LaPaglia v. Valve Corporation (2025): Artificial Intelligence in Arbitration and the Limits of Judicial Review

Author: Mauli Chaudhary
Student, CHRIST (Deemed to be University) Delhi NCR

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💡 3 Quick Takeaways

The Federal Arbitration Act (FAA) does not independently confer federal subject-matter jurisdiction. A party challenging an arbitral award must establish a separate legal basis for federal jurisdiction.
The court did not determine whether the arbitrator had used artificial intelligence or whether such use would violate the FAA. The allegation remained unresolved.
The case raises important questions about the distinction between using AI for administrative assistance and allowing it to replace an arbitrator’s independent adjudicative judgment.

I. Introduction

The increasing use of artificial intelligence in legal decision-making raises a fundamental question: where should the boundary lie between using AI as an administrative or research tool and allowing it to influence or perform the adjudicative function itself? LaPaglia v. Valve Corporation presents this question in the context of arbitration, although the United States District Court for the Southern District of California ultimately did not decide it.

The dispute arose from an arbitration between John LaPaglia, a consumer of Valve Corporation’s Steam gaming platform, and Valve Corporation. After an arbitrator issued an award in favour of Valve, LaPaglia sought to have the award vacated under the Federal Arbitration Act (FAA). Among his allegations was that the arbitrator had improperly outsourced his adjudicative role to artificial intelligence, raising concerns about the integrity, independence, and legitimacy of arbitral decision-making.

The case is particularly significant because the Court did not reach the substantive AI question. Instead, it held that it lacked subject-matter jurisdiction over LaPaglia’s petition. Although the FAA provides the substantive framework for challenging arbitration awards, it does not itself confer federal subject-matter jurisdiction.

Consequently, LaPaglia is not authority for the proposition that arbitrators may or may not use AI. Its significance lies in the jurisdictional barriers that prevented the Court from addressing the allegation and the broader legal questions that remain unresolved.

II. Particulars of the Case

Case name: LaPaglia v. Valve Corporation
Case number: 3:25-cv-00833-RBM-DDL
Citation: LaPaglia v. Valve Corp., No. 3:25-cv-00833-RBM-DDL, 2025 WL 3527053 (S.D. Cal. Dec. 9, 2025)
Court: United States District Court for the Southern District of California
Judge: Hon. Ruth Bermudez Montenegro
Date of judgment: 9 December 2025
Petitioner: John LaPaglia
Respondent: Valve Corporation
Area of law: Arbitration law, contract law, artificial intelligence, and judicial review
Relevant legislation: Federal Arbitration Act, 9 U.S.C. §§ 4, 9 and 10

III. Facts of the Case

Valve Corporation is a Washington corporation involved in the distribution of computer games and is the parent company of Steam, a digital gaming platform. John LaPaglia was an individual consumer and account holder on the platform. Their relationship was governed, in part, by an arbitration agreement contained in Steam’s Subscriber Agreement.

On 2 October 2023, LaPaglia initiated arbitration proceedings against Valve before the American Arbitration Association (AAA). He alleged violations of the federal Sherman Antitrust Act, Washington’s Consumer Protection Act, and California’s Unfair Competition Law. He sought damages arising from allegedly higher prices on the Steam platform, together with other relief, including attorney’s fees, arbitration costs, enhanced damages, and injunctive relief.

LaPaglia’s claims were consolidated with those of 22 other individuals who had brought similar antitrust and state-law unfair competition claims. The arbitration was conducted before Michael Saydah.

On 7 January 2025, the arbitrator issued a final award in favour of Valve. The award rejected LaPaglia’s claims and granted him no monetary relief.

LaPaglia subsequently filed a petition in the District Court seeking to vacate the award. He alleged, among other things, that the arbitrator had exceeded his authority by consolidating claims without his consent, refusing to hear relevant evidence, and outsourcing his adjudicative role to artificial intelligence.

The AI allegation was particularly novel. LaPaglia relied on circumstances surrounding the preparation of the award, including alleged statements by the arbitrator about using ChatGPT to write articles, alleged factual inaccuracies and unsupported assertions in the award, stylistic characteristics, and the time taken to issue the decision.

These circumstances were advanced by LaPaglia in support of his allegation. However, the Court did not determine whether the arbitrator had actually used AI to perform his adjudicative function.

Valve moved to dismiss the petition for lack of subject-matter jurisdiction. The Court therefore had to determine whether it possessed the jurisdiction necessary to consider the challenge before examining any substantive allegation.

IV. Issues Before the Court

The principal issues were:

Whether the Federal Arbitration Act independently conferred federal subject-matter jurisdiction over LaPaglia’s petition to vacate the arbitral award.
Whether the federal claims involved in the underlying arbitration could establish federal-question jurisdiction over the post-award petition.
Whether diversity jurisdiction existed, including whether the amount in controversy exceeded US$75,000.
Whether the Court could examine the allegation that the arbitrator had outsourced his adjudicative role to AI.

The fourth issue is central to the broader significance of the case. However, the Court did not decide it because subject-matter jurisdiction was a threshold requirement.

V. Arguments of the Parties

A. Petitioner — John LaPaglia

LaPaglia sought to vacate the arbitral award under Section 10 of the FAA, arguing that the arbitrator had exceeded the authority granted by the arbitration agreement.

His challenge rested on several grounds. He alleged that the arbitrator had improperly consolidated his claims with those of other claimants without his consent, refused to hear relevant evidence concerning his antitrust claims, and outsourced his adjudicative role to artificial intelligence.

Regarding AI, LaPaglia relied on alleged circumstances surrounding the arbitration and the preparation of the award. These included the arbitrator’s alleged previous use of ChatGPT, purported factual inaccuracies and unsupported assertions in the award, stylistic characteristics, and the time between the conclusion of the proceedings and delivery of the award.

LaPaglia’s argument under Section 10(a)(4) of the FAA was that the arbitrator had exceeded his powers. His underlying theory was that the parties had entrusted their dispute to a human arbitrator who was expected to exercise independent judgment, rather than delegate the adjudicative function to AI.

On jurisdiction, LaPaglia relied on the federal antitrust claims raised during the arbitration. He also argued that his request to reopen the proceedings could be treated as a motion to compel arbitration under Section 4 of the FAA, potentially providing a basis for federal-question jurisdiction.

B. Respondent — Valve Corporation

Valve sought dismissal of the amended petition on the ground that the Court lacked subject-matter jurisdiction.

Its principal argument was that the FAA establishes substantive rules governing arbitration but does not independently grant federal courts jurisdiction. A party seeking to vacate an award must identify a separate basis for federal jurisdiction.

Valve further argued that the federal claims raised during the original arbitration could not automatically establish jurisdiction over a later petition to vacate the award. A petition under Section 10 is distinct from an application to compel arbitration under Section 4.

Valve also disputed the availability of diversity jurisdiction. Under 28 U.S.C. § 1332, the amount in controversy must exceed US$75,000. Valve argued that LaPaglia’s amended petition did not establish the required amount and that the value of the underlying claims could not simply be carried over into the post-award jurisdictional analysis.

VI. Judgment and Judicial Reasoning

On 9 December 2025, the United States District Court for the Southern District of California granted Valve’s motion to dismiss the amended petition for lack of subject-matter jurisdiction.

The Court did not decide whether the arbitrator had used AI. Nor did it determine whether the alleged use of AI would constitute an excess of arbitral authority under Section 10(a)(4) of the FAA.

A. The FAA does not independently confer federal jurisdiction

The Court reaffirmed that the FAA provides substantive rules governing arbitration but does not itself confer federal subject-matter jurisdiction over applications to compel arbitration or to confirm or vacate arbitral awards.

The Court relied on established authorities, including Badgerow v. Walters, 596 U.S. 1 (2022), and Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

A party seeking relief under the FAA must therefore establish an independent basis for federal jurisdiction. The mere fact that a petition is brought under the FAA does not give a federal district court the authority to hear it.

B. Federal claims in the underlying arbitration were insufficient

LaPaglia argued that federal-question jurisdiction existed because the underlying arbitration involved claims under the Sherman Antitrust Act.

The Court distinguished between Section 4 of the FAA, which concerns applications to compel arbitration, and Sections 9 and 10, which concern confirmation and vacatur of arbitral awards.

Relying on Badgerow, the Court explained that jurisdiction over post-award applications must be determined from the application itself, rather than by looking through it to the underlying substantive dispute.

The Court also rejected LaPaglia’s attempt to characterise his request to reopen the arbitration as a motion to compel arbitration under Section 4. Arbitration had already taken place, so the request could not properly be treated as an application to compel a party to arbitrate.

The federal claims involved in the original arbitration therefore did not independently establish jurisdiction over the Section 10 petition.

C. Diversity jurisdiction was unavailable

The Court also considered whether diversity jurisdiction could provide an alternative basis for hearing the petition.

Under 28 U.S.C. § 1332, diversity jurisdiction requires, among other conditions, that the amount in controversy exceed US$75,000.

LaPaglia attempted to rely on potential attorney’s fees and the value of the underlying claims that might be revived if the arbitration were reopened. However, the Court concluded that the jurisdictional requirement could not be satisfied by looking beyond the post-award petition to the underlying substantive controversy.

The Court relied on the approach adopted in Badgerow and concluded that the required jurisdictional amount had not been established.

D. Final holding

The Court granted Valve’s motion to dismiss the amended petition for lack of subject-matter jurisdiction. The original petition and Valve’s original motion to dismiss were consequently treated as moot.

Most importantly, the Court did not rule on the allegation that the arbitrator had used AI. The decision neither prohibits nor approves AI-assisted arbitration. Its actual holding concerns federal jurisdiction over a petition to vacate an arbitral award.

VII. Ratio Decidendi

The ratio decidendi of LaPaglia v. Valve Corporation must be stated narrowly because the Court did not adjudicate the allegations concerning artificial intelligence.

The Court held that the FAA does not itself confer federal subject-matter jurisdiction. A party seeking to vacate an arbitral award under Section 10 must establish an independent jurisdictional basis, such as federal-question jurisdiction under 28 U.S.C. § 1331 or diversity jurisdiction under 28 U.S.C. § 1332.

The Court relied particularly on Badgerow v. Walters, under which jurisdiction over applications to confirm or vacate an arbitral award is determined from the face of the application itself, rather than by examining the underlying dispute.

LaPaglia could not establish federal-question jurisdiction merely by relying on the federal antitrust claims raised during arbitration. Nor could his request for a rehearing be treated as a motion to compel arbitration under Section 4 after the arbitration had already occurred. The Court also found that the requirements for diversity jurisdiction had not been satisfied.

The operative principle may therefore be summarised as follows: a petition to vacate an arbitral award under Section 10 of the FAA does not itself confer federal subject-matter jurisdiction. The petitioner must establish an independent jurisdictional basis, and the federal court cannot rely solely on the federal nature or monetary value of the underlying arbitration dispute.

There is no ratio in LaPaglia establishing a legal rule about the permissibility of AI use by arbitrators. The Court resolved the case before reaching that question.

VIII. Critical Analysis

The principal significance of LaPaglia v. Valve Corporation lies in its demonstration of the limits of judicial intervention. The Court treated subject-matter jurisdiction as a threshold requirement and did not proceed to consider the novel AI allegation without the necessary jurisdictional foundation.

At the same time, the case exposes unresolved questions concerning the use of AI in arbitration. An allegation that an arbitrator may have relied on AI in performing an adjudicative function raises issues of independence, procedural fairness, party autonomy, and the integrity of the decision-making process.

A key distinction is that between AI assistance and AI delegation. Using AI for administrative tasks, document organisation, or preliminary research does not necessarily mean that an arbitrator has surrendered independent judgment. By contrast, allowing AI to determine facts, formulate substantive reasoning, or effectively replace the arbitrator’s own assessment could raise different legal concerns, including whether the arbitrator exceeded the authority conferred by the arbitration agreement.

These are potential legal questions, not findings made by the Court in this case. The allegations concerning AI were never judicially established, and the judgment cannot be relied upon as authority either prohibiting or permitting AI-assisted arbitration.

The case illustrates the tension between technological efficiency and adjudicative responsibility. AI may offer practical benefits in legal work, but its use in dispute resolution raises questions about who exercises judgment and remains accountable for the resulting decision.

IX. Overall Assessment

LaPaglia v. Valve Corporation has a narrow procedural holding but raises questions with broader prospective significance.

Its actual legal holding concerns federal subject-matter jurisdiction over a petition to vacate an arbitral award. Its broader significance arises from the AI-related allegation that the Court did not resolve.

The case demonstrates that the novelty or importance of a legal question cannot remove the requirement that a court possess jurisdiction. It also highlights the need for further legal consideration of the boundaries between AI assistance and the independent adjudicative role entrusted to an arbitrator.

X. Impact and Significance

The case brings an emerging technological concern into the established framework of arbitral review. Although the Court did not determine whether the alleged use of AI was lawful, the dispute illustrates how such allegations may eventually require courts to consider the scope of an arbitrator’s authority under the FAA.

The distinction between using AI for research, document organisation, or drafting and allowing it to perform the adjudicative function may become increasingly important as generative AI becomes more common in legal practice.

The judgment also reinforces the practical importance of jurisdictional requirements. A potentially significant substantive question cannot be determined unless the court has jurisdiction to hear the dispute.

Accordingly, the case’s significance lies not in a definitive judicial rule on AI-assisted arbitration, but in the unresolved question it brings into focus.

XI. Conclusion

LaPaglia v. Valve Corporation is a significant case at the intersection of contract law, arbitration, and artificial intelligence. Its immediate holding is that the FAA does not independently confer federal subject-matter jurisdiction and that LaPaglia failed to establish another sufficient basis for federal jurisdiction.

The Court did not determine whether the arbitrator had used AI or whether such use would violate the FAA. The decision should therefore not be cited as establishing a rule on the legality of AI use by arbitrators.

Its broader importance lies in the questions it raises about the future of adjudication. As AI becomes increasingly integrated into legal practice, the distinction between technological assistance and the delegation of independent judgment may require further legal clarification. The case illustrates that although technology may change how disputes are prepared and decided, the legal responsibility associated with adjudication remains a central concern.

References

LaPaglia v. Valve Corp., No. 3:25-cv-00833-RBM-DDL, 2025 WL 3527053 (S.D. Cal. Dec. 9, 2025).
Badgerow v. Walters, 596 U.S. 1 (2022).
Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).
United States v. Park Place Associates, Ltd., 563 F.3d 907 (9th Cir. 2009).
Theis Research, Inc. v. Brown & Bain, 400 F.3d 659 (9th Cir. 2005).
Federal Arbitration Act, 9 U.S.C. §§ 4, 9 and 10.
28 U.S.C. §§ 1331 and 1332.
Silicon Valley Arbitration & Mediation Center, Guidelines on the Use of Artificial Intelligence in Arbitration (1st ed. 2024).

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of The Lawscape.

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