February 20, 2013 Articles

A Closer Look: Federal Courts Jurisdiction and Venue Clarification Act

By James C. Barton Jr., Alan D. Mathis, and Zachary D. Trotter

One of last year's most significant developments in federal court litigation occurred on January 6, 2012, when the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, Public Law No. 112-63, took effect. The act, which was designed to simplify and clarify the rules related to jurisdiction and venue in the federal courts, has largely served its purpose—providing bright-line rules with little need for further clarification or interpretation from the courts. Though the act also made changes to federal venue provisions, the changes to the removal statute served as the centerpiece of the legislation. This article provides a refresher on the history and purpose of the act, discusses in greater detail the changes to the removal statute and their effect on legal practice, and notes where court interpretation is still needed. Finally, the article briefly discusses notable omissions from the act.

As with most federal statutes, the act followed a tortuous path to passage, and a number of interesting aspects about its journey stand out. (A full history of the act is found in the House Judiciary Committee Report, available here.)  

First, the bill that was originally introduced by representative Lamar Smith, the chairman of the House Judiciary Committee, was largely drafted by the Committee on Federal-State Jurisdiction of the Judicial Conference of the United States. This collaboration ensured that the act would address problematic questions of law and resolve contentious circuit splits as addressed in more detail below.

Also, instead of following the traditional path to enactment with public hearings in multiple committees, the bill largely relied on the Administrative Office of U.S. Courts to function "as a clearinghouse to vet the bill," collaborating with the Judicial Conference's Federal–State Jurisdiction Committee, academics, and interested stakeholders to craft the bill. H.R. Rep. No. 112-10, at 2 (2011). In this respect, the final content of the bill was shaped by an informal process, with no hearings on the bill in the final six years before its passage.

Finally, with unusual candor, the House Report states that the purpose of the vetting process was "to identify and delete those provisions that were considered controversial by prominent legal experts and advocacy groups." H.R. Rep. No. 112-10, at 2. Though this strategy of cutting all controversial provisions facilitated its passage, it also resulted in some notable omissions from the statute.

Changes to Removal
The act was designed to "clarif[y] the operation of federal jurisdictional statutes and assist[] Federal judges in identifying the appropriate State or Federal court where actions should be brought." H.R. Rep. No. 112-10, at 5. To accomplish this objective, the act significantly amended and revised many aspects of removal jurisdiction and procedure.

Time to Remove for Multiple Defendants
Congress' main objective in the act was to resolve a circuit split regarding the timing of removal in cases involving multiple defendants. The prior version of 28 U.S.C. § 1446(b) required that removal be completed "within thirty days after the receipt" of the pleadings from the plaintiff. Courts disagreed on how to interpret this statute when dealing with multiple defendants served at different times. Some courts, including the Fourth Circuit in Barbour v. Int'l Union, 640 F.3d 599 (4th Cir. 2011) and the Fifth Circuit in Getty Oil Corp. v. Ins. Co. of North America, 841 F.2d 1254 (5th Cir. 1988), held that the first-served defendant and all later-served defendants must join in the notice of removal within 30 days after service upon the first-served defendant.

Other circuits, including the Eighth Circuit in Marano Enters. of Kansas v. Z-Teca Rests., L.P., 254 F.3d 753 (8th Cir. 2001), theNinth Circuit in Destfino v. Reiswig, 630 F.3d 952 (9th Cir. 2011), and the Eleventh Circuit in Bailey v. Janssen Pharmaceutica, Inc., 536 F.3d 1202 (11th Cir. 2008), reached the opposite conclusion and determined that the 30-day period ran from the date of service on the last-served defendant. Therefore, relying on the last-served defendant interpretation, the earlier-served defendants who failed to remove the case during their own 30-day removal period could consent to the removal of a later-served defendant so long as the later-served defendant's removal fell within its own 30-day removal period.

The act settled this issue by adopting the majority, last-served defendant approach, adding explicit language to section 1446(b)(2)(B) to permit each defendant 30 days to remove from the time of its own service. Additionally, section 1446(b)(2)(C) explicitly provides that an earlier-served defendant may consent to the removal by a later-served defendant even if the earlier-served defendant did not initiate or consent to removal during its own 30-day removal window.

One-Year Removal Limit
The act also recognized the problems associated with an absolute one-year bar to removal in diversity cases. The act amended the time in which a defendant may remove a case by providing an escape from the one-year bar when a plaintiff acts in "bad faith" to prevent removal. See Act § 103(b)(3)(C). As the Eastern District of Virginia recognized in Linnen v. Michielsens, 372 F. Supp. 2d 811 (2005), the previous one-year bar lent itself to abuse by allowing plaintiffs' attorneys to "include in diversity cases a non-diverse defendant only to non-suit that very defendant after one year has passed in order to avoid the federal forum."

In the act, Congress created an equitable exception to the one-year bar to defeat, or at least to minimize, this gamesmanship. Now, if a "plaintiff has acted in bad faith in order to prevent a defendant from removing the action," the court can waive the one-year time bar and allow the defendant to remove the case anyway. See Act § 103(b)(3)(C). Though the drafters did provide an example of what constitutes bad faith by a plaintiff to avoid the one-year limit—for example, if the district court finds that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal—litigators should keep a watchful eye on how expansively the courts interpret this bad-faith provision.

Although the House Report states that this exception is "limited in scope," it is up to the courts to decide exactly how broad or narrow the provision will be. Because the act did not take effect until January 6, 2012, and applied only prospectively, the courts have not yet had an opportunity to weigh in on this bad-faith provision. Thus, the first interpretive decisions should begin to be issued in the first quarter of 2013.

Amount in Controversy
The act's final major change to diversity jurisdiction resolved several issues relating to the evaluation of the amount in controversy when a case is removed based on diversity. The act clarified the procedures for determining the amount in controversy necessary to permit a federal court to retain diversity jurisdiction. It is no secret that the former rules about the amount in controversy placed the plaintiff in the unusual position of seeking to minimize the potential amount of damages while a defendant was then forced to say that the case was potentially worth far more than the plaintiff stated.

While the new procedures did not eliminate this tension, they did clarify how such arguments will unfold. The act's new section 1446(c)(2) places the plaintiff in control by stating that "the sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy." However, the act allows a defendant the ability to prove by a preponderance of the evidence that the amount in controversy exceeds the minimum jurisdictional amount, currently $75,000, if the complaint seeks either "(i) nonmonetary relief; or (ii) a money judgment, but the State practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded." See Act § 103(b)(3)(C). To establish that the amount is over the jurisdictional limit, the act makes clear that the defendant may use information collected during discovery to support the removal petition even if removal would not be permitted based solely on the initial pleadings. See Act § 103(b)(3)(C). The act treats this information as "other paper" to permit its use for purposes of removal. See Act § 103(b)(3)(C). These changes resolved a circuit split regarding both the burden of proof in demonstrating that the amount in controversy is satisfied and what evidence may factor into such a determination.

Federal-Question Jurisdiction
Though the act's effect on federal-question jurisdiction was limited, it was significant. The act's only provision relating to federal-question jurisdiction deals with the questionable, and troublesome, "separate and independent" claim provision of section 1441(c), which addresses the removal of actions that include both removable federal-question claims and non-removable state law claims. Section 103(a)(4) of the act eliminated a federal court's discretion to hear independent state law claims asserted in a case removed to federal court on the basis of federal-question jurisdiction. Under the new section 1441(c), a defendant is allowed to remove an action containing federal claims and unrelated state law claims, but the act requires the federal court to sever the unrelated state law claims and remand them to state court. Thus, defendants who are subject only to unrelated state law claims need not consent to removal of the federal-question claims because all counts in which they are named will be remanded back to state court.

The aim of this provision was to prevent parties from circumventing federal-question jurisdiction and the removal process by asserting unrelated state law claims against in-state defendants and allowing in-state defendants to override federal-question jurisdiction for the removable claims by refusing to consent to removal. While the act itself is not entirely clear, it appears that the sever and remand requirement applies only to "separate and independent" state-law claims and that it does not deprive a federal court of its supplemental jurisdiction to hear state-law claims that form part of the same case or controversy. See 28 U.S.C. § 1367.

Other Changes to Removal Jurisdiction
In addition to the major changes addressed above, Congress also made a number of smaller changes to removal procedure. One change of note was Congress' codification of the longstanding, but judge made, rule of unanimity. This rule, codified in a newly created 28 U.S.C. § 1446(b)(2)(A), formally requires that all defendants who have been properly joined and served either join in or consent to a removal petition.

While this rule seems absolute, taken in conjunction with the previously addressed sever and remand provision, the removal consent of defendants sued solely under unrelated state law claims that will be remanded shall not be considered by the court. Thus, if a plaintiff sues multiple defendants, defendant A and defendant B, alleging violations of federal and state law against defendant A and violations solely of state law against defendant B, a court can retain jurisdiction over the claims to which federal jurisdiction applies (the federal claims against defendant A) even if defendant B does not consent to the removal of the federal claims because defendant B's unrelated state law claims will be severed and remanded.

Notable Omissions
The Forum-Defendant Loophole
It is clear from the above that the act addressed a number of areas of disagreement and confusion relating to removal. However, the act contained at least two notable omissions. Perhaps of most interest was the retention of the "forum-defendant loophole." Though Congress completely rewrote the federal removal statute, 28 U.S.C. § 1441, it retained the "forum-defendant loophole" allowing for removal in the case of unserved defendants of the forum state.

For those unfamiliar with the so called "forum-defendant loophole," a brief look at the language of Section 1441 is in order. Under the removal statute, a case is removable "only if none of the parties in interest properly joined and served is a citizen of the state in which such action is brought." 28 U.S.C. § 1441(b) (emphasis added). Though there is disagreement, the majority of courts hold that the qualifying language "and served" means that if all properly joined and served out-of-state defendants consent to removal before the service of any in-state defendant in an otherwise removable action, then the in-state defendant's citizenship must be ignored for determining diversity and the action is allowed to proceed on the basis of diversity in federal court. See, e.g., North v. Precision Airmotive Corp., 600 F. Supp. 2d 1263, 1268 (M.D. Fla. 2009) (noting circuit split on the validity of the forum-defendant loophole).

Plaintiffs' lawyers have responded that this is an absurd interpretation of the principles of diversity jurisdiction, and they argue that courts should not permit this provision to allow pre-service removal of a case when a named defendant, even if not yet served, is a resident of the forum state. However, by its retention within the rewritten statute, Congress' silent affirmation of the forum-defendant loophole essentially rejects this argument. Congress had the opportunity to change or remove the forum-defendant loophole when it rewrote 28 U.S.C. § 1441(b), yet it chose to retain the "properly joined and served" language exactly as it read in the previous version of the statute. Compare Act § 103(a)(3) with prior 28 U.S.C. § 1441(b). As the Supreme Court held in Forest Grove School District v. T.A., 129 S.Ct. 2484, 2492 (2009), "Congress is presumed to be aware of a[] … judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change" (internal quotation omitted). Accordingly, it may be much harder for a plaintiff to take the position that this provision was never intended to allow removal for cases with an as yet unserved defendant of the forum state. Whether, as a practical matter, the retention of the forum-defendant loophole changes any court's analysis of the issue remains to be seen.

Amount in Controversy Declarations
Through the vetting process, the drafters also deleted a provision that would have allowed a plaintiff to avoid removal based on diversity by filing a "declaration" with the court limiting the amount in controversy below the $75,000 threshold. H.R. 5440, 109th Cong. § 6 (2006) available at http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5440:. This proposal may have avoided the transactional costs associated with litigating the amount in controversy as it relates to remand by allowing plaintiffs to create an upper limit to recovery. Such a provision would have saved the court time by allowing it to make jurisdictional determinations more quickly, while also saving both parties money by preventing a lengthy removal/remand battle relating to the amount in controversy. However, such a provision may also have led to mischief, particularly in cases originally filed in state-court jurisdictions in which such a declaration would not necessarily limit a subsequent verdict amount.

Undoubtedly, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 has had a significant impact on federal court litigation practice. The act made a number of important changes to removal jurisdiction and procedure that litigators must continue to evaluate when determining whether and how a case will reach federal court. While the stated purpose of the act was to "bring more clarity" to jurisdictional issues, it also raised several questions for future courts to decide. Not unexpectedly, one year after implementation, the full effect of the act on removal is still not known. Litigators should carefully monitor decisions interpreting the Act, such as those relating to the "bad faith" exception to the one-year removal limit and to the retention of the forum-defendant loophole, to ensure that they are using the act's provisions to the full extent possible.

Keywords: litigation, products liability, Federal Courts Jurisdiction and Venue Clarification Act, removal, forum-defendant loophole, amount in controversy

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