VADEN v. DISCOVER BANK
Syllabus
VADEN v. DISCOVER BANK (No. 07-773)
489 F. 3d 594, reversed and remanded.
VADEN v. DISCOVER BANK et al.
certiorari to the united states court of appeals for the fourth circuit
Section 4 of the Federal Arbitration Act (FAA or 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] agreement,” over “a suit arising out of the controversy between the parties.”
Discover Bank’s servicing affiliate filed a complaint in Maryland state court to recover past-due charges from one of its credit cardholders, petitioner Vaden. Discover’s pleading presented a claim arising solely under state law. 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 Federal District Court to compel arbitration of Vaden’s counterclaims. The District Court ordered arbitration.
On Vaden’s initial appeal, the Fourth Circuit remanded the case for the District Court to determine whether it had subject-matter jurisdiction over Discover’s §4 petition pursuant to 28 U. S. C. §1331, which gives federal courts jurisdiction over cases “arising under” federal law. The Fourth Circuit instructed the District Court to conduct this inquiry by “looking through” the §4 petition to the substantive controversy between the parties. With Vaden conceding that her state-law counterclaims were completely preempted by §27 of the Federal Deposit Insurance Act (FDIA), the District Court expressly held that it had federal-question jurisdiction and again ordered arbitration. The Fourth Circuit then affirmed. The Court of Appeals recognized that, in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U. S. 826, this Court held that federal-question jurisdiction depends on the contents of a well-pleaded complaint, and may not be predicated on counterclaims. It concluded, however, that the complete preemption doctrine is paramount and thus overrides the well-pleaded complaint rule.
Held: A federal court may “look through” a §4 petition to determine whether it is predicated on a controversy that “arises under” federal law; in keeping with the well-pleaded complaint rule as amplified in Holmes Group, however, a federal court may not entertain a §4 petition based on the contents of a counterclaim when the whole controversy between the parties does not qualify for federal-court adjudication. Pp. 6–21.
(a) Congress enacted the FAA “[t]o overcome judicial resistance to arbitration,” Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, and to declare “ ‘a national policy favoring arbitration’ of claims that parties contract to settle in that manner,” Preston v. Ferrer, 552 U. S. ___, ___. To that end, §2 makes arbitration agreements in contracts “involving commerce” “valid, irrevocable, and enforceable,” while §4 provides for federal district court enforcement of those agreements. The “body of federal substantive law” generated by elaboration of §2 is equally binding on state and federal courts. Southland Corp. v. Keating, 465 U. S. 1. However, the FAA “requir[es] [for access to a federal forum] an independent jurisdictional basis” over the parties’ dispute. Hall Street Associates, L. L. C. v. Mattel, Inc., 552 U. S. ___, ___. Under the well-pleaded complaint rule, a suit “arises under” federal law for 28 U. S. C. §1331 purposes “only when the plaintiff’s statement of his own cause of action shows that it is based upon [federal law].” Louisville & Nashville R. Co. v. Mottley, 211 U. S. 149. Federal jurisdiction cannot be predicated on an actual or anticipated defense, ibid., or rest upon an actual or anticipated counterclaim, Holmes Group, 535 U. S. 826. A complaint purporting to rest on state law can be recharacterized as one “arising under” federal law if the law governing the complaint is exclusively federal, see Beneficial Nat. Bank v. Anderson, 539 U. S. 1, but a state-law-based counterclaim, even if similarly susceptible to recharacterization, remains nonremovable. Pp. 6–11.
(b) FAA §4’s text drives the conclusion that a federal court should determine its jurisdiction by “looking through” a §4 petition to the parties’ underlying substantive controversy. The phrase “save for [the arbitration] agreement” indicates that the district court should assume the absence of the agreement and determine whether it “would have jurisdiction under title 28” over “the controversy between the parties,” which is most straightforwardly read to mean the “underlying dispute” between the parties. See Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1. Vaden’s argument that the relevant “controversy” is simply and only the parties’ discrete dispute over the arbitrability of their claims is difficult to square with §4’s language. If courts are to determine whether they would have jurisdiction “save for [the arbitration] agreement,” how can a dispute over an arbitration agreement’s existence or applicability be the controversy that counts? The Court is unpersuaded that the “save for” clause means only that the “antiquated and arcane” ouster notion no longer holds sway. To the extent that the ancient “ouster” doctrine continued to impede specific enforcement of arbitration agreements, FAA §2, the Act’s “centerpiece provision,” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, directly attended to the problem by commanding that an arbitration agreement is enforceable just as any other contract. Vaden’s approach also has curious practical consequences. It would permit a federal court to entertain a §4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract, yet would not accommodate a §4 petitioner who could file a federal-question suit in, or remove such a suit to, federal court, but has not done so. In contrast, the “look through” approach permits a §4 petitioner to ask a federal court to compel arbitration without first taking the formal step of initiating or removing a federal-question suit. Pp. 11–15.
(c) Having determined that a district court should look through a §4 petition, this Court considers whether the court “would have [federal-question] jurisdiction” over “a suit arising out of the controversy” between Discover and Vaden. Because §4 does not enlarge federal-court jurisdiction, a party seeking to compel arbitration may gain such a court’s assistance only if, “save for” the agreement, the entire, actual “controversy between the parties,” as they have framed it, could be litigated in federal court. Here, the actual controversy is not amenable to federal-court adjudication. The “controversy between the parties” arose from Vaden’s “alleged debt,” a claim that plainly did not “arise under” federal law; nor did it qualify under any other head of federal-court jurisdiction. The Fourth Circuit misapprehended Holmes Group when it concluded that jurisdiction was proper because Vaden’s state-law counterclaims were completely preempted. Under the well-pleaded complaint rule, a completely preempted counterclaim remains a counterclaim, and thus does not provide a key capable of opening a federal court’s door. Vaden’s responsive counterclaims challenging the legality of Discover’s charges are merely an aspect of the whole controversy Discover and Vaden brought to state court. Whether one might hypothesize a federal-question suit involving that subsidiary disagreement is beside the point. The relevant question is whether the whole controversy is one over which the federal courts would have jurisdiction. Section 4 does not give parties license to recharacterize an existing controversy, or manufacture a new controversy, in order to obtain a federal court’s aid in compelling arbitration. It is hardly fortuitous that the controversy in this case took the shape it did. Seeking to collect a debt, Discover filed an entirely state-law-grounded complaint in state court, and Vaden chose to file responsive counterclaims. Section 4 does not invite federal courts to dream up counterfactuals when actual litigation has defined the parties’ controversy. Allowing parties to commandeer a federal court to slice off responsive pleadings for discrete arbitration while leaving the remainder of the parties’ controversy pending in state court makes scant sense. Furthermore, the presence of a threshold question whether a counterclaim alleged to be based on state law is totally preempted by federal law may complicate the §4 inquiry. Although FAA §4 does not empower a federal court to order arbitration here, Discover is not left without recourse. Because the FAA obliges both state and federal courts to honor and enforce arbitration agreements, Discover may petition Maryland’s courts for appropriate aid in enforcing the arbitration clause of its contracts with Maryland credit cardholders. Pp. 15–20.
489 F. 3d 594, reversed and remanded.
Ginsburg, J., delivered the opinion of the Court, in which Scalia, Kennedy, Souter, and Thomas, JJ., joined. Roberts, C. J., filed an opinion concurring in part and dissenting in part, in which Stevens, Breyer, and Alito, JJ., joined.
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CDInPart
BETTY E. VADEN, PETITIONER v. DISCOVER
BANK et al.
on writ of certiorari to the united states court of appeals for the fourth circuit
Chief Justice Roberts, with whom Justice Stevens, Justice Breyer, and Justice Alito join, concurring in part and dissenting in part.
I agree with the Court that a federal court asked to compel arbitration pursuant to §4 of the Federal Arbitration Act should “look through” the dispute over arbitrability in determining whether it has jurisdiction to grant the requested relief. But look through to what? The statute provides a clear and sensible answer: The court may consider the §4 petition if the court “would have” jurisdiction over “the subject matter of a suit arising out of the controversy between the parties.” 9 U. S. C. §4.
The §4 petition in this case explains that the controversy Discover seeks to arbitrate is whether “Discover Bank charged illegal finance charges, interest and late fees.” App. 30. Discover contends in its petition that the resolution of this dispute is controlled by federal law—specifically §27(a) of the Federal Deposit Insurance Act (FDIA), 12 U. S. C. §1831d(a) (setting forth the interest rates a state-chartered, federally insured bank may charge “notwithstanding any State constitution or statute which is hereby preempted”). Vaden agrees that the legality of Discover’s charges and fees is governed bythe FDIA.** A federal court therefore “would have jurisdiction … of the subject matter of a suit arising out of the controversy” Discover seeks to arbitrate. That suit could be an action by Vaden asserting that the charges violate the FDIA, or one by Discover seeking a declaratory judgment that they do not.
The majority is diverted off this straightforward path by the fortuity that a complaint happens to have been filed in this case. Instead of looking to the controversy the §4 petitioner seeks to arbitrate, the majority focuses on the controversy underlying that complaint, and asks whether “the whole controversy,” as reflected in “the parties’ state-court filings,” arises under federal law. Ante, at 16 (emphasis added). Because that litigation was commenced as a state-law debt-collection claim, the majority concludes there is no §4 jurisdiction.
This approach is contrary to the language of §4, and sharply restricts the ability of federal courts to enforce agreements to arbitrate. The “controversy” to which §4 refers is the dispute alleged to be subject to arbitration. The §4 petitioner must set forth the nature of that dispute—the one he seeks to arbitrate—in the §4 petition seeking an order to compel arbitration. Section 4 requires that the petitioner be “aggrieved” by the other party’s “failure, neglect, or refusal … to arbitrate under a written agreement for arbitration”; that language guides the district court to the specific controversy the other party is unwilling to arbitrate.
That is clear from the FAA’s repeated and consistent use of the term “controversy” to mean the specific dispute asserted to be subject to arbitration, not to some broader, “full flavor[ed]” or “full-bodied” notion of the disagreement between the parties. Ante, at 17, and n. 16. In §2, for example, the “controversy” is the one “to [be] settle[d] by arbitration” and the one “to [be] submit[ted] toarbitration.” 9 U. S. C. §2. In §10(a)(3), it is a ground for vacating an arbitration award that the arbitrator refused to hear evidence “pertinent and material to thecontroversy”—obviously the “controversy” subject toarbitration, or the arbitrator’s refusal to consider the evidence would hardly be objectionable. In §11(c), an award may be modified if “imperfect in matter of form not affecting the merits of the controversy”—again, necessarily the controversy submitted to arbitration, and therefore the subject of the award.
There is no reason to suppose “controversy” meant the controversy subject to arbitration everywhere else in the FAA, but something quite different in §4. The issue is whether there is jurisdiction to compel arbitration to resolve a controversy; why would the pertinent controversy for assessing jurisdiction be anything other than the same one asserted to be subject to arbitration?
The majority looks instead to the controversy the state-court litigation seeks to resolve. This produces the odd result of defining “controversy” more broadly than the §4 petition itself. Discover’s petition does not seek toarbitrate its state-law debt-collection claims, but rather Vaden’s allegation that the fees Discover has beencharging her (and other members of her proposed class) violate the FDIA. See App. 30. The majority does not appear to question that there would be federal jurisdiction over a suit arising out of the subject matter of thatdispute. The majority finds no jurisdiction here, however, because “a federal court could not entertain Discover’s state-law debt-collection claim.” Ante, at 20, n. 19. There is no jurisdiction to compel arbitration of a plainly federal controversy—the FDIA dispute—because there is no jurisdiction to compel arbitration of the debt-collection dispute. But why Discover should have to demonstrate federal jurisdiction over a state-court claim it does not seek to arbitrate is a mystery. Cf. Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 19–21 (1983) (affirming federal-court jurisdiction over a §4 petition seeking to arbitrate only one of two disputes pending in state-court litigation); Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 218–221 (1985) (when litigation involves multiple claims, only some of which are covered by an arbitration agreement, district court must compel arbitration of the covered claims if so requested).
The majority’s approach will allow federal jurisdiction to compel arbitration of entirely state-law claims. Under that approach the “controversy” is not the one the §4 petitioner seeks to arbitrate, but a broader one encompassing the “whole controversy” between the parties. Ante, at 16. If that broader dispute involves both federal and state-law claims, and the “originating” dispute is federal, ibid., a party could seek arbitration of just the state-law claims. The “controversy” under the majority’s view would qualify as federal, giving rise to §4 jurisdiction to compel arbitration of a purely state-law claim.
Take this case as an example. If Vaden had filed her FDIA claim first, and Discover had responded with a state-law debt-collection counterclaim, that suit is one that “could be litigated in federal court.” Ante, at 15. As a result, the majority’s approach would seem to permit Vaden to file a §4 petition to compel arbitration of the entirely state-law-based debt-collection dispute, because that dispute would be part and parcel of the “full flavor[ed],” “originating” FDIA controversy. Ante, at 16, 17. Defining the controversy as the dispute the §4 petitioner seeks to arbitrate eliminates this problem by ensuring that the actual dispute subject to arbitration is federal.
The majority’s conclusion that this controversy “is not one qualifying for federal-court adjudication,” ante, at 19, stems from its mistaken focus on the existing litigation. Rather than ask whether a court “would have” jurisdiction over the “subject matter” of “a” suit arising out of the “controversy,” the majority asks only whether the court does have jurisdiction over the subject matter of a particular complaint. But §4 does not speak of actual jurisdiction over pending suits; it speaks subjunctively of prospective jurisdiction over “the subject matter of a suit arising out of the controversy between the parties.” 9 U. S. C. §4. The fact that Vaden has chosen to package the FDIA controversy in counterclaims in pending state-court litigation in no way means that a district court “would [not] have” jurisdiction over the “subject matter” of “a suit” arising out of the FDIA controversy. A big part of arbitration is avoiding the procedural niceties of formal litigation; it would be odd to have the authority of a court to compel arbitration hinge on just such niceties in a pending case.
By focusing on the sequence in which state-court litigation has unfolded, the majority crafts a rule that produces inconsistent results. Because Discover’s debt-collection claim was filed before Vaden’s counterclaims, the majority treats the debt-collection dispute as the “originating controversy.” Ante, at 16. But nothing would have prevented the same disagreements between the parties from producing a different sequence of events. Vaden could have filed a complaint raising her FDIA claims before Discover sought to collect on any amounts Vaden owes. Because the “originating controversy” in that complaint would be whether Discover has charged fees illegal under federal law, in that situation Discover presumably could bring a §4 petition to compel arbitration of the FDIA dispute. The majority’s rule thus makes §4 jurisdiction over the same controversy entirely dependent upon the happenstance of how state-court litigation has unfolded. Nothing in §4 suggests such a result.
The majority glosses over another problem inherent in its approach: In many if not most cases under §4, no complaint will have been filed. See Hartford Financial Systems, Inc. v. Florida Software Servs., Inc., 712 F. 2d 724, 728 (CA1 1983) (Breyer, J.) (“Normally, [§4] motions are brought in independent proceedings”). What to “look through” to then? The majority instructs courts to look to the “full-bodied controversy.” Ante, at 17, n. 16. But as this case illustrates, that would lead to a different result had the state-court complaint not been filed. Discover does not seek to arbitrate whether an outstanding debt exists; indeed, Discover’s §4 petition does not even allege any dispute on that point. See App. 28–41. A district court would therefore not understand the §4 “controversy” to include the debt-collection claim in the absence of the state-court suit. Under the majority’s rule, the FDIA dispute would be treated as a “controversy” qualifying under §4 before the state suit and counterclaims had been filed, but not after.
The far more concrete and administrable approach would be to apply the same rule in all instances: Look to the controversy the §4 petitioner seeks to arbitrate—as set forth in the §4 petition—and assess whether a federal court would have jurisdiction over the subject matter of a suit arising out of that controversy. The controversy the moving party seeks to arbitrate and the other party will not would be the same controversy used to assess jurisdiction to compel arbitration.
The majority objects that this would allow a court to “hypothesiz[e] discrete controversies of its own design,” ante, at 16, in an apparent effort to find federaljurisdiction where there is none. Not so. A district court entertaining a §4 petition is required to determine what “a suit” arising out of the allegedly arbitrable controversy would look like. There is no helping that, given the statute’s subjunctive language. But that does not mean the inquiry is the free-form one the majority posits.
To the contrary, a district court must look to the specific controversy—the concrete dispute that one party has “fail[ed], neglect[ed], or refus[ed]” to arbitrate—and determine whether that controversy would give rise to a suit under federal law. District courts do that sort of thing often enough; the exercise is closely analogous to the jurisdictional analysis in a typical declaratory judgment action. See Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U. S. 1, 19 (1983) (jurisdiction over a declaratory judgment action exists when, “if the declaratory judgment defendant brought a coercive action to enforce its rights, that suit would necessarily present a federal question” (emphasis added)). Looking to the specific controversy outlined in Discover’s §4 petition (whether its fees violate the FDIA), it hardly requires “dream[ing]” to conceive of a lawsuit in which Vaden would claim the FDIA has been violated and Discover would claim it has not. Ante, at 18.
Nor would respondents’ approach allow a §4 petitioner to simply “recharacterize” or “manufacture” a controversy to create federal jurisdiction. Ante, at 17. All of theestablished rules of federal jurisdiction are fully applicable in scrutinizing whether a federal court would have jurisdiction over a suit arising out of the parties’ underlying controversy.
For example, a federal question must be presented by the specific controversy the §4 petitioner seeks to arbitrate, not by some hypothetical federal issue “lurking in the background.” Gully v. First Nat. Bank in Meridian, 299 U. S. 109, 117 (1936) . A district court could not compel arbitration of a state-law dispute by pointing to a potential federal defense that the §4 petitioner is not seeking to arbitrate, because the “claim itselfmust present a federal question” to arise under federal law. Skelly Oil Co. v. Phillips Petroleum Co., 339 U. S. 667, 672 (1950) . Nor could a district court compel arbitration of a dispute that, though not federal in character, could lead to the filing of a federal counterclaim, for “a counterclaim … cannot serve as the basis for [federal] jurisdiction” of the state-law dispute itself. Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U. S. 826, 831 (2002) .
Accordingly, petitioners may no more smuggle state-law claims into federal court through §4 than they can through declaratory judgment actions, or any other federal cause of action. To the extent §4 brings some issues into federal court in a particular case that may not be brought in through other procedural mechanisms, it does so by “enlarg[ing] the range of remedies available in the federal courts[,] … not extend[ing] their jurisdiction.” Skelly Oil, supra, at 671.
That is why the majority’s recital of the basic rules of federal-court jurisdiction in Part II of its opinion is beside the point: No one disputes what those rules are, and no one disputes that they must be followed under §4 indeciding whether a federal court “would have jurisdiction … of the subject matter of a suit arising out of thecontroversy between the parties.” The issue is instead what suit should be scrutinized for compliance with those rules. In defining “controversy” by reference to existing litigation, the majority artificially limits the reach of §4 to the particular suit filed. The correct approach is to accord §4 the scope mandated by its language and look to “a suit,” arising out of the “subject matter” of the “controversy” the §4 petitioner seeks to arbitrate, and determine whether a federal court would have jurisdiction over such a suit.
The majority concludes by noting that state courts are obliged to honor and enforce agreements to arbitrate. Ante, at 20. The question here, however, is one of remedy. It is a common feature of our federal system that States often provide remedies similar to those under federal law for the same wrongs. We do not, however, narrowly construe the federal remedies—say federal antitrust or civil rights remedies—because state law provides remedies in those areas as well. Cf. Monroe v. Pape, 365 U. S. 167, 183 (1961) (“It is no answer that the State has a law which if enforced would give relief”).
***
Discover and Vaden have agreed to arbitrate anydispute arising out of Vaden’s account with Discover. Vaden’s allegations against Discover have given rise to such a dispute. Discover seeks to arbitrate that controversy, but Vaden refuses to do so. Resolution of the controversy is governed by federal law, specifically the FDIA. There is no dispute about that. In the absence of the arbitration agreement, a federal court “would have jurisdiction … of the subjectmatter of a suit arising out of the controversy between the parties,” 9 U. S. C. §4, whether the suit were brought by Vaden or Discover. The District Court therefore may exercise jurisdiction over this petition under §4 of the Federal Arbitration Act.
Notes
** Vaden has conceded that the FDIA completely pre-empts her state-law counterclaims. See 489 F. 3d 594, 604, n. 10 (CA4 2007). What is significant about that concession is not Vaden’s agreement on the jurisdictional question of complete pre-emption (which we need not and do not address), cf. ante, at 19, but rather her agreement that federal law—the FDIA—governs her allegation that Discover’s charges and fees are illegal.