Arbitration & Mediation

Discover Wins Battle, Loses War in FAA Section 4 Interpretation Battle Before U.S. Supreme Court

By Christopher B. Hopkins, Esq.

While the U.S. Supreme Court begins its session on the First Monday in October, it was not until the second Monday in March that we received their first arbitration decision. Arbitration-watchers get anxious when that occurs, as we often expect that Supreme Court will hand down a some broad, significant ruling. The issue in this case is narrow, however, and, while it will likely spur a few interpreting cases, there is no reason to believe it will change the landscape for parties compelling or avoiding arbitration. This case is not a "hot button" issue like class action waiver or other percolating issues. Don't look for this case to be covered on local news.

The case of Betty A. Vaden v. Discover Bank involves technical questions of federal jurisdiction as raised under section 4 of the Federal Arbitration Act. The issue essentially boils down to a procedural method for federal courts to determine if they have jurisdiction under the FAA to compel arbitration. Again, most of this opinion is more about jurisdiction rather than arbitration.

Discover sued Vaden for $10k owed on her credit card. The suit was filed in Maryland state court and applied state law theories. No basis for diversity jurisdiction, give the amount at issue. Vaden answered and counterclaimed, bringing state law theories. Neither side mentioned arbitration or federal law. Then, Discover did something strange. It filed a wholly separate lawsuit in federal court, asking that court to compel arbitration of Vaden's counterclaims. The theory was that her counterclaims were pre-empted by a federal lending statute which then gave FAA jurisdiction to the court. It went up to the Fourth Circuit twice, and arbitration was compelled.

The U.S. Supreme Court was called upon to resolve a controversy since some federal courts would not look at the underlying case to determine if there was federal court jurisdiction. The High Court agreed (unanimously) that the trial court should "look through" the pleadings to determine if there was free-standing federal court jurisdiction. In other words, if there was no arbitration clause, would the federal trial court still have jurisdiction over the lawsuit? That is now the (clarified) interpretation of section 4 of the FAA.

In this case, both claims apparently should be pre-empted by federal law however federal jurisdictional theories (complete preemption doctrine and well pleaded complaint rule) directed the Court to the conclusion that the plaintiff's complaint alone, and not defenses or counterclaims, trigger federal jurisdiction. But no one was claiming the initial action (collection case worth ten grand) was a federal issue. Hence, the Court agreed with Discover that federal trial courts should look through the arbitration issue and focus on the underlying claim to find jurisdiction; once there, however, the Court disagreed with Discover and held that the facts of this case did not present federal jurisdiction.

Technicians of federal jurisdiction and arbitration, as well as academics, will likely scrutinize this decision at length. These are the two groups which pose lofty questions about whether the FAA does or does not confer federal jurisdiction (it doesn't) and the implications either way. Unless you have a discrete federal practice involving lots of arbitration issues, this is not something most lawyers trouble themselves with. I certainly do not envy first year law students subjected to this new Opinion mid-semester. The broader dispute about whether arbitration is "good" or "bad" is not going to rest on this decision.

Full post as published by Florida Arbitration Law on March 09, 2009 (boomark / email).