Supreme Court Holds That Third-Party Counterclaim Defendants May Not Remove An Action Based On The General Removal Statute Or CAFA
Securities Litigation
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  • Supreme Court Holds That Third-Party Counterclaim Defendants May Not Remove An Action Based On The General Removal Statute Or CAFA

    On May 28, 2019, the Supreme Court held in a 5-4 decision authored by Justice Thomas that a third-party counterclaim defendant was not permitted to remove class action claims against it under the general removal statute, 28 U.S.C. § 1441 (“Section 1441”), or the Class Action Fairness Act, 28 U.S.C. § 1453 (“CAFA”).  Home Depot U. S. A., Inc. v. Jackson, No. 17-1471, 587 U.S. ___ (2019).  The Court held that the term “defendant” in the two removal provisions at issue applies only to “the party sued by the original plaintiff” and should not be expanded to include third-party counterclaim defendants.  As noted in our prior post when the case was argued before the Supreme Court, this decision is the first time the Supreme Court has discussed the scope of Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), which addressed analogous language in Section 1441’s predecessor and held that a plaintiff who originally filed an action in state court would not be permitted to later remove it to federal court as a “defendant” once counterclaims were filed against it.

    In Home Depot, a national bank brought a debt collection action against a North Carolina resident in state court to recover payment on the purchase of a water treatment system the individual made at a retailer using a credit card issued by the bank.  In response, the individual asserted class action consumer-protection counterclaims against the bank, the retailer, and the manufacturer of the water treatment system, claiming unfair trade practices violating North Carolina law.  The retailer removed the class action to district court.  Shortly thereafter, the bank dropped its claims against the individual, and the individual amended its class action complaint, leaving only the counterclaims against the retailer and manufacturer as the remaining live claims.  In response to the retailer’s removal of the counterclaims, the individual moved to remand.  The  district court remanded the action, finding that the retailer, a third-party counterclaim defendant, was not a “defendant” under the applicable removal statutes, based on Shamrock Oil.  The retailer appealed, and the Fourth Circuit affirmed.  The retailer then petitioned for a writ of certiorari, which the Supreme Court granted in order to determine “whether a third party named in a class-action counterclaim brought by the original defendant can remove if the claim otherwise satisfies the jurisdictional requirements of CAFA.”  The Court also directed the parties to address “whether the holding in [Shamrock Oil]—that an original plaintiff may not remove a counterclaim against it—should extend to third-party counterclaim defendants.”  Oral argument was heard on January 15, 2019.

    Writing for the majority, Justice Thomas—joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, in an unusual grouping of Justices for a majority opinion—examined Section 1441 and CAFA.  Under Section 1441(a), a civil action brought in state court (and as to which a federal district court has jurisdiction) may be removed to federal court by “the defendant or defendants.”  Under CAFA, “any defendant” in a “class action” may remove the action to federal court.  Because neither provision specifically refers to third-party counterclaim defendants, the Court first considered “whether either provision allows a third-party counterclaim defendant . . . to remove the counterclaim filed against it.”  The Court noted that Section 1441(a) refers to “actions,” not “claims,” and that the “action” is the original action brought.  Accordingly, the Court found it is the defendant in such an action that is the “defendant” referenced by the statute and Section 1441(a) “does not permit removal based on counterclaims at all.”  The Court observed that a number of provisions in the Federal Rules of Civil Procedure, such as Rules 12 and 14, distinguish between third-party defendants, counterclaim defendants, and defendants, thus providing further support to the view that Congress’s deliberate use of “defendant” in Section 1441 was not intended to extend to third-party defendants.  The Court also noted that in other removal provisions, such as Sections 1452 and 1454, “Congress has clearly extended the reach” to include parties other than just the defendant, whereas Section 1441(a) “limits removal” to “defendants.”  The Court further observed that its decision in Shamrock Oil “suggests that third-party counterclaim defendants are not ‘the defendant or the defendants’ who can remove under §1441(a).”  The Court recognized that Shamrock Oil “does not specifically address whether a party who was not the original plaintiff can remove a counterclaim against it,” and that “a third-party counterclaim defendant, unlike the original plaintiff, has no role in selecting the forum for the suit.”  However, the Court found “no textual reason [in Section 1441] to reach a different conclusion for a counterclaim defendant who was not originally part of the lawsuit,” and emphasized that “Shamrock Oil did not view the counterclaim as a separate action with a new plaintiff and a new defendant,” but rather “highlighted that the original plaintiff was still ‘the plaintiff.’”  The Court also found that Congress has imposed limits on removal which indicate it did not intend to provide to all defendants an unqualified right to remove. 

    The Court then turned to the application of CAFA’s removal provision and held that it similarly does not allow third-party counterclaim defendants to remove class actions.  The Court rejected the argument that the provision’s reference to any defendant was a signal from Congress that removal was permitted by even third-party counterclaim defendants.  Rather, the Court found that the use of “any” was to “simply clarify that certain limitations on removal that might otherwise apply” will not apply for CAFA (such as diversity Section 1441(b)(2)’s prohibition on removal on the basis of diversity if any defendant is a citizen of the state in which the suit is filed).  Additionally, the Court noted that both removal provisions at issue—Section 1441 and CAFA—“rely on the procedures for removal in §1446,” which also employs the term “defendant,” and to have the term “defendant” construed differently in the various provisions related to removal would “render [them] incoherent.”  The Court affirmed the Fourth Circuit’s decision.

    Justice Alito dissented, joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh, arguing that “defendant” has a “plain meaning” as one who is “sued in a civil proceeding,” and that this should include both the original defendant and the third-party counterclaim defendant, who did not choose to be in state court.  The dissent states that the majority opinion runs counter to Congress’s intent, with CAFA, “to remedy alleged state-court abuses in class actions.”  The dissent also warns that the decision could lead to a proliferation of litigation “tactics” to prevent removal—such as plaintiffs raising class-action claims as a counterclaim.  The potential pursuit of such a tactic, however, would likely be limited to certain types of suits, such as the action involved here (a debt collection lawsuit in which the borrower brought a counterclaim alleging the debt itself was somehow fraudulent).