WASHINGTON – An appeals panel has ruled that federal courts can intervene in certain arbitration disputes, reversing years of case law and overturning a thorny jurisdictional anomaly in the process.
The published opinion Monday from a three-judge panel of the 4th U.S. Circuit Court of Appeals held that federal courts have jurisdiction over arbitration disputes when the underlying controversy presents a federal question.
Previously, under the so-called “Westmoreland doctrine,” federal courts could only order arbitration in lawsuits where one party was attempting to force the other to the table under the Federal Arbitration Act. Courts could only get more deeply involved in such cases if there was some other basis for federal jurisdiction, like diversity of citizenship or admiralty.
A federal district judge did just that in June, ordering Baltimore resident Betty E. Vaden and Discover Bank to arbitration over Vaden’s unpaid credit card bills.
But the circuit court panel on Monday vacated that order and said that federal courts have jurisdiction over suits compelling arbitration with a valid federal question — although it did not say whether such a question existed in Vaden’s case, leaving that for the lower court to decide on remand.
Vaden’s attorney, John A. Mattingly Jr., said the 4th Circuit becomes “the very first circuit to not adopt the Westmoreland doctrine.”
He said he fears that the court’s decision may allow “forum shopping”: If a company does not receive a favorable ruling in state court, it could try to “jump” to a new forum to argue its case.
Lawyers for Discover Bank and Discover Financial Services declined to comment Tuesday, saying that it is their policy not to comment on pending litigation.
The case began in June 2003, when Discover Financial Services Inc. — the company that services Discover Bank’s credit cards — sued Vaden in Maryland state court for unpaid credit card bills of more than $10,000.
Vaden filed several class-action counterclaims against Discover Financial Services, arguing among other things that interest rate increases and fees levied by Discover Financial Services were illegal under Maryland law.
Discover Bank filed a petition in November 2003 in U.S. District Court to compel arbitration of Vaden’s claims, pursuant to the credit card agreement.
But Vaden argued that she never entered into an arbitration agreement with Discover, and that Discover Bank had no standing to petition, since she initially sued Discover Financial Services.
She asked for dismissal of Discover’s petition, but the district court disagreed, and granted Discover Bank’s request to compel arbitration.
Vaden appealed to the 4th Circuit, with mixed results.
The appeals court vacated the order for arbitration and told the lower court to reconsider all the issues presented, including whether there is a federal issue to consider.
Mattingly said he was surprised at the opinion, calling the court’s decision to circumvent the Westmoreland doctrine the “negative side” of the decision.
The good side of the decision, he said, was that the court recognized that there were questions about the validity of the arbitration agreement, and in a footnote, directed the lower court to examine the agreement in detail.
Mattingly said the bigger issue was whether or not companies can unilaterally dictate terms to consumers. He believes the sole purpose of the arbitration agreements is to avoid class-action lawsuits and “skirt Maryland law.”
-30- CNS 01-25-05