Vaden v. Discover Bank

PETITIONER: Betty Vaden
RESPONDENT: Discover Bank, et al.
LOCATION: The Arvin Site

DOCKET NO.: 07-773
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Fourth Circuit

CITATION: 556 US 49 (2009)
GRANTED: Mar 17, 2008
ARGUED: Oct 06, 2008
DECIDED: Mar 09, 2009

ADVOCATES:
Carter G. Phillips - argued the cause for the respondent
Daniel R. Ortiz - argued the cause for the petitioner

Facts of the case

Discover Bank filed this suit in the United States District Court for the District of Maryland in order to compel arbitration on certain counterclaims brought by Betty Vaden, a card member, in a state court suit against her. Discover had originally brought the state suit to recover on Vaden's outstanding credit card balance, but Vaden counterclaimed that certain fees and interest rates had been charged in violation of state law. The district court held that Vaden's usury claims were preempted by federal law and that the agreement clearly contained a provision compelling arbitration in such cases

The U.S. Court of Appeals for the Fourth Circuit agreed with the district court, holding that Discover was the "real party in interest" and that Vaden's claims were therefore preempted by the Federal Deposit Insurance Act. Furthermore, Vaden had failed to overcome the presumption that she received the properly mailed arbitration agreement. Based on these conclusions, the Ninth Circuit granted Discover's motion to compel arbitration.

Question

1) Does a suit seeking to enforce a state-law arbitration obligation brought under Section 4 of the Federal Arbitration Act establish federal subject matter jurisdiction when the petition to compel raises no federal question, but the dispute itself does raise a federal question?

2) If not, can a preempted state-law counterclaim supply federal subject matter jurisdiction?

Media for Vaden v. Discover Bank

Audio Transcription for Oral Argument - October 06, 2008 in Vaden v. Discover Bank

Audio Transcription for Opinion Announcement - March 09, 2009 in Vaden v. Discover Bank

John G. Roberts, Jr.:

Justice Ginsburg has the Court opinion in two cases this morning.

Ruth Bader Ginsburg:

The first case is No. 07-773, Vaden against Discover Bank.

Section 4 of the Federal Arbitration Act authorizes a United States district court to entertain a petition to compel arbitration if the Court would have jurisdiction, save for the arbitration agreement over a suit arising out of the controversy between the parties.

This case presents two questions concerning the meaning of Section 4.

First, should a District Court limit its jurisdictional inquiry to the discrete dispute about arbitrability?

Or should it instead look through the petition to compel arbitration and determine whether the underlying controversy between the parties presents a cognizable federal question.

Second, if a court should look through the petition and focus on the underlying controversy, may the Court exercise jurisdiction when the federal question arises only in a counterclaim.

The case we decide today began with proceedings in a Maryland state court.

Discover Bank's servicing affiliate filed a state law debt-collection action seeking to recover past-due charges from one of its credit cardholders, Betty Vaden.

Vaden counterclaimed alleging that Discover's finance charges, interests and late fees violated state law.

Invoking an arbitration clause in its cardholder agreement, Discover then petitioned a Federal District Court to compel arbitration of Vaden's counterclaims.

The federal court had jurisdiction Discover asserted because Vaden's counterclaims were entirely preempted by federal banking law.

The District Court ordered arbitration and the Court of Appeals for the Fourth Circuit ultimately affirmed.

We now reversed the Fourth Circuit's judgment.

As to the first question, we agree with the Fourth Circuit that a District Court may look through a Section 4 petition and home in on the party's underlying controversy.

The text of Section 4 strongly supports this conclusion the phrase, save for the arbitration agreement instructs courts to determine whether had there been no arbitration agreement, they would have jurisdiction over the substantive dispute between the parties.

As to the second question, however, we hold that the Fourth Circuit erred.

Because Section 4 does not enlarge federal-court jurisdiction, a party seeking to compel arbitration may gain a federal court's assistance, we hold, only if the parties underlying controversy in its entirety could be litigated in federal court.

Here, the controversy between Discover and Vaden was triggered by Discover's garden-variety state law, debt-collection claim against Vaden.

That claim plainly did not provide any basis for federal court jurisdiction and it is well established that federal jurisdiction cannot be premised on a defense or counterclaim.

We decline to read Section 4 to enable a party to commandeer a federal court to order arbitration of a slice of a controversy when the controversy as a whole would not qualify for federal court adjudication.

Discover we note remains free to petition a Maryland state court for assistance in enforcing the arbitration clause contained in its contracts with Maryland cardholders.

The Chief Justice has filed an opinion concurring in part and dissenting in part in which Justices Stevens, Breyer, and Alito joined.