Supreme Court Rules That Third-Party Counterclaim Defendants Cannot Remove Class Actions Under the Class Action Fairness Act (CAFA)
The U.S. Supreme Court held today that a third-party defendant could not remove a class action to federal court under the Class Action Fairness Act (CAFA) because the term “defendant” as used in CAFA refers only to the party or parties sued by the original plaintiff. The Court’s opinion also has implications beyond the class action context because it addresses the scope of removal jurisdiction under 28 U.S.C. § 1441(a). The key implication of this decision in class actions is that a company that regularly brings suit against consumers (typically in collections matters) may be forced to defend a class action counterclaim filed by the consumer in state court, without any opportunity to remove the case to federal court. Companies may be able to avoid this outcome if there is a governing arbitration provision or forum selection clause in the applicable consumer contract.
In Home Depot U.S.A., Inc. v. Jackson, No. 1701471, the lawsuit began as a collections suit by Citibank, N.A. against George Jackson, seeking to recover for an unpaid balance on a Home Depot credit card. Jackson counterclaimed against Citibank, and brought third-party class action claims against Home Depot and Carolina Water Systems, Inc. After Citibank dismissed its claims against Jackson, Home Depot removed the case to federal court. The district court remanded the case on the grounds that Home Depot as a third-party defendant had no right of removal. The Fourth Circuit affirmed, and the Supreme Court affirmed as well.
Justice Thomas wrote the majority opinion, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. The Court first addressed the scope of the right of removal under 28 U.S.C. § 1441(a), the removal statute enacted long before CAFA, which provides for removal of a civil action “by the defendant or the defendants . . . .” The Court noted that it was plausible that the term “defendant” referred to any person or entity sued in a civil case, but concluded that was not the best interpretation of the statute. Instead, the Court concluded that Section 1441(a) focuses on whether there is jurisdiction over the “civil action,” not particular claims or counterclaims made therein. The Court concluded that “Section 1441(a) thus does not permit removal based on counterclaims at all, as a counterclaim is irrelevant to whether the district court had ‘original jurisdiction’ over the civil action.” Slip op. at 6. The Court also reasoned that: (1) the Federal Rules of Civil Procedure distinguish between “defendants,” “third-party defendants,” and “counterclaim defendants”; (2) other removal statutes in the bankruptcy and patent/copyright context allow “any party” to remove; and (3) the Court held in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941) that a counterclaim defendant that was the original plaintiff had no right of removal under a predecessor statute to § 1441.
The Court then addressed the scope of the right of removal under 28 U.S.C. § 1453(b), part of CAFA, which provides for removal of a putative class action “without regard to whether any defendant is a citizen of the State in which the action is brought, except that such action may be removed by any defendant without the consent of all defendants.” The Court concluded that the use of the words “any defendant” in this statute were simply intended to clarify that the in-state defendant limitation and consent requirement do not apply to a removal under CAFA. The Court noted that, in other contexts, the word “any” is given an “expansive meaning,” but concluded that Congress did not intend an expansive meaning in this context. Slip op. at 10. The Court noted that “[o]f course, if Congress shares the dissent’s disapproval of certain litigation ‘tactics,’ it certainly has the authority to amend the statute. But we do not.” Id.at 11.
Justice Alito wrote a lengthy dissent, joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh. I won’t belabor the dissent here because it does not appear to provide guidance on the scope of the majority opinion that is now the governing law. In brief, the dissent’s key points included: (1) the purpose of CAFA was to expand defendants’ right of removal, contrary to the tactic employed by Jackson’s counsel here; (2) the ordinary meaning of the word “defendant,” i.e., a party being sued, includes a counterclaim defendant or third-party defendant; (3) the word “any” should be given an expansive meaning; and (4) the Court previously stated that there is no anti-removal presumption under CAFA.
This decision upholds prior rulings by some lower courts that counterclaim defendants have no right of removal. In the class action context, the decision is likely to have the most impact on companies that regularly bring suits against consumers that may result in a class action counterclaim, or get brought into such suits as third-party defendants. Other than lobbying Congress to amend CAFA, potential strategic options from the defense perspective may include the use of arbitration provisions in consumer contracts that the Supreme Court’s decisions have upheld, and potentially the use of forum selection clauses that could attempt to restrict the filing of CAFA-eligible class actions to federal courts.