United States: Class & Collective Action Newsletter - July 2, 2019

SUPREME COURT

Decision in Home Depot U.S.A. Inc. v. Jackson

Key Issue

Whether the general removal statute or the removal provision in the Class Action Fairness Act (CAFA) permit third-party defendants to remove class-action claims from state to Federal court.

Background

Citibank sued George Jackson, the original defendant, in June 2016 in a debt-collection action in North Carolina state court. Jackson asserted an individual counterclaim against Citibank and named Home Depot and Carolina Water Systems, Inc. as additional third-party counterclaim defendants in a putative class action. Citibank dropped its claims, and Home Depot filed a notice of removal pursuant to CAFA. The plaintiff filed an amended complaint dropping Citibank from the action and moved to remand the case to state court. The District Court granted Jackson's motion to remand on the grounds that Home Depot was not entitled to remove the remaining class action.

The Fourth Circuit affirmed, holding that 28 U.S.C. § 1441(a) (the general removal statute) limits the right of removal to "the defendant or the defendants," which does not include a counterclaim defendant even if added as a third party, and also rejected Home Depot's argument that CAFA, which allows removal by "any defendant," provides removal rights that include third-party counterclaim defendants.

In December 2018, the Supreme Court granted certiorari to decide the issue of whether third-party defendants are entitled to removal under CAFA and also directed the parties to address whether Shamrock Oil & Gas Corp. v. Sheets,1 which bars original plaintiffs from removing counterclaims under the general removal statute, should be extended also to bar removal by third-party counterclaim defendants.

Decision

The Supreme Court held that a third-party counterclaim defendant cannot remove claims to Federal court either under the general removal statute or under CAFA's removal provision.2

Justice Thomas, who, in an unusual alignment, was joined by the four more usually liberal justices of the Court, held that in these removal provisions, "the term 'defendant' refers only to the party sued by the original plaintiff." The Court came to this conclusion based on an analysis of the text of the removal statute and the relevant Federal procedural rules. Specifically, the Court found that § 1441(a) refers to "civil actions" (not "claims") as to which the district court must have original jurisdiction to justify removal, and the relevant pleading therefore "is the action as defined by the plaintiff's complaint." The "defendant" to that action is the defendant to the complaint, not a party named in a counterclaim. Although the Majority acknowledged that the Dissent's reading of § 1453(b)'s use of the term "any defendant" as expanding the class of parties entitled to remove to include third-party defendants was "plausible," it held that the better reading of the statute was that the inclusion of the word "any" was simply to reinforce that all defendants were not required to consent to a removal under CAFA and that, as such, it was not intended to expand the class of parties who are permitted to remove. Having found that the term "defendant" did not include third-party counterclaim defendants under § 1441(a), the Court declared that the term "defendant" should have the same limited meaning in § 1453(b).

As a policy matter, Justice Thomas acknowledged the Dissent's argument that this opinion permits "defendants to use the statute as a 'tactic' to prevent removal," but noted that if Congress disapproves of this behavior, it can amend the text of the statute accordingly.

Justice Alito wrote a lengthy, detailed Dissent, which was joined by Justices Roberts, Gorsuch and Kavanaugh. While noting the policy argument, Justice Alito also focused his arguments principally on a textual analysis of the removal statutes. In particular, he argued that "a 'defendant' is a 'person sued in a civil proceeding,'" and therefore plainly included third-party defendants as parties entitled to invoke CAFA's expanded removal rights.

Thoughts & Takeaways

This decision significantly extends the Court's holding in Shamrock, where the party who sought removal was both the original plaintiff and a counterclaim defendant. In Home Depot, the party seeking removal was a third-party counterclaim defendant and thus had no role in selecting the forum. The decision dramatically expands a previously-recognized loophole in CAFA if the statute were read not to permit removal of class-action counterclaims. In this case, such removal was not permitted even by new third-party defendants, even though they had no input into the selection of the forum, and even though the original plaintiff was no longer in the case.

The case represents an interesting clash between two schools of conservative thought. Justice Thomas's Majority opinion clearly reflects traditional deference to state courts and a reluctance to expand the jurisdiction of the Federal courts. Justice Alito's Dissent arguably reflects the pro-business sentiments of the members of the Court who joined in his Dissent. The case is likely to have its greatest impact in the area of consumer-debt class-action claims. Firms interested in pursuing such claims will likely look for opportunities to take advantage of a state-law collection action as a platform from which they can launch class-action counterclaims that now may include multiple additional parties, all without the ability to remove the case to Federal court.

Read the decision here.

Denial of Certiorari in Hagan v. Khoja

Key Issue

Whether the Ninth Circuit erred by imposing a duty to update on "a statement of historical fact that was accurate when made, where the 'value' or 'weight' of that prior statement was later 'diminished' by subsequent events."

Background & Decision

In 2015, Orexigen issued an "interim analysis" that its obesity drug reduced the risk of cardiovascular events by 41%. Weeks later, new results from the study showed the drug offered no such benefits, which information Orexigen did not include in its subsequent SEC filing, which repeated the early claim of a successful interim test. Plaintiffs filed a putative securities class action, and the District Court dismissed, holding that Orexigen had not issued misleading statements because its earlier results were accurate when released and it had explicitly cautioned, including in its later statement, that more testing would be needed to precisely determine the drug's effects.

The Ninth Circuit reversed, holding, among other things, that although the results of the interim analysis were technically accurate, Orexigen had a duty to disclose that these results were "likely unreliable" because the Food and Drug Administration (FDA) had earlier told Orexigen that the results had a "high degree of uncertainty and were likely to change with the accumulation of additional data," and that it was also misleading to repeat the discussion of the earlier results without disclosing the results of the subsequent test. While the Ninth Circuit's opinion primarily engaged with the separate issues of the contours of the incorporation by reference and judicial notice doctrines, the petition for certiorari focused on what it claimed was the Ninth Circuit's newly-articulated standard of a "duty to update" when the "value" or "weight" of an historical fact has been "diminished" by subsequent events. Petitioners claimed this standard was at odds with those of other Circuits, which reject a duty to update or recognize a duty to update in narrow circumstances, but do not require an issuer to update a statement of historical fact that was accurate when made. On May 20, 2019, the Supreme Court denied the petition for certiorari.3

Thoughts & Takeaways

The decision to deny certiorari leaves intact this potential circuit split. Also still intact is the Ninth Circuit's primary holding not presented to the Supreme Court—that courts should exercise extreme caution when applying the incorporation by reference doctrine. Specifically, the Ninth Circuit noted that "it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in a well-pleaded complaint," and that it may be improper to consider a document that merely forms the basis of a defense to a plaintiff's claims.

Read the petition for certiorari here, and read the decision below here.

Denial of Certiorari in Fleshman v. Volkswagen, AG

Key Issue

The Supreme Court denied a petition for certiorari seeking to challenge Volkswagen's $10 billion settlement in multidistrict litigation stemming from the diesel emissions scandal.4

Background

In July 2018, the Ninth Circuit upheld a decision by the U.S. District Court for the Northern District of California approving a $10 billion settlement with a class of owners and former owners of certain Volkswagen automobiles implicated in the emissions scandal that came to light in 2015.

Ronald Clark Fleshman, Jr. was one of a small number of objectors, all of whose appeals were denied by the Ninth Circuit. Fleshman contended that the settlement created a risk of liability under the Clean Air Act (CAA) because it allowed class members to continue driving their vehicles while waiting for an emissions modification solution from Volkswagen or, alternatively, allowed them to opt out of the settlement and drive or resell unmodified vehicles. Fleshman argued that this risk—and the settlement notice's failure to advise class members of it—rendered the settlement unfair and unreasonable. In his petition for certiorari, Fleshman argued, inter alia, that the U.S. Environmental Protection Agency (EPA) wrongly stated that the vehicles were "legal to drive and resell," and that the District Court abused its discretion in approving a settlement that condoned conduct in violation of the CAA and related state implementation plans.

Thoughts & Takeaways

The Court's denial of certiorari leaves in place the Ninth Circuit's finding that the risk of liability Fleshman raised was so improbable at the time of settlement that there was no need to explain it to class members or to protect them from it. This finding was not based on assessment of Fleshman's interpretation of the CAA, however, but rather on the more practical consideration that the EPA and most states had clearly indicated that they would allow consumers to continue driving unmodified vehicles.

Read the petition for certiorari here, and read the decision below here.

To view this Newsletter in full, please click here.

Footnotes

1. 313 U.S. 100 (1941).

2. Home Depot U.S.A. Inc. v. Jackson, 587 U.S. — (May 28, 2019).

3. Hagan v. Khoja, No. 18-1010 (May 20, 2019).

4. Fleshman v. Volkswagen, AG, No. 18-1264 (May 28, 2019).

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