Facing a Class Action Complaint as a Third-Party Defendant? Time to Get Comfortable in State Court

From the class action defense perspective, companies and counsel alike are almost always looking for an angle to move a state-filed putative class action to the more rigorous environment of the federal courts.  Congress appreciated the benefits of a federal court environment and the potential biases facing out of state defendants in state courts when Congress enacted the Class Action Fairness Act in 2005 (“CAFA”).  CAFA provided, among other things, relaxed standards for removal of class actions to the federal courts.  However, the Supreme Court’s decision in Home Depot U.S.A., Inc. v. Jackson has now limited access to the federal courthouse by a third-party counterclaim defendant (a party brought into a lawsuit through a counterclaim filed by the original defendant). In yet another 5-4 decision this term, Justice Thomas, writing for the majority with an unusual coalition of Justices Breyer, Ginsburg, Kagan, and Sotomayor, applied a strict textual view of the general removal statutes and CAFA, and held that “because in the context of these removal provisions the term “defendant” refers only to the party sued by the original plaintiff, we conclude that neither provision allows such a third-party to remove.” 

In June 2016, Citibank filed a debt-collection action against George Jackson in North Carolina state court over an unpaid Home Depot credit card bill.  Jackson answered the complaint and filed a third-party class action complaint against new third-party defendants Home Depot and Carolina Water Systems, alleging a scheme between Home Depot and Carolina Water to induce homeowners to buy water treatment systems at inflated prices.  Citibank later dismissed its claims against Jackson, leaving only Jackson’s proposed class action claims against Home Depot and Carolina Water Systems. Home Depot then filed a Notice of Removal.  Following a Motion for Remand by Jackson, the District Court remanded the case to state court finding that as a third-party defendant, Home Depot could not avail itself of the removal mechanisms and the federal courts because Home Depot was not the “original defendant.” On appeal, the Fourth Circuit affirmed.

The Supreme Court in Home Depot sought to address a seemingly simple question:  does the term “defendant” under the general removal provisions and CAFA also encompass third-party counterclaim defendants? The majority answered this question with a resounding “no.”  Justice Thomas wrote that with respect to the general removal statutes, the right to removal is based upon the federal court having original jurisdiction over the original civil action, which is determined under the well pleaded complaint rule by the action framed by the plaintiff’s complaint.  In this regard, the “defendants” must have been named in the original complaint – not a counterclaim – to benefit from the general removal procedures.  As to CAFA, the Supreme Court held that while it was a “closer question,” applying the rules of statutory construction the majority reasoned that Congress had intended CAFA to only clarify that certain removal provisions did not apply to class actions, and that Congress did not intend to expand the identity of the parties that could avail themselves of the removal procedures.

Justice Alito, joined by Chief Justice Roberts and Justices Gorsuch and Kavanagh, also arguably applied a strict constructionist approach to interpreting to CAFA, but came to the opposite result, arguing that third-party counterclaim defendants fall within the broad meaning of the term “defendant.”  Justice Alito referred to the potential ramifications of the majority’s rulings as offering savvy lawyers additional “tactics” or “loopholes” in avoiding federal courts, and that he could “think of no rational purpose for this limit on which defendants may remove.”

It remains to be seen what effect this decision will have on potential consumer class actions.  While class action complaints raised for the first time in counterclaims are certainly not the garden variety class action, this decision certainly raises concerns for companies that may be dragged into claims in seemingly unfavorable state jurisdictions.  Defense counsel will continue to look for ways to litigate consumer class action matters in federal court, but now may have to be prepared to combat these cases on the state court level more often.