Discover Bank v. Vaden

• Decision Date: 24 January 2005
• Docket Number: No. 04-1848.,04-1848.
• Citation: 396 F.3d 366
• Parties: DISCOVER BANK; Discover Financial Services, Incorporated, Plaintiffs-Appellees, v. Betty E. VADEN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 366

396 F.3d 366

DISCOVER BANK; Discover Financial Services, Incorporated, Plaintiffs-Appellees, v. Betty E. VADEN, Defendant-Appellant.

No. 04-1848.

United States Court of Appeals, Fourth Circuit.

Argued: December 1, 2004.

Decided: January 24, 2005.

ARGUED: John Andrew Mattingly, Jr., Baldwin, Briscoe & Mattingly, Chtd., Lexington Park, Maryland, for Appellant. Christopher Landau, Kirkland & Ellis, L.L.P., Washington, D.C., for Appellees. ON BRIEF: Joseph W. Hovermill, Matthew T. Wagman, John C. Celeste, II, Miles & Stockbridge, P.C., Baltimore, Maryland; Alan S. Kaplinsky, Martin C. Bryce, Jr., Ballard, Spahr, Andrews & Ingersoll, L.L.P., Philadelphia, Pennsylvania, for Appellees.

Before WILKINSON, TRAXLER, and DUNCAN, Circuit Judges.

Vacated and remanded by published opinion. Judge WILKINSON wrote the opinion, in which Judge TRAXLER and Judge DUNCAN joined.

OPINION

WILKINSON, Circuit Judge:

Betty Vaden, a Discover card holder, was sued in state court by Discover Financial Services, an affiliate of Discover Bank, for her unpaid credit card balance. In response, she instituted several class action counterclaims against Discover Financial Services based on state law. Discover then filed suit in federal district court under § 4 of the Federal Arbitration Act, seeking to compel Ms. Vaden to submit her counterclaims to arbitration. The district court ordered arbitration.

On appeal, this court was presented with a host of issues, including the threshold question of whether the federal district court had subject matter jurisdiction to hear the case. We remand most of these issues for the district court to consider in the first instance. However, we do hold that when a party comes to federal court seeking to compel arbitration, the presence of a federal question in the underlying dispute is sufficient to support subject matter jurisdiction. Whether such a question exists here is a matter we reserve for the district court on remand.

I.

Discover Bank issued Betty Vaden a credit card in October 1990. Discover Financial Services ("DFS") is the servicing affiliate of the bank. On June 23, 2003, DFS sued Ms. Vaden in Maryland state court for the nonpayment of over $10,000 in credit card bills. Ms. Vaden responded by filing several class action counterclaims against DFS on behalf of herself and other Maryland residents. All of these counter-claims — most involving breach of contract allegations as to increased interest rates and late fees — were based on Maryland law. It is Discover's position that these state law claims are completely preempted by the Federal Deposit Insurance Act.

On November 12, 2003, Discover filed a petition in the United States District Court for the District of Maryland seeking to compel arbitration of Ms. Vaden's counterclaims. According to Discover, Ms. Vaden's credit card agreement was amended in July 1999 to include a provision requiring arbitration in the event of a dispute. Thus, Discover asked the federal court to compel arbitration, invoking § 4 of the Federal Arbitration Act. 9 U.S.C. § 4 (2000).

Whether or not a valid arbitration agreement exists between the parties is a matter of some controversy. Ms. Vaden has never signed such an agreement. However, Discover points to language in the original credit agreement which specifies that it can be amended by written notice and that "the use of your Account or the Card on or after the effective date of the change means that you accept and agree to the change." Discover claims it mailed Ms. Vaden a notice in July 1999 explaining that her credit card agreement was being amended to include an arbitration provision. By continuing to use her card after receiving this notice, Discover says Ms. Vaden consented to the new terms of her agreement.

Ms. Vaden argues, however, that this notice of amendment was addressed only to Discover card members who held a Discover Platinum card. She claims — supported by evidence from Discover's own business records — that she was not a Discover Platinum card holder until September 1999. Thus, she says, the amendment notice allegedly sent in July did not apply to her.¹

In any event, on December 15, 2003, and on January 12, 2004, Ms. Vaden filed a motion to dismiss and a motion for summary judgment with the district court. She asked the court to dismiss Discover's suit compelling arbitration for two main reasons. First, Ms. Vaden claimed that Discover Bank lacked standing to sue for arbitration since the class action counterclaims were filed against Discover Financial Services, and not Discover Bank. Second, Ms. Vaden argued that she had never validly entered into an arbitration agreement with Discover.

On June 21, 2004, the district court rejected Ms. Vaden's arguments and granted Discover's request to compel arbitration. It ordered that Ms. Vaden's counterclaims in state court be stayed pending the outcome of the arbitration. With the exception of the standing issue, the district court did not have the opportunity to address any of the issues relating to its subject matter jurisdiction which are now before this court on appeal.

II.

We must first address the question of whether the district court had subject matter jurisdiction over the present case. Discover asserts that its suit is properly in federal court by virtue of 28 U.S.C. § 1331 (2000) because it presents a federal question. Since neither party pressed this issue in the court below, it is before us for the first time on appeal.

Discover invokes § 4 of the Federal Arbitration Act ("FAA") to support its view that federal question jurisdiction exists. This part of the FAA states that a petition to compel arbitration can be filed in "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...." 9 U.S.C. § 4.

No one contends that this statute in and of itself constitutes a federal question. Indeed, such an understanding is inconsistent with the language of the statute and has been foreclosed by the Supreme Court. Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25, n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). However, the courts of appeals are in disagreement as to whether — in a suit to compel arbitration authorized by §4 — a district court has subject matter jurisdiction of a case when the underlying dispute between the parties raises a federal question. Compare Westmoreland Capital Corp. v. Findlay, 100 F.3d 263 (2d Cir.1996) with Tamiami Partners, Ltd. v. Miccosukee Tribe, 177 F.3d 1212 (11th Cir.1999).

There are two approaches to this issue, which respectively narrow and broaden the instances in which a federal court can properly assume jurisdiction of a suit under § 4 of the FAA. The narrower view has come to be known as the Westmoreland doctrine. See Blue Cross v. Anesthesia Care Assocs. Med. Group, 187 F.3d 1045, 1050, n. 5 (9th Cir.1999). This doctrine holds that for a district court to have federal question jurisdiction over a suit compelling arbitration, the federal question must be evident on the face of the arbitration petition itself. Perhaps realizing that such a possibility is highly unlikely the Westmoreland line of cases concludes that federal question jurisdiction will never form the basis for a court's subject matter jurisdiction to hear a § 4 petition. Westmoreland, 100 F.3d at 268. Under this view, jurisdiction will lie only when "some other basis for federal jurisdiction exists, such as diversity of citizenship or assertion of a claim in admiralty," but will not lie simply because the underlying controversy between the parties "raises a federal question." Id.

By contrast, the broader view permits a federal court to examine the underlying dispute between the parties to determine if a federal question is present. On this understanding, a district court is permitted to "look through" the arbitration request to assess whether the overall controversy between the parties is grounded in federal law. Tamiami Partners, 177 F.3d at 1223, n. 11.

After examining the text of § 4 and the relevant precedent, we are persuaded by the broader view outlined above. We thus hold that a federal court possesses subject matter jurisdiction over a case when the controversy underlying the arbitration agreement presents a federal question.

A.

It is fundamental that "[w]hen interpreting statutes we start with the plain language." U.S. Dep't of Labor v. North Carolina Growers Ass'n, 377 F.3d 345, 350 (4th Cir.2004). In fact, "where the statute's language is plain, the sole function of the courts is to enforce it according to its terms." U.S. ex rel. Wilson v. Graham County Soil & Water Conservation Dist., 367 F.3d 245, 247 (4th Cir.2004)(internal quotation omitted).

Section 4 of the FAA states:

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...

9 U.S.C. § 4. We are convinced that this language directs courts to look through the arbitration agreement so to assess questions of subject matter jurisdiction. There are three specific components of the text which lead us to this conclusion.

First, there is the phrase "save for such agreement" in the text of § 4. It is a classic canon of statutory construction that courts must "give effect to every provision and word in a statute and avoid any interpretation that may render statutory terms meaningless or superfluous." United States v. Ryan-Webster, 353 F.3d 353, 366 (4th Cir.2003)(internal quotation omitted). When interpreting these words, we must give them their "common and ordinary meaning." Mapoy v....