Ruling limits removal of class actions to federal court

In a 5-4 decision, the U.S. Supreme Court recently held that neither the general federal removal statute, 28 U.S.C. §1441(a), nor the Class Action Fairness Act of 2005, 28 U.S.C. §1453(b), allowed a third-party defendant to remove to federal court a class action counterclaim arising out of pre-existing litigation in state court.

The court’s decision, Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743 (2019), reflects a narrow interpretation of the term “defendant,” as used in §1441(a) and CAFA, and appears to leave room for plaintiffs’ lawyers to maneuver to avoid a federal forum for class action claims.

Background

In June 2016, Citibank, N.A., filed a debt collection action against George Jackson in North Carolina state court. Citibank alleged that Jackson was liable for unpaid charges made on his Home Depot credit card.

Jackson answered the complaint and asserted a counterclaim against Citibank, as well as third-party class action claims against Home Depot and Carolina Water Systems.

In support of his class action claims, Jackson alleged that Home Depot and Carolina Water Systems had engaged in a scheme to coerce homeowners into purchasing unnecessary home water treatment systems at inflated prices. Jackson brought the claims under North Carolina’s consumer protection statute, N.C. Gen. Stat. Ann. §§25A-37, 75-1.1.

In September 2016, Citibank dismissed its claims against Jackson. One month later, Home Depot filed a notice of removal to federal court, citing §1441(a) and CAFA.

On motion by Jackson, a federal District Court judge remanded the case to state court, and the 4th Circuit subsequently affirmed the remand.

The 4th Circuit held that “neither the general removal provision, § 1441(a), nor CAFA’s removal provision, § 1453(b), allowed Home Depot to remove the class action claims filed against it.”

Home Depot then petitioned for certiorari, which the Supreme Court granted.

Supreme Court’s decision

In accepting the case, the Supreme Court undertook to decide whether the term “defendant,” as used in §1441(a) and in §1453(b), includes any party “brought into a lawsuit to defend against a counterclaim filed by the original defendant or whether [those] provisions limit removal authority to the original defendant.”

The Supreme Court acknowledged its holding in Jackson leaves open the prospect that plaintiffs’ lawyers who prefer to litigate class action claims in state court may be able to do so by raising such claims as third-party counterclaims, rather than original claims.

The court began its analysis with a review of general principles of federal jurisdiction, noting that “federal courts are courts of limited jurisdiction” and that “the district courts may not exercise jurisdiction absent a statutory basis.”

The court noted that §1441(a), the general removal statute, allows “the defendant or the defendants” in a state court action to remove a case over which the federal courts would have original jurisdiction.

Similarly, the court observed that CAFA confers District courts with original jurisdiction over “class actions” in which the amount in controversy exceeds $5 million and at least one class member is a citizen of a different state than the “defendant.”

The court further noted that CAFA includes a removal provision specific to class actions (§1453(b)), under which a class action may be removed from state court “by any defendant without the consent of all defendants” and “without regard to whether any defendant is a citizen of a State in which the action was brought.”

• Removal under §1441(a)

In considering whether §1441(a) authorized removal of the case, the court emphasized that “[i]t is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”

The court concluded that the phrase “the defendant or the defendants,” as used in §1441(a), does not encompass a litigant, such as Home Depot, that first becomes involved in a state court lawsuit as a defendant to a third-party claim.

In support of that conclusion, the court noted that the Federal Rules of Civil Procedure differentiate among “defendants,” “counterclaim defendants” and “third-party defendants,” and that the FRCP impose differing requirements and obligations upon a party depending on how that party is characterized.

The court also observed that in other statutes relating to removal of specific types of claims, Congress had explicitly authorized removal by parties other than original “defendants.”

For example, 28 U.S.C., §1452(a), allows a “party” to “remove any claim or cause of action” over which the federal courts would have bankruptcy jurisdiction. Likewise, 28 U.S.C., §§1454(a) and (b), permit any “party” to remove “a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents … or copyrights.”  Section §1441(a), by contrast, refers to removal by a “defendant,” not a “party.”

The court further noted that it has long been settled law, under Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), that when a defendant in a state court action asserts a counterclaim under federal law, the original plaintiff in the action does not thereby become a “defendant” entitled to remove the case under §1441. That same principle, the court concluded, applied to Home Depot.

• Removal under CAFA

Home Depot also contended that even if it could not remove the class action claims pursuant to §1441(a), it could do so under CAFA’s removal provision, §1453(b), because the wording of that provision is different.

Specifically, Home Depot noted that §1453(b) permits removal by “any defendant” to a “class action.”

Jackson, on the other hand, argued that §1453(b) was intended to alter certain requirements for removal, not to expand the class of persons entitled to removal. The Supreme Court considered that to be a close question but ultimately agreed with Jackson.

The court reasoned that §1453(b) merely serves as an exception to the general rule that diversity jurisdiction requires complete diversity of citizenship and that all defendants agree to removal.

The court held that the term “any defendant,” as used in CAFA, refers to the category of persons who may implement removal, in that unanimity of all defendants is not required. Rather, under CAFA’s removal provision, “any” defendant can remove a class action that satisfies the diversity and amount-in-controversy requirements.

While recognizing that the term “any” generally has an expansive meaning, the court rejected Home Depot’s argument that “defendant,” as used in §1453(b), has a broader meaning than under §1441(a).

The court noted that both §1453(b) and §1441(a) rely on the removal procedures set forth in §1446, which also employs the term “defendant.” Thus, the court concluded, assigning varying meanings to “defendant” in those different sections would render their removal provisions “incoherent.”

Implications for litigants

As the Supreme Court acknowledged, its holding in Jackson leaves open the prospect that plaintiffs’ lawyers who prefer to litigate class action claims in state court may be able to do so by raising such claims as third-party counterclaims, rather than original claims.

However, the court emphasized that it was up to Congress, and not the courts, to decide whether to revise the federal removal statutes to address that possibility.

Anthony L. DeProspo Jr. is an attorney at Schwartz Hannum in Andover, Massachusetts. The firm represents management in labor and employment law matters, and educational institutions in those and education law matters.