SCOTUSwiki Preview: Vaden v. Discover Bank
on Oct 3, 2008 at 1:57 pm
Below, Sally Laing previews the third case to be heard on Monday — No. 07-773, Vaden v. Discover Bank. Sally was a 2008 Akin Gump summer associate and is a 3L at the University of Virginia School of Law.
In No. 07-773, Vaden v. Discover Bank, the Supreme Court will consider whether subject matter jurisdiction over a motion to compel arbitration under Section 4 of the Federal Arbitration Act (FAA) requires a federal question arising from the allegations in the motion itself, or instead, whether the federal question can arise more broadly in the substantive dispute between the parties. Â Furthermore, if the reviewing court may â€œlook throughâ€ the motion to compel to find a federal question in the underlying dispute between the parties, can state law counterclaims â€œcompletely preemptedâ€ by federal law provide subject matter jurisdiction under the FAA?
In 1990, petitioner Betty Vaden obtained a Discover credit card issued by Discover Bank and serviced by an affiliate, Discover Financial Services (DFS). Â In June 1999, Vaden received a new Platinum Discover card. Â One month later, Discover sent a notice amending the Discover Platinum Cardmember Agreement to allow for election of arbitration by either party as a means of dispute resolution.
In July 2003, DFS sued Vaden in Maryland state court for nonpayment of her credit card balance.Â Vaden subsequently filed class-action counterclaims in which she alleged breach of contract and contested fees and interest rates that allegedly violated state law.Â DFS then filed an independent petition in federal court, seeking to compel arbitration pursuant to the Cardmember Agreement.Â Although all of the counterclaims were based on Maryland state law, DFS contended that the district court had federal subject matter jurisdiction because the Federal Deposit Insurance Act (FDIA) completely preempted the state-law claims.Â The district court agreed and granted the motion to compel arbitration.
Vaden appealed, challenging the district courtâ€™s subject matter jurisdiction. Â Following the logic advanced by the Respondent and set out in the Eleventh Circuitâ€™s decision in Tamiami Partners, Ltd. v. Miccosukee Tribe (1999), the court of appeals dismissed the view that the federal question must appear on the face of the motion to compel â€“ that is, within the dispute over the validity or enforceability of the arbitration agreement â€“ to comply with the FAA.Â Instead, the Fourth Circuit held, “when a party comes to federal court seeking to compel arbitration, the presence of a federal question in the underlying dispute is sufficient to support subject matter jurisdiction.” Â In reaching this conclusion, the court cited the plain language of Section 4, which provides that a party aggrieved by the failure or refusal to arbitrate â€œunder a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of the suit arising out of the controversy between the parties.â€ Â In the view of the court of appeals, this language creates jurisdiction over all controversies within the district courtâ€™s purview, if not otherwise circumvented by arbitration agreements, including 28 U.S.C. Â§ 1331, which establishes jurisdiction over cases â€œarising underâ€ federal law.Â Moreover, the court reasoned, Section 4â€™s reference to the â€œcontroversy between the partiesâ€ would most naturally include all controversies between the parties, not simply those relating to the contractual validity of the arbitration agreement. Â The court of appeals declined to determine whether, applying the â€œlook throughâ€ methodology, a federal question existed in the case.Â Instead, it remanded the case to the district court for it to determine the true party in interest and the existence of a federal question. Â
On remand, the district court determined that Discover Bank is the real party in interest and that Vaden’s state court claims were â€œcompletely preemptedâ€ by federal FDIA claims, and this provided adequate subject matter jurisdiction needed to grant the motion to compel arbitration.Â
Vaden again appealed the district court’s decision, arguing that the court lacked subject matter jurisdiction because DFS, rather than Discover Bank, was the real party in interest.Â In any event, Vaden also argued, arbitration was inappropriate because Discover Bank failed to satisfy the statutory requirements to compel arbitration, and no valid arbitration agreement existed.Â Noting that the FAA did not independently provide a sufficient basis for subject matter jurisdiction, the Fourth Circuit examined the federal questions underlying Vadenâ€™s counterclaims.Â First, relying on the Cardmember Agreement, servicing agreement, and management structure of the Bank, the court agreed with the district court that Discover Bank was indeed the real party in interest.Â Second, because all of Vadenâ€™s counterclaims were state law counterclaims, a federal question would exist, according to the Fourth Circuit, only if the claims were â€œcompletely preemptedâ€ by federal law.Â And although the complete preemption doctrine usually only arises when an affirmative complaint is removed to federal court, the court nonetheless found the doctrine narrowly applicable to the unique procedural posture of Vadenâ€™s case, with its state law counterclaims against a state-chartered, federally insured bank.Â Furthermore, based on the Supreme Courtâ€™s interpretation of a statute, the National Banking Act, similar to the FDIA, the Fourth Circuit concluded that Congress intended the FDIA to completely preempt state-law claims such as Vadenâ€™s. Â Thus, the court of appeals affirmed the district courtâ€™s decision granting the Bankâ€™s motion to compel arbitration.
<!–[endif]–>Vaden filed a petition for certiorari. Â The first question presented by the petition is whether a suit seeking enforcement of an arbitration clause or agreement â€œarises underâ€ federal law as long as the underlying dispute between the parties is a matter of federal law, or whether federal question subject matter jurisdiction exists only when the petition seeking to compel arbitration raises a federal question.Â According to the petition, the courts of appeals are divided on this question.Â Four circuits â€“ the Second, Fifth, Sixth, and Seventh â€“ favor a narrow understanding of Section 4 of the FAA that considers only the contractual dispute contained in the motion to compel.Â By contrast, three circuits â€“ the First, Fourth, and Eleventh â€“ will â€œlook throughâ€ the motion to compel at the underlying dispute to determine what subject matter jurisdiction exists. Â
Moreover, Vadenâ€™s petition contends that the â€œlook throughâ€ approach directly conflicts with basic principles of subject matter jurisdiction and impermissibly privileges arbitration agreements. Â First, she asserts, the Fourth Circuit has flouted the general rule that â€œstatutory â€˜arising underâ€™ jurisdiction is to be determined by reference to the well-pleaded allegations of the complaint.â€ Â Instead, she contends, under the Fourth Circuitâ€™s approach, jurisdiction is based on the background dispute, thereby requiring a costly and fact-intensive review of the underlying merits rather than the dispute presented to the district court. Â Second, Vaden argues, the text, structure and history of the FAA strongly indicate that Congress did not intend to expand the sources of subject matter jurisdiction. Â To the contrary, the FAAâ€™s inclusion of Title 28 clearly includes only those cases with diversity jurisdiction (Â§ 1332), under admiralty law (Â§ 1333), or with supplemental jurisdiction (Â§ 1367).Â Furthermore, it includes those cases with obvious â€œarising underâ€ jurisdiction (Â§ 1331).Â This is, the petitioner contends, merely a reference to the well-pleaded complaintÂ and should not be read as an expansion of â€œarising underâ€ jurisdiction to any part of the underlying dispute between the parties. Â Similarly, Section 4â€™s reference to the â€œcontroversy between the partiesâ€ refers solely to the controversy presented to the court in the motion to compel (i.e., whether there is an agreement to arbitrate), while the phrase â€œsave such agreementâ€ refers only to suits that seek enforcement of arbitration agreements. Â
The second question presented by the petition is whether (even assuming that the Fourth Circuitâ€™s â€œlook throughâ€ approach is proper) courts may rely on completely preempted state law counterclaims to find federal subject matter jurisdiction. Â Relying on Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc. (2002), in which the Court held that a federal issue must be present on the face of the plaintiffâ€™s well-pleaded complaint and a counterclaim cannot serve as the basis for â€œarising underâ€ jurisdiction, Vaden contends that subject matter jurisdiction cannot rest on a counterclaim notwithstanding the Fourth Circuitâ€™s characterization of the unique procedural posture created by the motion to compel.Â Vaden again emphasizes that the Fourth Circuitâ€™s approach requires a fact-intensive review of the underlying complaint and responsive pleadings, which will not only undermine clarity and ease of administration, but also create a system that is unduly burdensome on litigants.
Opposing certiorari, respondent first relies on the text of Section 4 of the Federal Arbitration Act.Â In respondentâ€™s view, the use of the phrase â€œsave such agreementâ€ clearly indicates that a federal court has jurisdiction over all cases which it would otherwise be able to hear based on the diversity of the parties, the existence of a federal question, or some other circumstance. Â Furthermore, to read Section 4 as prohibiting courts from looking through the petition is counterintuitive and counterproductive, as such a reading would also prohibit courts from looking through the petition to determine whether the amount in controversy has been satisfied in cases alleging jurisdiction based on the diversity of the parties.Â Indeed, respondent emphasizes, although petitioner contends that the Second, Sixth, and Seventh Circuits shun the â€œlook throughâ€ approach in favor of reviewing only the motion to compel, even those circuits have used a look through approach to determine whether the criteria for diversity jurisdiction were met.Â Thus, respondent argues, the only possible split among the circuits is whether the â€œlook throughâ€ approach may be used to specifically support federal question jurisdiction.Â Because several circuits are scheduled to deal with this issue shortly, respondent concludes, granting the petition would be premature.Â Respondent cites the number of pending cases as providing for a possible consensus on the issue of arising under jurisdiction or, at a minimum, instructive debate on the meaning the FAA and the validity of the â€œlook throughâ€ approach.
Turning to the second question, respondent rejects petitionerâ€™s argument that the decision below conflicts with the Courtâ€™s decision in Holmes Group and contends that the counterclaimâ€™s federal law assertions were sufficient to establish subject matter jurisdiction.Â First, Holmesâ€™s prohibition on using counterclaims to establish subject matter jurisdiction or manipulate forum choice rests on respect for the choices of the plaintiff.Â Here, by contrast, that concern is not implicated because the state court plaintiff (the Bank) is also filing the motion to compel.Â Furthermore, cases such as Holmes did not involve Section 4 of the FAA, which does not require an underlying suit be filed. Â Indeed, because a complaint may not have been filed yet in the underlying dispute, that the federal question appears in the counterclaim rather than an affirmative statement is irrelevant as to whether subject matter jurisdiction exists.
The petition for certiorari was granted March 17, 2008 and oral arguments are scheduled for October 6, 2008.Â Â
In her brief on the merits, Vaden contends that Congress enacted the FAA to place arbitration agreements â€œon the same footing as other contracts,â€ and eliminate state courtsâ€™ contention that arbitration usurps the courtâ€™s role or offends public policy.Â The Fourth Circuitâ€™s use of the â€œlook throughâ€ methodology offends this intent by allowing the district court to consider the underlying dispute instead of simply determining the collateral issue of arbitrability.Â Moreover, she argues, not only did the Fourth Circuit misinterpret the text of Section 4, but it also failed to correctly apply 28 U.S.C. Â§ 1331, which requires more than the nebulous presence of a federal issue â€“ i.e., a clear federal question on the face of the complaint.Â Additionally, the ability to look through the petition for such jurisdiction undermines the FAAâ€™s intent to move parties with arbitration agreements quickly to the contracted-for means of dispute resolution.Â Furthermore, the bounds of jurisdiction are stretched beyond permissible limits by the use of completely preempted state law counterclaims to form the basis of a federal question.Â In sum, petitioner contends that the â€œmaximalâ€ look though approach endorsed by the Fourth Circuit not only ignores state interests in determining the bounds of their jurisdiction, but â€“ in direct conflict with the tenets of the FAA â€“ also creates a duplicative and costly system of adjudication.
Respondentâ€™s brief focuses first on the plain language, structure and purpose of the FAA, which in its view lead to the conclusion that the court in this case has the jurisdiction to compel arbitration. It is unambiguous, according to respondent, that the court may consider whether to compel arbitration only when it would otherwise have jurisdiction over â€œa suit arising out of the controversy between the parties.â€Â Furthermore, that the language of Section 4 instructs the court to assess whether it â€œwould have jurisdiction under title 28.â€ This indicates that the question is not the dispute presented, but instead the potential suit between the parties when eventually filed. Â Here, respondent notes, petitions to compel arbitration may appear either as independent actions or as part of a larger suit.Â Further the phrase â€œcontroversy between the partiesâ€ â€“ which, petitioner contends, means the dispute whether to arbitrate â€“ is better read in the context of the full sentence to mean that, absent such an arbitration agreement, the controversy between the parties could only be the underlying dispute. Â As to the second issue pending before the Court, respondent rejects petitionerâ€™s contention that a federal court cannot hear a completely preempted state-law counterclaim because it does not appear on the face of the well-pleaded complaint.Â Instead, respondent claims, Section 4 turns on the existence of a federal claim generally and the failure to respect an arbitration agreement, rather than on â€œthe pendency of an existing lawsuit in federal or state court.â€ Â A rule that requires pending and valid litigation, respondent concludes, would ignore the core purpose of Section 4 and allow the circumvention of arbitration clauses.
Addressing the jurisdictional issues, petitionerâ€™s reply brief counters that respondent still has not satisfied its burden of delineating where â€œarising underâ€ jurisdiction can be found in this case. Â In petitionerâ€™s view, respondentâ€™s expansive view of jurisdiction does not meet the limitations created by Section 1331, which requires more than a federal question lurking in the background or a courtâ€™s hypothesization of what sort of suit may eventually be presented. Â Petitioner also renews its argument that the preemption of the state law counterclaims was improper.Â In fact, petitioner concludes that when a suit is pending in state court and the case is not removable, the Congress could not have intended Section 4 of the FAA to apply. Â