United States: Supreme Court Argument On Third-Party Counterclaim Defendant Removal

Last Updated: January 25 2019
Article by Shearman & Sterling LLP

On January 15, 2019, the Supreme Court heard argument on an appeal from a unanimous decision of the U.S. Court of Appeals for the Fourth Circuit holding that a third-party defendant against whom class action counter-claims are asserted in state court is not a "defendant" for purposes of the general removal statute, 28 U.S.C. § 1441 ("Section 1441") or the Class Action Fairness Act, 28 U.S.C. § 1453 ("CAFA").  The third-party defendant to the class action counterclaims therefore could not rely on those statutes to remove the case.  Home Depot U.S.A., Inc., v. Jackson, No. 17-1471.

Section 1441 provides "any civil action brought in State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants to the [appropriate] district court."  28 U.S.C. § 1441(a).  In Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), the Supreme Court, interpreting similar language in Section 1441's predecessor, held that the plaintiff who originally filed an action could not later remove it as a "defendant" if counterclaims were filed against it.  Since Shamrock Oil, numerous federal appellate courts have construed the term "defendant" in Section 1441 to mean only the "original defendant."  See, e.g., Westwood Apex v. Contreras, 644 F.3d 799, 808 (9th Cir. 2011) (Bybee, C.J.) (concurring) ("[o]ver time, the holding of Shamrock Oil—that an original plaintiff could not remove the case after a counterclaim was filed—transformed into a rule that only the original defendant could remove the case."). 

In 2005, Congress enacted CAFA to prevent perceived abuses of class actions as a device to litigate multi-state or nationwide class action lawsuits in plaintiff-friendly state courts.  CAFA confers removal authority on "any defendant" in a "class action."  28 U.S.C. § 1453(b) (emphasis added).  Based on Shamrock Oil, several federal appellate courts have allowed only "original defendants," i.e., not counterclaim defendants, to remove cases under CAFA.  See, e.g., Palisades Collections LLC v. Shorts, 552 F.3d 327 (4th Cir. 2008); see also Tri-State Water Treatment, Inc. v. Bauer, 845 F.3d 350, 355-56 (7th Cir. 2017); Westwood Apex v. Contreras, supra, 644 F.d at 799.

In Home Depot, a national bank commenced a debt collection action in state court against a North Carolina resident who had purchased a water treatment system using a credit card issued by the bank ("Respondent").  Respondent filed an answer asserting class action consumer-protection counterclaims under North Carolina law against the bank and third-party counterclaim defendants, including the retailer ("Petitioner").  The counterclaims alleged a scheme to sell water treatment systems by misleading customers.  Petitioner filed a notice of removal to federal court.  Shortly thereafter, the original plaintiff bank voluntarily dismissed its debt collection claims, and Respondent amended his answer to eliminate any reference to the original plaintiff.  Judge Graham C. Mullen of the United States District Court for the Western District of North Carolina remanded the civil action to state court on the ground that there is "clear Fourth Circuit precedent on this issue that says only the original defendant in a case is granted the power to remove" and Petitioner did not have the right to remove to federal court because it was not an "original defendant" in the bank's state court debt collection action.  Citibank, N.A. v. Jackson, 3:16-CV-00712, 2017 WL 1091367 (W.D.N.C. Mar. 21, 2017). 

On appeal to the Fourth Circuit, Petitioner argued that Congress's use of "any" to modify "defendant" in CAFA reflected its intent to mean "defendants of whatever kind," including third-party counterclaim defendants like it.  Petitioner also argued the Supreme Court cast doubt on Shamrock Oil's application to CAFA when it remarked in the more recent Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S.Ct. 547 (2014) that "no anti-removal presumption attends cases invoking CAFA, which Congress enacted to facilitate adjudication of certain class actions in federal court."  Alternatively, Petitioner maintained that it was a "defendant" under Shamrock Oil because it had no claims of its own, and the counterclaims were the only remaining live claims.  The Fourth Circuit panel unanimously affirmed the district court, holding that Shamrock Oil's definition of "defendant" applied to CAFA.  The panel found that Petitioner did not constitute an original defendant with removal authority under Section 1441 or CAFA because it was a third-party counterclaim defendant when it removed the case.  Jackson v. Home Depot U.S.A., Inc., 880 F.3d 165 (4th Cir. 2018). 

Petitioner filed a petition for a writ of certiorari, arguing that the Fourth Circuit's reading of CAFA was counter-textual and circumvented its "clear purpose" by adopting an overly narrow view of removal authority.  According to Petitioner, this created a risk for plaintiffs to use a debt collection or other state court proceeding as a vehicle for asserting interstate class action claims against an entity that is not even a party to the proceeding.  It noted that the risk is particularly high in the context of consumer protection claims.  On September 27, 2018, the Supreme Court granted certiorari of the question Petitioner presented of "[w]hether an original defendant to a class-action claim can remove the class action if it otherwise satisfies the jurisdictional requirements of the Class Action Fairness Act when the class action was originally asserted as a counterclaim against a co-defendant."  In addition, the Supreme Court directed briefing and argument on the question of whether the holding in Shamrock Oil that an original plaintiff may not remove a counterclaim against it extends to third-party counterclaim defendants.

Oral argument was held on January 15, 2018.  Petitioner maintained that it is a "defendant" under Shamrock Oil because its "only role" in the case is that of a defendant.1  Justices Kagan, Sotomayor, and Gorsuch appeared skeptical.  Justice Sotomayor questioned whether Petitioner was suggesting a "claim-by-claim analysis" for removability, and pointed out that "[Section 1441] speaks about a civil action and it talks about removal of an action, not removal of a claim."2  Justice Kagan echoed this concern and noted that Section 1441 "says that a civil action, not claims . . . can be removed where district courts have original jurisdiction."  Justice Sotomayor explained that, to determine original jurisdiction, "you look to the plaintiff's complaint, the original plaintiff.  It gives you the original jurisdiction."3]  The implication of this was that the original complaint, rather than the counterclaim, was the proper frame of reference to evaluate removability.  Justice Gorsuch also noted that, under Petitioner's proposed definition of "defendant," Respondent, who was the defendant in the original action brought by the bank, would no longer qualify as a defendant for purposes of Section 1441.  Justice Gorsuch questioned whether the word "defendant" could "expand[] and contract[] like that," and whether it "could . . . be so Procrustean as to just happen to fit [the Petitioner]."4

In the alternative, Petitioner argued that Congress intended CAFA to bestow removal authority upon third-party counterclaim defendants.  In its brief, Petitioner cited to Dart Cherokee to support its contention that "CAFA's provisions should be read broadly, with a strong preference that interstate class actions should be heard in federal court if properly removed by any defendant," including a third-party counterclaim defendant.  Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S.Ct. at 554.  Chief Justice Roberts asked questions that suggested potential sympathy to this argument, pointing out that the phrase "any defendant" would seem to include all types of defendants, including counterclaim defendants.5 

However, Justice Breyer, who joined Justice Ginsburg in the majority in Dart Cherokee, suggested that Petitioner might not be able to invoke CAFA because the counterclaims did not constitute "class action" claims under CAFA.  He noted that "[s]ince this isn't a civil action" filed under Rule 23 of the Federal Rules of Civil Procedure, Petitioner could not benefit from CAFA because the claims are outside the purview of CAFA's definition.6  Meanwhile, Justice Alito appeared more open to Petitioner's argument that the decision below is incompatible with Congressional intent.  In describing the case, Justice Alito stated that "[s]uddenly this thing gets transmogrified into a class action that you say, 'Well this one has to stay in state court despite CAFA," even though "if it had been brought originally in this forum, it would be removable under CAFA.  That's what Congress wanted."7 

The Supreme Court's ultimate decision will be the first time it has addressed the scope of Shamrock Oil.  Overall, no matter how it rules, the Supreme Court's decision will provide guidance to both plaintiffs and defendants on reading CAFA, and will likely impact plaintiffs' determination as to whether to file class action claims as counterclaims in state court (to possibly attempt to avoid removal of their cases to federal court) in the future.

Footnotes

1 Home Depot U.S.A., Inc., v. Jackson, Home Depot U.S.A., Inc., v. Jackson, No. 17-1471 (Jan. 15, 2019) (No. 17-1471) Transcript of Oral Argument ("Tr.") at 4:5-10.

2 Tr. 10:12-18.

3 Tr. 13:24-14:11.

4 Tr. 8:12-20.

5 Tr. 56:13-20.

6 Tr. 45:19-46:21.

7 Tr. 42:9-17.

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