New Clear Limits on Federal Jurisdiction for Compelling Arbitration

In March 2009 the United States Supreme Court ruled 5-4 that unless federal-question jurisdiction exists based on the complaint in the underlying litigation, federal courts cannot compel arbitration when petitioned under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4. Vaden v. Discover Bank, 552 U.S. ____, ____, 129 S. Ct. 1262, 173 L. Ed. 2d 206 (2009). The Court also held that federal courts may “look through” the petition to determine whether there is federal subject-matter jurisdiction. However, it is the complaint, not counterclaims, which establishes whether or not such jurisdiction exists, said the Vaden court. (Complaints, even though predicated on state law claims, may be recharacterized to arise under federal law if the governing law is exclusively federal. The same is not true for counterclaims.) The holding that federal courts may “look through” the petition seeking to compel arbitration abrogated rulings by the Fifth, Sixth, Seventh, and Eleventh circuits to the contrary.

The Vaden court’s ruling on the “look through” issue was unanimous, but its determination that the complaint controls was made on the narrowest of margins, 5 to 4. The dissent would have federal courts examine the controversy below framed by the petition to compel arbitration in order to determine whether federal courts would have jurisdiction over the subject matter. In Vaden the bnk’s petition asserted that federal law preempted Vaden’s state law counterclaims. The bank thus argued that the counterclaims should be recharacterized as arising under federal law. The bank thus claimed the right to a federal court order compelling arbitration, since federal jurisdiction existed predicated on Federal Deposit Insurance Act provisions governing interest rates. The bank had obtained a federal district court order compelling arbitration and affirmance by the Fourth Circuit. The four Vaden court dissenters would have found federal subject matter jurisdiction, allowing the federal district court to compel arbitration of Vaden’s counterclaims.

This Supreme Court decision will restrict federal courts examining petitions to compel arbitration of disputes brought in state or federal courts to examining the complaint initiating the litigation sought to be stayed, along with the petition. State court, in many instances, will be the forum of choice for parties seeking to compel arbitration.

Post by Wesley B. Howard, Esq.