Source: https://www.classactiondefenseblog.com/arbitration_class_action_defen_10/
Timestamp: 2019-04-25 19:55:13+00:00

Document:
Discover Card filed a “garden-variety, state-law-based contract action” against a cardholder in Maryland state court to collect $10,610.74, plus interest and attorney fees; the cardholder agreement provided for arbitration of “any claim or dispute” between Discover and the cardholder, and included a class action waiver in that it prohibited “any claims as a representative or member of a class.” Vaden v. Discover Bank, 129 S.Ct. 1262, 1268-69 and n.2 (2009). The cardholder answered and filed a putative class action counterclaim that also asserted only state law claims, id., at 1268. According to the allegations underlying the class action counterclaim, “Discover’s demands for finance charges, interest, and late fees violated Maryland’s credit laws.” Id. Neither Discover nor the cardholder invoked the arbitration clause in the cardholder agreement. Id., at 1268-69. In response to the class action counterclaim, Discover petitioned the federal court for an order compelling arbitration under § 4 of the Federal Arbitration Act (FAA), id., at 1269 (9 U.S.C. § 4). Though the class action claims were brought under state law, Discover argued that the counterclaims were governed by § 27(a) of the Federal Deposit Insurance Act (FDIA), which “prescribes the interest rates state-chartered, federally insured banks like Discover can charge, ‘notwithstanding any State constitution or statute which is hereby preempted.’” Id. Discover’s argument was that the cardholder’s state law claims were preempted by the FDIA and, accordingly, the federal court had jurisdiction to rule on Discover’s petition under the FAA. Id. The district court granted Discover’s petition and ordered arbitration of the cardholder’s individual claims. Id. The cardholder appealed: the Fourth Circuit questioned whether the district court had federal question jurisdiction over Discover’s FAA petition; the Circuit Court remanded the case to the district court with instructions to “‘look through’ the § 4 petition to the substantive controversy between the parties” and to make “an express determination whether that controversy presented ‘a properly invoked federal question.’” Id. (citations omitted). On remand, the cardholder conceded that his state law claims were completely preempted by the FDIA because Discover was a federally insured bank; based on this concession, the district court held it had federal-question jurisdiction and again granted the petition compelling arbitration. Id. This time, the Fourth Circuit affirmed. Id. The Supreme Court reversed.
Under Section 4 of the FAA, a district court may consider a petition to compel arbitration “if the court would have jurisdiction, ‘save for [the arbitration] agreement,’ over ‘a suit arising out of the controversy between the parties.’” Vaden, at 1267-68. The petition for certiorari presented the Supreme Court with two questions “concerning a district court’s subject-matter jurisdiction over a § 4 petition”: First, “Should a district court, if asked to compel arbitration pursuant to § 4, ‘look through’ the petition and grant the requested relief if the court would have federal-question jurisdiction over the underlying controversy?” And second, “[I]f the answer to that question is yes, may a district court exercise jurisdiction over a § 4 petition when the petitioner’s complaint rests on state law but an actual or potential counterclaim rests on federal law?” Id., at 1268. The High Court summarized its holding at page 1268 as follows, “A federal court may ‘look through’ a § 4 petition and order arbitration if, ‘save for [the arbitration] agreement,’ the court would have jurisdiction over ‘the [substantive] controversy between the parties.’” But the Supreme Court reversed the Fourth Circuit’s decision because it had “misidentified the dimensions of ‘the controversy between the parties’ by ignoring that the lawsuit originated with “Discover’s claim for the balance due on Vaden’s account” – “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.” Id. Accordingly, the Supreme Court reversed.
We do not here review the Supreme Court’s opinion in detail, as its holding and reasoning is concisely summarized above. We add only the Supreme Court’s observation that federal court jurisdiction “cannot be predicated on an actual or anticipated defense” or “upon an actual or anticipated counterclaim.” Vaden, at 1272. Additionally, while “[a] complaint purporting to rest on state law, we have recognized, can be recharacterized as one ‘arising under’ federal law if the law governing the complaint is exclusively federal,” this does not apply to counterclaims which “would remain unremovable.” Id., at 1273. This is because “[a] state-law-based counterclaim, however, even if similarly susceptible to recharacterization, would remain nonremovable.” Id. Because the FAA “does not enlarge federal-court jurisdiction” but confines it to the jurisdiction that already would have existed but for the arbitration agreement, the lawsuit here at issue was “precipitated by Discover’s state-court suit for the balance due on Vaden’s account” which “is not amenable to federal-court adjudication.” Id., at 1275.

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