High Court OKs "Look Thru" For Fed'l Q Jurisdiction

Dispute Resolution Journal, May-Jul 2009 by Kelly, Justin

The U.S. Supreme Court ruled on March 9, by a 4:3 majority. that district courts are authorized to "look through" to the contents of the underlying claims to be arbitrated when determining whether they have "federal question jurisdiction" to hear a motion to compel arbitration under Section 4 of the Federal Arbitration Act (FAA).

The opinion in Betty E. Vaden v. Discover Bank (No. 07-773, cert. granted March 17, 2008), written by Associate Justice Ruth Bader Ginsburg, joined in by Associate Justices Antonin Scalia, Anthony Kennedy, David Souter (who will be retiring at the end of the current term), and Clarence Thomas, resolved a split between the 1st, 4th and 11th Circuits, which favored the look-through approach, and the 2nd, 5th, 6th and 7th Circuits, which did not.

The Court also ruled that district courts may not determine that they have federal court jurisdiction solely on the basis of a state law counterclaim that is completely preempted by a federal statute.

In the first sentence of the opinion, the Court paraphrased FAA Section 4, saying that it "authorizes a federal district court to entertain 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.'" The Court concluded that "save for [the arbitration] agreement" directs courts to consider if they would have jurisdiction over the dispute in the absence of an arbitration agreement. The Court also ruled that "the controversy between the parties" refers to the substantive conflict, not the dispute over whether the arbitration agreement is enforceable.

Vaden argued that the "save for" phrase was designed to inform courts they could not use the "ouster" doctrine to refuse to enforce arbitration agreements. But the Court rejected that argument, reasoning that Section 2 addressed the ouster problem by directing courts to enforce arbitration agreements. "Having commanded that an arbitration agreement is enforceable just as any other contract, Congress had no cause to repeat the point [in Section 4]," the opinion said.

Next, the Court turned to whether district courts could "look through" to an underlying federally preempted state-law counterclaim in order to determine if it had federal question jurisdiction. It answered the question in the negative. Section 4 does not enlarge federal court jurisdiction, she said; rather it confines the court's jurisdiction to situations where it would otherwise have jurisdiction to hear the case, she reasoned. The Court cited Holmes Group v. Vornado Air Circulation Systems (535 U. S. 826, 2002) for the principle "that federal question jurisdiction depends on the contents of a well-pleaded complaint, and may not be predicated on counterclaims."

The Court identified the "relevant question" as whether "the whole controversy between the parties-not just a piece broken off from that controversy- is one over which the federal courts would have jurisdiction." Section 4 should not be read to permit parties to ask a federal court to order arbitration of the issue implicating federal law when it would not have jurisdiction to hear the overall controversy, she wrote.

Turning to the underlying controversy in this case, Ginsburg held that the district court would not have had subject matter jurisdiction because "the controversy between Discover and Vaden, properly perceived, was a debt-collection claim."

The opinion pointed out that Discover was not without a remedy because it could still seek to compel arbitration in state court. "At no time was federal-court intervention needed to place the controversy between the parties before an arbitrator," the Court said.

The Concurrence and Dissent

Chief Justice John Roberts wrote a concurring and dissenting opinion. Associate Justices John Paul Stevens, Stephen Breyer and Samuel Alito joined this opinion. Roberts argued that Section 4 requires district courts to look solely to the Section 4 petition to determine if the petitioner desires to arbitrate a dispute that states a federal question. He charged the majority with being "diverted off this straightforward path" by the "fortuity" that a debt-collection complaint had been filed in state court. Roberts criticized the majority's approach of looking to the "overall controversy" in the underlying complaint, because that approach looks at a broader controversy than Section 4 requires. He also argued that the majority's approach would severely limit the ability of district courts to enforce arbitration agreements and might even allow district courts to compel arbitration of complaints alleging only state-law claims.

Earlier Proceedings

The underlying complaint was filed in Maryland state court. Discover Bank's service affiliate sued Vaden for nonpayment of credit card debt. Vaden filed a class action counterclaim alleging that Discover's affiliate charged usurious fees and interest in violation of Maryland law.

Discover filed a separate lawsuit in a district court in Maryland, seeking an order compelling arbitration of Vaden's state law usury counterclaim, based on the arbitration clause in an amendment of Discover's customer credit card agreement. The district court enforced the arbitration clause and granted the motion to compel arbitration. This resulted in two appeals to the 4th Circuit.