LawyersUSA

WASHINGTON - A dispute over an unpaid credit card bill has led to the nation's highest court wrestling with a complicated case involving preemption, federal jurisdiction and compelled arbitration.

In Vaden v. Discover Bank, No. 07-773, the Supreme Court is being asked to consider whether federal subject matter jurisdiction exists in matters seeking to compel arbitration when the underlying claim includes a purely state-based tort allegation.

The case arises from a suit filed by Discover Bank against a cardholder, Betty Vaden, for nonpayment of a credit card bill. Vaden filed class-action counterclaims against Discover Bank's servicing affiliate, Discover Financial Services, in state court alleging breach of contract and usurious interest and finance charges.

Discover Bank filed a motion in federal court to compel arbitration of the state court counterclaims, citing the arbitration provision in Vaden's amended credit card agreement. Vaden claims she never received the amendment.

The district court granted Discover Bank's motion, and Vaden launched the first of two appeals to the 4th Circuit.

She argued that the Federal Arbitration Act itself does not grant subject matter jurisdiction, and since her state law claim was against Discover Bank's servicing agency, she claimed it was not covered under the Federal Deposit Insurance Act, which applies only to banks.

Ultimately the 4th Circuit found subject matter jurisdiction, saying that Discover Bank was the real party interest and noting that "even when a complaint alleges only violations of state law, the case may nevertheless center on a federal question, and therefore be removable, if federal law completely preempts the state law claims."

During oral arguments yesterday, Daniel Ortiz, a professor at University of Virginia Law School in Charlottesville, Va., argued on Vaden's behalf. He urged the Court to find that where no federal question exists on the face of a complaint, courts should not "look through" the pleadings to search for the existence of any possible federal question to justify granting jurisdiction.

He contended that would take away the right of a plaintiff to bring an action in state court if he or she so chose.

"That would have the effect [of] not allowing the petitioner to define the contours of the lawsuit," Ortiz said.

"Maybe it would – so what?" asked Justice John Paul Stevens.

Ortiz countered that individual litigants could more easily get bullied by big companies into federal court, discouraging them from seeking redress for alleged torts.

"That is an implication that is lurking in [Discover Bank's] position, and in a case like this it is a little bit worrying," Ortiz said.

Carter G. Phillips, managing partner in the Washington, D.C., office of Sidley Austin, represented Discover Bank. He said the authority for courts to look through a pleading to find subject matter jurisdiction is found in the very language of the Federal Arbitration Act, which reads: "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."

"It seems to me reasonably clear to interpret that language as saying you look to the underlying dispute between the parties," Phillips said.

"But that's the question that I have, Mr. Phillips," said Justice Ruth Bader Ginsburg, noting that there is both a state-based claim and a district court arbitration proceeding below. "What is the underlying dispute between the parties?"

Phillips said that you look to the controversy and whether it is based on a state issue, not the actual pleadings in a case, because the law "doesn't require that a lawsuit have been filed."

"So it's not appropriate simply to say to yourself, 'Look at what litigation actually exists,' because in as many cases as not there is not going to be any litigation ongoing," Phillips said.

A decision from the Court is expected later this term.

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com