Maryland arbitration case tops Supreme Court agenda
Story reprinted from hometownannapolis.com
Vaden countersued over the legality of interest payments and other fees imposed by Discover Bank, alleging breach of contract and claiming that the bank’s interest rates violated state law. Under Maryland law, credit card companies may not assess finance charges and late fees concurrently. They also are prohibited from compounding interest on finance charges, according to court documents.
Vaden’s lawyers charged that Discover Bank violated both of these laws, almost doubling Vaden’s original balance of more than $5,000 to more than $10,000.
Vaden did not return phone calls and her lawyer, Daniel Ortiz, said she was not speaking to the press.
Discover Financial Services then petitioned the 4th U.S. Circuit Court of Appeals to compel arbitration of Vaden’s counterclaims. Before then, Discover had not requested arbitration, according to the court record.
“If Discover (Bank) had just brought this arbitration argument to the Baltimore City (Circuit) Court in the first place and asked them to compel arbitration, it would have been a very simple thing,” said David Goldberg, another lawyer for Vaden. “Instead they brought it to federal court, raising all these incredibly complicated jurisdiction questions. Everyone agrees that whether or not there’s arbitration, it should be decided by the court quickly.”
After the federal appellate court heard the case, it then remanded the case to Baltimore City to determine whether Discover Financial Services, a collection agency, or Discover Bank, a Delaware-chartered, federally insured bank, was the party at interest.
The Baltimore court found Discover Bank was the party of interest, raising a federal question under the Federal Arbitration Act and Federal Deposit Insurance Act.
The arbitration act provides for judicial aid with private disputes through arbitration, but doesn’t imply whether federal courts or state courts have jurisdiction.
Vaden appealed that ruling to the 4th Circuit, which affirmed the state court’s ruling in a 2 to 1 decision, stating that a federal district court does have jurisdiction to compel arbitration if the underlying dispute states a federal question.
After six years of litigation only to figure out which court has jurisdiction, the case has yet to be seen by an arbitrator.
The Supreme Court’s decision to hear the case stems from a string of similar cases in four other federal circuit courts that were decided differently, lawyers for Vaden said.
Only a decision from the 11th Circuit agreed with the 4th Circuit’s ruling, and even that case is under review after a sharp 80-page majority and specially concurring opinion criticizing the ruling by Judge Stanley Marcus.
“This important issue which has split the circuits merits more consideration than either this Court or the Supreme Court has given it,” Marcus wrote.
Yet, Discover Bank’s counsel is still confident.
“We believe the 4th Circuit decided the case correctly and we’re hopeful that the Supreme Court simply affirms,” said Alan Kaplinsky, attorney for Discover Bank. “Their opinion was very compelling in its logic. Based on plain language of the (Federal Arbitration Act), we believe that type of plain language argument will resonate with the Supreme Court.”
Affirmation by the Supreme Court would send similar cases to individual arbitration. Another decision could make it more difficult to get a federal court to rule on the enforceability of arbitration.
“I hope the Supreme Court says that federal court can’t order arbitration and that the proceeding has to be decided in state court,” said Ortiz, lead counsel for Vaden. “Giving the case to federal courts screws everything up. It’s a lot simpler to let the states take care of the issue. I’m not anti-arbitration, I’m just saying if you’re going through all this you should do it in state.”
Arguments on this issue have begun between the two sides and the Supreme Court Justices. I’ll post the decision when it is made. In the meantime, here is an update that was published by the United States Supreme Court Monitor on law.com:
‘LOOKING THROUGH’ FOR JURISDICTION
At issue in the third case argued Monday, Vaden v. Discover Bank, is whether a federal court’s subject matter jurisdiction over a petition to compel arbitration must be supported by the petition itself, or whether the court can “look through” the motion to determine the presence of a federal question in the underlying dispute between the parties.
Discover Financial Services, on behalf of Discover Bank, sued Betty Vaden for nonpayment of a $10,000 credit card balance, and Vaden filed counterclaims under Maryland law relating to fees, finance charges and interest on the account. Discover filed a petition in federal court to compel arbitration of the counterclaims. The 4th U.S. Circuit Court of Appeals held that Vaden’s counterclaims were pre-empted by the Federal Deposit Insurance Act and that the presence of a federal question in the underlying dispute was sufficient for jurisdiction.
Justices and counsel spent much of the argument hour parsing the language of Section 4 of the Federal Arbitration Act, which governs whether a party may petition a federal district court to compel arbitration.
University of Virginia School of Law Professor Daniel R. Ortiz, arguing for Vaden, told the justices that the “look-through approach to federal subject matter jurisdiction violates the core purposes of the Federal Arbitration Act.”
“The Federal Arbitration Act was meant to get things to arbitration quickly and to have arbitrators, not judges, decide them. These … sometimes often complex jurisdictional inquiries undermine both those aims,” Ortiz said.
Sidley Austin’s Carter G. Phillips, counsel for Discover, ran into some difficult questions from the justices regarding the scope of the underlying dispute between the parties for the purpose of determining jurisdiction.
“It seems to me that your look-through argument is look-through only halfway,” Ginsburg told Phillips. “That is … if you consider the controversy, the suit that was brought in the state court, the controversy is here we have a customer who hasn’t paid the amount charged. So we have a suit on a debt. Why isn’t that the controversy? You have to make the counterclaim the controversy, which comes up only defensively.”
Scalia took up that point as well, saying that under the respondent’s interpretation of the FAA, a court could simply imagine a counterclaim that might become part of an underlying dispute. “It’s very strange to decide federal jurisdiction on the basis … of imagined complaints,” he said.
“It’s close to inconceivable to me that Congress wanted us … to construct litigation that is not yet in existence,” Scalia said.
Justice David Souter questioned why Discover was pushing to enforce the arbitration agreement in federal court at all.
“Why don’t you do it in the state court instead of going through these gymnastics?” Souter asked Phillips.
When Ginsburg asked a similar question, Phillips told her, “The problem is that there is some lack of confidence in the state courts that we will get the same treatment under [FAA] Section 4 that we would get in federal court.”
“Then bring that up here on appeal from the state court,” Souter told him.
“Well, I wish it were that easy to get this Court to grant review of everything that I bring up here in the first place,” said Phillips.
Stevens then jumped in with a compliment: “You don’t have any trouble.”
“I appreciate that,” the veteran Supreme Court advocate said. Phillips has made a career total of 59 appearances before the high court, according to Sidley Austin’s Web site.
Laurel Newby is a senior editor with Law.com.
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