This case involves whether federal courts have jurisdiction in a lawsuit seeking to enforce an arbitration agreement under state law.
Discover Bank sued a customer in Maryland state court when she failed to make payments on her credit card balance. She filed a counterclaim for herself and on behalf of a class, alleging that the bank had imposed unlawful fees, finance charges, and interest and had breached its contract under state law. In response, the bank filed a motion to compel arbitration of the cardholder’s counterclaims under the Federal Arbitration Act (FAA) in federal court in Maryland.
Although the court granted the motion, it did not address whether it had jurisdiction to hear the case. In June 2007, the Fourth Circuit held that the district court had the requisite jurisdiction, since the underlying dispute involved the Federal Deposit Insurance Act and thus presented a federal question.
On March 9, the Supreme Court ruled that a federal court may not exercise jurisdiction to mandate arbitration under the FAA where the actual controversy between the parties is based on state law. A company seeking to compel arbitration may not recharacterize a state-law controversy to try to find some federal law aspect to the case, including an argument that the claims are preempted by federal law. In this case, even though federal courts may not compel arbitration, the company may still be able to get the state court to do so under the contract.