Making a Federal Case of It: Removing Civil Cases to Federal Court Based on Fraudulent Joinder

• Author: E. Farish Percy
• Position: Assistant Professor of Law, University of Mississippi School of Law
• Pages: 04

E. Farish Percy: Assistant Professor of Law, University of Mississippi School of Law. I thank the Lamar Order for providing a summer research grant to support this project. I also thank my colleagues Mercer Bullard, George Cochran, Matthew Hall and Paul Secunda for their thoughtful comments on drafts of this paper.

Page 191

It is essential that we achieve a proper jurisdictional balance between the federal and state court systems, assigning to each system those cases most appropriate in the light of the basic principles of federalism. ¹

Introduction

The fraudulent joinder doctrine has played an increasingly frequent and critical role in determining whether many civil cases will be litigated in state court or federal court. Plaintiffs generally prefer state court while defendants generally prefer federal court.² In cases against out-of-state defendants, plaintiffs have long attempted to defeat removal to federal court by joining claims against in-state defendants.³ For example, in many early tort actions against out-of-state railroads, plaintiffs also sued in-state railroad employees, thereby defeating complete diversity and preventing removal.⁴Recognizing that plaintiffs should not be able to defeat a diverse defendant's right to remove by joining an in-state defendant when there is no reasonable basis for the plaintiff's claim against the in-state defendant, the Supreme Court established the fraudulent joinder doctrine pursuant to which a federal court ignores the citizenship of a fraudulently joined non-diverse or in-state defendant and assumes jurisdiction over the removed case.⁵

The battle over forum selection has intensified in recent years as defendants have become increasingly resistant to litigating in state court.⁶ In Page 192 response to the business lobby's push for tort reform, Congress recently enacted legislation that diverts most class action litigation and some mass tort litigation to federal court.⁷ In other civil litigation, however, litigants continually wage forum selection battles in hundreds of cases that are removed to federal courts each year based on allegations of fraudulent joinder.

Recently, fraudulent joinder litigation has increased dramatically.⁸Although fraudulent joinder litigation is especially frequent in certain jurisdictions,⁹ it is escalating throughout the country and is fast becoming a prominent and time-consuming aspect of complex tort litigation. In pharmaceutical litigation against drug manufacturers, plaintiffs often sue in- state physicians, pharmacists, pharmacies and drug sales representatives.¹⁰ In Page 193 products liability litigation against product manufacturers, plaintiffs often sue in-state retail sellers.¹¹ In bad faith and vanishing premium litigation against insurance companies, plaintiffs often sue in-state insurance agents.¹²In premises liability litigation, plaintiffs often sue in-state managers of retail stores owned by diverse corporations.¹³ When the defendants in these cases remove based on fraudulent joinder, the plaintiffs frequently deny fraudulent joinder and move for remand to state court, thereby forcing the federal court to determine whether the non-diverse defendant was fraudulently joined.¹⁴

In light of the serious federalism concerns raised by the exercise of diversity jurisdiction,¹⁵ federal courts evaluating allegations of fraudulent joinder must walk a fine line between appropriately exercising jurisdiction to determine jurisdiction and inappropriately determining the merits of a case which lacks complete diversity.¹⁶ This task is difficult in the fraudulent joinder context because the jurisdictional issue is related to the merits.¹⁷ The inescapable tension between protecting diverse defendants' right to remove and ensuring that district courts do not exceed their statutory jurisdiction has contributed to the confusion and lack of uniformity that plagues modern-day fraudulent joinder law.

The lack of uniformity is troubling because a diverse defendant's ability to remove may vary by jurisdiction.¹⁸ The lack of clarity is problematic Page 194 because it creates unnecessary and costly satellite litigation over the issue of the proper forum, some of which could be avoided by establishing a coherent framework for resolving allegations of fraudulent joinder.¹⁹

Currently, the circuit courts of appeal define fraudulent joinder differently.²⁰ Some circuits inquire whether the plaintiff had a reasonable basis for the claim against the jurisdictional spoiler.²¹ Others inquire whether the plaintiff has a possibility, or reasonable possibility, of recovering from the jurisdictional spoiler, while others equate fraudulent joinder with failure to state a claim. The variations among these definitions can be outcome-determinative in certain cases. Courts also employ different procedures to evaluate allegations of fraudulent joinder. For example, there is no uniformity concerning the degree to which the pleadings may be pierced.²² As a result, many courts have recently grappled with the extent to which the pleadings may be pierced.²³

Another significant emerging issue contributing to the lack of uniformity is the proper treatment of common defenses or other common defects when analyzing claims of fraudulent joinder. The issue arises when the diverse defendant argues that the plaintiff fraudulently joined the non- diverse defendant based on a defense or argument that equally disposes of the plaintiff's claims against the non-diverse and diverse defendants. For example, assume a New York citizen brings fraud claims against a New Jersey corporation and a New York citizen and that the statute of limitations on both claims has expired. Should the New Jersey corporation be permitted to remove the case by arguing that the New York citizen was fraudulently joined because the statute of limitations has run, even though the same statute of limitations defense disposes of the plaintiff's claim against the New Jersey corporation? There is a split among the circuits over consideration of common defenses and common defects. The Third and Fifth Circuits hold Page 195 that removing defendants cannot establish fraudulent joinder by relying on common defenses or other common defects.²⁴ The Seventh and Ninth Circuits, however, have found fraudulent joinder based on common statute of limitations defenses.²⁵

This Article examines current fraudulent joinder law and suggests certain clarifications and improvements. Part I outlines the debate over the historic and current justifications for diversity jurisdiction. It also discusses the serious federalism concerns posed by the exercise of diversity jurisdiction. Part II reviews the constitutional provisions, statutory law and Supreme Court precedent governing removal based on fraudulent joinder. Part III surveys the different definitional tests used by circuit courts and argues that the "reasonable basis for the claim" test is most consistent with Supreme Court precedent and most sensitive to federalism concerns. This Article further suggests that the "reasonable basis for the claim" test be applied in one of two ways, depending on whether the court is evaluating allegations of legal inadequacy or allegations of factual inadequacy. When evaluating allegations of fraudulent joinder based on legal inadequacy, the court need not pierce the pleadings and must simply determine whether the plaintiff's claim is a colorable one under state law.²⁶ When evaluating allegations of fraudulent joinder based on factual inadequacy, the district court may, in its discretion, engage in limited piercing, but only when piercing might identify discrete and undisputed facts demonstrating fraudulent joinder. Part IV argues that diverse defendants should not be able to establish fraudulent joinder by relying on common defenses or other common defects because they do not provide sufficient indicia of fraudulent joinder. The Article concludes by urging courts to clarify and rehabilitate the fraudulent joinder doctrine in light of its increasing significance.

I Justification For Removal Jurisdiction Based On Diversity

A Historic Justification

Although the Constitution does not expressly authorize removal jurisdiction, such jurisdiction has existed since the Judiciary Act of 1789.²⁷ In Page 196 Martin v. Hunter's Lessee,²⁸ the Court upheld the constitutionality of removal jurisdiction, finding that the Constitution authorized such jurisdiction by "implication" to effectuate the Constitution's express authorization of original jurisdiction.²⁹ The Court concluded that the judicial power of the United States was granted for the "common and equal benefit of all people" and was not intended to be "exercised exclusively for the benefit of parties who might be plaintiffs, and would elect the national forum, but also for the protection of defendants who might be entitled to try their rights or assert their privileges, before the same forum."³⁰ Therefore, to determine the historic purpose of removal jurisdiction based on...