The U.S. Supreme Court issued several decisions construing the Federal Arbitration Act. In Vaden v. Discover Bank, a credit card issuer filed suit in state court against a cardholder to collect on past-due charges, and the cardholder responded with a class action counterclaim, alleging that Discover Bank’s demands violated state credit laws. Discover Bank then filed a petition in federal district court under §4 of the FAA to compel arbitration of the state court counterclaim pursuant to the card agreement’s arbitration provision. Discover Bank argued federal question jurisdiction was present because the counterclaim was preempted by federal banking laws.
The Court held the federal district court should determine federal question jurisdiction by “looking through” the §4 petition to ascertain whether “the controversy between the parties” arises under federal law. However, the Court also held that federal question jurisdiction in such a case could not be premised on a counterclaim, even if it were completely preempted by federal law. Accordingly, the federal courts lacked jurisdiction to entertain the §4 petition.
In Arthur Andersen LLP v. Carlisle, plaintiffs brought suit in federal district court concerning an unsuccessful tax shelter arrangement. Various defendants moved pursuant to §3 of the FAA to stay the action, contending principles of equitable estoppel required plaintiffs to arbitrate even though the moving defendants were not signatories of the relevant arbitration agreement. The trial court denied the stay, and the Sixth Circuit dismissed the interlocutory appeal brought under §16(a)(1)(A) of the FAA.
The Supreme Court reversed, rejecting the reasoning that §3 affords a stay only to signatories of an arbitration agreement, and that therefore the §16(a)(1)(A) requirement that the appeal be from the denial of a stay “under section 3” would deprive non-signatories of an appeal. The Court disapproved this “conflating” of the appellate jurisdictional question with the merits of the appeal, and held that by its terms §16(a)(1)(A) allowed an appeal of the denial of a §3 stay regardless of the underlying merits. The Court further held that §3 stays are not limited to “disputes between parties to a written arbitration agreement[,]” but also are available when an arbitration provision “is made enforceable against (or for the benefit of) a third party under state contract law.” Thus, §§ 3 and 16(a)(1)(A) of the FAA do not discriminate between signatories and non-signatories of arbitration agreements.