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Vaden v. Discover Bank et al.

Supreme Court of the United States
556 U. S. ____ (2009) (2009)
ELI5:

Rule of Law:

Under Section 4 of the Federal Arbitration Act, a federal court may 'look through' a petition to compel arbitration to the underlying substantive controversy to determine if federal question jurisdiction exists, but jurisdiction must be based on the whole controversy as framed by the plaintiff's original complaint and cannot be established by a federal defense or counterclaim.


Facts:

  • Discover Bank and its cardholder, Betty Vaden, were parties to a credit card agreement.
  • The agreement contained a clause requiring arbitration for 'any claim or dispute' between them.
  • Vaden became delinquent on her account, owing Discover $10,610.74.
  • Discover initiated a lawsuit in Maryland state court to collect the past-due charges.
  • In response, Vaden filed counterclaims, alleging that Discover's finance charges, interest, and late fees violated Maryland's credit laws.
  • Neither party initially sought to invoke the arbitration clause in the state court proceeding.

Procedural Posture:

  • Discover Bank's servicing affiliate sued Betty Vaden in a Maryland state court for debt collection.
  • Vaden answered and filed state-law counterclaims in the same action.
  • Discover Bank petitioned the U.S. District Court for the District of Maryland under FAA § 4 to compel arbitration of Vaden's counterclaims.
  • The District Court granted the petition and ordered arbitration.
  • Vaden, as appellant, appealed to the U.S. Court of Appeals for the Fourth Circuit, where Discover Bank was the appellee.
  • The Fourth Circuit remanded, instructing the District Court to apply a 'look through' analysis.
  • On remand, the District Court again found it had federal-question jurisdiction and ordered arbitration.
  • Vaden again appealed to the Fourth Circuit, which affirmed the District Court's order.
  • The U.S. Supreme Court granted Vaden's petition for a writ of certiorari.

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Issue:

Does a federal district court have jurisdiction under § 4 of the Federal Arbitration Act to compel arbitration when the original complaint raises only state-law claims, but the defendant's counterclaims are allegedly completely preempted by federal law?


Opinions:

Majority - Justice Ginsburg

No. A federal court lacks jurisdiction to compel arbitration under § 4 of the FAA when the basis for federal jurisdiction over the underlying controversy would depend solely on a federal counterclaim. A federal court should 'look through' the § 4 petition to the underlying substantive controversy, but in doing so, it must apply the well-pleaded complaint rule. This rule dictates that federal-question jurisdiction exists only when a federal question is presented on the face of the plaintiff's complaint. The court in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc. established that a federal counterclaim cannot serve as the basis for 'arising under' jurisdiction. The 'controversy between the parties' for the purpose of a § 4 analysis is the entire actual dispute as framed by the litigation, not just the portion a party wishes to arbitrate. Here, the controversy originated with Discover's state-law debt-collection complaint. Vaden's counterclaims, even if completely preempted by the Federal Deposit Insurance Act (FDIA), cannot create the federal jurisdiction necessary to support Discover's § 4 petition.


Dissenting - Chief Justice Roberts

Yes. A federal court should have jurisdiction because the specific controversy a party seeks to arbitrate is governed by federal law. While the 'look-through' approach is correct, the majority misidentifies what to 'look through' to. The proper focus is not the entire controversy as defined by existing state-court filings, but the specific dispute alleged to be subject to arbitration in the § 4 petition. Discover seeks to arbitrate Vaden's claims about illegal fees, which both parties agree are governed by the federal FDIA. A hypothetical suit arising from that specific controversy could have been brought in federal court. The majority’s rule makes federal jurisdiction dependent on the arbitrary happenstance of which party filed which claim first in state court, contrary to the language of § 4, which speaks prospectively of 'a suit' over which a court 'would have jurisdiction.'



Analysis:

This decision significantly clarifies and limits federal court jurisdiction under § 4 of the FAA by tethering the 'look-through' approach to the well-pleaded complaint rule. By prohibiting jurisdiction based on counterclaims, the ruling prevents § 4 from being used as a procedural tool to remove state-law cases to federal court that would not otherwise qualify for federal jurisdiction. The case reinforces the primacy of the well-pleaded complaint rule from Mottley and the counterclaim prohibition from Holmes Group in the arbitration context. This places a greater burden on state courts to enforce arbitration agreements when the underlying dispute, as a whole, lacks an independent basis for federal jurisdiction.

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