SCOTUS Declines to Hear Arbitration Dispute Over Texas Wind Energy Contract

The Supreme Court of the United States has declined to consider a Fifth Circuit Court of Appeals panel’s decision stating the Western District of Texas should not have compelled arbitration in a wind energy dispute because the parties’ case was not ripe for arbitration. In Lower Colorado River Authority v. Papalote Creek II, LLC, No. 17-785, the Lower Colorado River Authority (“LCRA”) entered into an agreement to purchase wind energy from Papalote Creek.  According to a previous Disputing blog post:

The parties’ Power Purchase Agreement (“PPA”) stated LCRA may owe Papalote Creek damages if the LCRA fails to purchase all of the wind energy produced by the company at a specific location.  Despite this, the terms of the PPA limited the LCRA’s aggregate liability to $60 million.  In addition, the PPA included a broad binding arbitration clause.

In response to a disagreement regarding the damages cap included in the parties’ contract, the LCRA filed a written demand for binding arbitration over the interpretation of the terms of the PPA.  Papalote Creek refused to acknowledge the LCRA’s demand and the LCRA filed a motion to compel arbitration with the Western District of Texas in Austin.  In response, Papalote Creek argued arbitral proceedings were not warranted because neither party was in breach of the PPA.

The federal district court ultimately concluded:

LCRA and Papalote have a dispute that clearly falls within the scope of Section 13.2. Contrary to Papalote’s position, a breach is not required to submit this dispute to arbitration and Papalote’s interpretation of the arbitration provision would, if accepted, effectively require the Court to rewrite the PPA. Given the strong federal policy in favor of arbitration, and Section 13.2’s broad and inclusive language, the Court should submit the dispute between LCRA and Papalote to binding arbitration.

In response, Papalote Creek filed an appeal with the nation’s Fifth Circuit Court of Appeals.  After concluding the district court lacked jurisdiction to compel arbitration, the appellate court vacated the lower court’s decision and remanded the case.  The LCRA then sought review by the nation’s highest court.

The Question Presented in the LCRA’s petition for certiorari states:

By contract, parties can agree to the arbitration of virtually any dispute. The Federal Arbitration Act (the FAA) makes such arbitration agreements “valid, irrevocable, and enforceable.” 9 U.S.C. § 2. It then tells parties that they may turn to “any United States district court which, save for such agreement, would have jurisdiction under Title 28” to compel arbitration. Id. § 4. Here, verifying the requirement of “jurisdiction under Title 28” was easy because the existence of diversity jurisdiction was undisputed. But the court of appeals concluded that § 4 also requires federal district courts to probe the underlying dispute between the parties to ensure that all other measures of justiciability, not just “jurisdiction under Title 28,” would have been satisfied if the parties had never agreed to arbitration. The underlying dispute here, the court concluded, would not have been “ripe” if brought as an original matter and, therefore, the district court lacked subject-matter jurisdiction to compel arbitration of that dispute.

The question presented is whether a federal court’s subject-matter jurisdiction to entertain a motion to compel arbitration under § 4 of the FAA can be established by complete diversity without “looking through” the petition to assess whether the underlying dispute would have presented separate “justiciability” concerns (like ripeness) if it had been brought directly in a federal-court lawsuit.

On January 16th, the Supreme Court of the United States denied the LCRA’s petition without additional comment.

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