Ruling on Federal-Question Jurisdiction Opens Federal Courts to FAA § 4 Motions
FEDERAL COURT DEVELOPMENTS
Under a new ruling by the 4th Circuit, it will be possible for federal district courts to hear motions to compel arbitration under § 4 of the Federal Arbitration Act (FAA) where the underlying controversy raises a federal question.
When diversity of citizenship does not exist between parties to a dispute, a federal question usually must exist in order for a federal district court to have jurisdiction to hear the case. This rule applies equally to actions in district court to compel arbitration under § 4 of the FAA. Section 4 provides:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have 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 Supreme Court has established that the FAA does not create federal question jurisdiction, so there must be an independent ground for the court to have jurisdiction under § 4. However, when that ground is federal question jurisdiction, the courts of appeals have not agreed on how to determine whether such jurisdiction exists. The 2nd Circuit ruled in 1996 that federal question jurisdiction does not exist for purposes of § 4 unless the petition for arbitration itself raises a federal question. This approach, which would preclude all motions to compel under § 4 in cases not involving diverse parties, is referred to as the Westmoreland doctrine since it was originated in Westmoreland Capital Corp. v. Findlay, 100 F.3d 263. A few other circuits have followed this approach. However, the 11th Circuit came to a different conclusion in Tamiami Partners, Ltd. v. Miccosukee Tribe, 177 F.3d 1212 (1999). It ruled that federal question jurisdiction can exist based on the underlying dispute between the parties.
Now, the 4th Circuit has ruled on the issue, siding with the 11th Circuit and offering a reasoned decision that expressly rejects the Westmoreland doctrine. Ruling on Jan. 24, 2005, in Discover Bank v. Vaden, 396 F.3d 366, a lawsuit to collect on a debt, the 4th Circuit held that a district court may look through to the parties' dispute to determine if a federal question is raised.
The Discover Bank Case
In this case, an affiliate of Discover Bank sued Betty Vaden, a Discover cardholder, for an unpaid credit card balance. She responded by filing several class-action, state law counterclaims against the bank. …