Arbitration — Applying Vaden to Look Through a Freestanding FAA Petition Where No Complaint Exists — State Law Discovery Sanction Striking Arbitration Clause Precludes Motion to Compel in Federal Court
From Community State Bank v. Strong, 2011 U.S. App. LEXIS 17767 (11th Cir. Aug. 25, 2011):
This resilient case has arrived back in our Court after the Supreme Court's opinion in Vaden v. Discover Bank, 556 U.S. 49, 129 S. Ct. 1262, 173 L. Ed. 2d 206 (2009), and following a detour through our en banc Court. Again we are asked to navigate the labyrinth of federal jurisdiction to determine whether the district court had jurisdiction to entertain a petition to compel arbitration, pursuant to Section 4 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4.
The case arose when the Respondent James Strong ("Strong") obtained a month-long $200 loan from a storefront in Georgia in 2004. Strong later sought relief from a Georgia state court, arguing that the loan was illegal and usurious under Georgia law, because it carried a finance charge of $36, equivalent to an annual percentage rate of 253%. The Petitioners in this case, Community State Bank, Cash America Financial Services, Inc., Cash America International, Inc., Georgia Cash America, Inc., and Daniel Feehan, counter that the loan was perfectly legal, because federal law permits Community State Bank to charge interest rates without regard to Georgia law. The only issue on appeal is jurisdictional: whether the federal district court has jurisdiction over the petition to compel arbitration of Strong's claims.
In our first opinion in this case, we held that in order to determine whether there is federal jurisdiction over a petition to compel arbitration under § 4 of the FAA, we must "look through" the arbitration petition to the underlying controversy and ask whether the underlying dispute between the parties would have arisen under federal law. Cmty. State Bank v. Strong ("Strong I"), 485 F.3d 597, 607 (11th Cir. 2007). We concluded that, looking through the § 4 arbitration petition to the underlying controversy, it was apparent that Strong could have filed a coercive action arising under federal law, and therefore the district court had subject matter jurisdiction over the petition to compel arbitration. Id. at 612. ***
In Vaden, the Supreme Court adopted the "look through" approach for determining federal jurisdiction over FAA § 4 arbitration petitions, holding that "[a] federal court may 'look through' a § 4 petition and order arbitration if, 'save for [the arbitration] agreement,' the court would have jurisdiction over 'the [substantive] controversy between the parties.'" Vaden, 129 S. Ct. at 1268 (quoting 9 U.S.C. § 4) (alterations in Vaden). ***
We now revisit the same question we faced in Strong I, with the benefit of the Supreme Court's guidance in Vaden. Following Vaden's instruction to "look through" the FAA § 4 petition to the substantive controversy between the parties, we remain convinced that Strong's dispute with Community State Bank ("the Bank") could have arisen under federal law and, therefore, provides a basis for federal jurisdiction over the FAA petition. We therefore continue to endorse the primary thrust of the Strong I holding with respect to the Bank, and conclude that the district court has jurisdiction over the Bank's § 4 petition.
However, we depart from our result in Strong I as to the other petitioners in the case — Cash America Financial Services, Inc., Cash America International, Inc., Georgia Cash America, Inc., and Daniel R. Feehan (collectively "Cash America"). During the long pendency of this appeal, the Cash America parties —who were defendants in a parallel state-court lawsuit brought by Strong — moved to compel arbitration of Strong's claims in state court. Yet, when the state court ordered Cash America to produce discovery on the limited issue of the enforceability of the arbitration agreement between the parties, Cash America repeatedly refused to comply with the state court's orders. Ultimately, the state court struck Cash America's arbitration defenses as a statutorily authorized sanction for its willful discovery abuses. We now conclude that this state-court judgment — which has since been upheld on appeal and now constitutes a final judgment from a court of competent jurisdiction — has preclusive effect, and Cash America is collaterally estopped from petitioning the district court to decide the very same issue that the state court has already decided against it. We, therefore, affirm the district court's dismissal of the FAA petition as to all of the petitioners who were defendants in the state-court lawsuit. Accordingly, we affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.***
[In Vaden], the Supreme Court unanimously affirmed the Fourth Circuit's "look through" approach for determining federal jurisdiction over FAA § 4 arbitration petitions, holding that "[a] federal court may 'look through' a § 4 petition and order arbitration if, 'save for [the arbitration] agreement,' the court would have jurisdiction over 'the [substantive] controversy between the parties.'" Vaden, 129 S. Ct. at 1268 (quoting 9 U.S.C. § 4) (alterations in Vaden). All members of the Court concurred in adopting this "look through" approach. See id. (majority); id. at 1279 (Roberts, C.J., concurring in part and dissenting in part).
However, the Vaden majority of five Justices reversed the Fourth Circuit's application of the "look through" rule. The majority concluded that when the parties' controversy has already been "embodied" in pending litigation, id. at 1276 n.16, as it had been in Vaden, federal jurisdiction over the subsequent FAA petition must be assessed from the face of the preexisting complaint. Id. at 1277-78. In other words, when "actual litigation has [already] defined the parties' controversy," the well-pleaded complaint rule must be applied only to the "controversy as framed by the parties"; in such cases, "[w]hether one might imagine a federal-question suit involving the parties' disagreement . . . is beside the point." Id. at 1276-77 (emphasis added). ***
Four justices who dissented in part (the Vaden "dissent") agreed that determining federal question jurisdiction requires a federal court to "look through" the FAA petition, but disagreed with the majority about what precisely a federal court should train its attention on, once it has looked through the petition. See id. at 1279 (Roberts, C.J., concurring in part and dissenting in part) ("I agree with the Court that a federal court asked to compel arbitration pursuant to § 4 of the Federal Arbitration Act should 'look through' the dispute over arbitrability in determining whether it has jurisdiction to grant the requested relief. But look through to what?"). They criticized the majority for its "mistaken focus on . . . existing litigation," id. at 1281, noting that the majority's rule turns entirely on the mere "fortuity that a complaint happens to have been filed," id. at 1279. Instead, the dissent would have held that the district court should focus on the concrete dispute to be arbitrated and determine for itself whether a hypothetical suit — whether pending or not — arising out of that controversy would arise under federal law. Id. at 1282.
Upon careful review, we conclude that, as applied to Community State Bank, the essential holding of Strong I survives Vaden. The Bank was not a party to Strong's state-court lawsuit. Indeed, Strong expressly disavowed any claims against the Bank. Therefore, no preexisting litigation has yet defined the contours of the controversy between Strong and the Bank. The Bank's FAA petition is, in other words, what we will call "freestanding" — that is, it does not arise out of pending litigation between the parties. As we've noted, the Vaden majority did not answer the question of how a federal court should assess the nature of the parties' controversy when faced with a freestanding FAA petition. Nonetheless, we believe the approach we adopt most faithfully adheres to the Court's reasoning in Vaden, in spite of this case's admittedly different posture.
*** [I]n the case of a freestanding § 4 petition, by definition, there is no preexisting litigation defining the parties' controversy to structure the court's inquiry. The Vaden majority's jurisdictional focus on the "actual litigation [that] has defined the parties' controversy," id. at 1277, does not answer the question we face of how to discern jurisdiction when no such "actual litigation" exists. Indeed, the dissent criticized the majority's "mistaken focus on . . . existing litigation" for this very reason: It provides no instruction to a court faced with a freestanding § 4 petition, where no complaint has been filed "to 'look through' to." Id. at 1281 (Roberts, C.J., concurring in part and dissenting in part) ("In many if not most cases under § 4, no complaint will have been filed. What to 'look through' to then?" (citation omitted)). The Vaden Court did not answer the question of what a district court must look through to when the parties' controversy has not yet been "embodied," id. at 1276 n.16 (majority), in litigation — because that question was not before it.
Nonetheless, it remains clear that we must still "look through" the petition to something. The Court was very clear that jurisdiction should be predicated on the substantive dispute between the parties, not the arbitrability issue actually to be decided by the district court. See id. at 1273 ("The text of § 4 drives our conclusion that a federal court should determine its jurisdiction by 'looking through' a § 4 petition to the parties' underlying substantive controversy." (emphasis added)); id. at 1274 (rejecting the alternative construction in which "[t]he relevant 'controversy between the parties' . . . is simply and only the parties' discrete dispute over the arbitrability of their claims"). The Vaden Court thus gives us one primary instruction for how to approach freestanding FAA petitions. "Whether or not the controversy between the parties is embodied in an existing suit, the relevant question remains the same: Would a federal court have jurisdiction over an action arising out of that full-bodied controversy?" Id. at 1276 n.16. In other words, the proper jurisdictional inquiry is whether either party to the § 4 petition "could file a federal-question suit" based on the parties' underlying dispute. Id. at 1275 (emphasis in original).
We, therefore, conclude that where the parties' controversy has not yet been embodied in preexisting litigation, "[a] district court entertaining a § 4 petition" must decide for itself "what 'a suit' arising out of the allegedly arbitrable controversy would look like." Id. at 1282 (Roberts, C.J., concurring in part and dissenting in part) (quoting 9 U.S.C. § 4). That is, the court must examine the dimensions of the "full-bodied controversy," id. at 1276 n.16 (majority), between the parties, and determine whether any hypothetical claims arising out of that controversy would support federal jurisdiction. If so, then the district court may entertain the petition and, if warranted, compel arbitration of the entire controversy. 9 U.S.C. § 4; see Vaden, 129 S. Ct. at 1275 ("[Section 4 of the FAA allows a party access to federal court if] the entire, actual 'controversy between the parties,' as they have framed it, could be litigated in federal court." (quoting 9 U.S.C. § 4)).***
Although the Vaden majority had no occasion to reach the issue, Chief Justice Roberts, whose opinion commanded four votes, provided some clues as to how a federal court should confront a freestanding FAA petition. As a start, a federal court should focus on "the specific controversy — the concrete dispute that one party has 'fail[ed], neglect[ed], or refus[ed]' to arbitrate — and determine whether that controversy would give rise to a suit under federal law." Id. at 1282 (Roberts, C.J., concurring in part and dissenting in part) (quoting 9 U.S.C. § 4). After all, FAA § 4 is only triggered when one party has expressed a "refusal" to arbitrate, and the other party has been thereby "aggrieved." See 9 U.S.C. § 4. This refusal will undoubtedly be documented in some way (for example, by a letter). Examining these pre-litigation or extra-legal communications between the parties can provide insight into the factual nature of the dispute. In addition, the FAA petitioner's description of the underlying dispute in the § 4 petition itself can provide some (although not conclusive) evidence of the contours of the dispute. Thus, although the court's task necessarily requires some hypothesizing, the inquiry is not thereby utterly "free-form" or readily manipulable by the parties. Vaden, 129 S. Ct. at 1282 (Roberts, C.J., concurring in part and dissenting in part). As Chief Justice Roberts explained, "the exercise is closely analogous to the jurisdictional analysis in a typical declaratory judgment action," which requires a court to imagine for itself which coercive claims the parties' dispute could hypothetically support, in order to determine whether a hypothetical coercive lawsuit brought by the declaratory judgment defendant would present a federal question on the face of its well-pleaded complaint. Id. (citing Franchise Tax Bd., 463 U.S. at 19).
Footnote 11. In this regard, we part with the Vaden dissent, which apparently would accept the § 4 petitioner's statement of the controversy as dispositive. See Vaden, 129 S. Ct. at 1282 (Roberts, C.J., concurring in part and dissenting in part) (advocating that the court "[l]ook to the controversy the § 4 petitioner seeks to arbitrate  as set forth in the § 4 petition" (emphasis added)). Instead, we heed the Vaden majority's command to examine the "whole controversy between the parties — not just a piece broken off from that controversy," and to ensure that "[a]rtful dodges by a § 4 petitioner" not blinker the court from assessing "the full flavor of the parties' entire dispute." Id. at 1276 (majority).
*** We must discern the nature of the parties' "whole controversy," id. at 1276 (majority), on the basis of their various representations to the court, and then determine whether "a suit" arising out of the underlying dispute "would" support federal jurisdiction, 9 U.S.C. § 4. See Strong I, 485 F.3d at 606 ("We therefore look to petitioners' own statement of the dispute or disputes they wish to arbitrate, and in this, they are not limited to seeking compelled arbitration of claims that have been brought against them in court."); cf. id. at 607 ("[W]e must 'look through' the petition to compel arbitration and . . . ask: If petitioners had brought this dispute in federal district court . . ., would it have arisen under federal law?").
Having probed the factual basis of the underlying controversy between the parties, we now explore the potential lawsuits that could arise between the parties from this controversy. In so hypothesizing, we can only consider well-pled, non-frivolous potential suits. Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 89, 118 S. Ct. 1003, 140 L. Ed. 2d 210 (1998) (stating that federal subject matter jurisdiction may not be premised on a "wholly insubstantial and frivolous" claim (quoting Bell v. Hood, 327 U.S. 678, 682-83, 66 S. Ct. 773, 90 L. Ed. 939 (1946))); Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S. Ct. 2425, 96 L. Ed. 2d 318 (1987) ("[T]he well-pleaded complaint rule . . . provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." (emphasis added) (internal quotation marks omitted)). Anticipated federal defenses are irrelevant. See Vaden, 129 S. Ct. at 1272 ("Federal jurisdiction cannot be predicated on an actual or anticipated defense." (citing Mottley, 211 U.S. at 152)). ***
Footnote 14. We consider only potential coercive actions here. We have no occasion to consider hypothetical declaratory judgment actions, because the jurisdictional analysis regarding a potential declaratory judgment suit by the Bank is simply the mirror image of the jurisdictional analysis regarding potential coercive suits by Strong. See Household Bank, 320 F.3d at 1251 (holding that jurisdiction over a declaratory judgment action depends on whether the declaratory judgment defendant could file a non-frivolous coercive claim against the declaratory judgment plaintiff arising under federal law).
We can discern at least one potential basis for federal jurisdiction over the Bank's FAA petition. The dispute between Strong and the Bank could support a potential Federal Racketeer Influenced and Corrupt Organizations ("Federal RICO") claim against the Bank, that would be both well pled and non-frivolous, and which would state a federal issue on its face. Federal RICO prohibits conducting the affairs of an enterprise affecting interstate commerce through the collection of an "unlawful debt," that is, charging a usurious rate that is more than twice the enforceable rate under either state or federal law, or conspiring to do the same. 18 U.S.C. §§ 1961-1962.
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