Can a third-party defendant in a class action suit remove a counterclaim from state court to federal court?
This case asks the Supreme Court whether a third-party defendant in a state court class action may remove a counterclaim from state court to federal court. Petitioner Home Depot U.S.A. Inc. (“Home Depot”) argues that the Supreme Court’s case Shamrock Oil & Gas Co. v. Sheets, which holds that an original plaintiff may not remove a counterclaim to federal court, does not apply to third-party defendants. Moreover, Home Depot asserts that the text of the Class Action Fairness Act (“CAFA”) allows for the removal of class action counterclaims by any defendant, including third-party defendants. Conversely, Respondent George W. Jackson—a class action representative who counterclaimed against Home Depot—contends that Shamrock Oil actually bars third-party defendants from removing. Furthermore, Jackson maintains that CAFA’s discussion of removal does not explicitly expand the term “defendant” to third-party defendants, and thus should not be read to allow Home Depot to remove Jackson’s counterclaim. This case has large implications for consumer class action suits in state court, as it will affect class action litigation strategy and forum selection in potentially hostile state courts.
Questions as Framed for the Court by the Parties
(1) Whether, under the Class Action Fairness Act—which permits “any defendant” in a state-court class action to remove the action to federal court if it satisfies certain jurisdictional requirements—an original defendant to a class-action claim that was originally asserted as a counterclaim against a co-defendant can remove the class action to federal court if it otherwise satisfies the jurisdictional requirements of the Class Action Fairness Act; and
(2) whether the Supreme Court's holding in Shamrock Oil & Gas Co. v. Sheets—that an original plaintiff may not remove a counterclaim against it—extends to third-party counterclaim defendants.
In June 2016, Citibank, N.A. (“Citibank”) sued George W. Jackson in North Carolina state court to collect on his credit card debt. Jackson v. Home Depot U.S.A., Inc. at 3. Two months later, Jackson counterclaimed against Citibank, also adding third-party class action claims against Home Depot and Carolina Water Systems, Inc. (“CWS”). Id. at 3. Jackson asserted that Home Depot and CWS were misleading customers about their water treatment systems and that Citibank was also liable for its direct involvement in the transactions. Id. at 3. In September 2016, Citibank dismissed its claim against Jackson. Id. at 9.
Then, in October 2016, Home Depot attempted to remove the case to the United States District Court for the Western District of North Carolina under the Class Action Fairness Act of 2005 (“CAFA”). Id. at 4, 9. Home Depot also asked the district court to realign the parties, such that Jackson would be the plaintiff and Home Depot, CWS, and Citibank would be the defendants. Id. at 4. The district court denied the realignment request, finding that there was no need to realign because the adverse parties were already on opposite sides of the lawsuit. Id. at 4. In November 2016, Jackson moved to remand the case back to state court—which the court granted—finding that Home Depot technically was not a “defendant” and therefore could not have removed to federal court in the first place. Id. at 4. Jackson also dropped his counterclaim against Citibank, eliminating it from the case. Id. at 9.
Under 28 U.S.C. § 1441(a) (“Section 1441”), a defendant may remove a case from the state court to federal court, as long as the federal court was otherwise a proper venue at the time of filing. Id. at 5. In Shamrock Oil & Gas Corp. v. Sheets, the Supreme Court clarified that only an original defendant could remove to federal court; plaintiffs may not do so, even if there are counterclaims brought against them. Id. at 5. For class actions, however, CAFA eliminates many of the traditional restrictions on a defendant’s ability to remove a case. Id. at 6. In Palisades Collections LLC v. Shorts, the Fourth Circuit limited CAFA’s scope by deeming it inapplicable to counter-defendants like Home Depot. Id. at 7.
Home Depot first argued that Dart Cherokee Basin Operating Co., LLC v. Owens suggests that courts should reconsider the definition of “defendant” more broadly to allow third-party defendants to remove. See id. at 9–10. The Fourth Circuit rejected this first argument, explaining that because Congress used the plain word “defendant” in both Section1441 and in CAFA, the word should not be interpreted more broadly under one than under the other. See id. at 11–12.
Second, Home Depot argued that Citibank, the original plaintiff, was no longer in the case, meaning Home Depot is no longer a "third-party defendant"—and is instead simply a defendant that should be entitled to remove. Id. at 9. The Fourth Circuit rejected this argument, however, emphasizing that the validity of removal is evaluated at the time when the notice of removal is filed. Id. at 7. Here, when Home Depot filed the notice of removal in October 2016, Jackson still had his counterclaim against Citibank. See id. at 13. Thus, Citibank was still a party and the district court’s decision to remand was therefore correct. See id.
IS REMOVAL LIMITED TO THE ORIGINAL DEFENDANT?
Home Depot argues that the Supreme Court’s holding and reasoning in Shamrock Oil & Gas Corp. v. Sheets does not bar third-party defendants from removing counterclaims from state court to federal court. Brief for Petitioner, Home Depot U.S.A., Inc. (“Home Depot”) at 15. Home Depot contends that the Court in Shamrock Oil held that if plaintiff X brings a state court action against defendant Y and defendant Y brings a counterclaim against plaintiff X, then plaintiff X does not have the right to remove the counterclaim to federal court based on diversity jurisdiction. Id. at 17–18. Home Depot asserts that the rationale underlying the decision was a desire to mitigate the risk of state court bias against the defendant, given that the plaintiff chooses the original forum when bringing an action. Id. at 18–20. As a result, according to Home Depot, an original plaintiff cannot remove a counterclaim because the original plaintiff chose the forum for the action. Id.
Home Depot also argues that third-party defendants to a counterclaim meet the definition of defendants for removal purposes because they do not choose the forum for the original action. Id. Furthermore, Home Depot contends that no federal statute concerning removal explicitly or implicitly limits removal to an original defendant in an action. Id. at 20–21. In support, Home Depot points to statute 28 U.S.C. § 1446(b)(2)(C) (“Section 1446(b)(2)(C)”), which affirmatively allows later-served defendants—that is, defendants who are not original defendants—the right to remove. Id. Finally, Home Depot claims that any defendant has the right to remove because they were involuntarily brought into state court and they do not have the opportunity to invoke federal jurisdiction without removal. Id. at 23–24.
Jackson argues that barring third-party defendants from removing is consistent with the Court’s holding and reasoning in Shamrock Oil. Brief for Respondents, George W. Jackson (“Jackson”) at 18–19. Jackson contends that the Shamrock Oil Court was concerned with maintaining a balance between state and federal court jurisdiction. Id. at 21. Jackson points out that the Shamrock Oil Court barred plaintiffs from removing based on a counterclaim even when the original action had to be filed in state court because federal jurisdiction was not available. Id. Thus, according to Jackson, the holding in Shamrock Oil applies to defendants even when they never had the opportunity to invoke federal court jurisdiction. Id.
Additionally, Jackson argues that the 28 U.S.C. § 1441 removal statute does not grant third-party defendants removal rights. Id. at 22. Jackson contends that Congress limited the removal statute to cases where federal courts would have original jurisdiction—had the plaintiff chosen to file there. Id. at 22–23. Thus, according to Jackson, providing defendants to a counterclaim the ability to remove cases undermines Congress’s intent of limiting removal to original jurisdiction cases. Id. at 23–24. Jackson further asserts that the definition of defendant for removal purposes has traditionally only included those sued by plaintiffs —not a party brought in to the action as defendants by the original defendant. Id. at 24–25. Jackson argues that this logic is consistent with Section 1446(b)(2)(C)—providing removal to later-served defendants—because they are still parties being sued by the plaintiff. Id. at 29. Furthermore, Jackson contends that Congress has had several opportunities to amend the removal statute since 1965, but has chosen not to explicitly give third-parties the right to remove. Id. at 32. Lastly, Jackson claims that Home Depot’s definition of defendants will greatly expand removal rights and distort the balance between federal and state court jurisdictions. Id. at 34–36.
CAN CLASS ACTION COUNTERCLAIMS BE REMOVED?
Home Depot argues that CAFA, independent of the federal removal statute, permits a third-party class action counterclaim defendant to remove a class action. Brief for Petitioner, Home Depot U.S.A., Inc. (“Home Depot”) at 32. Home Depot asserts that courts must first look to the plain meaning of a statute’s text when interpreting a statute. Id. at 33–34. Home Depot then cites CAFA, which states that “any defendant” can remove if they meet jurisdiction requirements. Id. at 34. Accordingly, Home Depot contends that the plain meaning of CAFA’s text permits any defendant, including third-party defendants in a counterclaim, to remove. Id. Home Depot also points out that Congress departed from the language in the federal removal statute that allows “the defendant or the defendants” to remove because Congress intended for a more expansive definition of defendants in class actions. Id. at 35. Furthermore, Home Depot argues that not allowing a third-party defendant to remove in a class action counterclaim contradicts the purpose of CAFA. Id. at 41–42. Home Depot claims that Congress passed CAFA because removal statutes at the time were not sufficient in preventing plaintiffs from “gaming the system” and keeping large class actions in state court. Id. Home Depot argues that CAFA was passed in order to prevent out-of-state bias against class action defendants. Id. at 43. Therefore, Home Depot posits that a narrow reading of “defendants,” which includes only the original defendant of an action, undermines the purpose of CAFA by allowing plaintiffs to “game the system” and keep class actions in state court. Id. at 43–46.
Conversely, Jackson argues that the phrase “any defendant” in CAFA’s text does not, by itself, expand removal rights to third-party defendants. Brief for Respondents, George W. Jackson (“Jackson”) at 36–37. Jackson explains that Congress would explicitly expand removal to third-party defendants instead of using the vague term ‘any’ if Congress wanted to expand removal rights. Id. at 37–39. Jackson also adds that Congress did not intend for CAFA to expand removal to counterclaims, arguing that Congress did not once in the text of the statute, in the Senate report, or the draft bills consider expanding removal rights to counterclaims. Id. at 41. Jackson contends that Congress was concerned with specific actions taken by plaintiffs to “game the system” and keep class actions in state court, but these actions had nothing to do with third-party removal rights. Id. at 44. For example, Jackson notes that the removal of class actions was particularly subject to gamesmanship because plaintiffs could defeat removal by joining a single local defendant. Id. at 40. Jackson further asserts that the defendants claims in a class action could not be aggregated to meet the amount-in-controversy requirement. Id. Thus, Jackson argues that Congress intended CAFA to address these two specific issues that made removal of class actions difficult. Id. Additionally, Jackson maintains that other statutes—such as the SPEECH Act—use the text “any defendant,” but do not permit removal by third-party defendants. Id. at 46–47. Jackson contrasts the SPEECH Act with statutes such as the America Invents Act, arguing that while some statutes do expand removal to third-party defendants, the language of those statutes provide support of that expansion. Id. at 47–48. Finally, Jackson claims that even if CAFA can be read to expand removal to third-party defendants in a class action counterclaim, CAFA does not override the fact that removal is limited to cases that have original jurisdiction in federal court. Id. at 49–53. Thus, according to Jackson, Home Depot is ultimately barred from removing to federal court. Id.
HOSTILE STATE COURTS AND EXCESSIVE SETTLEMENTS
The Retail Litigation Center et al. (“Center”), in support of Home Depot, argues that if third-party defendants like Home Depot are not permitted to remove such cases to federal courts, a “tsunami” of interstate class-action claims will overwhelm state courts throughout the country. Brief of Retail Litigation Center, Inc., Chamber of Commerce of the United States of America, and the Product Liability Advisory Council, in Support of Petitioner at 15. DRI – The Voice of the Defense Bar (“DRI”), in support of Home Depot, posits that state courts are so hostile to corporate defendants that they are severely pressured to settle nearly any class action, such that the settlement is akin to a ransom to the class action attorneys. See Brief of DRI – The Voice of the Defense Bar, in Support of Petitioners at 12. The Product Liability Advisory Council (“Council”), in support of Home Depot, explains that Congress enacted CAFA in large part because of the significant level of hostility state courts demonstrated against class action defendants. See Brief of the Product Liability Advisory Council, Inc., in Support of Petitioner at 19. Allowing this CAFA loophole, the Council argues, would reinvigorate the widespread state court abuse that CAFA sought to prevent. See id.
The American Association for Justice (“Association”), in support of Jackson, fears the opposite result, arguing that permitting third-party removal would leave the door wide open for defendants to remove all sorts of cases that are primarily of state interest to federal courts. Brief of American Association for Justice, in Support of Respondent at 32. The Association explains that permitting such removal would lead to absurd results; for example, if a plaintiff sued a defendant in the same state, and that defendant counterclaimed, the plaintiff would be able to implead its out-of-state insurance company who would then be able to remove the case to federal court based on diversity jurisdiction. See id. at 32–33. The National Consumer Law Center (“NCLC”), in support of Jackson, suggests that fears of flooding the state courts are wholly unfounded, given that state court class action counterclaims simply occur too rarely to risk such flooding. See Brief of the National Consumer Law Center, in Support of Respondent at 4. Indeed, the NCLC explains that such counterclaims only arise in rare situations and that there simply are not enough opportunities for these situations to arise and flood state courts. See id.
The Center explains that, prior to CAFA, class action attorneys widely abused the state court system by engaging in forum shopping and bringing major interstate class actions in certain favorable state courts. Brief of Retail Litigation Center et al. at 15. By forbidding third-party removal to federal courts, according to the Center, class action attorneys would be able to circumvent CAFA’s safeguards and thereby force defendants like Home Depot to litigate major class actions in the same exact state courts whose hostility CAFA intended to curb. See id. The Council adds that attorneys who seek to bring a class action claim against a corporate defendant in a particular favorable jurisdiction would have no trouble finding small claims—similar to the debt collection proceeding Citibank brought against Jackson—against which they could counterclaim with a class action suit. Brief for the Product Liability Advisory Council at 18. Therefore, forbidding removal, the Council maintains attorneys would be able to engage in the exact same forum shopping we saw prior to CAFA. Id. Even worse, the Council argues, attorneys could engineer such an opportunity by having a potential plaintiff in the jurisdiction simply fail to pay a bill to provoke a debt collection action upon which they could counterclaim. Id.
The Association largely dismisses the concerns of forum shopping as ridiculous—stating that if a business “partner[s] in a predatory scheme to defraud” in a particular forum, such a decision is that of the business and not of the class of defrauded consumers. See Brief of American Association for Justice at 31. The NCLC agrees, describing the notion that attorneys will “scour” state dockets to find a debt collection suit, or that consumers will intentionally default on their debts, in hope that they might be able to counterclaim, as a “grim—and absurd—vision.” Brief of National Consumer Law Center at 3. Additionally, the NCLC suggests that permitting removal would actually allow the corporate defendants more freedom in forum shopping, at least as between state and federal courts. See id. at 13. Permitting removal, the NCLC argues, would mean that co-conspirators would have two chances to select federal courts—when one of them brings the initial suit as a plaintiff and again when the other removes as a third-party defendant. Id. at 13–14.
- Perry Cooper, Home Depot Wins SCOTUS Look at Consumer Class Suit, Bloomberg BNA (Sept. 27, 2018).
- Home Depot U.S.A., Inc. v. Jackson, Oyez (Dec. 30, 2018).
- Ryan M. Tosi & Scott G. Ofrias, Does “Any Defendant” Really Mean “Any Defendant”?, K&L Gates (Oct. 4, 2018.