Vaden v. Discover Bank Oral Argument

Background

The U.S. Supreme Court case Vaden v. Discover Bank heard today on oral arguments asks the U.S. Supreme Court to determine when the Federal Arbitration Act allows suits to be brought in federal court, in the context of a dispute over credit card debts and interest due on those debts where there is an arbitration agreement. As the SCOTUS Blog Wiki explains:

In June 1999, Vaden received a new Platinum Discover card. One month later, Discover sent a notice amending the Discover Platinum Cardmember Agreement to allow for election of arbitration by either party as a means of dispute resolution.

In July 2003, [the servicing company] sued Vaden in Maryland state court for nonpayment of her credit card balance. Vaden subsequently filed class-action counterclaims in which she alleged breach of contract and contested fees and interest rates that allegedly violated state law. [The servicing company] then filed an independent petition in federal court, seeking to compel arbitration pursuant to the Cardmember Agreement. Although all of the counterclaims were based on Maryland state law, [the servicing company] contended that the district court had federal subject matter jurisdiction because the Federal Deposit Insurance Act (FDIA) completely preempted the state-law claims.

Normally, federal question jurisdiction in federal court is allowed only of the party bringing the suit in state court has asserted federal rights, regardless of the counterclaims or defenses brought. In the absence of an arbitration agreement, the federal issues involved in the serving company's federal defense to the consumer's class counterclaim would have been insufficient to provide federal jurisdiction.

The issue in this case is whether the existence of an arbitration clause makes a federal court forum available, and, if so, when.

This case has been in litigation for six years and hasn't seen an arbitrator yet. The 4th Circuit ruling appealed from is at odds with most courts that have looked at the circuit splitting jurisdictional issue.

Argument

Daniel R. Ortiz, on behalf of the consumers in the case of Vaden v. Discover Bank has arguably set a new record for the number of U.S. Supreme Court justices who were confused by his argument about the role of the historical divided between law and equity and the doctrine of ouster in the interpretation of the Federal Arbitration Act. Every Justice (except Justice Thomas who customarily does not participate in oral argument) seemed confused by, or doubted, his argument.

This isn't to say that Carter G. Phillips, on behalf of the bank, had a very good day at the Supreme Court in this case himself. The justices seemed troubled by his argument that judges must make up hypothetical cases between the parties to determine if they have jurisdiction over them, because arbitration cases often don't involve underlying state court litigation, even though this case did involved state court litigation commenced by the bank.

Analysis

Given the weak performances at oral arguments of both sides, the final decision may not follow the reasoning of either party. Instead, the judges seemed inclined to adopt a simpler, bright line rule.

The Justices seemed quite unimpressed by the argument that the bank had any interest in having their request to compel arbitration decided by federal rather than state court judges.

So, a ruling from the U.S. Supreme Court that any request to compel arbitration of claims asserted as counterclaims or defenses in state court under the Federal Arbitration Act must be resolved by the state court judge, rather than in federal court, would seem to provide a simple, easy to apply rule.