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The Fourth Circuit Court of Appeals held that the doctrine of "complete preemption" warranted the exercise of federal jurisdiction over a petition to compel arbitration even though the presence of a federal question was based solely on a defense to the underlying claims.
In Discover Bank v. Vaden, No. 06-1221, 2007 WL 1695758 (4th Cir. June 13, 2007), Discover Financial Services (DFS) sued Vaden in state court on behalf of Discover Bank (Discover). The suit sought recovery of the unpaid balance on Vaden's Discover card. In response, Vaden filed class action counterclaims alleging that the finance charges violated Maryland law.
Discover subsequently filed a petition in federal court, seeking to compel arbitration of Vaden's counterclaims in accordance with an arbitration clause in the cardmember agreement. The district court granted the petition.
On appeal from that ruling, the issue was whether the federal courts had subject matter jurisdiction. The Court held that "the presence of a federal question in the underlying dispute [would be] sufficient to support subject-matter jurisdiction." Discover Bank v. Vaden, 396 F.3d 366, 367 (4th Cir. 2005). Accordingly, the Court remanded the matter with instructions to determine whether a federal question existed.
On remand, the district court found that there was a federal question based on Discover's argument that Vaden's usury claims were preempted by federal law. As such, the district court once again granted Discover's petition to compel arbitration. Vaden appealed that ruling as well.
In deciding the second appeal, the Court reiterated its previous holding, explaining that the doctrine of "complete preemption" may warrant the exercise of federal jurisdiction even if preemption (i.e., the federal question) is only raised as a defense. Whether the doctrine of "complete preemption" applied in this case depended on two underlying questions: (1) whether Discover, rather than DFS, was the real party in interest; and (2) whether the Federal Deposit Insurance Act (FDIA) "completely preempts" state law usury claims against a state-chartered, federally insured bank.
Regarding the first question, the Court held that Discover was the real party in interest because the evidence conclusively established that Discover was the lender and thus the entity that imposed the finance charges underlying Vaden's counterclaims.
In addressing the second question, the Court relied largely on precedent construing the National Banking Act in holding that the FDIA completely preempts state law usury claims against a state-chartered, federally insured bank. Given this holding, some of Vaden's counterclaims were completely preempted by the FDIA, thus presenting a federal question that warranted the exercise of federal jurisdiction.
Having determined that the district court properly exercised jurisdiction, the Court turned to the question of whether there was a binding arbitration agreement. On this question, the Court held that Vaden's "mere denial" of receipt was "insufficient to rebut the presumption of receipt" arising from a proper mailing. The Court thus affirmed the order compelling arbitration.
Some circuit courts take a more limited view of federal jurisdiction under the FAA. According to those courts, even if the underlying dispute presents a federal question, there is no federal jurisdiction over a petition to compel arbitration unless the federal question is manifest from the complaint. See, e.g., Wisconsin v. Ho-Chunk Nation, 463 F.3d 655, 659 (7th Cir. 2006).
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