.C. § 4 (emphasis added).
   Those “parties” are only the parties to the suit to compel arbitration.
          Section 4 empowers
          [a] party aggrieved by the alleged failure, neglect, or refusal of
          another to arbitrate under a written agreement for arbitration [to]
          petition any United States district court which, save for such
          agreement, would have jurisdiction under title 28, in a civil
          action or in admiralty of the subject matter of a suit arising out
          of the controversy between the parties, for an order directing that
          such arbitration proceed in the manner provided for in such
          agreement.
   Id. (emphasis added). Beyond the quoted excerpt, the word “party” or
   “parties” appears at six other points in § 4.
          At all those points, § 4 refers to one or both of two parties. The first
   are those who “fail[ ], neglect, or refus[e] . . . to arbitrate under a written
   agreement for arbitration.” Id. The second are those whom the first aggrieve

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                                            No. 21-10023

   by not submitting to arbitration. See id. In other words, § 4 uses “parties”
   to mean only the parties to the § 4 suit: those who refuse to abide their
   agreement to arbitrate and those whom they aggrieve by doing so. Non-
   parties to that suit do not matter.
           Reading “parties” more broadly would make no textual sense. To
   take one example, if “the making of the agreement for arbitration . . . is not
   in issue,” a court must “order . . . the parties to proceed to arbitration.” Id.
   That provision applies easily to those who have agreed to arbitrate. But how
   could it apply to nonparties? A court can’t compel a party to arbitrate when
   it never agreed to. See Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
   460 U.S. 1, 19–20 (1983).
           Vaden does not control. There, the Court explained only how we must
   define the § 4 “controversy.” It never defined the “parties” whom § 4
   describes. Vaden’s facts show why.
           Vaden was a federal-question case. See Vaden, 556 U.S. at 70. And
   unlike diversity jurisdiction, federal-question jurisdiction turns not on the
   identity of the parties but on the subject matter of the controversy. 1
           Even if the Vaden Court could have decided who the “parties” are, it
   did not. Vaden spoke only to the word “controversy.” Section 4, the Court
   explained, “does not invite federal courts to dream up counterfactuals when
   actual litigation has defined the parties’ controversy.” Vaden, 556 U.S. at 68
   (emphasis added). “The relevant question,” the majority persisted, “is
   whether the whole controversy between the parties—not just a piece broken off

           1
               Compare 28 U.S.C. § 1331 (“The district courts shall have original jurisdiction of
   all civil actions arising under the Constitution, laws, or treaties of the United States.”), with
   28 U.S.C. § 1332(a)(1) (requiring complete diversity among the parties to sustain diversity
   jurisdiction).

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   from that controversy—is one over which the federal courts would have
   jurisdiction.” Id. at 67 (emphasis added). The majority even framed the
   question presented as whether “a district court, if asked to compel arbitration
   pursuant to § 4, [should] ‘look through’ the petition and grant the requested
   relief if the court would have federal-question jurisdiction over the underlying
   controversy.” Id. at 53 (emphasis added).
           Although Vaden did not define “parties,” both its language and its
   method support our reading. After looking to § 4’s text, the Court opined
   that it refers only to the two parties we’ve identified: the party “seek[ing]
   arbitration pursuant to a written agreement” and the party who “resists.”
   Id. at 62. And though Vaden drew a partial dissent, every Justice agreed that
   the Court’s task was to interpret § 4’s text. 2 We do likewise, drawing the
   meaning of “parties” directly from that section.
           Moses H. Cone also favors our view. Moses Cone Hospital, a North
   Carolina citizen, had contracted with Mercury, an Alabama citizen. The con-
   tract contained an arbitration clause. Rather than arbitrate, the hospital sued
   Mercury and a North Carolina architect, who hadn’t signed the agreement
   to arbitrate, in state court. Mercury then moved in federal court to compel
   arbitration on diversity-of-citizenship grounds. Moses H. Cone, 460 U.S. at 7.
   The federal district court stayed Mercury’s suit, citing the state proceedings.
   Id.
           The Court in Moses H. Cone considered only the appealability and

           2
               Compare Vaden, 556 U.S. at 52–53 (framing the question as whether § 4’s text
   dictates the “look through” approach); id. at 62 (“The text of § 4 drives our conclusion”
   that the look-through test applies), with id. at 72–73 (Roberts, C.J., concurring in part and
   dissenting in part) (“I agree with the Court that a federal court . . . should ‘look through’
   the dispute. . . . But look through to what? The statute provides a clear and sensible answer.
   . . . [But the majority’s] approach is contrary to the language of § 4.”).

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   propriety of the district court’s stay, not jurisdiction. Id. at 8. But if the
   Richmonds were right that the FAA requires federal courts to determine the
   “parties” from the first-filed state-court complaint, the Court should have
   dismissed 3 because the architect’s inclusion in the hospital’s state-court suit
   destroyed complete diversity. See Moses H. Cone, 460 U.S. at 7 n.4. The
   Court instead affirmed the Fourth Circuit’s decision to reverse the stay and
   to remand. Id. at 29. The Court passed over the jurisdictional question, leav-
   ing untouched the Fourth Circuit’s forceful holding that diversity jurisdic-
   tion was proper. 4

           3
             See Northport Health Servs. of Ark., LLC v. Rutherford, 605 F.3d 483, 490 (8th
   Cir. 2010) (“Even if no party challenged diversity jurisdiction, that the Supreme Court did
   not even discuss the issue [in Moses H. Cone] is telling because in other cases it has noted
   that federal courts are obligated to consider lack of subject matter jurisdiction sua sponte.”).
           4
            See In re Mercury Constr. Corp., 656 F.2d 933, 941–42, 944–46 (4th Cir. 1981)
   (en banc). The Fourth Circuit explained, in relevant part,
           [T]his case plainly qualified for relief under Section 4. . . . [T]here was an
           independent basis for federal jurisdiction (i.e., diversity). . . . [T]he right
           of Mercury to a stay of proceedings and an order of arbitration under
           Section 4 is beyond dispute.
           ...
           [The Hospital] joined as a codefendant its own agent, the Architect, and
           again it seems fair to assume that this was to avoid removal of the action to
           the federal court. But, even assuming there is some controversy between
           the Hospital and the Architect, to which Mercury is not a party, why
           should Mercury be delayed in its right to a prompt resolution by arbi-
           tration, without the expense of long and protracted litigation, as the parties
           had solemnly agreed, because of some controversy between the Hospital
           and its Architect?
           ...
           [F]ederal procedure under the [FAA], as established in the decisions,
           would not permit the Hospital, by the addition of the Architect as a co-
           defendant, to frustrate and defeat arbitration; the federal court would
           simply sever the arbitrable claim and order the parties to proceed to

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           Other circuits agree that we must determine diversity of citizenship in
   a § 4 suit from the parties to that suit. In Hermès of Paris, Inc. v. Swain,
   867 F.3d 321 (2d Cir. 2017), the court observed that § 4’s text refers only to
   “the parties to the petition to compel arbitration.” Id. at 326; see also Doctor’s
   Assocs. v. Distajo, 66 F.3d 438, 445 (2d Cir. 1995) (“The ‘parties’ to which
   § 4 of the FAA refers are the parties to the petition to compel.”). On that
   ground, the court rejected the claim that courts must look through the § 4
   petition to determine who the parties are. Swain, 867 F.3d at 325–26. The
   Eighth Circuit has agreed, 5 noting that every circuit precedent before Vaden
   had looked “only to the citizenship of the parties to the [§ 4] action.”
   Rutherford, 605 F.3d at 489. 6

           arbitration of that claim.
   Id. at 941–42, 944–46.
           5
                See Rutherford, 605 F.3d at 491 (“[W]e conclude that diversity of citizenship [in
   a § 4 case] is determined . . . by the citizenship of the parties named in the [§ 4] proceedings
   . . . , plus any indispensable parties who must be joined pursuant to Rule 19.”).
           6
              Swain and Rutherford correctly held that when a federal court assesses diversity
   of citizenship in a § 4 suit, the parties listed in the § 4 petition, plus any indispensable
   parties, are the only ones that count. See Swain, 867 F.3d at 324 & n.4; Rutherford, 605 F.3d
   at 491.
           Yet both cases proclaimed that Vaden applies only in federal-question cases. See
   Swain, 867 F.3d at 325; Rutherford, 605 F.3d at 488 (making that point). Nothing in Vaden
   or § 4 supports that view. True, Vaden addressed federal-question jurisdiction. But it
   advanced no new principles of federal-question jurisdiction. Vaden was a statutory-
   interpretation case. It looked to § 4’s text to define a § 4 “controversy.” And § 4 applies
   regardless of the claimed basis for federal jurisdiction.
            Under § 4, a federal court may hear a petition to compel arbitration only if, “save
   for” the arbitration agreement, it would “have jurisdiction under title 28 . . . of the subject
   matter of a suit” over the parties’ controversy. 9 U.S.C. § 4 (emphasis added). Title 28
   encompasses all the usual bases for federal jurisdiction, from a federal question to diversity.
   See 28 U.S.C. §§ 1330–1389. We conclude from this that we always must look to the
   parties’ whole dispute to define the controversy over which the petition asserts jurisdiction.
   See Vaden, 556 U.S. at 66 (“§ 4 . . . confines federal courts to the jurisdiction they would

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           Reading “parties” to mean only the parties to the § 4 petition also
   advances the core policy behind the look-through test. Vaden stressed that
   looking only to a § 4 petition to define the parties’ controversy would invite
   litigants to manipulate federal jurisdiction. See Vaden, 556 U.S. at 66–70.
   The look-through test defeats artful pleading by ensuring that federal
   jurisdiction over a petition to compel arbitration corresponds with federal
   jurisdiction over the parties’ actual dispute.
           Likewise, uncritically crediting how the first litigant defines the par-
   ties, as the Richmonds suggest, would invite “[a]rtful dodges” of federal jur-
   isdiction. Id. at 67. After agreeing to arbitrate its claims against a diverse
   defendant, a party could breach that compact, sue in state court, and join a

   have save for the arbitration agreement.” (cleaned up)).
            Our precedents affirm that straightforward reading of § 4. We have explained that
   courts must look through the petition to compel arbitration to ascertain whether the under-
   lying controversy is ripe. See Lower Colo. River Auth. v. Papalote Creek II, L.L.C., 858 F.3d
   916, 923 (5th Cir. 2017). “Vaden’s holding,” we’ve said, “necessarily implies that any of
   the reasons that a federal court may lack subject matter jurisdiction over the underlying
   dispute—e.g., ripeness—would similarly prevent a district court from having jurisdiction
   to compel arbitration.” Id. And in Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020), cert.
   granted, 141 S. Ct. 2620 (2021), we applied Vaden’s look-through test to find supplemental
   jurisdiction over a petition to vacate an arbitral award. Id. at 471–72, 474. The petitioner
   had sought to vacate only the arbitrators’ dismissal of her state-law claims. Id. at 472. But
   we found, in the underlying dispute, a federal question that shared with the petitioner’s
   state-law claims common facts supporting supplemental jurisdiction. Id. at 474–75.
            We thus have applied the look-through test to assess our jurisdiction over cases
   implicating supplemental jurisdiction, see id. at 474–75, and traditional limits on judicial
   power, see Lower Colo. River Auth., 858 F.3d at 923. Given those precedents and the text of
   § 4, it would be freakish to exempt diversity jurisdiction, and diversity jurisdiction alone,
   from the look-through inquiry.
           Vaden does not apply here because it defines only the § 4 “controversy,” not the
   “parties” to that controversy. The look-through test defines the “controversy” no matter
   the basis for federal jurisdiction. But it does not determine diversity of citizenship. That
   question concerns the parties’ identity, not their dispute.

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   nondiverse nonparty to its suit to deprive federal courts of the power to hold
   it to its bargain.
            The Richmonds’ rule also would trap those seeking to enforce arbitra-
   tion agreements between a rock and a hard place: If they move early to com-
   pel arbitration, beating a state-court filing, the dispute may be unripe. See,
   e.g., ADT LLC v. Madison, No. 3:20-CV-1417, 2020 WL 7046850, at *4
   (N.D. Tex. Nov. 30, 2020). But if they wait until after the plaintiff has filed
   a state-court complaint, that plaintiff may defeat federal jurisdiction by suing
   a nondiverse nonparty. Allowing that tactic would “fatally undermine the
   FAA,” Swain, 867 F.3d at 324 (cleaned up), and cheapen the power of this
   court.
            Section 4 defines “parties” as it does to bar litigants from abusing fed-
   eral jurisdiction. Having agreed to arbitrate its claims against a diverse defen-
   dant, a plaintiff may not escape our power by joining to its state-court suit
   nondiverse persons whom it could not hale into arbitration. “Parties,” in
   § 4, means the parties to the § 4 suit—not everyone against whom one party
   claims relief.

                                               B.
            We have diversity jurisdiction here. The amount in controversy far
   exceeds $75,000. Complete diversity exists as well. The parties to the § 4
   petition are ADT and the Richmonds. The Richmonds sued Aviles, too. But
   only the Richmonds and ADT are alleged to have agreed to arbitrate, 7 and
   only they are the parties to ADT’s suit.

            7
             There is no showing that Aviles ever agreed, actually or constructively, to arbi-
   trate the Richmonds’ claims against him. No one has alleged, for example, that Aviles
   authorized ADT to bind him to the arbitration agreement. See Restatement
   (Second) of Agency § 140 (1958).

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           One wrinkle remains. An indispensable party is one whose joinder is
   vital to avoid serious prejudice to that person or the parties already joined.
   See Fed. R. Civ. P. 19(b) (listing the relevant factors). If Aviles is indis-
   pensable to the dispute between ADT and the Richmonds, diversity juris-
   diction may not be proper. See, e.g., Brown v. Pac. Life Ins. Co., 462 F.3d 384,
   393–94 (5th Cir. 2006); see also Rutherford, 605 F.3d at 491. On remand, the
   district court should decide whether Aviles could be indispensable to an
   arbitral proceeding to which he never agreed. 8

                                                 C.
           The Richmonds protest that Vaden instructs us to look to the “sub-
   stantive controversy as the parties have framed it.” Volvo Trucks N. Am., Inc.
   v. Crescent Ford Truck Sales, Inc., 666 F.3d 932, 937 (5th Cir. 2012). By listing
   Aviles in their state-court complaint, the Richmonds say, they framed that
   controversy to include him, so there is no diversity jurisdiction here.
           We disagree. The statute says otherwise. Section 4 doesn’t tell us to
   look to any controversy. It points us only to the controversy “between the
   parties” to the § 4 suit. The Richmonds’ approach would erase that qualify-
   ing phrase.
           Vaden’s look-through test requires us to define the § 4 “controversy”
   by looking to the whole dispute “between the parties.” The Richmonds say
   their framing of who the parties are is part of that controversy. But that can’t

           8
             See Brown, 462 F.3d at 394 (“The threat of piecemeal, inconsistent litigation of
   claims and issues . . . is insufficiently prejudicial to render a party indispensable under
   Rule 19 given the oft-stated preference for arbitration under the FAA.” (cleaned up)); see
   also Rutherford, 605 F.3d at 491 (observing that “every circuit to consider the issue has
   concluded that a party joined in a parallel state court contract or tort action who would
   destroy diversity jurisdiction is not an indispensable party . . . in a federal action to compel
   arbitration”).

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   be right. “Between the parties” qualifies the “controversy”; it cannot be that
   controversy.
           Wherever possible, we must read statutes to give effect to their every
   word. 9 If the word “parties” were, as the Richmonds suggest, a mere subset
   of the “controversy” that § 4 describes, then the FAA’s drafters would not
   have written “between the parties” at all. We won’t declare that phrase sur-
   plusage; it is neither unclear nor absurd. 10
           There is no injustice in refusing to credit the Richmonds’ state-court
   complaint as the definitive statement of the parties to the dispute. Suppose
   that we struck the words “between the parties” from § 4. We still would
   have to look to the whole dispute as framed by the parties. And the Rich-
   monds framed that dispute, in no small part, by agreeing to arbitrate with
   ADT and ADT only. When a party agrees to arbitrate a dispute with another,
   it consents to resolving that dispute separately from others, even if piecemeal
   litigation results. See Moses H. Cone, 460 U.S. at 20. The party may not
   defeat federal jurisdiction over that dispute by sparking others that arbitra-
   tion can’t resolve.
                                          * * * * *

           9
            See Corley v. United States, 556 U.S. 303, 314 (2009) (“[A] statute should be
   construed so that effect is given to all its provisions, so that no part will be inoperative or
   superfluous, void or insignificant.” (cleaned up)).
           10
             See United States v. Dison, 573 F.3d 204, 207 (5th Cir. 2009) (“When the plain
   language of a statute is unambiguous and does not lead to an absurd result, our inquiry
   begins and ends with the plain meaning of that language.” (cleaned up)); see also Duncan v.
   Walker, 533 U.S. 167, 174 (2001); Antonin Scalia & Brian A. Garner, Read-
   ing Law: The Interpretation of Legal Texts § 26 (2012) (for the surplusage
   canon).

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          Not all is lost for the Richmonds. Perhaps the agreement to arbitrate
   is invalid, as they argued at the district court. We take no view on that issue.
   But a federal court can decide it.
          Because there’s diversity jurisdiction over ADT’s suit to compel arbi-
   tration, we VACATE the judgment of dismissal and REMAND. The dis-
   trict court shall decide whether Aviles is indispensable to this federal suit.
   We place no limitations on what matters the district court may address on
   remand in accord with this opinion.

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   Haynes, Circuit Judge, concurring in the judgment:
          I concur in the judgment of this court but would arrive there on a
   shorter road: the “look through” test of Vaden does not apply to diversity
   jurisdiction cases. See, e.g., Northport Health Servs. of Arkansas, LLC v.
   Rutherford, 605 F.3d 483, 491 (8th Cir. 2010); Hermes of Paris, Inc. v. Swain,
   867 F.3d 321, 324-26 (2d Cir. 2017). Thus, we simply “look at” the parties
   to the federal litigation where there is, undoubtedly, complete diversity
   (though I agree with the point about “indispensable parties” being a
   consideration on remand). Accordingly, I concur in the judgment only.

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