Vaden v. Discover Bank

Understanding of this case, like the Locke case I recently discussed, would be aided by the answering of one simple question, which no one in the briefs seems to present. I will give it below, but for now I simply will present this enormously complex procedural issue in most of its glory.

This case involves whether a federal court has subject matter jurisdiction to compel arbitration between parties to a lawsuit when the petition to compel arbtration raised no federal question but the underlying dispute involves a federal law. A second question makes the issue more precise. If the answer to the first question is "Yes," can that subject matter jurisdiction be supplied by a state law counterclaim that has been "completely pre-empted" by federal law? Confused yet? I hope so. Let's uncover a few facts, and some things will become clear.

Relevant Facts

Ms. Vaden has been a proud (?) holder of a Discover Credit card since 1990. June is the month for graduations and in June 1999 her account status "graduated" to Platinum status. July 1999 saw the mailing to her of an amendment to her Cardmember Agreement that included a broad arbitration clause allowing each party to elect binding arbitration of any issue "arising from or relating to" her account.

Unfortunately for all concerned, this clause was invoked a few years later. Why? Well, not unlike millions of other Americans, Ms. Vaden became delinquent on her credit card payment. In July 2003 Discover Bank's "servicing affiliate" (i.e., the guys/girls who collect the dough you owe) sued her in Maryland state court because she failed to pay her credit card balance of over $10,000. Deep breath. Not good for her. So, what did Ms. Vaden do? Hired a lawyer to file counterclaims against the affiliate alleging breach of contract and violations by Discover of various Maryland anti-usury laws.

Discover decided not to sit on its hands and let the legal system just deal with the issue. So, it filed an action in federal court seeking to compel arbitration. The specific statute under which it brought its suit was sec. 4 of the Federal Arbitration Act of 1925. In relevant part, this provides:

"A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement," 9 USC sec. 4.

The Maryland federal court decided that, on the basis of this law, the parties had to arbitrate. Then, on appeal to the Fourth Circuit, Vaden's attorneys argued, for the first time, that the federal courts, in fact, have no jurisdiction in the issue because what they were dealing with was a straight state-law issue (breach of contract). So, the Fourth Circuit had to pay attention to that issue and decided that the case presented lots of other complexities, so many in fact that they decided to send complex cases where they belong--back to the district court judge.

The four or five issues the district court had to decide on remand were: (1) whether the real party in interest was the servicing affiliate or Discover Bank itself; (2) if the real party was Discover Bank, whether a federal law (the Federal Deposit Insurance Act) would "preempt" Vaden's state-law claims, and thus provide enough federal law presence to say that a federal law was involved in some way in the case; (3) whether, in fact, Vaden's status had been upgraded to Platinum and, therefore, whether the arbitration amendment really applied to her; (4) whether it was proper to invoke federal jurisdiction if her possibly pre-empted state law claims were only raised in a counterclaim rather than in the original petition for arbitration. This issue brings us into a labyrinth of its own, since assertion of federal jurisdiction on the basis of a counterclaim originated in removal cases; and (5) whether Vaden's conterclaim had to be "completely" pre-empted by federal law in order for federal jurisdiction to be appropriate.

Phew. Some of these bring enormous complexities to this case. Well, ultimately the district court decided that the Bank was the real party in interest; that Vaden had been upgraded in her status (thus the arbitration clause applied to her) and that a counterclaim under Maryland's usury laws could provided the basis for a court to "look through" the court filings to determine if a federal law was fully enough implicated so that the federal court could have jurisidiction to decide to order arbitration.

The Issue Before the Supreme Court

As the case comes to the Court, then, the questions with which I began the essay ought to make more sense. Can the Court find jurisidiction for a federal court to order arbitration in this matter (the federal court is not being called on to resolve the original dispute)? Is the Court confined in finding jurisdiction to examining the arbitration petition filed in federal court, or can it "look through" all the filings, discover that the counterclaim is pre-empted by federal law, realize that federal law is therefore implicated in the case, and therefore claim federal subject matter jurisdiction over the arbitration petition? The answer to this question may rest more on judicial philosophy than on reading of the text of the statute quoted above--i.e., whether the Court so favors arbitration as a means of settling disputes that it will tend to find federal jurisidiction almost everywhere so that arbitration can be ordered.

As for me, however, a lingering question persists. Why didn't Discover file the petition for arbitration in state court (assuming that Vaden was reluctant to go into arbitration in the first place--I didn't see any mention of this reluctance in what I read)? Is this just a case of potentially improper filing that then "freezes" the action until the federal case is resolved? It seems that this thing will eventually go to arbitration, but Ms. Vaden will have "bought" about five years before having to pay off her bills. Hm. Now maybe I understand why some of America's financial institutions are failing...

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