United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 8, 1999 Decided February 12, 1999
No. 98-7082
Matt Kasap,
Appellant
v.
Folger Nolan Fleming & Douglas, Inc., et al.,
Appellees
Appeal from the United States District Court
for the District of Columbia
(97cv02536)
John P. Connolly argued the cause for appellant. With
him on the briefs was Harold Richard Mayberry, Jr.
Thomas O. Barnett argued the cause for appellees. With
him on the brief was Mitchell F. Dolin.
Before: Silberman, Sentelle, and Randolph, Circuit
Judges.
Opinion for the Court filed by Circuit Judge Silberman.
Silberman, Circuit Judge: Appellant seeks reversal of the
district court's decision dismissing his application to vacate an
arbitration decision for lack of subject matter jurisdiction.
We agree with the district court that it had no jurisdiction to
consider appellant's application and affirm the dismissal.
I.
Matt Kasap is an experienced investor who maintained a
nondiscretionary margin account with appellee Folger Nolan
Fleming & Douglas, Inc. Appellee Joseph E. Anderson, a
Folger Nolan employee, was the registered representative for
appellant's account. After Kasap lost what he estimated to
be nearly one half million dollars in the account during a
period of market decline in 1996, he filed a statement of claim
with the National Association of Securities Dealers pursuant
to his agreement with appellees to submit such a dispute to
arbitration. He contended that appellees falsely represented
the amount of his margin debit and account equity and failed
to make adequate disclosures regarding his margin account,
in violation of s 10(b) of the Securities Exchange Act of 1934
and the SEC's rules enforcing that section. Appellant
claimed further that appellees' conduct violated state securi-
ties law and NASD rules of fair practice, and constituted a
breach of contract, fraud, and deceit under state law.
An NASD arbitration panel held a two-day hearing at
which, inter alia, Kasap questioned appellee Anderson about
his substance abuse history during the period in which he
handled appellant's account. After the close of the hearing,
Kasap discovered evidence which he believed demonstrated
that Anderson perjured himself before the panel, and re-
quested that the panel reopen the record to consider the new
evidence. The panel rejected the request, and later denied
all of appellant's claims on the merits. Appellant then filed in
the district court an application to vacate the arbitration
award in favor of appellees under s 10 of the Federal Arbi-
tration Act, 9 U.S.C. s 10 (1994). He argued that Anderson's
alleged perjury enabled appellees to procure the award by
fraud and undue means, id. s 10(a)(1), and that the panel's
decision not to reopen the record constituted misconduct, id.
s 10(a)(3). Appellees filed a motion to dismiss on the
grounds that the court lacked subject matter jurisdiction over
appellant's application.
The district court granted appellees' motion and dismissed
the case with prejudice. Relying on Moses H. Cone Memori-
al Hospital v. Mercury Construction Corp., 460 U.S. 1, 25
n.32 (1983), and the Seventh Circuit's decision in Minor v.
Prudential Securities, Inc., 94 F.3d 1103 (7th Cir. 1996), the
district court held that it lacked subject matter jurisdiction
because the parties were not diverse, because the Federal
Arbitration Act does not itself create jurisdiction for the
federal courts, and because the federal securities claims in-
volved in the underlying arbitration do not supply an indepen-
dent jurisdictional basis. Appellant challenges the district
court's decision, arguing that the district court had subject
matter jurisdiction and that, even if it did not, the district
court erred insofar as it dismissed his application to vacate
with prejudice.
II.
The Federal Arbitration Act creates several federal causes
of action relating to arbitration agreements (to be initiated by
"petition" or "application"), including an action under s 4 to
compel arbitration, which provides,
A party aggrieved by the alleged failure, neglect, or
refusal of another to arbitrate under a written agreement
for arbitration may petition any United States district
court which, save for such agreement, would have juris-
diction 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....
9 U.S.C. s 4 (1994), and an action under s 10 to vacate an
arbitrator's award, which provides,
(a) In any of the following cases the United States court
in and for the district wherein the award was made may
make an order vacating the award upon the application
of any party to the arbitration--
(1) Where the award was procured by corruption, fraud,
or undue means.
(2) Where there was evident partiality or corruption in
the arbitrators, or either of them.
(3) Where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior
by which the rights of any party have been prejudiced.
(4) Where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and defi-
nite award upon the subject matter submitted was not
made.
(5) Where an award is vacated and the time within which
the agreement required the award to be made has not
expired the court may, in its discretion, direct a rehear-
ing by the arbitrators.
(b) The United States district court for the district
wherein an award was made that was issued pursuant to
section 580 of title 5 may make an order vacating the
award upon the application of a person, other than a
party to the arbitration, who is adversely affected or
aggrieved by the award, if the use of arbitration or the
award is clearly inconsistent with the factors set forth in
section 572 of title 5.
9 U.S.C. s 10 (1994). Notwithstanding the apparent federal
causes of action thus devised, the Supreme Court has inter-
preted the statute as not itself bestowing jurisdiction on the
federal district courts, nor permitting federal jurisdiction to
be invoked under 28 U.S.C. s 1331 (1994), the general statute
conferring on federal district courts jurisdiction over "all civil
actions arising under the ... laws ... of the United States."
Id.; see Southland Corp. v. Keating, 465 U.S. 1, 16 n.9 (1984)
(describing the Act as "creat[ing] federal substantive law
requiring the parties to honor arbitration agreements, [but]
... not creat[ing] any independent federal-question jurisdic-
tion under 28 U.S.C. s 1331 (1976) or otherwise"); see also
Moses H. Cone, 460 U.S. at 25 n.32 (holding that, to assert a
cause of action under the Act, "[t]here must be diversity of
citizenship or some other independent basis for federal juris-
diction").
That construction of the statute is certainly, as has been
observed, "something of an anomaly," Moses H. Cone, 460
U.S. at 25 n.32; see also Southland, 465 U.S. at 30 n.19
(O'Connor, J., dissenting) (noting that it is "rare to find a
federal substantive right that cannot be enforced in federal
court under the jurisdictional grant of 28 U.S.C. s 1331");
Richard H. Fallon et al., Hart & Wechsler's The Federal
Courts and the Federal System 912 n.9 (4th ed. 1996)
(labeling Southland's footnote 9 "puzzling"). Ordinarily, a
plaintiff, relying squarely on a federal cause of action, would
easily satisfy s 1331's requirement that the claim "arise
under" federal law, see Merrell Dow Pharms., Inc. v. Thomp-
son, 478 U.S. 804, 808 (1986), at least absent an overwhelming
predominance of state law issues incorporated by the federal
cause of action, see id. at 814 n.12. Still, the Supreme Court
has spoken and it is not for us to quarrel. But cf. Allied-
Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 290-92 (1995)
(Thomas J., dissenting) (noting jurisdictional anomaly under
s 2 of the Act and attributing it to Southland's erroneous
conclusion that the Act creates substantive federal law bind-
ing on state courts); id. at 285 (Scalia, J., dissenting) (vowing
no longer to dissent from judgments resting on Southland,
but "stand[ing] ready to join four other Justices in overruling
it").
It should be noted, however, that s 4--unlike s 10--in-
cludes language that specifically refers to what appears to be
a basis for federal question jurisdiction. A petition for an
order compelling arbitration may be brought in a "United
States district court which, save for [the arbitration] agree-
ment, 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 parities ... ." That provision in
s 4--though conspicuously absent from s 10--is the key to
appellant's argument. He does not claim that s 10, if it stood
alone, would confer federal question jurisdiction on federal
district courts to entertain an application to vacate an arbitra-
tion panel's award.1 Rather, it is his argument that s 4 does
so--at least where the underlying claim that is to be put to
arbitration could have been brought in federal court--and
that the two sections should be construed in pari materia.
The first difficulty with appellant's argument is that despite
s 4's language, it is not at all clear that even that wording
creates a basis for federal question jurisdiction. Admittedly,
the Supreme Court suggested as much, see Moses H. Cone,
460 U.S. at 24 n.32 ("Section 4 provides for an order compel-
ling arbitration only when the federal district court would
have jurisdiction over a suit on the underlying dispute...."),
but the clear weight of authority rejects that proposition.
See, e.g., Westmoreland Capital Corp. v. Findlay, 100 F.3d
263, 267-68 (2d Cir. 1996); Smith Barney, Inc. v. Sarver, 108
F.3d 92, 94 (6th Cir. 1997); Prudential-Bache Sec., Inc. v.
Fitch, 966 F.2d 981, 988 (5th Cir. 1993); see also Minor, 94
F.3d at 1106 (citing cases). The strongest opinion rejecting it
focused on the common law origins to which the language of
s 4 likely was addressed, see Drexel Burnham Lambert, Inc.
v. Valenzuela Bock, 696 F. Supp. 957, 961-63 (S.D.N.Y. 1988)
(Leval, J.) (explaining that a claim for specific performance of
an arbitration agreement would not be enforced at common
law because such agreements were thought to "oust" a court
of its jurisdiction, and that the s 4 language was intended
__________
1 Other parties have argued that the Supreme Court's broad
language in Southland and Moses H. Cone should be confined to
s 4, and that federal question jurisdiction without any limitation is
conferred by s 10, which specifically refers to a United States
district court, see 9 U.S.C. s 10(a), (b). That argument has been
uniformly rejected. See, e.g., Baltin v. Alaron Trading Corp., 128
F.3d 1466, 1468-71 (11th Cir. 1997), cert. denied, 119 S. Ct. 105
(1998); Ford v. Hamilton Invs., Inc., 29 F.3d 255, 257 (6th Cir.
1994); Garrett v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7
F.3d 882, 883-84 (9th Cir. 1993); Harry Hoffman Printing, Inc. v.
Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611
(2d Cir. 1990).
only to reverse that practice), and on the incompatibility
between appellant's suggested interpretation and the well-
pleaded complaint rule, see id. at 963-64. The only authority
supporting appellant's construction of s 4 is a Fourth Circuit
opinion which went on to hold that the underlying dispute did
not involve a federal claim, see Gibraltar, P.R., Inc. v. Otoki
Group, Inc., 104 F.3d 616, 618-19 (4th Cir. 1997), and two
district court opinions that are rather sketchy, see Dean
Witter Reynolds, Inc. v. Sanchez Espada, 959 F. Supp. 73, 76
(D. Puerto Rico 1997); Gouger v. Bear, Stearns & Co., 823
F. Supp. 282, 285 (E.D. Pa. 1993).
But assuming arguendo that appellant's reading of s 4 is
correct, we do not see how he can transport the unique
jurisdictional language of s 4 into s 10. Appellant claims we
simply have to because otherwise there is no jurisdictional
coherence to the statute. How can it be thought that Con-
gress intended that a federal court have jurisdiction to compel
arbitration of a claim under federal securities law but not
jurisdiction over the other provision of the same statute that
provides for the vacating of an award of the same claim?
Indeed, if we read s 10 as not permitting federal question
jurisdiction based on the underlying federal claims then a
plaintiff, as a practical matter, could bring this sort of action
in federal court only in diversity (or perhaps admiralty) cases,
which seems a strange result.2
We readily admit that appellant's argument is powerful.
Faced with the same argument, the Seventh Circuit in Minor
v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir. 1996),
heroically sought to explain the rationale for such a congres-
__________
2 That is because the ordinary method for establishing federal
question jurisdiction under 28 U.S.C. s 1331--demonstrating a
federal cause of action or a "substantial question of federal law"
necessary to the plaintiff's right to relief, Franchise Tax Bd. v.
Construction Laborers Vacation Trust, 463 U.S. 1, 27-28 (1983)--
would appear precluded by the Act's anomalous jurisdictional struc-
ture. As we saw, the Arbitration Act cause of action itself is
insufficient, and we do not see how (although we do not rule it out)
a s 10 claim could depend on a substantial question of federal law
distinct from the substantive law that s 10 creates.
sional choice. It contended that Congress had a more "cen-
tral" interest in the enforcement of agreements to arbitrate
than in the review of arbitration decisions, see id. at 1107, and
that since a s 10 action to vacate an award because of fraud,
corruption, misconduct or an excess of the arbitrators' powers
would depend on state, not federal, law, it was no different
from an ordinary diversity suit, despite the underlying federal
claims, see id. at 1106. We see little evidence supporting the
former. And we do not agree with the Seventh Circuit as to
the latter. The Supreme Court has made clear that the Act
creates federal substantive law, see Moses H. Cone, 460 U.S.
at 25 n.32, and federal courts have interpreted the fraud
provision of s 10 as a provision of federal law. See, e.g.,
Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383
(11th Cir. 1988) (discussing three part test, developed by
federal courts, for fraud under s 10); see also DVC-JPW
Investors v. Gershman, 5 F.3d 1172, 1174 (8th Cir. 1993)
(evaluating application to vacate alleging arbitrator miscon-
duct under federal standard). Nevertheless, we agree with
the Seventh Circuit's conclusion that s 10 does not create
federal question jurisdiction, even when the underlying arbi-
tration involves federal law, essentially because of the Su-
preme Court's general pronouncements concerning the limits
of federal district court jurisdiction over the Federal Arbitra-
tion Act. In sum, even if by focusing on the exact wording of
s 4, appellant can--in accordance with the Supreme Court's
suggestion--establish federal question jurisdiction over some
kinds of s 4 proceedings, the same words are not in s 10.
He who lives by the in haec verba form of analysis dies by it.
We conclude by noting that the district court improperly
dismissed appellant's suit with prejudice. As appellees con-
cede, dismissals for lack of jurisdiction are not decisions on
the merits and therefore have no res judicata effect on
subsequent attempts to bring suit in a court of competent
jurisdiction. See Fed R. Civ. P. 41(b); Charles Alan Wright
& Arthur R. Miller, 13A Federal Practice and Procedure
s 1350, at 225 (2d ed. 1990). Appellees attempt to salvage
this aspect of the district court's opinion by interpreting the
"with prejudice" dismissal to apply only to the jurisdictional
issue decided by the court, thereby foreclosing only the re-
filing of the same application in federal court. But the
district court's order dismissed appellant's "case" with preju-
dice, not simply the "issue" of federal court jurisdiction. In
fact, under principles of issue preclusion, even a case dis-
missed without prejudice has preclusive effect on the jurisdic-
tional issue litigated. See Dozier v. Ford Motor Co., 702 F.2d
1189, 1194 (D.C. Cir. 1983); Shaw v. Merritt-Chapman &
Scott Corp., 554 F.2d 786, 789 (6th Cir. 1977) ("[W]hile a
dismissal for lack of jurisdiction does not constitute an adjudi-
cation upon the merits, it does constitute a binding determi-
nation on the jurisdictional question, which is not subject to
collateral attack."); cf. Durfee v. Duke, 375 U.S. 106, 116
(1963) (holding that a court's decision that subject matter
jurisdiction is proper has issue preclusive effect). We there-
fore affirm the district court's decision, but modify its order
to state that the dismissal of appellant's case is without
prejudice.3
__________
3 Whether, as appellees suggest, this disposition will be of no help
to appellant since his s 10 application would be time-barred if
brought in state court is not for us to decide.