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The U.S. Supreme Court in Home Depot U. S. A., Inc. v. Jackson, No. 17-1471, 2019 WL 2257158 (U.S. May 28, 2019) held that a third-party defendant first named in a counterclaim cannot remove cases under either the general removal statute or the more liberal removal provisions of the Class Action Fairness Act (“CAFA”). The Supreme Court’s decision does not create new law; it confirms the holding of every circuit court of appeals to have considered the issue. But the decision maintains an odd and restrictive limit on federal jurisdiction where some class-action defendants can remove—and other cannot—based solely on when and how the class-action claim is asserted. As a result, companies will be forced to defend class actions in state court, where (the dissent noted) in-state plaintiffs may enjoy a ‘home court advantage.’ Home Depot, 2019 WL 2257158, at * 6.
The Supreme Court’s 1941 Limit on Removal.
Home Depot arose from a limit on removal the U.S. Supreme Court first imposed in 1941. In Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), the Court held that original plaintiffs who become counterclaim defendants cannot remove to federal court under the general removal statute, 28 U.S.C. § 1441, because that statute limits the right to removal to “the defendant or the defendants,” (emphasis added), which the Court found did not include an original plaintiff who later became a counterclaim defendant. And over time, lower courts have expanded Shamrock Oil to prevent third-party-defendants and third-party counterclaim defendants from removing.
For this reason, in Home Depot, the parties were “directed to brief and argue the following question: Should [the Supreme Court]’s holding in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 61 S. Ct. 868, 85 L. Ed. 1214 (1941)–that an original plaintiff may not remove a counterclaim against it–extend to third-party counterclaim defendants?” Jackson v. Home Depot U.S.A., Inc., 880 F.3d 165 (4th Cir.), cert granted, 139 S. Ct. 51 (2018) (No 17-1471).
Lower Courts in Home Depot Denied Third-Party Defendant’s Right to Remove, Consistent with All Other Circuit Courts.
Home Depot arose from a 2016 collection action filed by a credit-card company against a consumer in North Carolina state court. The consumer responded with a counterclaim against the lender and a third-party class-action against Home Depot and another entity for alleged for unfair and deceptive trade practices in connection with the credit-card purchase. The credit-card company and consumer eventually dismissed their claims against each other leaving only the class-action counterclaim, which Home Depot then sought to remove under CAFA.
The district court remanded the case to state court, and the Fourth Circuit affirmed. Cititbank, N.A. v. Jackson, No. 3:16-CV-00712-GCM, 2017 WL 1091367, at *3 (W.D.N.C. Mar. 21, 2017), aff’d sub nom. Jackson v. Home Depot U.S.A., Inc., 880 F.3d 165 (4th Cir. 2018), cert. granted, 139 S. Ct. 51 (2018). The Fourth Circuit held that a third-party defendant was not a “defendant” eligible to remove, and only “parties against whom the original plaintiff asserts claims” may remove claims. Jackson, 880 F.3d 165, 171.
The Fourth Circuit’s holding was in line with all other circuit court courts that similarly denied third-party defendants a right to remove. Tri-State Water Treatment, Inc. v. Bauer, 845 F.3d 350, 355 (7th Cir. 2017); Westwood Apex v. Contreras, 644 F.3d 799, 805 (9th Cir. 2011); First Nat’l Bank of Pulaski v. Curry, 301 F.3d 456, 461–63 (6th Cir. 2002).
Supreme Court Confirms Counterclaim and Third-Party Defendants Cannot Remove.
In an oddly split 5-4 decision (the four liberal justices joined Justice Thomas’s majority opinion), the Supreme Court affirmed the Fourth Circuit and confirmed that counterclaim and third-party defendants cannot remove class actions to federal court. As expected from Justice Thomas, the majority opinion was heavily textual and rejected policy-based arguments as appropriate only for Congress to consider.
The Court’s primary rationale was that the traditional federal-removal statute—28 U.S.C. § 1441—only permits removal of “actions”, rather than “claims”, over which the federal court had original jurisdiction. Home Depot, 2019 WL 2257158 at *4 (“Home Depot emphasizes that it is a ‘defendant’ to a ‘claim’, but the statute refers to “civil action[s]’, not ‘claims’”). Thus, a “defendant” entitled to remove can only be the “defendant” named in the original complaint. Id. (“because the ‘civil action … of which the district cour[t]’ must have ‘original jurisdiction’ is the action as defined by the plaintiff’s complaint, ‘the defendant’ to that action is the defendant to that complaint, not a party named in a counterclaim.”).
The Court rejected the argument that CAFA required a different result because it permitted removal by “any” defendant rather than “the” defendant, holding that CAFA merely eliminated certain, defined, limits on removal, but did not change “§1441(a)’s limitation on who can remove, which suggests that Congress [in passing CAFA] intended to leave that limit in place.” Id. at *6.
The Court also rejected the policy argument that third-party defendants, unlike counterclaim defendants, did not choose to be in state court and thus deserved a chance to remove to federal court, finding no text to support the argument. Id. at *5 (“[W]e see no textual reason to reach a different conclusion for a counterclaim defendant who was not originally part of the lawsuit.”). The Court noted that any such policy rationale was better directed to Congress. Id. at *6 (“Congress … has the authority to amend the statute. But we do not.”).
Class-Action Defendants Can Be Forced to Litigate in State Courts.
Home Depot does not change the law—it affirmed the conclusion of the four circuit courts to consider the issue—so there should not be a significant change in current practice. But the decision does give a final seal of approval to a tactic to force litigation of class actions in state court even if those claims would typically be removable to federal court. A plaintiffs’ attorney with a potential class action may advise their client to refuse to pay a bill, generating a state-court collection action (such collection actions do not meet jurisdiction requirements to be filed in federal court) to use to file a class-action counterclaim or third-party claim. That class action will likely not be removable. A third-party defendant’s only possible refuge would be to ask the state court to sever the third-party class-action claim by arguing it is too attenuated to be part of the collection action. If successful, the third-party defendant may then be able to remove the severed class-action claim to federal court.