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Arbitration: U.S. Supreme Court Will Hear a Case on the Federal Arbitration Act's Jurisdictional Reach. (Web)

The U.S. Supreme Court agreed to hear its fourth arbitration case for the 2007-2008 term this morning. 

The case invokes the Federal Arbitration Act’s jurisdiction in the touchy context of class-action claims. The petitioner pointed to a U.S. Circuit Court split on the issue of “look-through” jurisdiction, which in the case allowed a credit-card provider to invoke the FAA to compel arbitration in federal court, after the case had been filed in Maryland state court.

The issue in Vaden v. Discover Bank, et al., No. 07-773, goes to the heart of the FAA’s reach: Does a suit seeking to enforce a state-law arbitration obligation invoke federal law if the petition to compel raises no federal question, but the dispute sought to be arbitrated involves federal law? See

Discover Bank’s Discover Financial Services affiliate filed suit in 2003, in Maryland state court, against petitioner Betty Vaden for nonpayment on her five-figure credit card balance. DFS is the bank’s account-servicing arm. Vaden filed class-action counterclaims alleging usurious interest and illegal fees against DFS.

Discover Bank, according to the second Fourth U.S. Circuit Court of Appeals opinion in the case--Discover Bank v. Vaden, 489 F.3d 594 (2007)(available at a federal district court to compel arbitration. The federal court granted the motion, but the Fourth Circuit in 2005 returned the matter to the district court to decide whether the federal court had jurisdiction in the case. 

The inquiry for the district court was whether the “real party in interest” was Discover Bank, not the DFS affiliate. If the bank was the real party in interest, then Vaden’s state claims would be preempted by the Federal Deposit Insurance Act.

The district court agreed with Discover Bank that Vaden’s claims were preempted by the FDIA, and found “no issue of material fact regarding the existence of an arbitration agreement between Vaden and Discover Bank.”

Last June, in its second opinion in the matter, the Fourth Circuit backed the lower court’s decision sending the case to arbitration. 489 F.3d 594. The majority opinion, written by Circuit Judge Allyson Kay Duncan and joined by Circuit Judge J. Harvie Wilkinson III, rejected Vaden’s contention that Discover lacked standing to compel arbitration, and that she had no valid arbitration agreement with Discover.

There was a dissent by U.S. District Court Judge Joseph R. Goodwin, of West Virginia’s Southern District, who was sitting by designation. Goodwin’s focus–that the state court action’s counterclaim doesn’t serve as an independent basis for federal subject matter jurisdiction to compel arbitration–is the reason the Court agreed to hear the case. 

In his dissent, Goodwin notes that state courts are obligated to hear federal claims and enforce federal law under the U.S. Constitution’s Supremacy Clause. No diversity or federal question appeared on Discover’s original complaint that would bring the matter into federal court. Goodwin wrote:

. . . Ms. Vaden’s counterclaims provided federal subject matter jurisdiction over the underlying case, and therefore an independent jurisdictional basis existed to permit the court to decide the petition to compel arbitration under the FAA. This was error. There was no “properly invoked federal question” in the underlying state case. (Emphasis is in the opinion.)

Vaden notes in her successful certiorari petition that four circuit courts have held that federal law doesn’t permit a federal district court to “look through” pleadings that “themselves contain no properly invoked federal question to find jurisdiction based on a federal question in the underlying dispute.”

The Fourth Circuit, the brief points out, joins the First and Eleventh Circuits in permitting the lower courts to look through the complaint to find a basis for federal jurisdiction. 

The Vaden petition (available at the Scotus blog URL above) warns that the latter view could hurt the justice system:

Most federal courts of appeals and district courts reject look-through jurisdiction for good reason: By giving parties the additional option to compel arbitration in federal court, it threatens to dramatically expand the federal docket and trample on state courts’ rights to develop their own substantive law of contract enforcement.

The petition invokes the American Arbitration Association and Finra caseloads, providing numbers that the Vaden petitioner states “could absorb significant federal court resources” if look-through jurisdiction was allowed. 

The case also may give the Court a reason to examine Associate Justice Clarence Thomas’s customary Supreme Court arbitration decision dissents. 

Thomas regularly votes to dismiss FAA cases, because, he notes, he doesn’t believe the FAA applies to arbitration cases arising under state law. Thomas’s last such dissent arose in last month’s 8-1 decision in Preston v. Ferrer, No. 06-1463 (Feb. 20, 2008)(available at where the Court found that the FAA preempts California’s Talent Agencies Act, which sent disputes to the state’s labor commission before arbitration.

Argument dates in Vaden haven’t been released.

The Court hasn’t yet decided Hall Street Associates v. Mattel, 06-989, an arbitration case on contracting for judicial review which was argued on Nov. 7. The Court asked the parties for supplemental briefs on Nov. 16. 

On Feb. 19, the Court agreed to hear 14 Penn Plaza LLC, et al., v. Pyett, et al., Docket No. 07-581. The issue is whether an arbitration clause in a collective-bargaining agreement that waives employees' rights to file statutory discrimination claims is enforceable. The Court hasn’t announced an argument date.

Russ Bleemer, Editor, Alternatives