U.S. Supreme Court Rules on Vaden v. Discover Bank

Last week we blogged about the U.S. Supreme Court ruling on Vaden V. Discover Bank, No. 07-773, (U.S. Mar. 9, 2009). Justice Ginsburg delivered the opinion of the Court, joined by Scalia, Kennedy, Souter, and Thomas. Chief Justice Roberts concurred in part and dissented in part and was joined by Stevens, Breyer, and Alito. Here is a summary of the case.

Discover Bank sued cardholder Vaden in Maryland state court to recover past due charges ($10,610.74 plus interest and attorneys fees). Discover’s pleading raised only state law issues and the parties did not qualify for diversity-of-citizenship jurisdiction (the amount in controversy did not exceed $75,000). Vaden answered with the affirmative defense of usury and filed several class-action styled counterclaims. Right after, Discover filed to compel arbitration in federal court, based on a clause in the credit card agreement providing for arbitration. The district court granted Discover’s request for arbitration and Vaden appealed. The Fourth Circuit remanded the case for determination on whether the controversy presented “a properly invoked federal question.” On remand, the district court held that the controversy presented a federal-question jurisdiction and ordered arbitration once again. The case was appealed to the Fourth Circuit for the second time and the Fourth Circuit affirmed.

Now the U.S. Supreme Court granted certiorari and examined two questions concerning subject-matter jurisdiction over a petition under section 4 of the FAA:

1. Whether a district court, if asked to compel arbitration, should “look through” the petition and grant the relief if the court would have federal-question jurisdiction of the controversy. The Court held that a court may “look through” a section 4 petition to make this determination.
2. Whether a district court should exercise jurisdiction over the petition when the petitioner’s complaint rests on state law but an actual or potential counterclaim rests on federal law. Here, the Court held that a federal court may not entertain a section 4 petition based on the contents of a counterclaim, when the whole controversy between the parties does not qualify for federal-court adjudication.

Thus, the Court refused to compel arbitration because the federal court did not have jurisdiction over the whole controversy. However, the Court noted that Discover may still petition a Maryland state court to enforce the arbitration agreement.

The dissent argued that the “controversy” to be decided by the Court should be the subject matter of the arbitration. Whether Discover Bank charged illegal finance charges, interest, and late fees, which is controlled by the Federal Deposit Insurance Act. Not the complaint based on state law that Discover filed initially.

It is worth noting an issue barely discussed on footnote 13. It was Discover who first sought court adjudication of the dispute, and it was not until Vaden countered with class-action allegations, when Discover invoked the arbitration clause contained in the cardholders’ agreement. Usually, it is the defendant party the one who files to compel arbitration to avoid litigating the dispute. Generally, courts find “forum-shopping” distasteful and some courts have held that a party has waived its right to arbitrate based on their invocation of the judicial process. See a recent case here.

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