May 08, 2012 Articles

Updating Federal Procedures for Removal and Venue

The Federal Courts Jurisdiction and Venue Clarification Act resolves several disagreements and clarifies lingering ambiguities.

By Thomas A. Gilson

For years, federal courts have clashed over the interpretation of procedures for removal, jurisdiction, and venue. In the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112–63, a new law that took effect in January 2012, Congress resolved many of these disagreements and clarified lingering ambiguities.

The Act Clarifies Procedures for Removal
A defendant that is sued in state court may remove the lawsuit to federal district court if there is federal-question or diversity jurisdiction. 28 U.S.C. §§ 1331–32. To initiate removal, a defendant must file a notice of removal with the federal district court within 30 days after it is served or otherwise receives a copy of the complaint. The procedures for removal are set forth in 28 U.S.C. §§ 1441, et seq.

Timing of Removal in Cases Involving Multiple Defendants
Before the act went into effect, the removal statute stated that the defendant had 30 days to remove an action after receiving a copy of the complaint. See 28 U.S.C. § 1446(b) (2010).The statute, however, did not specify how deadlines would be calculated if multiple defendants were served separately at different times.

Resolving a split in authority, the act now gives each defendant an opportunity to remove within 30 days after being served. 28 U.S.C. § 1446(b)(2)(B)–(C). To illustrate how this new provision works, suppose a complaint names two defendants: A and B. The plaintiff serves A first, but A does not file a timely notice of removal. The plaintiff then serves B. Under the act, B still has 30 days from the time it is served to file a notice of removal, even though A’s deadline has expired.

Stated differently, a plaintiff may not deprive a defendant of its opportunity to remove the case to federal court by serving one defendant first, and then waiting more than 30 days to serve a second defendant. The act also clarifies that an earlier-served defendant may join a later-served defendant’s notice of removal, even though the earlier-served defendant’s own 30-day time period has expired. 28 U.S.C. § 1446(b)(2)(C).

Notably, this provision comes into play only when multiple defendants are served at different times. If multiple defendants are served on the same day, of course, all of them will have the same removal deadline.

Codifying the Rule of Unanimity
The act addresses another issue relating to the removal of multi-defendant cases—it codifies the long-established “rule of unanimity,” under which all defendants that have been properly joined and served must consent to removal. 28 U.S.C. § 1446(b)(2)(A).

Is the Complaint Removable?: When Federal Jurisdiction Is Unclear
Assume that a state-court complaint specifically asserts claims under a federal statute. There is no question that the 30-day time period for filing a notice of removal starts to run when a defendant receives a copy of such a complaint. But what if it is unclear that there is federal jurisdiction over the state-court complaint?

The act provides guidance to defendants who are served with complaints that do not explicitly reveal that federal jurisdiction exists—in particular, when a complaint does not clearly indicate an amount in controversy. 28 U.S.C. § 1332 (to establish diversity jurisdiction, the amount in controversy must exceed $75,000). When a complaint in state court does not specify the amount of damages it seeks, a defendant may attempt to persuade the federal district court judge that the $75,000 amount-in-controversy requirement has been satisfied. This is often a challenging process, as the defendant may not yet have any meaningful evidence about the plaintiff’s damages. Moreover, federal courts have disagreed about the standards a defendant must meet to establish that the amount-in-controversy requirement has been met.

Under the act, a defendant may simply allege in its notice of removal that the amount in controversy exceeds $75,000. 28 U.S.C. § 1446(c)(2). The defendant must persuade the federal district court judge that the amount-in-controversy requirement has been satisfied under a preponderance of the evidence standard—not the more demanding “legal certainty” standard previously used by some courts. See Pratt Cent. Park Ltd. v. Dames & Moore, 60 F.3d 350, 351 (7th Cir. 1995); Columbia Gas Transmission Corp. v. Tarbuck, 62 F.3d 538, 541 (3d Cir. 1995). Thus, if the district court judge is convinced, and the other diversity jurisdiction requirements have been met, the defendant has met its burden of establishing that removal is proper.

If the defendant learns during the course of proceedings in state court that there is a basis for federal jurisdiction—for example, the plaintiff files an amended complaint that raises a federal claim—the defendant will have 30 days to file a notice of removal. 28 U.S.C. § 1446(b)(2)(B).Likewise, if the defendant learns for the first time through state-court discovery that the amount in controversy exceeds $75,000, the defendant has 30 days to file a notice of removal based on diversity jurisdiction after learning that fact. 28 U.S.C. § 1446(c)(3)(A).

Extending the One-Year Time Limit for Removal
The removal statute sets forth an outside time limit for state-court defendants that want to remove a lawsuit on diversity grounds: one year from the commencement of the lawsuit. 28 U.S.C. § 1446(b). Congress recognized that some state-court plaintiffs were using delay tactics and concealing facts that would support diversity jurisdiction until after the one-year period had expired. The act, therefore, now provides that the one-year time period may be extended if the court concludes that a plaintiff has acted in bad faith to prevent removal. 28 U.S.C. § 1446(c)(1).

The Removal of State-Law Claims
The act also addresses the removal of state-court lawsuits that include both federal claims and unrelated state-law claims. Before the act went into effect, federal courts had discretion to accept jurisdiction over unrelated state claims when a complaint was removed on federal-question grounds. 28 U.S.C. § 1441(c) (2010). Many courts and commentators viewed this procedure as constitutionally suspect because it appeared to afford federal courts the right to hear state-law claims they would have lacked jurisdiction to hear initially. See, e.g., Salei v. Boardwalk Regency Corp., 913 F. Supp. 993, 1007 (E.D. Mich. 1996); Charles A. Wright and Mary K. Kane, Law of Federal Courts § 39 at 235 (6th ed. 2002). In response to these critiques, the act now requires federal district courts to sever unrelated state-law claims and remand them to state court. 28 U.S.C. § 1441(c)(2).

To be clear, district courts need not sever all state-law claims in a removed complaint, as federal courts have supplemental jurisdiction to hear state-law claims that are substantially related to federal claims.

Diversity Jurisdiction: Defining the Citizenship of Corporations
The act clarifies how corporations with foreign contacts should be treated in diversity cases. Before the act went into effect, the diversity statute stated that a corporation was a citizen of any “State” where it was incorporated and of the state where it has its “principal place of business” or its headquarters. See 28 U.S.C. § 1332(c)(1) (2010).The federal appellate courts treated this provision inconsistently, with some interpreting the term “State” to include foreign states, and some concluding the contrary. Compare, e.g.Torres v. Southern Peru Copper Corp., 113 F.3d 540, 543 (11th Cir. 1997) (statutory term “State” does not refer to foreign states) with Nike, Inc. v. Comercial Iberica de Exclusivas Deportivas, S.A., 20 F.3d 987, 990 (9th Cir. 1994) (“State” applies to both foreign countries and states of the United States). This led to confusion in determining the citizenship of foreign and domestic corporations with a presence in the United States and abroad.

Resolving this circuit split, the act clarifies that a corporation is a citizen of both the state or country in which it was incorporated and the state or country where its “principal place of business” is located. 28 U.S.C. § 1332 (c)(1). For example, it is now clear that there will be no diversity jurisdiction in a lawsuit between a citizen of New York and a Chinese corporation whose principal place of business is in New York. In that instance, the Chinese corporation would be considered a citizen of New York, thus destroying diversity.

The Act Updates Procedures for Venue
The act also makes several tweaks to the laws governing venue. First, there were formerly two statutory provisions for venue: one for diversity cases, 28 U.S.C. § 1391(a) (2010), and another for federal-question cases,28 U.S.C. § 1391(b) (2010). The act abolishes this distinction and establishes a new, unitary provision, 28 U.S.C. § 1391(b), that covers venue for both types of cases.

Second, venue was formerly proper in “a judicial district where any defendant resides, if all defendants reside in the same state.” See 28 U.S.C. § 1391(a)(1) & (b)(1) (2010). Congress recognized that this language was problematic in cases involving corporate defendants. To illustrate the problem, suppose a complaint names two defendants: an Arizona resident and a corporation that does substantial business in every state, including Arizona. The corporation is treated as a resident of every state, including Arizona. 28 U.S.C. § 1391(c). Under the former language of the statute, because the corporation and the individual are deemed to both “reside” in Arizona, venue would seem to be proper in any other district where the corporation resides (the District of Maine, for example). The act clarifies that venue should not be treated so expansively. Now, in multi-defendant cases, venue is limited to a district of the state where all the defendants reside. 28 U.S.C. § 1391(b)(1).In our example, venue would be proper in the District of Arizona, but would not be proper in the District of Maine.

Finally, the act addresses the standards for transferring venue from one federal district to another. Civil actions may be transferred from one federal district to another for the convenience of parties and witnesses and in the interest of justice. 28 U.S.C. § 1404(a).Before the act was passed, there was one important caveat: A lawsuit could only be transferred to a district where the lawsuit could have been filed initially—that is, where venue and personal jurisdiction would have been proper. The act eliminates this restriction, permitting federal lawsuits to be transferred to almost any district as long as all parties agree, even if the lawsuit could not have been brought in that district originally. Id. Such a transfer will be permitted only if the court agrees that it would be in the interest of justice and that it would be convenient for the parties and witnesses.

The act makes significant changes to the federal jurisdictional statutes. These changes are worthy of careful consideration, as they could affect your clients’ rights to defend themselves in federal court.

Keywords: litigation, business torts, Federal Courts Jurisdiction and Venue Clarification Act, jurisdiction, federal district court

Thomas A. Gilson – May 8, 2012