WASHINGTON – One of the first cases the U.S. Supreme Court will hear during its October session is a Maryland one concerning whether federal courts have jurisdiction to enforce an arbitration agreement under state law.
The case, Vaden v. Discover Bank, will be heard Monday, the first day of the court’s new session.
The dispute began in 2003 when Discover Financial Services, on behalf of Discover Bank, sued retired Baltimore resident Betty Vaden, 68, in Baltimore City Circuit Court for alleged nonpayment of her credit card debt.
Vaden countersued over the legality of interest payments and other fees imposed by Discover Bank, alleging breach of contract and claiming that the bank’s interest rates violated state law. Under Maryland law, credit card companies may not assess finance charges and late fees concurrently. They also are prohibited from compounding interest on finance charges, according to court documents.
Vaden’s lawyers charged that Discover Bank violated both of these laws, almost doubling Vaden’s original balance of more than $5,000 to more than $10,000.
Vaden did not return phone calls and her lawyer, Daniel Ortiz, said she was not speaking to the press.
Discover Financial Services then petitioned the 4th U.S. Circuit Court of Appeals to compel arbitration of Vaden’s counterclaims. Before then, Discover had not requested arbitration, according to the court record.
“If Discover (Bank) had just brought this arbitration argument to the Baltimore City (Circuit) Court in the first place and asked them to compel arbitration, it would have been a very simple thing,” said David Goldberg, another lawyer for Vaden. “Instead they brought it to federal court, raising all these incredibly complicated jurisdiction questions. Everyone agrees that whether or not there’s arbitration, it should be decided by the court quickly.”
After the federal appellate court heard the case, it then remanded the case to Baltimore City to determine whether Discover Financial Services, a collection agency, or Discover Bank, a Delaware-chartered, federally insured bank, was the party at interest.
The Baltimore court found Discover Bank was the party of interest, raising a federal question under the Federal Arbitration Act and Federal Deposit Insurance Act.
The arbitration act provides for judicial aid with private disputes through arbitration, but doesn’t imply whether federal courts or state courts have jurisdiction.
Vaden appealed that ruling to the 4th Circuit, which affirmed the state court’s ruling in a 2 to 1 decision, stating that a federal district court does have jurisdiction to compel arbitration if the underlying dispute states a federal question.
After six years of litigation only to figure out which court has jurisdiction, the case has yet to be seen by an arbitrator.
The Supreme Court’s decision to hear the case stems from a string of similar cases in four other federal circuit courts that were decided differently, lawyers for Vaden said.
Only a decision from the 11th Circuit agreed with the 4th Circuit’s ruling, and even that case is under review after a sharp 80-page majority and specially concurring opinion criticizing the ruling by Judge Stanley Marcus.
“This important issue which has split the circuits merits more consideration than either this Court or the Supreme Court has given it,” Marcus wrote.
Yet, Discover Bank’s counsel is still confident.
“We believe the 4th Circuit decided the case correctly and we’re hopeful that the Supreme Court simply affirms,” said Alan Kaplinsky, attorney for Discover Bank. “Their opinion was very compelling in its logic. Based on plain language of the (Federal Arbitration Act), we believe that type of plain language argument will resonate with the Supreme Court.”
Affirmation by the Supreme Court would send similar cases to individual arbitration. Another decision could make it more difficult to get a federal court to rule on the enforceability of arbitration.
“I hope the Supreme Court says that federal court can’t order arbitration and that the proceeding has to be decided in state court,” said Ortiz, lead counsel for Vaden. “Giving the case to federal courts screws everything up. It’s a lot simpler to let the states take care of the issue. I’m not anti-arbitration, I’m just saying if you’re going through all this you should do it in state.”