Jurisdiction - Motion to Compel Arbitration: Sullivan on Vaden v. Discover Bank
On March 17, 2008, after having granted a petition for certiorari in Vaden v. Discover Bank, 2007 U.S. App. LEXIS 13830 (4th Cir. 2007), the U.S. Supreme Court is poised to resolve a difficult procedural question that has engendered a substantial circuit split: does the Federal Arbitration Act (FAA) provide federal courts with jurisdiction over petitions to compel arbitration when the underlying dispute between the parties raises a federal question, or does there need to be a basis for jurisdiction independent of the underlying dispute, such as diversity jurisdiction? Christopher D. Sullivan, a partner with McGrane Greenfield LLP in San Francisco, explores: (1) the background of the Vaden decisions and the jurisdictional question that has divided the circuits; (2) the competing justifications for the varied outcomes reached; and (3) the practical impact the Supreme Court's decision will likely have for businesses and consumers that are parties to agreements containing arbitration provisions. He writes:
The Vaden decisions relied on three primary justifications to find federal jurisdiction exists under §4 of the FAA over a motion to compel arbitration when a federal question is present in the underlying dispute. First, the decisions invoked the language of §4, which allows a party aggrieved by a refusal to arbitrate to “petition any United States district court which, save for such agreement, would have had jurisdiction under Title 28 in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” The court concluded that “the phrase ‘save for’ must mean that the district court would have had jurisdiction of the case even if the agreement had never existed.” In other words, Congress intended to grant jurisdiction under §4 to hear a motion to compel arbitration if a lawsuit could have been heard in district court had there been no arbitration agreement. The court also noted the general, broad reference to Title 28, which covers both diversity and federal question jurisdiction. Finally, the court found significant the use of the phrase “controversy between the parties,” interpreting the phrase to reference “the overall substantive conflict between the parties.” All of these factors were viewed by the Vaden courts as supporting a broad interpretation of the jurisdictional grant.
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The Second, Fifth, Sixth, and Seventh Circuits have adopted a different rule and held that a motion to compel arbitration does not “arise under” federal law even if the issue to be arbitrated is federal in character. The leading case is Westmoreland Capital Corp. v. Findlay, 100 F.3d 263, 268 (1996). The Westmoreland court relied on the well-pleaded complaint rule to hold that only the face of the petition to compel arbitration could be used to support jurisdiction, which only would give rise to jurisdiction if the parties were diverse. Moreover, the court took note of other sections of the FAA, §§ 9 & 10, which contain language that could be viewed as conferring a broad grant of jurisdiction, but have been interpreted narrowly. The Westmoreland court considered the “save for” phrase in the text of §4 as relating only to an “antiquated and arcane principal of the common law” where a claim for specific performance of an arbitration agreement had been held to divest a court of jurisdiction. Finally, the courts following [sic] Westmoreland approach implicitly conclude that adopting a “look through” analysis would unduly expand federal jurisdiction.
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The Supreme Court’s decision in Vaden will most likely have a strong impact on the development of the law as to the enforceability of mandatory arbitration agreements. Attorneys with clients who seek to enforce, or to avoid, mandatory arbitration clauses in cases involving federal questions should look to the outcome in Vaden with interest. Litigating the issue in a federal district court versus a state court could determine the outcome. One option to suggest for clients who intend to use arbitration clauses to minimize the impact of a decision in Vaden rejecting the “look through” approach is to include in the terms of an arbitration provision language providing that “This arbitration provision is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16.”
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