Vaden v. Discover Bank

Background

Discover Bank’s servicing affiliate sued a cardholder, Betty Vaden, in Maryland state court to collect about $10,610 in past-due charges. Vaden answered and filed counterclaims saying Discover’s finance charges, interest, and late fees violated Maryland law. Discover invoked an arbitration clause and filed a petition in federal district court under Section 4 of the Federal Arbitration Act, asking the court to compel arbitration. Discover argued that Vaden’s counterclaims were governed by federal banking law, the Federal Deposit Insurance Act (FDIA), which it said completely preempted state law.

Reasoning

The Court decided two legal questions. First, a federal district court may “look through” a Section 4 petition to the parties’ underlying dispute to ask whether, without the arbitration agreement, the court “would have” the power to hear a suit about that dispute. Second, reviewing that underlying dispute must follow the usual rule that a case’s federal status is judged by the original complaint, not by defenses or counterclaims. The Court therefore held that a counterclaim—even if it raises federal law—cannot by itself turn a state-law controversy into one that federal courts may hear. Because Discover’s original claim was a state-law debt-collection suit, the whole controversy did not qualify for federal-court resolution.

Real world impact

The federal court could not order arbitration in this case. Discover may still ask Maryland courts to enforce the arbitration clause. The decision limits when parties can use federal courts to compel arbitration in credit card and similar consumer disputes.

Dissents or concurrances

Chief Justice Roberts, joined by three Justices, agreed on look-through but argued the federal court would have jurisdiction here because the petition identified a federal issue under the FDIA.