In two cases this term, the U.S. Supreme Court will decide the extent to which federal courts should defer to the decisions of other tribunals. Its decisions will have a substantial effect on the role of the federal courts in relation to state proceedings and in reviewing the decisions of international arbitration panels.

Abstention Because of Ongoing State Proceedings

The court issued its decision in one of these cases less than two months after hearing oral argument. In Sprint Communications v. Jacobs, No. 12-815 (Dec. 10, 2013), the justices resolved a circuit split on when federal courts should abstain from deciding a question in deference to ongoing state proceedings. That case involved a challenge by Sprint to an order by the Iowa Utilities Board (IUB) regulating its Voice over Internet Protocol (VoIP) traffic. Sprint argued that federal law preempted Iowa’s regulations. The Supreme Court unanimously rejected the U.S. Court of Appeals for the Eighth Circuit’s order staying Sprint’s federal claims. The justices, in an opinion authored by Justice Ruth Bader Ginsburg, held that the abstention doctrine announced in Younger v. Harris, 401 U.S. 37 (1971), applies only to specific and exceptional categories of state-court proceedings.

Pursuant to the abstention doctrine, federal courts refrain from granting relief that would enjoin certain pending state-court proceedings. Instead, federal courts allow those proceedings to run their course in the interests of comity and federalism. Abstention, originally applied in Younger to state criminal proceedings, has since been extended to civil, administrative and even attorney disciplinary proceedings.

While the Supreme Court had stated that the state-court proceedings must involve “important state interests” to warrant abstention, it had not determined whether it applies to “remedial” as well as “coercive” state proceedings. In general, a remedial proceeding is one initiated by the federal plaintiff “of her own volition to right a wrong inflicted by the state,” whereas a proceeding initiated by the state against the federal plaintiff, “making her participation mandatory,” is considered coercive. Prior to the Supreme Court’s decision in Jacobs, several courts of appeals, including the Third Circuit, had held that abstention applied to coercive proceedings, but not to remedial ones.

In Jacobs, Sprint filed its federal claim after the IUB denied its request for a ruling that VoIP traffic was not subject to state regulation. It argued in federal court that federal law preempted the IUB’s order. The same day that Sprint filed its federal claim, it initiated a similar challenge in state court. The Eighth Circuit stayed Sprint’s federal claim pending resolution of the state-court action, rejecting the decision of several courts of appeals that abstention applies only to coercive state-court proceedings. Although the Eighth Circuit recognized that the state proceedings were remedial, it did not consider the “distinction to be outcome-determinative.” Instead, it focused on whether the state proceeding was “judicial” rather than legislative, and on the “importance of the generic proceeding to the state.” It found that both factors favored deference to the state proceedings and allowed Iowa courts to have the first word on enforcement of the state’s regulatory scheme.

The Supreme Court reversed the Eighth Circuit and substantially limited the application of Younger abstention. It noted that federal courts are generally obliged to decide cases within their jurisdiction, and that abstention is warranted in only three categories of “exceptional” circumstances: (1) state criminal prosecutions, (2) civil enforcement proceedings, and (3) civil proceedings necessary to enforce certain orders essential to judicial functions. The justices noted that adoption of the Eighth Circuit’s rationale would extend abstention “to virtually all parallel state and federal proceedings, at least where a party could identify a plausibly important state interest.” Importantly, the court also rejected the remedial/coercive distinction adopted by some lower courts, noting that this distinction was unclear and susceptible to manipulation.

Arbitrator’s Decisions on Procedural Preconditions

The justices also considered the appropriate deference to other tribunals in BG Group PLC v. Republic of Argentina, 665 F.3d 1363 (D.C. Cir. 2012). In that case, the court will resolve the extent of judicial review of an arbitrator’s decision about preconditions to arbitration. The principal issue in the case—whether an arbitrator or a federal court should decide issues of jurisdiction—has been the subject of several decisions by the Supreme Court. It may prove difficult, however, to apply that precedent to the unique facts of this case, which involve a dispute between a British investor group and Argentina arising under a bilateral investment treaty (BIT).

At the center of the dispute is a 1990 “Agreement for the Promotion and Protection of Investments” between the governments of the United Kingdom and Argentina. That agreement provided for arbitration of investment-related claims brought by an investor from one country directly against the other country’s government. The governments entered the agreement to promote and encourage international investment by ensuring fair dispute resolution and providing safeguards against seizure or diminishment of investment assets.

This case concerns an arbitration between a British corporation, BG Group PLC, and a privately held Argentinian natural gas distributor, MetroGAS. Argentina enacted legislation that greatly diminished the value of BG Group’s minority ownership stake in MetroGAS. BG Group later filed a notice of arbitration in 2003, and in 2007, an arbitration panel in the United States issued a final award ordering Argentina to pay BG Group approximately $185 million in damages.

Argentina challenged the arbitration award in federal court, arguing, among other things, that the arbitration panel had improperly excused BG Group’s failure to submit the dispute first to the Argentinian courts before proceeding to arbitration. The 1990 agreement between Argentina and the United Kingdom required investment disputes to “be submitted … to the decision of the competent tribunal” where the investment was made. After 18 months, or after final judgment, the agreement allowed for the dispute to be submitted to arbitration.

The U.S.-based arbitration panel excused BG Group’s noncompliance with these provisions. It found that Argentina had rendered the requirement “absurd or unreasonable” under the Vienna Convention on the Law of Treaties by restricting BG Group’s access to Argentinian courts following the country’s economic collapse. The D.C. Circuit disagreed and vacated the arbitration award, finding that the agreement demonstrated Argentina’s “explicit intent” to condition an agreement to arbitrate on prior submission of the dispute to its courts.

The Supreme Court granted review to determine whether the D.C. Circuit applied the correct standard of review to the arbitrators’ decision. BG Group argues that the agreement’s prior-submission requirement is merely a procedural condition to arbitration, and that under the court’s decision in Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002), an arbitrator’s decision on the satisfaction of the condition is entitled to a presumption of correctness. Argentina, however, argues that the requirement is substantive and directly implicates the country’s consent to arbitrate. The United States, writing as amicus curiae, suggests that BITs should be subject to unique rules of treaty interpretation rather than the rules normally applied to domestic commercial disputes. According to the government, even procedural conditions to arbitration can be said to implicate a state’s consent in the context of treaties.

At oral argument in early December, Justice Anthony Kennedy characterized the issue as a “close case,” saying that he believed the D.C. Circuit may have been correct “as to the authority of the court to decide the issue,” but “probably wrong on the merits.” It seems unlikely, however, that the court will carve out special rules for international treaties. The justices did not appear to be impressed by the U.S. government’s argument that its prior arbitration cases should not apply. Justice Stephen Breyer at one point commented that the distinction drawn by the United States seemed to have “sprung, full blown from someone’s brain,” and “is not well embedded in any law that I could yet find.”

Insight From Decisions

Federal courts are necessarily creatures of “limited jurisdiction.” The justices’ decisions in Jacobs and BG Group will provide substantial insight on their views of those limits and the appropriate deference owed to other domestic and international decision-making bodies.

Stephen A. Miller practices in the commercial litigation group at Cozen O’Connor’s Philadelphia office. Prior to joining Cozen O’Connor, he clerked for Justice Antonin Scalia on the U.S. Supreme Court and served as a federal prosecutor for nine years in the Southern District of New York and the Eastern District of Pennsylvania.

Arthur P. Fritzinger also practices in the commercial litigation group at the firm in Philadelphia. He graduated from the University of Pennsylvania and Temple University’s Beasley School of Law, and clerked for Judge Mitchell S. Goldberg and David R. Strawbridge in the Eastern District of Pennsylvania.