Martha Doty, one of our California L&E specialists, has been railing for years (at least it seems like years to those of us who have to listen to it in group meetings and lunchroom therapy sessions) against the ease by which employees can destroy diversity jurisdiction – and hence prevent removal to federal court – by the simple artifice of naming sham defendants. Indeed, at the risk of further educating and emboldening the plaintiff’s bar, Martha even wrote a piece on the apparent upsurge in the use of defamation claims as the diversity-killing tool de jour: “Defamation: The New Diversity-Killing Claim For Employment Actions.”
Well, for once, there is some good news for diversity employers. As Martha explains in her new piece, the U.S. Supreme Court has provided employers with a little help in the battle against sham defendants. Read on to find out how Twombly and Iqbal are changing the removal landscape.
Plaintiffs have grown increasingly clever at frustrating defendants hoping to remove cases to federal court, by joining non-diverse defendants based on the barest of allegations.
Given the high bar required for defendants to establish fraudulent joinder, district courts are increasingly finding even those thin allegations sufficient to defeat removal, particularly in employment cases.
For example, a plaintiff alleging slander based on a supervisor’s statement that the plaintiff had a conflict of interest was held to have stated facts sufficient to defeat fraudulent joinder where the plaintiff had alleged in conclusory fashion that the alleged defamatory statement “was made with malice,” that the defendants knew the statements “were false when they made them,” and that the plaintiff “could allege facts sufficient to support malice.” The district court remanded the case to state court, ruling that these boilerplate and conclusory allegations were sufficient because the defendant had not established that “there was no possibility” the plaintiff could recover. In other words, merely pleading the basic elements of a cause of action, with no added facts about the particular employment relationship at issue, defeated diversity.
The standard should be higher. Two recent U.S. Supreme Court decisions may bolster defendants’ efforts to establish the insufficiency of boilerplate allegations, force plaintiffs to plead more fact, and defeat remand motions to keep cases in federal court.
RECENT SUPREME COURT CASES CHANGE THE LANDSCAPE
In Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007), the Supreme Court heightened the general pleading standards.
Prior to Twombly, courts followed the standard dictated by Conley v. Gibson, 355 U.S. 41 (1957), which established that in order for a motion to dismiss under Rule 12(b)(6) to be granted, the defendant had to prove that “no set of facts existed” that would entitle the plaintiff to recover. In Twombly, an antitrust case, the court rejected Conley’s flimsy standard and established a new “plausibility” standard for pleading. In Twombly, the court held that to survive a 12(b)(6) motion, a complaint need not contain detailed factual allegations, but it must plead “enough facts to state a claim for relief that is plausible on its face.”
The court in Twombly noted that efficiency and expense were the main reasons behind the need for the heightened standard. There, the plaintiff had filed a complaint that contained only a basic recitation of the elements of the claims and alleged the defendant had committed acts satisfying those elements. Before Twombly, this complaint likely would have survived a 12(b)(6) motion to dismiss and would have required the defendant to respond to the complaint and engage in expensive discovery. In re-characterizing the pleading standard, the court held that “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of a cause of action’s elements.”
Further, the court established that “[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint’s allegations are true.” This new pleading standard “serves the practical purpose of preventing a plaintiff with ‘a largely groundless claim’ from ‘taking up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value.”
More recently, in Ashcroft v. Iqbal¸ 129 S.Ct. 1937 (2009), a discrimination claim, the court confirmed that this heightened standard applied to all civil suits, not just antitrust actions.
There, the court held that Iqbal’s allegations that he had been “discriminated against” because of his “religion, race and/or national origin and for no legitimate interest” were not sufficient to state a claim.
In reaching that conclusion, the court instructed the district courts to engage in a two-step process when ruling on a 12(b)(6) motion. First, the district court must separate the conclusory allegations from the ones based in actual fact, and it need not accept as true assertions of mere legal conclusions. Then, the court must assume the factual allegations are true and determine whether they “plausibly give rise to an entitlement to relief.”
In order to survive a motion to dismiss, the complaint must state a plausible claim for relief based on the defendant’s alleged misconduct, not just the mere possibility that a defendant’s actions constituted misconduct. Under a “plausibility analysis,” facts that are simply consistent with liability fall short of the line between possibility and plausibility. Instead, in order for factual allegations to rise to the level of plausibility, the court must be able to “draw the reasonable inference the defendant is liable for the misconduct alleged.”
Thus, while a 12(b)(6) motion may now be granted where the defendant shows that the plaintiff has failed to make a plausible argument, in order for a defendant to successfully demonstrate fraudulent joinder it must make a much higher showing — that the plaintiff “could not possibly recover” against the in-state defendant. See Kruso v. Int’l Telephone & Telegraph Corp., 872 F.2d 1416 (9th Cir. 1989).
Given the Supreme Court’s trend toward heightening the pleading standards generally, the same higher pleading standards should apply in the context of fraudulent joinder analysis as well.
TWOMBLY, IQBAL AND FRAUDULENT JOINDERS
Even prior to Iqbal, courts had already begun applying the Twombly elevated pleading standard to determine whether a diversity-destroying defendant was fraudulently joined and was a sham defendant. The district courts that have addressed Twombly in the context of a motion to remand based on fraudulent joinder have overwhelmingly begun to incorporate the Twombly standard into the fraudulent joinder analysis.
For example, in Allen v. Monsanto Company, 2009 WL 426546 (N.D. Fla. 2009), the court determined the plaintiffs’ allegations of negligence against an individual corporate officer were sufficient to satisfy the plausibility pleading requirements under Twombly in the context of determining the fraudulent joinder issue. See also Watts v. Florida International University, 495 F.3d 1289 (11th Cir. 2007) (discussing Twombly).
Similarly, in Tippen v. Republic Fire and Casualty Ins. Co., No. 06-7701, 2007 WL 4219352 (E.D. La. 2007), the court merged the fraudulent joinder and 12(b)(6) analyses, agreeing that the standard for evaluating a claim of improper joinder is similar to that used in evaluating a motion to dismiss under Rule 12(b)(6).
Other cases include Pascale Service Corp. v. International Truck and Engine Corp., 2007 U.S. Dist. LEXIS 73339 (D. R.I. 2007) (which held the Twombly standard was established in 12(b)(6) context, but it is “equally applicable” to fraudulent joinder); Positive Results Mktg. v. Buffalo-Lake Erie Wireless Sys. Co., 2008 U.S. Dist. LEXIS 39924 (M.D. Pa. 2008); and Bush v. Nationwide Mut. Fire Ins. Co., 2008 U.S. Dist. LEXIS 61039 (S.D. Miss. 2008). The latter two both applied Twombly to fraudulent joinder analysis.
The only district court within the Ninth Circuit that has addressed the issue directly, Moorhouse v. Bayer Healthcare Pharmaceuticals, 2008 WL 2477389 (N.D. Cal. 2008), has left open the possibility that a Twombly/Iqbal argument may govern fraudulent joinder. Although the Moorhouse court rejected the defendant’s argument that Twombly’s plausibility analysis applied to the fraudulent joinder issue before the court, it did so only because it found the cases cited by the defendant there inapposite, not on any substantive grounds.
JUDICIAL ECONOMY AND EFFICIENCY
While some courts may conclude that the fraudulent joinder analysis differs from the Twombly standard, practical implications seem to require the standards to converge. The primary purpose for Rule 12(b)(6) and fraudulent joinder are similar: to prevent gamesmanship through the courts and to require the plaintiff to allege a cause of action legitimately alleging why the plaintiff is entitled to relief.
The 12(b)(6) motion prevents parties from having to fight expensive and frivolous claims by requiring a pleading threshold to be met before the court will recognize the legitimacy of the claim. The fraudulent joinder rule allows parties to prevent “sham” defendants from requiring litigation in state rather than federal courts. By incorporating the Twombly and Iqbal standard into fraudulent joinder analysis, courts would be better able to discern quickly whether claims have been pled sufficiently to move forward in federal court.
Application of these recent Supreme Court cases to fraudulent joinder analysis will reduce the gamesmanship currently employed in pleading claims designed to defeat diversity and will also serve the equally laudable purpose of increasing judicial economy and efficiency.