Please ensure Javascript is enabled for purposes of website accessibility

Federal removal statute creates venue changes

BridgeTower Media Newswires//March 2, 2012//

Federal removal statute creates venue changes

BridgeTower Media Newswires//March 2, 2012//

Listen to this article

Civil practitioners say a new federal venue law that quietly went into effect recently will lead to an increase in diversity-based discovery and cut down on the “jurisdictional gamesmanship” that regularly occurs in litigation.

On Jan. 6, Congress passed the far-reaching Federal Courts Jurisdiction and Venue Clarification Act of 2011, a measure that contains numerous revisions to 28 U.S.C. sec. 1441, as well as substantive changes to diversity jurisdiction rules.

“It’s surprising that this law raced through Congress,” said Minneapolis attorney David Herr.

“I’m not really sure how or why these rules slid under the radar with so few people knowing about them,” said Suffolk University Law School Professor Linda Sandstrom Simard in Boston. “You’re talking about changes in a removal statute that impact cases across the country in both state and federal court. I’ve been teaching civil procedure for a long time, and I can tell you that we haven’t come close to seeing a clarification like this in well over a decade.”

Bad-faith exception

Simard, who participated in a panel discussion on the new statute with Suffolk Law Associate Dean Karen M. Blum and U.S. Magistrate Chief Judge Leo T. Sorokin for the District of Massachusetts, said one of the act’s key changes is the adoption of a bad-faith exception to federal venue laws.

While lawyers have long operated under a system that generally prohibits them from removing a suit on diversity grounds more than a year after it is filed in state court, the new statute creates an exception.

Now, if a defendant learns a plaintiff purposely withheld information that would have indicated a state complaint was removable, a trial judge has the discretion to transfer it to federal court, even if the one-year window has closed, Simard said.

“If the plaintiff is playing funny games, the statute now says the one-year rule would not be binding,” she said. “If there’s a suspicion, for example, that the plaintiff is somehow obviating the existence of federal subject matter jurisdiction, lawyers on the defense side will now have every incentive to take advantage of the discovery process to try and uncover that abuse and use this amendment as an escape hatch.”

In other words, Herr explained, Congress created a problem with the one-year rule and now is fixing it.

Although jurisdiction in federal court is determined by statute, Brooks Magratten of Providence said many of the more complicated removal issues arising in recent years have been decided by appellate courts across the country.

Magratten, president of the Rhode Island chapter of the Federal Bar Association, said the passage of the new law will help provide clear answers to those questions.

“Cases are removed fairly frequently, and I know that in our practice we tend to remove cases whenever we can,” he said. “The circumstances of each removal vary from case to case and are often complicated, so any guidance we get from Congress is absolutely something we are all going to have to carefully study.”

Stopping the clock

Calling the new law “extremely significant,” Joseph B. Sconyers of Boston said Congress enacted it to provide uniformity in federal and state courts throughout the United States.

Sconyers said the statute, which does not apply retroactively, will increase the incentive for counsel to look for evidence of bad faith, particularly in cases in which a plaintiff names a non-diverse defendant simply to avoid removal on diversity grounds.

Sconyers, who with colleague John D. Hanify drafted a client alert on the FCJVCA, said it is common to see a plaintiff include such a defendant in a complaint, only to dismiss him or her after the 12-month window closes.

“Under the old rules, it was much more difficult for a defendant to deal with that kind of situation,” he said. “This is so important because it removes any incentive for plaintiffs’ attorneys to engage in jurisdictional gamesmanship, since the message is now out there that the case can still be removed.”

As a result, defense counsel will spend more time conducting depositions and collecting other evidence during the pretrial phase of a case in an effort to learn more about the connections a co-defendant may have to a suit.

Although the doctrine of fraudulent joinder was already on the books to try to stop such litigation abuses, Sconyers said, the codification of the rule provides a stronger basis for defendants to seek out violations.

“Under the old rule, the clock would start ticking, and if a year passed, the reality was that it wasn’t going to be removed to federal court even if you found something that would make it removable,” he said. “What this law means is that defendants will continue to press those jurisdictional issues, whereas before there was really no point in doing it because you were stuck in state court no matter what.”

Minneapolis attorney Eric Magnuson said the law does make life a little easier for defense attorneys who think the plaintiffs are hiding jurisdictional information.

“I think most defense lawyers watch this very carefully. You don’t get very many cases stuck in federal court if the defense lawyers watch what they’re doing,” Magnuson said.

In addition, Herr said, “federal judges are pretty good about rooting out jurisdictional issues, even if the parties don’t raise it.”

Counting the dollars

Michael C. Smith, editor of “O’Connor’s Federal Rules,” said the bad-faith exception to the FCJVCA also covers cases in which a plaintiff files suit in state court under a provision that does not require disclosure of a specific amount in controversy.

If a case is not removable based on the amount alleged in an initial pleading, under the new law a defendant can seek to remove the matter to federal court within 30 days of discovering that the dollar value exceeds $75,000.

Previously, judges across the country had been divided on whether the issue could be raised after a year, Smith said.

To prevail on such a motion, he added, a defendant will have to develop evidence in discovery to satisfy a judge that a plaintiff “deliberately failed” to disclose the true amount simply to prevent removal.

“The one-year time bar was there to give lawyers and their clients an outer limit, after which you just needed to get the case tried in whatever forum you were in,” he said. “Now, it is possible that, even after the one year passes, you may have to start all over again in federal court.”

Smith, who practices in Texas, said some of the changes in the law resulted from the 5th U.S. Circuit Court of Appeals’ 2003 opinion, Tedford v. Warner-Lambert Co. The court in Tedford found that a plaintiff had manipulated the facts of a case to keep it out of federal court.

“Changes like this only happen once every couple of decades,” he said. “This statute creates important new ground rules that lawyers need to pay attention to when a complaint is filed. Everyone, myself included, is sort of still scrambling right now to go back and figure out what it all means.”

Venue law clarifies areas of confusion

The Federal Courts Jurisdiction and Venue Clarification Act of 2011 was passed by unanimous consent in both chambers of Congress on Jan. 6.

Lawyers familiar with the statute say the FCJVCA clarifies a number of matters that have long been sources of confusion for federal practitioners and judges.

Some of the key changes to the law include:

• In cases with multiple defendants, each defendant has 30 days after being served with a complaint to seek removal. Earlier-served defendants will also be allowed to join in or consent to removal by another defendant.

• A federal judge hearing a case removed on federal question grounds has discretion to retain or remand “all matters in which State law predominates.”

• When a judge is deciding a diversity jurisdiction question, resident aliens are not considered citizens. As a result, the courts will not recognize diversity jurisdiction in a suit between two resident aliens domiciled in different states.

• Transfer of venue is permitted in “any district or division to which all parties have consented,” even if the case could not have originally been filed there.

• All corporations are considered to be citizens of their place of incorporation and principal place of business.

Barbara Jones contributed reporting to this article.

Top News

See All Top News

Legal calendar

Click here to see upcoming Minnesota events

Expert Testimony

See All Expert Testimony