Today, the Supreme Court held in Discover Bank v. Vaden,
http://www.supremecourtus.gov/opinions/08pdf/07-773.pdf, that a district court should “look through” a petition to compel arbitration to determine whether the case is predicated on a controversy that “arises under” federal law. Jurisdiction cannot be established, however, by a counterclaim if the whole complaint does not “qualify for federal court jurisdiction.”

The Court read section 4 of the FAA to require this look through analysis; according to the Court, the section four language “save for [the arbitration] agreement” indicates that the district court should assume the absence of the agreement and determine whether it “would have jurisdiction under title 28” over “the controversy be-tween the parties,” which is most straightforwardly read to mean the “underlying dispute” between the parties.

The Court held that, after looking through the petition, that Vaden’s dispute with Discover Bank was not amenable to federal-court adjudication. The “controversy between the parties” arose from Vaden’s “alleged debt,” a claim that did not “arise under” federal law.

The other choice, at least from the federal courts’ perspective, would have been to examine only the face of the petition and refuse to grant federal jurisdiction unless the parties were diverse. See Community State Bank v. Strong , 485 F.3d 597, 632.

While neither of the approaches appeared “right”, which may explain the unusual division of justices between the majority and the dissent in this case (Ginsburg, Scalia, Kennedy, Souter and Thomas — majority; Roberts, Stevens, Alito and Breyer — dissent), the approach the Supreme Court took, to look through the petition to determine whether federal jurisdiction existed, seemed preferable because it is more consistent with the liberal federal policy favoring arbitration in the United States.

Ross Runkel reports on the case at: http://www.lawmemo.com/arbitrationblog/2009/03/vaden_v_discove.html