SCOTUS Affirms the Well-Pleaded Complaint Rule

On Monday the Supreme Court issued its decision in Vaden v. Discover Bank, No. 07–773, which held that federal question jurisdiction could not be predicated on the defendant's assertion of federal counterclaims, a holding that affirms the well-pleaded complaint rule. Here is an excerpt from the Syllabus:

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.

The opinions in this case are available at Cornell's LII website at http://www.law.cornell.edu/supct/html/07-773.ZS.html.