May 28, 2019

Stranded in State Court: Supreme Court Holds that Third-Party Counterclaim Defendants Cannot Remove Class-Action Counterclaims to Federal Court

By Michael P. Daly, Mark D. Taticchi and Robert J. DeNault*

The Lede

As Congress appreciated when it enacted the Class Action Fairness Act of 2005 (CAFA), large, multistate class actions are better suited for federal courts, not state ones. Following that logic, the Supreme Court has since recognized (repeatedly) that CAFA is designed to encourage federal jurisdiction over certain class actions in order to avoid unfairness to defendants in state courts. As a result, the Court has shown a degree of solicitude toward pro-removal interpretations of the federal jurisdictional statutes when the interpretation of those statutes was in doubt.

Not today. In a 5-4 decision issued this morning, the Supreme Court held that a party who is first brought into a case as a defendant to a counterclaim (e.g., when an individual sued by a debt collector files a counterclaim against not only the debt collector but also the merchant to whom the debt was originally owed) cannot remove the case to federal court—even where the original claim has evaporated, leaving only a multistate class action being prosecuted in state court. If not overturned by Congress, this decision will invite the plaintiffs’ bar to weaponize debt-collection (and other state-court) actions and try to use them to hold in state-court class actions that, in virtually any other scenario, would be immediately removed to federal court.

The Facts

George Jackson, a Home Depot customer and the defendant in the underlying lawsuit, purchased a water filtration system using a Home Depot credit card issued by Citibank. Citibank later sued Jackson to collect outstanding debt owed on the system. Jackson then filed a counterclaim against Citibank and a third-party class action counterclaim against Home Depot (the “third-party counterclaim defendant” in the Supreme Court’s parlance).

Citibank later dismissed its claims against Jackson. Home Depot then tried to remove the case to federal court under CAFA, and Jackson moved to remand. The district court remanded the case, and the Fourth Circuit affirmed, relying heavily on the Supreme Court’s decision in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), which held that plaintiffs who choose to file suit in state court do not later become “defendants” for purposes of removal under 28 U.S.C. § 1441 if counterclaims are subsequently asserted against them. The Fourth Circuit held that the text and logic that compelled that conclusion in Shamrock Oil compelled the same conclusion in the case of a party that is unwillingly haled into court as an additional defendant to a counterclaim.

The Decision

In a five-Justice majority opinion written by Justice Thomas and joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, the Supreme Court held that Home Depot could not remove the claims against it to federal court, either under the general removal statute or the provisions of CAFA that modified the removal statute in certain respects. That ruling was the result of a strict textual analysis of both statutes, which are discussed in turn below.

The General Removal Statute (28 U.S.C. § 1441)

First, the Court rejected Home Depot’s argument that it was a “defendant” with respect to the “claims” that had been asserted by Jackson. The Court was unpersuaded by this argument because Section 1441 allows removal of a “civil action,” not “claims.” In its view, the “civil action” that can be removed “is the action as defined by the plaintiff’s complaint,” and “‘the defendant’ to that action is the defendant to that complaint, not a party named in a counterclaim.” Slip Op. at 6. “Section 1441(a) thus does not permit removal based on counterclaims at all, as a counterclaim is irrelevant to whether the district court had ‘original jurisdiction’ over the civil action.” Id.

Second, the Court also noted that the Federal Rules of Civil Procedure differentiate among “third-party defendants,” “counterclaim-defendants,” and “defendants,” which the Court took as an indicator that Congress did not intend its use of the term “the defendant or the defendants” in Section 1441(a) to encompass third-party counterclaim defendants.

Third, and similarly, the Court observed that in other removal statutes, Congress has expressly extended the removal prerogative to parties other than the original defendant—e.g., 28 U.S.C. § 1452(a) (“[a] party”)). By negative implication, the Court reasoned, Congress intended a more restrictive scope of removal in Section 1441.

Fourth, the Court concluded (as the Fourth Circuit had) that Shamrock Oil weighed against allowing third-party counterclaim defendants to remove. Although the Court acknowledged that a third-party counterclaim defendant is differently situated than a counterclaim defendant—e.g., because the former had no role in choosing the forum for the original suit—it ultimately found the statutory text dispositive: “If a counterclaim defendant who was the original plaintiff is not one of ‘the defendants,’ we see no textual reason to reach a different conclusion for a counterclaim defendant who was not originally part of the lawsuit.” Slip Op. at 8.

CAFA (28 U.S.C. § 1453(b))

Whereas the general removal provision (Section 1441) allows “the defendant” or “the defendants” to remove the “civil action,” CAFA’s removal provision (Section 1453) says that “any defendant” in a “class action” may initiate removal. The question is whether this “any defendant” language was intended (as Home Depot argued) to permit removal in circumstances such as those present here or instead (as Jackson argued) only to eliminate (1) the rule that in-state defendants cannot remove cases to federal court; and (2) the requirement that all defendants consent to removal. Although describing this as a “closer question” than that presented by Section 1441, the Court ultimately held that the latter, narrower reading was the better one, and further reasoned that any other reading would be problematic because it would mean affording a different meaning to the same term (“defendant”) used in two different statutes.

In concluding, the Court acknowledged that its construction of these statutes might lead to jurisdictional manipulation by class plaintiffs keen to avoid litigating in federal court but opined that that was a consideration for Congress, not the Courts, to address.

The Dissent

Justice Alito dissented, joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh. In addition to a robust textual defense of the view ultimately rejected by the Court, Justice Alito also warned that the “tactic” used by Jackson in this case “subverts CAFA’s evident aims,” Dissent at 7, and admitted that he could “think of no rational purpose for this limit on which defendants may remove,” id. at 8. In his view, the irrationality of the Court’s interpretation should have caused it to adopt a plausible reading that tracked more faithfully the evident purpose and design of the statute’s drafters.

The Upshot

The bottom line from this decision is disquieting. As the dissent observed, the practice of lying in wait for a state-court lawsuit that can then be leveraged into an unremovable multistate class action is a tactic that surely would have been anathema to CAFA’s drafters. And yet that tactic has now seemingly been approved by the Supreme Court. Until Congress can be prevailed upon to close this loophole, merchants and the debt-collection companies with whom they work should consider carefully how they can structure their consumer-facing interactions—including in contract terms, Terms & Conditions, and the like—to limit their exposure to class or other aggregate litigation.

*Robert J. DeNault, a law clerk in Drinker Biddle’s Philadelphia office, assisted in preparation of this alert.

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