United States: Supreme Court Hears Oral Argument In Case Involving Removal Of Counterclaim Class Actions

Class action defendants usually prefer to have their cases heard in federal court, where the protections of Federal Rule of Civil Procedure 23 apply and where courts and juries are less likely to disfavor an out-of-state business. And as every class action defense lawyer knows, the Class Action Fairness Act of 2005 ("CAFA") puts a significant thumb on the scale in favor of having large class actions heard in federal court, allowing for removal of most class actions in which the amount in controversy exceeds $5 million and there is minimal diversity of citizenship between the defendants and the members of the putative class. But how should CAFA apply when one business sues a consumer and the consumer files as a counterclaim a class action against a different business? Today, the Supreme Court heard oral arguments in Home Depot U.S.A., Inc. v. Jackson, a case presenting that question. (One of us attended the oral argument.)

Some background is necessary to understand the thorny issues presented in Home Depot. The general federal removal statute, 28 U.S.C. § 1441(a), provides that when a "civil action" is brought in state court but would be within the "original jurisdiction" of federal district courts, that action may be removed to federal court by "the defendant or the defendants." Thus, under Section 1441(a), when there is more than one defendant, all defendants must consent to removal. CAFA relaxed some of Section 1441(a)'s requirements for class actions; in particular, using the broader article "any," it provides that a class action may be removed by "any defendant without the consent of all defendants." 28 U.S.C. § 1453.

Applying the predecessor to Section 1441(a), the general removal statute, the Supreme Court held in Shamrock Oil & Gas Corp. v. Sheets that when a suit is brought in state court and the defendant brings a counterclaim that invokes federal jurisdiction, the original plaintiff may not remove the case. The Shamrock Oil Court reasoned that in those circumstances, the original plaintiff chose the state forum in the first instance and should be required to "abide his selection."

Over time, however, the lower courts have expanded Shamrock Oil's holding to cover other situations that Shamrock Oil did not address. Most pertinently, they have held that, under Shamrock Oil, a "third-party counterclaim defendant"—i.e., a party that was not a plaintiff in the original complaint but instead brought into the lawsuit for the first time as a counterclaim defendant—cannot remove the case to federal court.

That is the circumstance that occurred in Home Depot. The case began when Citibank brought a debt-collection action in North Carolina state court against George Jackson, who had borrowed money on a Citibank credit card to buy a home water filtration system. In response, Jackson asserted a putative class action counterclaim against Citibank (the original plaintiff), and two nonparties (one of which was Home Depot). Home Depot filed a notice of removal under CAFA, but the district court remanded the case to state court, holding that under Shamrock Oil, Home Depot was not entitled to remove the action, even though it was not an original plaintiff, and that the broader language in CAFA did not compel a different result. The Fourth Circuit affirmed, and the Supreme Court granted certiorari in an order that expressly added to the issues under review the question whether the holding in Shamrock Oil that an original plaintiff may not remove a counterclaim against it extends to third-party counterclaim defendants. (Full disclosure: Two of us filed an amicus brief (pdf) in support of the petition.)

Today's oral argument reveals that it is too early to tell how the Court will rule, as the Justices had tough questions for both sides. (The transcript is available here (pdf).) And predicting the outcome is especially tricky given that Justice Ginsburg remained absent from the bench, and Justice Thomas continued his custom of not asking any questions of counsel for the parties.

Both sides' arguments found apparent supporters among the other Justices. Counsel for Home Depot consistently made the point that Home Depot falls within CAFA's provision authorizing removal by "any defendant," given that Home Depot is a defendant on Jackson's class action counterclaim—and would not be in the case but for that claim. Chief Justice Roberts and Justice Kavanaugh both indicated support for that argument, suggesting that Home Depot would seem to qualify as a "defendant" under any definition of that term. Justice Alito also appeared to think that Home Depot had the better of the statutory argument, opining that Jackson's position that Home Depot may not remove the case required "reading things" into the statute that Shamrock Oil did not require. Justice Alito suggested that Congress would have wanted a class action like the one Jackson brought to be heard in federal court and that Jackson's decision to assert the claim as a counterclaim in his debt-collection action was simply a "way of getting around CAFA."

But other Justices expressed doubts about Home Depot's position. Justice Kagan's questions suggested a view that the requirement that a case invoke a federal district court's "original jurisdiction" to be removable means that the initial complaint—not any subsequent counterclaim or cross-claim—must give rise to federal subject matter jurisdiction in order for a case to be removable. To hold otherwise, she suggested, might conflict with Section 1441(a), which provides that an entire "civil action" must be removable, rather than just a counterclaim within that action. Justice Sotomayor similarly expressed skepticism about what she characterized as Home Depot's "claim-by-claim" removal analysis, which Jackson's counsel argued would allow counterclaim and cross-claim defendants to remove a host of actions that belonged in state court. And Justice Breyer—who asked difficult questions of both sides, to be sure—pointed out that CAFA defines a removable "class action" as "a civil action filed under [federal] rule 23" or a comparable state rule (28 U.S.C. § 1332(d)(1)(B)), and he questioned counsel for Home Depot on whether a counterclaim qualifies as a "civil action."

In short, based on today's oral argument, the Court may be closely divided on the questions presented in the case. We expect a decision by June, and we will keep you posted on the outcome.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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