US Rising Star Inc. v. Amazon.com, Inc.

Background

Rising Star Inc. was a third-party vendor on Amazon’s online marketplace. Before joining the platform, it agreed to Amazon’s Services Business Solution Agreement. The agreement allowed Amazon to deactivate vendor accounts when it believed a vendor had abused Amazon’s systems or repeatedly violated Amazon policies. It also allowed Amazon to withhold a vendor’s sales proceeds under those circumstances.

Amazon notified Rising Star on July 2, 2021, that it had deactivated Rising Star’s account after determining that Rising Star had manipulated customer reviews. On January 5, 2022, Amazon notified Rising Star that it would withhold $1.148 million in sales proceeds under the agreement.

Rising Star began arbitration and sought the withheld funds, among other relief. Amazon denied liability and alleged that Rising Star had breached the agreement. The arbitrator denied all of Rising Star’s claims and ruled that Amazon could retain the sales proceeds. The arbitrator found that Rising Star had violated the agreement and that the provision allowing Amazon to keep the proceeds was an enforceable liquidated-damages provision, meaning a contract provision setting damages for a breach.

Removal and Motion for Remand

Rising Star then filed a petition in New York state court seeking to vacate, or set aside, the arbitration award. Amazon removed the state-court action to the Southern District of New York, asserting diversity jurisdiction under 28 U.S.C. § 1332. Diversity jurisdiction generally allows a federal court to hear a civil action involving citizens of different states when the amount in controversy exceeds $75,000.

Rising Star moved for remand, arguing that the Supreme Court’s decision in Badgerow v. Walters prevented federal jurisdiction over the petition. It also argued that the parties were not diverse because they were all domestic companies and that the amount in controversy did not exceed $75,000. Rising Star additionally argued that its claims did not arise under federal law, but Amazon did not rely on federal-question jurisdiction.

Court’s Analysis

Judge McMahon explained that Badgerow held that courts may not use the “look-through” approach for petitions to confirm or vacate arbitration awards. Under that approach, a court looks to the underlying dispute to determine jurisdiction. But Badgerow did not eliminate an independent basis for jurisdiction that appears on the face of the petition, such as diversity jurisdiction.

The court found complete diversity on the face of Rising Star’s petition. Rising Star alleged that it was incorporated in California and had its principal place of business in China. Amazon.com, Inc. was a Delaware corporation with its principal place of business in Seattle, Washington. Amazon.com Services, LLC was a Delaware limited liability company with its principal place of business in Seattle, Washington. The court also considered the citizenship of the limited liability company’s sole member, Amazon.com Sales, Inc., which was a Delaware corporation with its principal place of business in Washington.

The court also concluded that the amount-in-controversy requirement was met under both approaches discussed by the parties. Under the “demand” approach, the amount is based on what the party sought in arbitration. Rising Star sought more than $1 million in sales proceeds, which exceeded $75,000.

Under the “award” approach, the amount is based on what the arbitrator awarded. The court rejected Rising Star’s position that the arbitrator had issued a zero-dollar award. Although Rising Star did not receive money, the arbitrator found that Amazon was entitled to retain the approximately $1.148 million in withheld proceeds. The court treated that ruling as an award to Amazon exceeding $75,000.

Disposition

The court held that it had diversity jurisdiction over Rising Star’s petition. Judge McMahon denied Rising Star’s motion for remand and directed the clerk to close the motion at Docket No. 11 and remove it from the list of open motions.