A counterclaim defendant cannot remove a class action claim to federal court, under either the general removal statute (28 U.S.C. § 1441) or the Class Action Fairness Act (CAFA) (28 U.S.C. § 1453), the U.S. Supreme Court has ruled. In Home Depot U.S.A., Inc. v. Jackson, five of the nine justices agreed that a third-party counterclaim defendant that was not an original plaintiff has no removal rights. The opinion was authored by Justice Clarence Thomas, who was joined by the Court’s four more liberal justices. Justice Alito issued a lengthy and scathing dissent, branding the decision as “bizarre.” Whether logical or bizarre, the decision may have implications for class action practice, ABA Section of Litigation leaders say.
The saga began in North Carolina state court, where the original plaintiff, Citibank, brought a debt-collection lawsuit against George Jackson, alleging he was liable for charges accrued on a Home Depot credit card. Jackson answered that complaint and filed an individual counterclaim against Citibank and third-party class action claims against Home Depot U.S.A., Inc., and Carolina Water Systems, Inc., alleging a kickback scheme between Home Depot and Carolina Water Systems. Jackson also alleged that Citibank was jointly and severally liable for the wrongdoing of the third-party defendants and that his obligations under the sale were null and void.
Citibank voluntarily dismissed its claims against Jackson, and Home Depot filed a notice of removal under 28 U.S.C. §§ 1332, 1441, 1446, and 1453. Jackson subsequently moved to remand, arguing that a third-party counterclaimant like Home Depot cannot remove a case to federal court. The district court granted Jackson’s motion, and Home Depot appealed.
In affirming, the Fourth Circuit relied on the Supreme Court’s decision in Shamrock Oil & Gas Corp. v. Sheets, in which the Court held that an original plaintiff could not remove a counterclaim against it. The Fourth Circuit also cited Palisades Collections LLC v. Shorts, which held that CAFA’s removal authority does not permit removal of a class action counterclaim against an additional counter-defendant because it was not “the defendant or defendants” under section 1441(a) and, therefore, could not be “any defendant” under section 1453(b).
The Fourth Circuit held that neither the general removal statute nor CAFA’s removal provision permitted Home Depot to remove the case. Home Depot appealed again, and the U.S. Supreme Court granted certiorari to determine whether a third party named in a class action counterclaim can remove that claim if it otherwise satisfies the jurisdictional requirements of CAFA. The Court directed the parties to also discuss whether Shamrock Oil, which held that an original plaintiff may not remove a counterclaim, should be extended to third-party counterclaim defendants.
Congress passed CAFA in 2005 to allow class action defendants in diversity cases greater access to the federal courts. In passing CAFA, Congress stated that its purpose was to “restore the intent of the framers of the United States Constitution by providing for Federal court jurisdiction of interstate cases of national importance under diversity jurisdiction.” Congress further observed that the class action device had been abused in recent years, requiring a remake of the class action jurisdictional regime. CAFA expanded federal court jurisdiction to class action cases in which (1) the amount in controversy, in the aggregate of all class members, exceeds $5 million, and (2) any member of the class of plaintiffs is diverse from the defendant.
One purpose of CAFA was to reduce forum shopping by plaintiffs. By allowing removal in certain class action lawsuits, plaintiffs would be discouraged from hunting around for a plaintiff-friendly state court. “CAFA passed for many good reasons,” observes Lindsay D. Breedlove, Philadelphia, PA, cochair of the Section of Litigation’s Class Actions & Derivative Suits Committee. “But Congress likely intended the statute to apply to original actions filed as class actions, not counterclaim class actions,” notes Kathryn Honecker, Scottsdale, AZ, cochair of the Section’s Consumer Litigation Committee. “And that’s why we ended up with this decision.”
The Court used a strict textual analysis to determine that Home Depot could not remove the third-party claims to federal court. The Court first considered whether a third-party counterclaim defendant can remove under the general removal statute and then whether that defendant can remove under CAFA. Section 1441(a) provides that “[e]xcept as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.”
Home Depot argued it was a “defendant” to a “claim” and was, therefore, covered by this statute. The Court disagreed, pointing out that the statute references “a civil action” and not a “claim.” The Court held that, in the context of Supreme Court precedent, the statute does not permit removal by any counterclaim defendant. Referencing its earlier decision in Shamrock Oil, which held that section 1441(a) does not apply to third-party counterclaim defendants who were the original plaintiffs in the lawsuit, the Court explained that “[s]ection 1441(a) . . . does not permit removal based on counterclaims at all, as a counterclaim is irrelevant to whether the district court had ‘original jurisdiction’ over the civil action.”
The Court also considered whether CAFA’s removal provision would allow a third-party counterclaim defendant to remove. Home Depot argued that the text of that statute permits removal by “any defendant” to a “class action.” The Court again rejected Home Depot’s argument, saying that the term “defendant” does not have a different meaning under CAFA than in section 1441(a). The Court held that CAFA did not change section 1441(a)’s limitation on who can remove; it only extended the right of removal to a defendant even if any of the defendants is a citizen of the state in which the action was brought, something the general removal provision does not permit. This ruling should not come as a surprise. “For over 50 years, courts have consistently held that third-party defendants are not ‘defendants’ under section 1441(a). CAFA doesn’t define ‘defendants,’ so the definition from section 1441(a) must be read into CAFA,” observes Honecker.
Justice Alito wrote an extensive dissent, nearly twice as long as the majority opinion. Joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh, he accused the majority of validating a “tactic” that could be used to prevent removal of class actions from state court. “The dissent seemed a bit more swayed by policy rationales than the majority,” suggests Breedlove. “While both sides use textual interpretation, the dissent saw CAFA as ambiguously worded, and so it turned to congressional intent,” she adds. Indeed, Justice Alito asserted that the majority had “not one jot or tittle of analysis on the plain meaning” of the word “defendant” in CAFA. He emphasized that the purpose of the general removal statute is to ensure that “defendants get an equal chance to choose a federal forum” and that CAFA was enacted to facilitate the removal of class actions, even if a case does not meet certain conditions under the general removal statute.
The dissent also strongly disagreed with the Court’s conclusion that third-party defendants are not “defendants” for purposes of removal, using its own textual analysis to reach this conclusion. According to Justice Alito, Home Depot is a defendant because it has been sued. The term “third-party” is merely an adjective modifying the noun “defendant.” Further, CAFA’s “any defendant” language embraces Home Depot as a defendant because “putting the word ‘any’ into a ‘phrase . . . suggests a broad meaning.’” When analyzing this intent, the dissent proclaimed there was no evidence that Congress intended to exclude counterclaim defendants from the provisions of CAFA, and characterized the majority’s opinion as a “bizarre result.” The dissent also examined a potential tactic that plaintiffs could use if they wanted to subvert a defendant’s attempt to remove a class action: “They could raise their class-action claim as a counterclaim and hope that CAFA does not authorize removal.”
Despite Justice Alito’s concerns, this decision may not significantly change class action plaintiffs’ tactics. “The ruling is consistent with what courts have been holding for years. Plaintiffs will continue to file class actions as they have been, and not wait to get sued themselves solely for the purposes of bringing a counterclaim,” predicts Honecker.
On June 21, 2019, Home Depot filed a petition for rehearing, asserting that the decision conflicted with precedent and with the plain language of the removal statutes, which “show[] that a civil action can be outside federal jurisdiction as originally filed but brought within that jurisdiction by later developments in the record.” It argued that “defendant” was the only term that described what Home Depot is in the case. As of the writing of this article, the Supreme Court has not yet ruled on the petition.
While Justice Thomas acknowledged the dissent’s concern that the statute would be used as a tactic to prevent removal, he noted that if Congress did not intend this result, it was up to Congress to amend the statute. “This was perhaps the least palatable set of facts to frame this decision because Home Depot, as a third-party defendant, really had no choice as to the forum. The majority seems to understand that policy-wise, this was the wrong result, but it leaves it to Congress to fix,” says Breedlove.
Section leaders agree that Congress will need to act on the overarching issues. “In the long term, Congress will need to clarify section 1441 and CAFA; this decision really could have gone either way,” Breedlove adds. Honecker agrees. “This case highlights the fact that clarification is needed. The word ‘defendant’ should not be subject to interpretation. It’s a basic term that should have a simple meaning. Without clarification from Congress, courts will have to continue to make distinctions because the statute does not,” she says.
Proponents of the enactment of CAFA may need to renew their efforts to ensure federal court jurisdiction for all class action defendants. “The same lobby that helped CAFA get passed in the first place now has the opportunity to get Congress to amend section 1441 and CAFA to clarify that removal is available to counterclaim defendants,” observes Breedlove. “When reading the majority opinion, you still get the sense that the justices were troubled by the practical results, but they passed the issue back to Congress,” she notes.
As for litigation strategies, “entities like banks that regularly sue individuals in state court and worry about the prospect of becoming class action defendants will need to evaluate how much the forum matters to their ability to defend potential class claims,” suggests Breedlove. And a defendant finding itself in the same situation as Home Depot, as a counterclaim defendant facing a class action, is not without options. “Consider using the state rule equivalent of Federal Rule 14 to move to strike either the third-party defendant claims or at least the class claims,” recommends Honecker. “A simple debt collection matter or similar case will only be delayed by a complicated class action, and severing the claims would promote judicial economy. If the third-party defendant still wants to pursue the class members’ claims, then the class action will be its own distinct case, and the third-party counterclaim defendant will now be an original defendant, who can remove,” she adds.
