Supreme Court to Review Whether Third-Party Defendants May Remove Class Action Counterclaims under CAFAThese are interesting times at the Supreme Court for class certification defendants—and we aren’t talking about the Kavanaugh confirmation process. No, late last week, in Home Depot USA Inc. v. George Jackson*, the Supreme Court took the rare step of granting cert to visit an issue on which the circuit courts, to date, have been in agreement: whether class action counterclaims asserted against a third-party counterclaim defendant are removable if those claims meet the removal requirements of the Class Action Fairness Act of 2005 (CAFA).

In terms of traditional diversity and federal question removal, it has been settled law since the Supreme Court’s decision in Shamrock Oil & Gas Corp. v. Sheets that counterclaims asserted against an original plaintiff are not removable, even if they would have been removable had they been asserted in a separate action against the original plaintiff. In Shamrock Oil, the Supreme Court explained that the use of the phrase “defendant or defendants” in the traditional federal removal statute, 28 U.S.C. § 1441, applied only to original defendants, not to original plaintiffs who become defendants to a counterclaim. Shamrock Oil’s logic was subsequently applied to class action counterclaims asserted by the original defendant against the original plaintiff and to third-party counterclaims asserted against new defendants who were not the original plaintiff, including class action claims. Only in the relatively rare circumstance where a third-party defendant was able to successfully realign the parties did courts allow removal of counterclaims against a third-party defendant (see Hickman v. Alpine Asset Mgmt. Grp., LLC).

With the passage of CAFA, however, there was initially some hope that Shamrock Oil would no longer apply to class action counterclaims that met CAFA’s removability requirements. By enacting CAFA, Congress sought to curb abuse by plaintiffs’ attorneys who had sought to “game the system” by filing large, interstate class actions in favorable state courts where, often, the interests of class counsel were given priority over the interests of both defendants and the class. To accomplish this goal, CAFA broadly enables removal by “any defendant” of any sufficiently large class action ($5 million amount in controversy) that meets minimal diversity. Because the goal of CAFA is to enable more class actions to be removed to federal court, the Supreme Court has made clear that CAFA has no “antiremoval presumption.”

Yet, to date, the hope that CAFA would trump Shamrock Oil has been unfulfilled. Even after CAFA’s enactment, lower courts readily applied Shamrock Oil to bar CAFA removal of class action counterclaims. First, in Progressive West Insurance Co. v. Preciado, the Ninth Circuit held that original plaintiffs could not remove class action counterclaims under CAFA. A year later, in Palisades Collections LLC v. Shorts, the Fourth Circuit held that third-party counterclaim defendants—i.e., counterclaim defendants who were not the original plaintiff—also could not remove class counterclaims under CAFA. The only other circuits to address the issue—the Sixth, Seventh, and Ninth Circuits—have all concurred with the Fourth, and twice SCOTUS has denied cert. Therefore, it has been considered settled law that no counterclaim defendant, whether or not an original plaintiff, may remove a class action counterclaim under CAFA.

But with the Supreme Court’s grant of cert in Home Depot despite the complete absence of a circuit split, there is reason to believe that this “settled” law may be about to change. In Home Depot, Citibank filed a collection action against a consumer in state court. In response, the consumer filed class action counterclaims against original plaintiff Citibank, as well as additional third-party defendants Home Depot and Carolina Water Systems, Inc. (CWS), neither of which had been a party to the original collection action. Thereafter, Citibank dismissed its claim, and Home Depot removed the case to federal court, arguing that because it had never been anything but a defendant, it was entitled to remove under CAFA, given that CAFA allows “any defendant” to remove applicable class actions. Post-removal, the original defendant then dismissed his counterclaim against Citibank, leaving Home Depot and CWS as the only defendants in the case. Yet, in affirming the district court’s remand to state court, the Fourth Circuit disagreed with Home Depot’s argument that CAFA entitles third-party defendants who have never been plaintiffs to remove class counterclaims, explaining that under Fourth Circuit precedent and the unanimous precedent of other circuits, counterclaims are not removable, even under CAFA and even when the counterclaim defendant was not an original plaintiff.

Despite the unanimity among the circuits, the Supreme Court has chosen to take up this issue. Moreover, in granting cert, the Supreme Court made clear that it will address not only the question specifically presented in Home Depot—whether CAFA allows a third-party counterclaim defendant who is not an original defendant to remove a class action counterclaim—but also the broader question of whether such a third-party counterclaim defendant may remove any counterclaim, whether or not brought on behalf of a class.

Reading the tea leaves, the Supreme Court’s grant of cert despite circuit agreement seems to strongly suggest that the Supreme Court disagrees with—and will overturn—settled law. How things ultimately shakeout will depend upon a number of factors, not the least of which is who may ultimately end up being confirmed to fill Justice Kennedy’s vacated seat on the Supreme Court. Nevertheless, it seems prudent for any counterclaim defendants (whether original plaintiffs or third-party defendants) to consider removing any qualifying class counterclaims (and class third-party claims) under CAFA. Only by doing so may that defendant preserve the issue, because even if the Supreme Court ultimately decides that such claims are removable, it is unlikely that the Supreme Court would revive time periods for removal that have already lapsed or that may lapse pending its decision. Such removing counterclaim and third-party claim defendants should also consider seeking to stay any motion to remand pending a ruling in Home Depot.

We will continue to monitor this case.

*Bradley provided input on an amicus brief submitted by the Defense Research Institute in support of Home Depot’s petition for cert. Larry Ebner of Capital Appellate Advocacy PLLC was principal draftsman of that brief.