Federal Common Law Control 'Arbitration' Under FAA - U.S. Second Circuit
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Federal Common Law Control 'Arbitration' Under FAA

Does federal common law or state law provide the meaning of "arbitration" within the Federal Arbitration Act?

According to the Second Circuit Court of Appeals, Congress intended national uniformity regarding the interpretation of the term "arbitration," and therefore federal common law controls.

This issue cropped up in an insurance contract dispute between Imad John Bakoss and Lloyds of London. (Yes, that Lloyds of London. The insurance company that insures celebrity body parts.) Lloyds and Bakoss entered into a Certificate of Insurance, which provided for payment to Bakoss in the event he became "Permanently Totally Disabled."

Bakoss could only invoke that status if "in the opinion of a Competent Medical Authority [he] [would] not recover from the effects of a Sickness or Injury to the extent that [he] [would] ever be able to resume the Material and Substantial duties of [his] occupation."

The policy provided each party with the right to have Bakoss examined by a physician of its choice for the purpose of determining whether he was "totally disabled." In the event of a disagreement between each party's physicians, those two physicians would jointly name a third physician "to make a decision on the matter which shall be final and binding."

When Lloyds and Bakoss began to bicker about third physician, Bakoss sued in New York state court. Lloyds, in turn, removed the case to federal court, claiming that the third-physician clause is an arbitration agreement, thus providing federal subject-matter jurisdiction. Applying federal common law, the district court held that (1) the third-physician clause is an agreement to arbitrate, and (2) federal jurisdiction exists under the FAA.

Bakoss appealed that ruling, arguing, in part, that since the FAA does not supply a definition for "arbitration," the district court should have looked to New York law, rather than federal common law, to define that term.

The Second Circuit disagreed.

In a matter of first impression, the appellate court followed the majority of its sister circuits in finding that federal law should define the scope of "arbitration" under the FAA, noting that applying state law would create "a patchwork in which the FAA will mean one thing in one state and something else in another."

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