Seyfarth Synopsis: Defendants can remove lawsuits filed in state courts to federal courts if they meet the statutory requirements for removal under either 28 U.S.C. § 1441(a) or the Class Action Fairness Act. In Home Depot U. S. A., Inc. v. Jackson, No. 17-1471, 2019 WL 2257158, at *2 (U.S. May 28, 2019), the U.S. Supreme Court ruled that Home Depot was not entitled to removal under either provision because it was brought into the lawsuit by a counterclaim filed by the original defendant. According to the Supreme Court, the term “defendant” in the removal statutes refers only to the party sued by the original plaintiff.

Although counterclaim class actions are not the norm, this decision nonetheless restricts removal strategies for certain companies facing class actions in unfavorable state jurisdictions. Companies with multiple business segments, or in the franchise and staffing industries, or companies that regularly initiate lawsuits are more likely to be named as third-party defendants, and inevitably impacted by this decision.

Background

In 2016, Citibank N.A. filed a debt-collection action in North Carolina state court against George W. Jackson, for charges incurred on a Home Depot credit card. In responding to Citibank’s complaint, Jackson asserted a counterclaim against Citibank and third-party class-action claims against Home Depot and Carolina Water Systems (“CWS”).

In these third-party claims, Jackson alleged that Home Depot and CWS had engaged in unfair and deceptive trade practices with respect to the sale of water treatment systems. Citibank subsequently dismissed its claims against Jackson and one month later, Home Depot filed a notice of removal to federal court, citing federal jurisdiction under the Class Action Fairness Act (“CAFA”).

Jackson moved to remand the case to state court and amended his third-party complaint to remove any reference to Citibank. The district court granted Jackson’s motion to remand because Home Depot was not a “defendant” eligible to remove under the CAFA. The U.S. Court of Appeals for the Fourth Circuit affirmed, finding that allowing Home Depot to remove would be inconsistent with its prior interpretations of the CAFA’s removal statute.

Subsequently, the U.S. Supreme Court granted Home Depot’s writ of certiorari.

The Supreme Court Decision

Justice Thomas wrote the majority opinion for the Supreme court, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. On review, the Supreme Court concluded that the term “defendant’ used in 28 U.S.C. § 1441(a) and the CAFA does not include a third-party counterclaim defendant, such as Home Depot. First, the Supreme Court explained that while Home Depot was a defendant to a claim (i.e., Jackson’s counterclaim), the removal statute refers to ‘“civil action[s],’ not ‘claims.’” Id. at 6. Hence, under “Section 1441(a),” the Supreme Court reasoned, “a counterclaim is irrelevant to whether the district court has ‘original jurisdiction over the civil action.’” Id. The Supreme Court opined that its conclusion was bolstered by language in other removal statutes that either differentiated between a defendant and a third-party defendant, or expressly extended the reach of the statute to include parties other than the original defendant. Id. at 7.

The Supreme Court similarly concluded that “any defendant,” as used in the CAFA was not intended to expand the class of parties who can remove under Section 1441(a). Id. at 9. Instead, the CAFA merely limits certain restrictions on removal that might otherwise apply. In other words, the Supreme Court held that nothing in the CAFA alters Section 1441(a)’s limitations on who can remove.

Based on this reasoning, the Supreme Court ultimately ruled that neither § 1441(a) nor the CAFA permits removal by a third-party counterclaim defendant.

Implications for Employers

Removal should be in the arsenal for any company facing a class action in an unfavorable state jurisdiction. While the Supreme Court’s decision in Jackson undoubtedly restricts this strategy, it does so only in the narrow circumstances where the company faces a counterclaim as a third-party defendant. Fortunately, counterclaim class actions do not come up that often. In the class action context, the decision is likely to have the most impact on companies that regularly bring suits against individuals that may, in turn, result in a class action counterclaim. Hence, companies with multiple divisions or in the franchise and staffing industries face a potential situation in which a related company could initiate a lawsuit, thus giving rise to a third-party counterclaim.