Vaden v. Discover Bank

• Citation: 173 L.Ed.2d 206,129 S.Ct. 1262,556 U.S. 49
• Decision Date: 09 March 2009
• Docket Number: No. 07–773.,07–773.
• Parties: Betty E. VADEN, Petitioner, v. DISCOVER BANK et al.
• Court: U.S. Supreme Court

556 U.S. 49
129 S.Ct. 1262
173 L.Ed.2d 206

Betty E. VADEN, Petitioner
v.
DISCOVER BANK et al.

No. 07–773.

Supreme Court of the United States

Argued Oct. 6, 2008.
Decided March 9, 2009.

Daniel R. Ortiz, Charlottesville, VA, for Petitioner.

Carter G. Phillips, Washington, D.C., for Respondents.

Daniel R. Ortiz, Charlottesville, VA, David T. Goldberg, Donahue & Goldberg, LLP, New York, NY, John A. Mattingly, Jr., Leonardtown, MD, for Petitioner.

Alan S. Kaplinsky, Martin C. Bryce, Jr., Ballard, Spahr, Andrews & Ingersoll, LLP, Philadelphia, PA, Carter G. Phillips, Paul J. Zidlicky, Matthew B. Archer–Beck, Lowell J. Schiller, Sidley Austin LLP, Washington, D.C., Joseph W. Hovermill, Matthew T. Wagman, John C. Celeste, Miles & Stockbridge, P.C., Baltimore, MD, for Respondents.

Opinion

Justice GINSBURG delivered the opinion of the Court.

Section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, authorizes a United States district court to entertain a petition to compel arbitration if the court would have jurisdiction, “save for [the arbitration]

129 S.Ct. 1268

agreement,” over “a suit arising out of the controversy between the parties.” We consider in this opinion two questions concerning a district court's

556 U.S. 53

subject-matter jurisdiction over a § 4 petition: 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 if 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?

The litigation giving rise to these questions began when Discover Bank's servicing affiliate filed a complaint in Maryland state court. Presenting a claim arising solely under state law, Discover sought to recover past-due charges from one of its credit cardholders, Betty Vaden. Vaden answered and counterclaimed, alleging that Discover's finance charges, interest, and late fees violated state law. Invoking an arbitration clause in its cardholder agreement with Vaden, Discover then filed a § 4 petition in the United States District Court for the District of Maryland to compel arbitration of Vaden's counterclaims. The District Court had subject-matter jurisdiction over its petition, Discover maintained, because Vaden's state-law counterclaims were completely preempted by federal banking law. The District Court agreed and ordered arbitration. Reasoning that a federal court has jurisdiction over a § 4 petition if the parties' underlying dispute presents a federal question, the Fourth Circuit eventually affirmed.

We agree with the Fourth Circuit in part. 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.” We hold, however, that the Court of Appeals misidentified the dimensions of “the controversy between the parties.” Focusing on only a slice of the parties' entire controversy, the court seized on Vaden's counterclaims, held them completely preempted, and on that basis affirmed the District Court's order compelling arbitration. Lost from

556 U.S. 54

sight was the triggering plea—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. Accordingly, we reverse the Court of Appeals' judgment.

I

This case originated as a garden-variety, state-law-based contract action: Discover sued its cardholder, Vaden, in a Maryland state court to recover arrearages amounting to $10,610.74, plus interest and counsel fees.¹ Vaden's answer asserted usury as an affirmative defense. Vaden also filed several counterclaims, styled as class actions. Like Discover's complaint, Vaden's pleadings invoked only state law: Vaden asserted that Discover's demands for finance charges, interest, and late fees violated Maryland's credit laws. See Md. Com. Law Code Ann. §§ 12–506, 12–506.2 (Lexis 2005). Neither party invoked—by notice to the other or petition to the state court—the clause in the credit card agreement

129 S.Ct. 1269

providing for arbitration of “any claim or dispute between [Discover and Vaden],” App. 44 (capitalization and bold typeface omitted).²

Faced with Vaden's counterclaims, Discover sought federal-court aid. It petitioned the United States District Court for the District of Maryland for an order, pursuant to § 4 of the Federal Arbitration Act (FAA or Act), 9 U.S.C. § 4,

556 U.S. 55

compelling arbitration of Vaden's counterclaims.³ Although those counterclaims were framed under state law, Discover urged that they were governed entirely by federal law, specifically, § 27(a) of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. § 1831d(a). Section 27(a) prescribes the interest rates state-chartered, federally insured banks like Discover can charge, “notwithstanding any State constitution or statute which is hereby preempted.” This provision, Discover maintained, was completely preemptive, i.e., it superseded otherwise applicable Maryland law, and placed Vaden's counterclaims under the exclusive governance of the FDIA. On that basis, Discover asserted, the District Court had authority to entertain the § 4 petition pursuant to 28 U.S.C. § 1331, which gives federal courts jurisdiction over cases “arising under” federal law.

The District Court granted Discover's petition, ordered arbitration, and stayed Vaden's prosecution of her counterclaims in state court pending the outcome of arbitration. App. to Pet. for Cert. 89a–90a. On Vaden's initial appeal, the Fourth Circuit inquired whether the District Court had federal-question jurisdiction over Discover's § 4 petition. To make that determination, the Court of Appeals instructed, the District Court should “look through” the § 4 petition to the substantive controversy between the parties. 396 F.3d 366, 369, 373 (2005). The appellate court then remanded the case for an express determination whether that controversy presented “a properly invoked federal question.” Id., at 373.

556 U.S. 56

On remand, Vaden “concede[d] that the FDIA completely preempts any state claims against a federally insured bank.” 409 F.Supp.2d 632, 636 (D.Md.2006). Accepting this concession, the District Court expressly held that it had federal-question jurisdiction over Discover's § 4 petition and again ordered arbitration. Id., at 634–636, 639. In this second round, the Fourth Circuit affirmed, dividing 2 to 1. 489 F.3d 594 (2007).

Recognizing that “a party may not create jurisdiction by concession,” id ., at 604, n. 10, the Fourth Circuit majority conducted its own analysis of FDIA § 27(a), ultimately concluding that the provision completely preempted state law and therefore governed Vaden's counterclaims.⁴ This Court's decision in Holmes

129 S.Ct. 1270

Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 122 S.Ct. 1889, 153 L.Ed.2d 13 (2002), the majority recognized, held that federal-question jurisdiction depends on the contents of a well-pleaded complaint, and may not be predicated on counterclaims. 489 F.3d, at 600, n. 4. Nevertheless, the majority concluded, the complete preemption doctrine is paramount, “overrid[ing] such fundamental cornerstones of federal subject-matter jurisdiction as the well-pleaded complaint rule.” Ibid. (quoting 14B C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure § 3722.1, p. 511 (3d ed.1998) (hereinafter Wright & Miller)).⁵

The dissenting judge considered Holmes Group dispositive. As § 27(a) of the FDIA formed no part of Discover's complaint, but came into the case only as a result of Vaden's

556 U.S. 57

responsive pleadings, the dissent reasoned, “[t]here was no ‘properly invoked federal question’ in the underlying state case.” 489 F.3d, at 610.

We granted certiorari, 552 U.S. 1256, 128 S.Ct. 1651, 170 L.Ed.2d 352 (2008), in view of the conflict among lower federal courts on whether district courts, petitioned to order arbitration pursuant to § 4 of the FAA, may “look through” the petition and examine the parties' underlying dispute to determine whether federal-question jurisdiction exists over the § 4 petition. Compare Wisconsin v. Ho–Chunk Nation, 463 F.3d 655, 659 (C.A.7 2006) (in determining jurisdiction over a § 4 petition, the court may not “look through” the petition and focus on the underlying dispute); Smith Barney, Inc. v. Sarver, 108 F.3d 92, 94 (C.A.6 1997) (same); Westmoreland Capital Corp. v. Findlay, 100 F.3d 263, 267–269 (C.A.2 1996) (same); and Prudential–Bache Securities, Inc. v. Fitch, 966 F.2d 981, 986–989 (C.A.5 1992) (same), with Community State Bank v. Strong, 485 F.3d 597, 605–606 (court may “look through” the petition and train on the underlying dispute), vacated, reh'g en banc granted, 508 F.3d 576 (C.A.11 2007) ;⁶ and 396 F.3d, at 369–370 (case below) (same).

As this case shows, if the underlying dispute is the proper focus of a § 4 petition, a further question may arise. The dispute brought to state court by Discover concerned Vaden's failure to pay over $10,000 in past-due credit card charges. In support of that complaint, Discover invoked no federal law. When Vaden answered and counterclaimed, however, Discover asserted that federal law, specifically § 27(a) of the FDIA, displaced the state laws on which Vaden relied. What counts as the underlying dispute in a case so postured? May Discover invoke § 4, not on the basis of its

556 U.S. 58

own complaint, which had no federal element, but on the basis of counterclaims asserted by Vaden? To answer these questions, we first review relevant provisions of the FAA, 9 U.S.C. § 1 et seq., and controlling tenets of federal...