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.

Spokeo v. Robins – which confirmed that a plaintiff’s allegation of a defendant’s statutory violation without accompanying concrete harm fails to satisfy Article III’s “case or controversy” requirement – has brought the issue of standing to the forefront in a variety of class action cases. Standing has become a frequent weapon in the defense’s arsenal, both as an initial hurdle for a class plaintiff to overcome, and as a basis for resisting class certification by demanding that each putative class member demonstrate actual, concrete injury. A recent decision by the Seventh Circuit, however, reminds us that there can be a downside to a successful standing challenge: the permanent loss of a federal forum for adjudication of the claim.

The Standing Trap: Will a Spokeo Challenge Lock a Class Action Defendant into a State Court Forum?Collier v. SP Plus Corporation involved a class action brought against the operator of public parking facilities, claiming that the receipts generated by the defendant contained the expiration dates of consumers’ credit and debit cards, in violation of the Fair and Accurate Credit Transaction Act (FACTA). Plaintiffs alleged willful violation of FACTA and sought statutory and actual damages. Their complaint, however, did not describe any concrete harm resulting from the alleged statutory violation. SP Plus removed the case to federal court, invoking the court’s federal question jurisdiction under FACTA, and then moved to dismiss under Fed. R. Civ. P. 12(b)(1), contending that plaintiffs lacked Article III standing because they alleged no injury in fact.  Plaintiffs responded by moving to remand the case to state court, contending that SP Plus had failed to establish subject matter jurisdiction. The district court denied the motion to remand, and granted plaintiffs leave to amend to make factual allegations in support of their request for actual damages. When plaintiffs did not amend their complaint, the trial court dismissed the case with prejudice. Plaintiffs appealed to the Seventh Circuit.

The appeals court reversed. The court agreed that plaintiffs’ complaint did not allege an actual injury sufficient to establish Article III standing under Spokeo. Nonetheless, relying on the mandatory language of 28 U.S.C. § 1447(c), the court held that remand to state court was the only permissible option upon a finding of lack of subject matter jurisdiction. The court also noted that even if a dismissal had been proper, it should have been one without prejudice, as a jurisdictional dismissal is not an adjudication on the merits. In a parting shot, the court expressed displeasure that the defendant had removed the case to federal court and then promptly attacked federal jurisdiction; SP Plus’s “dubious strategy has resulted in a significant waste of federal judicial resources, much of which was avoidable.”

There are several takeaways from this decision:

  • From the defense perspective, seeking a Rule 12(b)(1) jurisdictional dismissal in a case removed from state court is strategically risky. The weight of authority (which Collier reflects) and the language of 28 U.S.C. § 1447(c) instruct that a successful challenge to plaintiff’s standing will result in a remand to state court. And the benefit of a federal court’s ruling of “no Article III standing” is far from clear, unless the state court’s standing jurisprudence mirrors Article III. Even then, as a non-final (and, at best, appealable by permission only) ruling, it is difficult to imagine that a state court would consider the remand order to be preclusive. There is authority in some circuits that a district court can dismiss rather than remand to state court if remand would be futile, i.e., if it is clear that the state court would likewise dismiss for lack of standing. But making that showing is likely to be difficult, as many states’ standing rules differ from federal standards. And – as Collier also teaches – a jurisdictional dismissal by the federal court should be one without prejudice, leaving the plaintiff free to refile the case in state court anyway.
  • Of course, ignoring standing altogether does not eliminates the trap. The plaintiff himself can raise the issue in an effort to have the case remanded. And as the late, great Dan Meador taught many of us in his Federal Courts class, “even the janitor can raise subject matter jurisdiction.” But beyond those scenarios, the defendant is better served by saving its standing arguments for class certification, in particular the argument that each class member must show actual injury, thus defeating commonality, typicality and predominance. Not all courts have bought into the concept that every member of the class must have standing, but arguing these issues under the Rule 23 factors can create traction for the defense while minimizing the risk of remand.
  • Collier also serves as a reminder that federal jurisdictional statutes (including the Class Action Fairness Act) may be of limited utility to the defendant facing a class action involving statutory violations without actual injury. Federal district courts have a duty independent of any Congressional enactment to determine whether an action involves an actual “case or controversy” under Article III.
  • Defense counsel’s natural instinct in “touch foul” class actions is to argue early and often that “plaintiff hasn’t been hurt at all.” In class cases removed from state court, however, it may be wise to curb that instinct. Attacking standing can result in the defendant being left to the tender mercies of the state court where plaintiff’s counsel initially chose to bring the suit.

Growing Consensus in the Courts of Appeals against Alternative-Citizenship Theory of Diversity under CAFAIf a putative class of plaintiffs, all citizens of State A, sues a corporate defendant, which the law considers to be a citizen of State A and State B, in state court, may the defendant remove the case to federal court under the Class Action Fairness Act (CAFA)? Recently, the Sixth Circuit became the third court of appeals to answer “no.”

CAFA, 28 U.S.C. § 1332(d), provides for federal jurisdiction over class actions involving at least 100 class members, with $5 million or more at stake, and in which “any member of a class of plaintiffs is a citizen of a State different from any defendant.” Unlike diversity jurisdiction in most other contexts, CAFA allows minimal diversity—as long as one plaintiff maintains citizenship in a state different from one defendant’s citizenship, diversity is satisfied, regardless of where all other parties reside. Frequently, diversity under CAFA is straightforward. If one plaintiff resides in California and one defendant resides in Tennessee, the case passes muster. In contrast, a class of plaintiffs from one state facing a defendant from the same state cannot satisfy even minimal diversity.

Sometimes, however, the nature of corporate citizenship creates a hybrid situation. Under § 1332(b), a corporation is a citizen of both its state of incorporation and the state where it maintains its principal place of business. Defendants in the Sixth, Fourth, and Eleventh Circuits have argued that minimal diversity exists within the meaning of CAFA when one of these places aligns with the citizenship of a class of plaintiffs but the other does not. The intent of CAFA to expand federal jurisdiction beyond the traditional confines of complete diversity is often relied upon in support of this argument. Under this “alternative-citizenship” theory of diversity, the corporation can pick between citizenship in one state or the other to either satisfy or defeat minimal diversity under CAFA.

Unfortunately for removing defendants, the theory has failed thus far in each of the three courts of appeals to squarely address it. The reasoning in each court follows similar lines: First, they say, the text of § 1332 is clear—a corporation is a citizen of its place of incorporation and where it maintains its principal place of business, not either-or. Second, the courts have reasoned, allowing jurisdiction based on the alternative-citizenship theory would not comport with the historical purpose behind federal diversity jurisdiction—to protect an out-of-state litigant from prejudice within a court in the opposing party’s home state. The Sixth Circuit’s opinion even suggests that the alternative-citizenship theory would push the limits of Article III. If that is right, even express Congressional legislation would not make the alternative-citizenship theory effective.  And unless and until another Circuit rules differently, this issue is not likely to reach the Supreme Court for clearer resolution.