The United States Court of Appeals for the Second Circuit recently weighed in on the proper role of American federal courts in adjudicating the validity of arbitration awards made in foreign countries. In Molecular Dynamics, Ltd. v. Spectrum Dynamics Medical Limited, 143 F.4th 70 (2d Cir. 2025), issued in July 2025, the court explained a distinct limitation on federal courts’ subject-matter jurisdiction over such challenges.
Background
Molecular Dynamics (“Molecular”), a medical-imaging technology company, was formed in 2013 through a joint venture between several companies and investors. Among these founders was Biosensors International, another medical-imaging technology company that sought to share intellectual property with Molecular. The two companies entered into a license agreement to “develop parallel but noncompeting medical-imaging technologies.”
Within several years, the relationship between the two companies deteriorated as each began to believe the other was developing a competing medical-imaging device. Then, in 2017, Biosensors International was acquired by Spectrum Dynamics Medical (“Spectrum”). Within months of acquiring the company, Spectrum notified Molecular that it was terminating their license agreement due to what it contended was Molecular’s breach. Molecular countered this correspondence by alleging that Spectrum (formerly Biosensors) — not Molecular — had breached the noncompete agreement.
Under their license agreement, the parties had agreed to arbitrate any disputes relating to the agreement, except for issues regarding injunctive relief. The chosen seat for arbitration was Geneva, Switzerland, and any arbitration proceedings covered by the agreement were to be conducted under the Swiss Rules of International Arbitration. The parties had further agreed that all contract terms would be construed in accordance with New York law, and that any matters regarding injunctive relief would be brought in “the courts of New York, New York.” The agreement also stated that “on matters [] concerning the Chosen Arbitration, the courts of New York, New York will have exclusive jurisdiction thereupon.”
Procedural History
In accordance with the license agreement, Spectrum initiated arbitration before the Swiss Arbitration Center in Geneva, Switzerland. The parties asserted competing breach of contract claims and each sought millions of dollars in damages. A three-member arbitration panel presided over the hearing in 2020. In 2021, the hearing was officially closed, and in 2022, an arbitration award was issued. The final award found in favor of Spectrum, rejecting all of Molecular’s counterclaims and concluding that Molecular had indeed breached the parties’ contract. The award ordered Molecular to pay Spectrum’s costs and attorney fees.
Molecular then sued Spectrum in the United States District Court for the Southern District of New York, seeking to vacate the Swiss arbitral decision. In an attempt to establish federal subject-matter jurisdiction, Molecular pointed to the license agreement clause that stated, “on matters [] concerning the Chosen Arbitration, the courts of New York, New York will have exclusive jurisdiction thereupon.” Molecular sought vacatur of the award on multiple statutory bases pursuant to 9 U.S.C. § 10, also known as the Federal Arbitration Act (“FAA”), including allegations that the arbitration tribunal was biased against Molecular, that Molecular was prejudiced by the arbitration tribunal’s refusing to re-open the proceedings to hear newly discovered evidence, and that New York law was “manifestly disregard[ed]” in the arbitration award.
The district court dismissed Molecular’s lawsuit. Notwithstanding the contractual language purporting to provide “exclusive jurisdiction” to “the courts of New York, New York,” the district court concluded that it lacked federal subject-matter jurisdiction over the action. Thereafter, Molecular appealed to the Second Circuit.
The Second Circuit’s Ruling
The Second Circuit affirmed the district court’s bottom-line judgment that federal subject-matter jurisdiction was lacking, although the appellate court used a different rationale than the one the district court had adopted.
The Second Circuit began its jurisdictional analysis by explaining that the FAA does not, in and of itself, supply federal subject-matter jurisdiction — over this case or any other case, for that matter. The court also noted that parties to a dispute, including the parties here, cannot create federal subject-matter jurisdiction simply by their own private agreement. Instead, the court observed, Molecular had to point to an independent statutory basis — independent of the FAA, and independent of the parties’ agreement — authorizing federal subject-matter jurisdiction.
Molecular argued that federal subject-matter jurisdiction was authorized by 9 U.S.C. § 203, a statute implementing the New York Convention. The New York Convention, also known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, is an international agreement sponsored by the United Nations that the United States joined in 1970. The agreement provides a uniform and efficient process for parties to an international business agreement to enforce arbitration awards in the courts of participating counties. Section 203 authorizes federal subject-matter jurisdiction in these cases, stating that controversies “falling under the Convention shall be deemed to arise under the laws and treaties of the United States.”
The Second Circuit rejected the argument that Section 203 conferred federal subject-matter jurisdiction. It held that Molecular’s action did not “fall[] under” the New York Convention within the meaning of that provision.
According to the Second Circuit, actions “fall under” the New York Convention only if they fit into one of two categories. The first category consists of actions which seek “recognition and enforcement” of “nondomestic arbitral awards,” or arbitral awards made in the United States but having a significant connection to one or more foreign countries, such as awards decided under the laws of a foreign country, and awards involving only parties hailing from a foreign country. The second category, relating to “foreign arbitral awards,” consists of proceedings that seek “recognition and enforcement” of an arbitral award made in a territory other than the country where the recognition and enforcement of such award is sought. “Recognition and enforcement” is a term of art in the New York Convention that entails both determining that the award is binding, and entering a judgment enforcing the award.
The Second Circuit held that Molecular’s action does not fit into either of the above two categories. The action does not fit into the first category, the court explained, because the arbitral award at issue was made in Switzerland, not the United States. And the action does not fit into the second category because Molecular was seeking to vacate the award — the opposite of recognition and enforcement. Based on this holding, the Second Circuit affirmed the district court’s order dismissing the action for lack of subject-matter jurisdiction.
Key Takeaways
In this case, the word jurisdiction took on its most powerful meaning and denied a party access to the U.S. federal court system. Nevertheless, the decision is limited. The court expressly noted that it was not deciding whether, under the New York Convention, parties may choose one country as the seat for arbitration and another as the seat for vacatur actions. Further, 9 U.S.C. § 203 was the only basis for federal subject-matter jurisdiction that Molecular pointed to. Whether there is another valid statutory basis for subject-matter jurisdiction, and whether the seat for vacatur actions may be designated by contract, is currently unclear. These questions will undoubtedly be the subject of future litigation.
In the meantime, however, parties to international business agreements cannot assume that federal subject-matter jurisdiction exists merely because they have consented to a forum selection clause within an arbitration agreement. As this case demonstrates, parties may still be shut out of their preferred forum before a court even addresses the merits of their claims.
International businesses and their counsel will be well-served to compare the language of their existing and future forum selection clauses to the clause at issue in this case, to avoid the same result. Parties desiring to litigate the procedural and substantive bases for an arbitration award in the U.S. federal court system should contemplate whether they prefer to specifically identify the seat for vacatur actions in a forum selection clause, which carries a risk of producing the same result as Molecular’s case, or to designate the United States as the site for arbitration altogether. Where the parties have substantial foreign connections, the latter option may still be precluded if the court determines the award is a “nondomestic arbitration award.” In addition, parties may wish to explore other potential outside bases to rely upon for federal subject-matter jurisdiction, in the event that an action to modify or vacate an arbitration award made in a foreign country is brought in a U.S. court.
Law clerk Kate Silverstrim-Jensen contributed to this legal alert.
