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LEGAL TRENDS Vaden v. Discover Bank By David Curcio For those few of us who actually read all the contracts we agree to in daily living, you will have noticed arbitration clauses sneaking into all sorts of routine dealings, from credit cards to mortgages. However, groups speaking on behalf of “consumers” have intensified their lobbying efforts to ban or restrict the use of arbitration clauses in consumer finance. Those groups have been given a boost by the recent United States Supreme Court decision in Vaden v. Discover Bank, 556 U.S. _____, (March 9, 2009) (http://www.supremecourtus.gov/opinions/08pdf/07-773.pdf), which held that the Federal Arbitration Act does not provide a path to federal court for a state debt collection action where the only federal question arose from a counterclaim. In so doing, it re-emphasized the important role state courts play in enforcing the Federal Arbitration Act (9 U.S.C. §1 (“FAA”)) (Op. at pp. 8, 20-21). The litigation began when Discover Bank’s servicing agent sued Betty Vaden in state court in Maryland to collect on a past due debt. Discover’s claims all arose under state law and the amount in controversy was less than the $75,000.00 threshold for removal jurisdiction. In response, Vaden counterclaimed on behalf of a class of Maryland cardholders under the state’s usury laws. Vaden’s Discover Card then paid her back by filing suit in federal court to enforce the arbitration clause in its cardholder agreement with Vaden. Discover asserted that the usury counterclaim was preempted by federal law governing national bank’s interest charges. (Discover Bank was state-chartered, but insured by the FDIC and asserted complete preemption under the Federal Deposit Insurance Act, 12 U.S.C. §1831d(a) (“FDIA”).) The District Court agreed and ordered the matter to arbitration. The Fourth Circuit affirmed holding that the underlying dispute presented a federal question. Discover Bank v. Vaden, 396 F.3d 366, 369 (4th Cir. 2005). The issue before the Supreme Court was whether §4 of the FAA gave a federal court jurisdiction to compel arbitration where the federal claim only arose from the underlying counterclaim. The Court broke this question into two parts: (1) can a district court look through the petition to see if federal question jurisdiction exists over the underlying dispute?, and, (2) if so, can the court exercise jurisdiction when the petitioner’s claim arises under state law, but a counterclaim rests on federal law? Like the Fourth Circuit, the Supreme Court answered the first question, “yes,” but held that the counterclaim could not provide the basis for federal question jurisdiction under FAA §4. Section 4 provides that a party aggrieved by the refusal of another party to arbitrate pursuant to a written arbitration agreement may sue in federal court if that court, “save for such agreement, would have jurisdiction under Title 28… .” The Court held that this text drives the conclusion that the district court must look through the §4 complaint to “determine whether it is predicated on an action that ‘arises under’ federal law (Op. at p. 11). Looking through the complaint still leaves open the question, “what counts as the underlying dispute?” (Op. at p. 6). Under the well-pleaded complaint rule, a suit arises under federal law “only when the plaintiff’s statement of his own cause of action shows that it is based upon federal law” and may not be based on a counterclaim (Op. at p. 5, 9). The Fourth Circuit held the FDIA’s complete preemption of Vaden’s usury counterclaim was paramount and overrode the well-pleaded complaint rule. However, the Supreme Court re-affirmed the well-pleaded complaint rule and found that “a federal court may not entertain a §4 petition based on the contents, actual or hypothetical, of a counterclaim.” To the Supreme Court, the substance of the controversy was the collection of a debt (Op. at p. 15); it noted that the case originated as a “garden variety, state-law-based contract action” (Op. at p. 2). To the dissent, the controversy which Discover was seeking to arbitrate was whether it charged illegal interest and that was a federal question under the FDIA (Op. at p. 16). The majority declined to “slice off” that discrete controversy and focused on the whole controversy which was a state law claim relating to a debt (Op. at p. 17-18). Thus, now not only does the FAA itself not bestow jurisdiction on federal courts, a creditor cannot transform a collection case into a federal question on the basis of a preempted counterclaim. David Curcio practices with the firm of Jackson Walker LLP.
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