Home Depot v. Jackson: Further Refining Who Has the Power to Remove a Case to Federal Court (Authored by Faruki Summer Associate Raika N. Casey at rcasey@ficlaw.com)

The Supreme Court closed the door to removal to federal court for third-party counterclaim defendants.  Only the defendant the original plaintiff sued has the privilege of removing under 28 U.S.C §1441 and § 1453(b).  As for defendants to counterclaims or defendants roped in as third-party defendants, they will have to try their luck in the plaintiff's choice of state court.

In a recent 5-4 decision, the Supreme Court refused to allow third-party counterclaim defendants to remove a case to federal court, relying on their analysis in Shamrock Oil finding that an original plaintiff may not remove a counterclaim against it.  Home Depot U.S.A., Inc. v. Jackson, __ US __, 139 S. Ct. 1743, 204 L. Ed. 2d 34 (2019); Shamrock Oil & Gas Corp v. Sheets, 313 U.S. 100, 61 S. Ct 868, 85 L. Ed. 1214 (1941).  The same can now be said for third-party counterclaim defendants.

In November 2018, Faruki wrote on the highly anticipated Home Depot case.  Associate Callum Morris predicted that it would be unlikely the Supreme Court would take a case to reaffirm the general consensus of the lower courts, while also noting the opportunity for ardent textualists to dig into what the words of the statute mean as constructed.  You can see Callum's discussion here.  As predicted, the Supreme Court's avid textualists jumped on the chance to demonstrate a plain meaning of the text analysis.  In doing so, the Supreme Court reaffirmed the general consensus of lower court decisions.

As a reminder, this case began as an unremarkable debt-collection action.  Citibank sued George Jackson in state court seeking payment on Jackson’s purchase from Home Depot of a product made by Carolina Water Systems ("CWS").  Home Depot, 139 S.Ct at 1747.  Jackson responded with a counterclaim class action alleging unfair and deceptive trade practices which roped in Home Depot and CWS as co-defendants.  Id.  Citibank then dismissed its claim against Jackson, and Jackson amended his complaint to remove any mention of Citibank.  At that point, all that remained in the case was Jackson’s class action counterclaims against Home Depot and CWS.  Id.

Invoking the Class Action Fairness Act ("CAFA"), Home Depot filed a notice of removal.  The District Court denied the motion and remanded the case to state court, holding that Home Depot could not remove under CAFA because CAFA’s "any defendant" excludes defendants to counterclaim class actions.  The Court of Appeals affirmed, citing Circuit precedent under Shamrock Oil.  Id. at 1754.

The Supreme Court upheld the lower court’s ruling, deciding that neither the general removal statute nor CAFA allow third-party defendants like Home Depot to remove an action to federal court.

The general removal statute, 28 U.S.C. §1441(a), provides that "any civil action" over which a federal court would have original jurisdiction may be removed to federal court by "the defendant or the defendants."  CAFA provides that "[a] class action" may be removed to federal court by "any defendant without the consent of all defendants."  28 U.S.C. §1453(b) (emphasis added).

The Supreme Court’s analysis in Home Depot culminated into a battle of statutory construction and interpretation.  The majority relied heavily on strict textualism and the dissent adopted a more practical, but also textual, interpretation driven by the policy behind CAFA.  The Court pondered what effect "any" has on the word it precedes, and who is a "defendant" for purposes of removal in 28 U.S.C. §§ 1441 and 1453(b).  Jackson proposed that "any defendant" refers to a situation where there are multiple defendants and one wants to remove to federal court.  Conversely, Home Depot argued that "any defendant" simply means literally any defendant, regardless of whether the party is an original defendant or a defendant brought in on a counterclaim.

Ultimately, the Court's decision hinged on the proposition that a "defendant" in the general removal statute and "any defendant" in CAFA refers to only the defendant sued by the original plaintiff in the civil action.  This proposition, the Supreme Court contends, is consistent and required by the Court’s ruling in Shamrock Oil.  There, the Court ruled that a counterclaim defendant cannot take advantage of federal court removal because it was an original plaintiff.  Its role as a "counterclaim defendant" did not make it a defendant within the language of the removal statute because it was a defendant to a claim.  The text of §1441(a) simply refers to "the defendant or the defendants" in the civil action, not the defendant to a claim.  Since a counterclaim defendant who was the original plaintiff is not one of "the defendants" to the civil action, the court saw no textual reason to reach a different conclusion for a third-party counterclaim defendant who was not originally part of the lawsuit, and thus not a defendant to the civil action.

Because Shamrock Oil made a distinction between original defendants and other types of defendants, lower courts and the Supreme Court have taken that to mean the defendant in the removal statute only includes the defendant sued by the original plaintiff.  If the removal statute was meant to include all kinds of defendants, it would have stated so.

However, it may be contended that lower courts, and now the Supreme Court, have glossed over the most valuable distinction (according to the dissent) made in Shamrock Oil: The counterclaim defendant in Shamrock was the original plaintiff.  That party already had an opportunity to choose the forum.  When it filed the lawsuit, it had an opportunity to file in federal court, but chose not to.  Shamrock Oil underscored that the removal statute was not created to allow the original plaintiff who chose the forum to change its mind later.  The case did not concern a third-party defendant who never had the opportunity to choose the forum in the first place and was brought in involuntarily.

It is easy to reason why an original plaintiff should not be afforded the privilege to remove.  In Shamrock Oil, the Court argued, "the Plaintiff, having submitted himself to the jurisdiction of the state court, was not entitled to avail himself of a right of removal conferred only on a defendant who has not submitted himself to the jurisdiction."  313 US at 106.  The Court then quoted a House Report calling it "'just and proper to require the Plaintiff to abide his selection of a forum.'"  Id. n.2.  Therefore, it was intuitive that original plaintiffs remain unable to remove even if countersued.

Applying the policy rationale in Shamrock Oil, however, critics may argue that the Supreme Court should have ruled in favor of allowing Home Depot to remove.  Critics may encourage the Court to look at what prompted creation of CAFA.  Even if the general removal statute does not afford third-party counterclaim defendants to class actions the power to remove, it may be argued that Congress intended for CAFA to open the door to federal forums and to not merely reinforce previous locks on the door.

Indeed, Congress enacted CAFA to prevent plaintiffs from weaponizing the class action device against out-of-state defendants. The abuse undermined the judicial system.  State and local courts were keeping cases of national importance out of federal court, sometimes acting in ways that demonstrate bias against out-of-state defendants, and making judgments that impose their view of the law on other states and bind the rights of the residents of those states.  Class Action Fairness Act of 2005, 119 Stat. 5.

The dissent in Home Depot drew attention to some of the failures of the Private Securities Litigation Reform Act of 1995 ("Reform Act"), 109 Stat. 737 to further demonstrate the intentions of CAFA.  Abuses of the class-action vehicle prompted the Reform Act's enactment.  In litigation involving nationally traded securities, class action lawyers would strike companies with moves such as bogus lawsuits and vexatious discovery requests which would exhaust the company into entering "extortionate settlements" in frivolous cases just to avoid the litigation costs.  Home Depot, 139 S. Ct at 1752 (Alito, J., dissenting) quoting Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81, 126 S. Ct 1503, 164 L. Ed 2d 179 (2006).  The Reform Act sought to curb these abuses by "limit[ing] recoverable damages and attorney’s fees, ...impos[ing] new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandat[ing] imposition of sanctions for frivolous litigation, and authoriz[ing] a stay of discovery pending resolution of any motion to dismiss."  Id.

But the Reform Act proved to be  a swing and a miss.  Some plaintiffs were clever and they avoided the Reform Act’s limits on federal litigation by simply "avoiding the federal forum altogether" and heading to state court.  Id. at 82.  Once there, they were immune from being dragged to federal court simply by naming an in-state defendant under the rules then in force. Subsequently, state courts became the predominant forum for securities class action litigation.

In passing CAFA, Congress had an eye on the loopholes of the Reform Act that permitted plaintiffs counsel to game the procedural rules, and sought to make it easier for defendants to remove to federal court.  Home Depot, 139 S. Ct at 1753 (Alito, J., dissenting).  CAFA made several changes to the general removal regime specific to class actions.  Instead of allowing removal by "the defendant or the defendants," see 28 U.S.C § 1441(a), CAFA allows removal by "any defendant" to certain class actions. 28 U.S.C § 1453(b).

Home Depot contended that the addition of the word "any" before defendant is demonstrative of Congress’ attempt to encompass all defendants, regardless of whether the party is an original defendant, or a defendant brought in on a counterclaim.  The Court disagreed, abiding by strict statutory construction in saying since CAFA does not address the types of parties or types of defendants that can use removal, CAFA did not intend to alter the limitations of the general rule—cementing their analysis in Shamrock Oil.

The dissent bought Home Depot's argument as underpinning the policy driving CAFA, which was to halt plaintiffs from manipulating the court system.  Home Depot, 139 S. Ct at 1752 (Alito, J., dissenting).  The dissent argued that it defied logic to presume that a "Congress eager to remedy alleged state-court abuses in class action would have chosen to discriminate between two kinds of defendants…all based on whether the claim against them had instigated the lawsuit or arisen just one filing later in the counter-complaint."  Id. at 1755.  The distinction drawn in Home Depot between a defendant to a claim and a defendant to a civil action seemed counterintuitive against the backdrop of the case.

Some assert that the decision in Home Depot could pave the way for Plaintiffs to abuse the class action vehicle.  However persuasive the policy rationale may be, the text speaks for itself.  The majority notes that if the Home Depot decision runs contrary to congressional intentions with CAFA, then Congress is free to amend it.  For now, the door to federal courts through removal for third-party counterclaim defendants is closed.

About The Author

Faruki | Updates