Vaden v. Discover Bank

The Supreme Court has agreed to determine whether federal courts have jurisdiction in a lawsuit seeking to enforce an arbitration agreement under state law.

In July 2003, Discover Bank sued Betty Vaden in Maryland state court over after she failed to make payments on her credit card balance in excess of $10,000. Vaden filed a counterclaim against the bank, alleging breach of contract. The bank then petitioned a federal district court in the state to compel arbitration of Vaden’s counterclaims under Section 4 of the Federal Arbitration Act.

The U.S. District Court for the District of Maryland granted the motion, but did not address whether it had subject matter jurisdiction to hear the case. A divided three-judge panel on the 4th U.S. Circuit Court of Appeals held in June 2007 that the district court did have jurisdiction because the underlying dispute presented a federal question.

“The Supreme Court has explained that even when a complaint alleges only violations of state law, the case may nevertheless center on a federal question, and therefore be removable, if federal law completely preempts the state law claims,” the court held.

In asking the Supreme Court to take the case, Vaden’s attorneys point to a split among the other circuit courts. “Given the starkness of the conflict and the pervasiveness of lower court confusion about this fundamental and recurring question of federal jurisdiction — not to mention the costly uncertainty engendered by the Fourth Circuit’s expansive approach — this Court’s review is warranted,” the brief states.

The justices will hear oral arguments in the case this fall.

Questions presented:

1. Whether a suit seeking to enforce a state-law arbitration obligation brought under Section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, “aris[es] under”
federal law, see 28 U.S.C. § 1331, when the petition to compel itself raises no federal question but the dispute sought to be arbitrated—a dispute that the
federal court is not asked to and cannot reach—involves federal law.

2. If so, whether a “completely preempted” state law counterclaim in an underlying state-court dispute can supply subject matter jurisdiction.

The Supreme Court held today that federal courts have jurisdiction in a lawsuit seeking to enforce an arbitration agreement under state law.

In July 2003, Discover Bank sued Betty Vaden in Maryland state court over after she failed to make payments on her credit card balance in excess of $10,000. Vaden filed a counterclaim against the bank, alleging breach of contract. The bank then petitioned a federal district court in the state to compel arbitration of Vaden’s counterclaims under Section 4 of the Federal Arbitration Act.

The U.S. District Court for the District of Maryland granted the motion, but did not address whether it had subject matter jurisdiction to hear the case. A divided three-judge panel on the 4th U.S. Circuit Court of Appeals held in June 2007 that the district court did have jurisdiction because the underlying dispute presented a federal question.

“The Supreme Court has explained that even when a complaint alleges only violations of state law, the case may nevertheless center on a federal question, and therefore be removable, if federal law completely preempts the state law claims,” the court held.

In asking the Supreme Court to take the case, Vaden’s attorneys point to a split among the other circuit courts. “Given the starkness of the conflict and the pervasiveness of lower court confusion about this fundamental and recurring question of federal jurisdiction — not to mention the costly uncertainty engendered by the Fourth Circuit’s expansive approach — this Court’s review is warranted,” the brief states.

On March 9, 2009, the Supreme Court reversed and remanded the lower court order.

“We agree with the Fourth Circuit in part,” Justice Ruth Bader Ginsburg wrote for the 7-2 majority. “We hold, however, that the Court of Appeals misidentified the dimensions of ‘the controversy between the parties.’ ... Given that entirely state-based plea and the established rule that federal-court jurisdiction cannot be invoked on the basis of a defense or counterclaim, the whole ‘controversy between the parties’ does not qualify for federal-court adjudication.”

Chief Justice John G. Roberts Jr. filed an opinion concurring in part and dissenting in part, in which Justices John Paul Stevens, Stephen G. Breyer, and Samuel A. Alito joined. Roberts agreed that the court should be able to “look through” to the underlying claim but would have allowed the district court to compel arbitration.

Questions presented:

1. Whether a suit seeking to enforce a state-law arbitration obligation brought under Section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, “aris[es] under”
federal law, see 28 U.S.C. § 1331, when the petition to compel itself raises no federal question but the dispute sought to be arbitrated—a dispute that the
federal court is not asked to and cannot reach—involves federal law.

2. If so, whether a “completely preempted” state law counterclaim in an underlying state-court dispute can supply subject matter jurisdiction.