5th Cir. Answers FAA Jurisdictional Question, Permits ADT’s Arbitration Bid to Proceed

An appellate panel overturned ADT L.L.C.’s loss in the Northern District of Texas on Wednesday in a case against the security company and a rogue ex-employee who spied on customers. The precedential opinion construed a Federal Arbitration Act (FAA) provision defining the term “parties” for purposes of diversity jurisdiction in ADT’s favor, thereby reviving its declaratory seeking to enforce its arbitration agreement.

The court explained that Telesforo Aviles worked for ADT installing security systems for a decade before he began spying on customers using cameras he installed. The company fired him and reported him to the authorities, though by then he had spied on several hundred customers, sometimes accessing their accounts hundreds of times, the opinion said.

A Texas family sued ADT and Aviles in Texas state court seeking more than $1 million in damages. In response, ADT filed an FAA § 4 petition seeking a judgment declaring the arbitration agreement signed by the ADT account holder binding and enforceable.

The trial court dismissed ADT’s suit for lack of subject matter jurisdiction after finding that because both Aviles and the Texas family were citizens of that state, there was no complete diversity. ADT appealed.

In this week’s decision, the court looked to the text of the FAA’s Section 4 in deciding that the parties to the § 4 petition are ADT and the Texas family, but not Aviles. “‘Parties,’ in § 4, means the parties to the § 4 suit—not everyone against whom one party claims relief,” the opinion explained.

The court pointed out that after agreeing to arbitrate its grievances against a diverse defendant, a party could breach that compact by suing in state court and joining a non-diverse non-party to effectively rob federal courts of the power to hold it to its bargain. The panel held that its ruling does the Texas family no injustice, because “[w]hen a party agrees to arbitrate a dispute with another, it consents to resolving that dispute separately from others, even if piecemeal litigation results.”

Finally, the panel instructed the district court to decide whether Aviles could be indispensable to an arbitral proceeding to which he never agreed. If it finds in the affirmative, diversity jurisdiction could be improper, the opinion said.

ADT is represented by Shook, Hardy & Bacon L.L.P. and Hartline Barger L.L.P. and the Texas family by Machi & Associates P.C.