The U.S. Supreme Court has ruled that a federal district court presented with a petition to enforce an arbitration agreement pursuant to § 4 of the Federal Arbitration Act may "look through" the petition to determine whether it is based upon an action that "arises under" federal law. However, the Court also held that a federal court may not entertain a § 4 petition when federal question jurisdiction is based on the contents of a counterclaim. The ruling highlights the risks of a class action counterclaim in state court, which cannot be removed to federal court or compelled to arbitration by a federal court.
In Vaden v. Discover Bank , the issuer of a credit card brought a breach of contract action in state court against a card holder to collect on past-due charges, and the card holder responded with a class action counterclaim, alleging that Discover Bank's demands violated state credit laws. Neither federal law nor the arbitration clause in the credit card agreement was invoked in the state court by either party. Discover Bank then filed a petition in federal district court pursuant to § 4 of the FAA to compel arbitration of the state court counterclaim. Discover Bank argued that federal question jurisdiction existed because the counterclaim was completely preempted by federal banking laws.
The Court held that the federal district court should determine its jurisdiction under 28 U.S.C. §1331 by "looking through" the § 4 petition to ascertain whether "the controversy between the parties" arises under federal law. The Court also held, however, 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 district court lacked jurisdiction to entertain the § 4 petition.