One to Watch: Arbitration and Complete Preemption
On October 6, 2008, the U.S. Supreme Court heard oral argument in Vaden v. Discover Bank, an appeal from Discover Bank, Discover Financial Services v. Vaden, 489 F.3d 594 (4th Cir. 2007), which will have a significant impact on arbitration and the doctrine of complete preemption.
Vaden arises out of a dispute between credit cardholder and a card issuer. In 2003, Discover Financial Services, a servicing subsidiary of Discover Bank, filed suit against cardholder Vaden in Maryland state court to collect a $10,000 delinquent debt. Vaden filed a putative class action counterclaim in state court, alleging, among other state law causes of action, violation of Maryland's usury laws. Discover Financial Services and Discover Bank filed a free-standing petition to compel arbitration in the U.S. District Court of Maryland, pursuant to Section 4 of the Federal Arbitration Act ("FAA"). Discover asserted that Vaden's state law claims were completely preempted by the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq. ("FDIA"). The district court granted Discover's motion to compel arbitration. Vaden appealed.
On Vaden's first appeal (Vaden I), the Fourth Circuit held that a district court has subject matter jurisdiction over a petition to compel arbitration under Section 4 of the FAA if a federal question exists in the underlying dispute. The Court rejected Vaden's argument that the jurisdictional analysis could not "look-through" the petition to determine whether the parties' underlying dispute involved a federal question. The Court remanded for the district court to determine several issues, including whether Vaden's counterclaim presented a federal question, whether Discover Financial Services or Discover Bank was the real party in interest, and whether the parties had a valid arbitration agreement.
On remand, the district court held: (1) that Discover Bank was the real party in interest; (2) that Vaden's state law usury claims were completely preempted by the FDIA, meaning the district court had federal question jurisdiction; and (3) that the parties had a valid arbitration agreement. Vaden appealed again. The Fourth Circuit affirmed (Vaden II).
The case presents two questions to the Supreme Court, as framed by respondents:
"(1) Whether the court of appeals correctly ruled that the district court had jurisdiction to compel arbitration under Section 4 of the Federal Arbitration Act where the parties’ underlying dispute is completely preempted by federal banking law.
(2) Whether the court of appeals correctly ruled that the district court’s exercise of jurisdiction to compel arbitration under Section 4 of the Federal Arbitration Act is consistent with this Court’s decision in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002)."
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