The Federal Courts Jurisdiction and Venue Clarification Act of 2011

When removal of a case from state court to federal court is based solely on diversity jurisdiction under the removal provision 28 U.S.C. ' 1332(a), an action may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the state in which such action is brought. All defendants who have been properly joined and served must join in or consent to the removal of the action. Each defendant has 30 days after receipt by or service on that defendant of the initial pleading or summons to file a notice of removal. If defendants are served at different times and a later-served defendant files a notice of removal, an earlier-served defendant may consent to the removal, even though the earlier-served defendant did not previously initiate or consent to removal.

Original Action Contains Both Federal and State Claims

In an action in which part of the claims arise under the Constitution, laws, or treaties of the United States, while other claims are not within the original or supplemental jurisdiction of the district court or a claim has been made non-removable by statute, the entire action may be removed if the action would be removable without the inclusion of the claims which are nonremovable by statute. Upon removal of such an action, the district court shall sever all claims not within its original or supplemental jurisdiction, as well as those claims made non-removable by a statute. Only defendants against whom federal law claims are asserted are required to join in or consent to the removal of such claims.

Removal Options upon Filing Amended Pleading

If a cause of action originally filed in state court is not removable, the filing of an amended pleading which makes the action removable starts a new clock for removal. According to 28 U.S.C. ' 1446(b)(3):

Except as provided in subsection (c) [28 U.S.C. ' 1446(c) discussed below], if the case stated by the initial pleading is not removable, a notice of removal may be filed within thirty days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.

Removal Limitations

Under subsection (c) mentioned above, a case may not be removed based on diversity of jurisdiction more than one year after commencement, unless the district court finds that the plaintiff acted in bad faith in order to prevent removal of the action. In other words, the district court must render a finding that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal in order for the case to be removed more than one year after the suit was originally filed in state court.

Amount in Controversy

For a removal sought based on diversity jurisdiction, the minimum threshold is $75,000. 28 U.S.C. ' 1332. The Act provides that the sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy except that:

(A) [T]he notice of removal may assert the amount in controversy if the initial pleading seeks (i) nonmonetary relief; or (ii) a money judgment, but the state practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded; and

(B) removal of the action is proper on the basis of an amount in controversy asserted under subparagraph (A) if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds the amount specified in section 1332(a). 28 U.S.C.
' 1446(c)(2)(A)-(B).

Implications of Removal Provisions on Franchise Litigation

The Act provides additional avenues for franchisors to get over the hurdles they have faced in the past when they attempted to remove a case. The typical franchisor prefers to litigate in federal court rather than in state court. However, when no federal claims are being contested, the franchisor is forced to try to get into federal court under diversity jurisdiction. Franchisors often are faced with trying to show that the threshold amount in controversy of $75,000 is met. At the outset of the litigation, a franchisor oftentimes struggles with how to address the amount in controversy when it has very little information (or even where the state pleading does not include an amount in controversy). The Act permits a defendant to include an amount in controversy where one is omitted in the underlying state court pleading. The district court will then determine, by a preponderance of the evidence, whether the amount in controversy exceeds $75,000.

Venue

The franchisee often wants to avoid federal court and will either plead an amount in controversy less than $75,000 or omit an amount in controversy pursuant to state law. Franchisees have often used this to their advantage to block removal. Franchisees have sometimes strategically waited until the one-year period of removal passed before disclosing the true amount in controversy, either by filing an amended pleading or during discovery. The Act provides an opportunity for the franchisor to file a notice of removal after one year and allege that the plaintiff acted in bad faith by not accurately pleading the amount in controversy to prevent removal.

Where the dispute involves both federal and state claims, of which the state claims are nonremovable, a franchisor could still remove the case. The federal district court would then sever the state claims that are nonremovable. While this option would help with removing a portion of the case, from a practical standpoint, litigating a dispute with the same franchisee in two different courts creates inefficiencies and is not likely to be attractive to many franchisors.

Proper Venue

The rules governing venue were also modified by the Act. Venue for a case originally brought in federal court is proper in: 1) any judicial district where any defendant resides if all defendants are residents of the same state in which the district court is located; or 2) the judicial district in which a substantial part of the events or omissions giving rise to the claim occurred or where a substantial part of the property which is the subject of the lawsuit is situated. 28 U.S.C. ' 1391(b)(1)-(2). If neither of these two options applies, venue is proper in any judicial district in which any defendant is subject to personal jurisdiction with respect to the claim. 28 U.S.C. ' 1391(b)(3).

Residency Defined

The Act defines the residency of a natural person, including an alien lawfully admitted for permanent residency in the United States, as the judicial district in which that person is domiciled. 28 U.S.C. ' 1391(c)(1). The residency of a corporate entity, if a defendant, is defined as any judicial district in which that defendant is subject to the court's personal jurisdiction with respect to the civil action in question. If the corporate entity is a plaintiff, residency is defined only as the judicial district in which the corporate entity maintains its principal place of business. 28 U.S.C. ' 1391(c)(2). If a defendant is not a resident of the United States, such defendant may be sued in any judicial district, and joinder of such a defendant shall be disregarded when determining proper venue with respect to other defendants. 28 U.S.C. ' 1391(c)(3). A corporation whose residency is within a state which has multiple judicial districts is deemed to reside in any district in the state within which its contacts would be sufficient to subject it to personal jurisdiction if that district were a separate state. 28 U.S.C. ' 1391(d). If there is no district in which such applies, the corporation shall be deemed to reside in the district within which it has the most significant contact.

Implication of New Venue Provisions on Franchise Litigation

The new Act provides for a change of venue to any district or division to which all parties consent, even if the venue would not have originally been permitted by law. 28 U.S.C. ' 1404(a). This modification should help franchisors enforce forum selection clauses in their franchise agreements, assuming that state law does not impose an anti-waiver provision to void such a provision in the franchise agreement.

Summary

The Act provides solutions to some practical realities. Like all amendments, there will be loose ends. For the most part, however, the modifications are useful in clarifying some areas with which courts have struggled. The severance provision will help avoid constitutional issues raised by permitting removal of federal claims and remand of state claims to which the district court does not have original or supplemental jurisdiction. The rule provides clarity on instances in which there are multiple defendants served at different times by stating that each defendant has 30 days from the time it is served. The new bad faith exception to the one-year bar for removal will be helpful to defendants whose hands have been tied as to removal after one year, even if it became apparent that the amount in controversy actually exceeds $75,000, based on later pleadings or discovery.

Earsa Jackson is a partner in the Dallas office of Strasburger & Price, LLP. She can be contacted at [email protected] or 214-651-2394.

Since Jan. 6, 2012, new rules have been in effect regarding removal and venue procedures for federal litigation. The impact of the Federal Courts Jurisdiction and Venue Clarification Act of 2011 in business disputes, including franchising, is gradually being felt as actions are filed in federal district courts or removed from state court to federal courts. This article outlines some of the key changes and their potential relevance for franchisors and franchisees.

Removal

Removal Based on Diversity of Citizenship

When removal of a case from state court to federal court is based solely on diversity jurisdiction under the removal provision 28 U.S.C. ' 1332(a), an action may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the state in which such action is brought. All defendants who have been properly joined and served must join in or consent to the removal of the action. Each defendant has 30 days after receipt by or service on that defendant of the initial pleading or summons to file a notice of removal. If defendants are served at different times and a later-served defendant files a notice of removal, an earlier-served defendant may consent to the removal, even though the earlier-served defendant did not previously initiate or consent to removal.

Original Action Contains Both Federal and State Claims

In an action in which part of the claims arise under the Constitution, laws, or treaties of the United States, while other claims are not within the original or supplemental jurisdiction of the district court or a claim has been made non-removable by statute, the entire action may be removed if the action would be removable without the inclusion of the claims which are nonremovable by statute. Upon removal of such an action, the district court shall sever all claims not within its original or supplemental jurisdiction, as well as those claims made non-removable by a statute. Only defendants against whom federal law claims are asserted are required to join in or consent to the removal of such claims.

Removal Options upon Filing Amended Pleading

If a cause of action originally filed in state court is not removable, the filing of an amended pleading which makes the action removable starts a new clock for removal. According to 28 U.S.C. ' 1446(b)(3):

Except as provided in subsection (c) [28 U.S.C. ' 1446(c) discussed below], if the case stated by the initial pleading is not removable, a notice of removal may be filed within thirty days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.

Removal Limitations

Under subsection (c) mentioned above, a case may not be removed based on diversity of jurisdiction more than one year after commencement, unless the district court finds that the plaintiff acted in bad faith in order to prevent removal of the action. In other words, the district court must render a finding that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal in order for the case to be removed more than one year after the suit was originally filed in state court.

Amount in Controversy

For a removal sought based on diversity jurisdiction, the minimum threshold is $75,000. 28 U.S.C. ' 1332. The Act provides that the sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy except that:

(A) [T]he notice of removal may assert the amount in controversy if the initial pleading seeks (i) nonmonetary relief; or (ii) a money judgment, but the state practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded; and

(B) removal of the action is proper on the basis of an amount in controversy asserted under subparagraph (A) if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds the amount specified in section 1332(a). 28 U.S.C.
' 1446(c)(2)(A)-(B).

Implications of Removal Provisions on Franchise Litigation

The Act provides additional avenues for franchisors to get over the hurdles they have faced in the past when they attempted to remove a case. The typical franchisor prefers to litigate in federal court rather than in state court. However, when no federal claims are being contested, the franchisor is forced to try to get into federal court under diversity jurisdiction. Franchisors often are faced with trying to show that the threshold amount in controversy of $75,000 is met. At the outset of the litigation, a franchisor oftentimes struggles with how to address the amount in controversy when it has very little information (or even where the state pleading does not include an amount in controversy). The Act permits a defendant to include an amount in controversy where one is omitted in the underlying state court pleading. The district court will then determine, by a preponderance of the evidence, whether the amount in controversy exceeds $75,000.

Venue

The franchisee often wants to avoid federal court and will either plead an amount in controversy less than $75,000 or omit an amount in controversy pursuant to state law. Franchisees have often used this to their advantage to block removal. Franchisees have sometimes strategically waited until the one-year period of removal passed before disclosing the true amount in controversy, either by filing an amended pleading or during discovery. The Act provides an opportunity for the franchisor to file a notice of removal after one year and allege that the plaintiff acted in bad faith by not accurately pleading the amount in controversy to prevent removal.

Where the dispute involves both federal and state claims, of which the state claims are nonremovable, a franchisor could still remove the case. The federal district court would then sever the state claims that are nonremovable. While this option would help with removing a portion of the case, from a practical standpoint, litigating a dispute with the same franchisee in two different courts creates inefficiencies and is not likely to be attractive to many franchisors.

Proper Venue

The rules governing venue were also modified by the Act. Venue for a case originally brought in federal court is proper in: 1) any judicial district where any defendant resides if all defendants are residents of the same state in which the district court is located; or 2) the judicial district in which a substantial part of the events or omissions giving rise to the claim occurred or where a substantial part of the property which is the subject of the lawsuit is situated. 28 U.S.C. ' 1391(b)(1)-(2). If neither of these two options applies, venue is proper in any judicial district in which any defendant is subject to personal jurisdiction with respect to the claim. 28 U.S.C. ' 1391(b)(3).

Residency Defined

The Act defines the residency of a natural person, including an alien lawfully admitted for permanent residency in the United States, as the judicial district in which that person is domiciled. 28 U.S.C. ' 1391(c)(1). The residency of a corporate entity, if a defendant, is defined as any judicial district in which that defendant is subject to the court's personal jurisdiction with respect to the civil action in question. If the corporate entity is a plaintiff, residency is defined only as the judicial district in which the corporate entity maintains its principal place of business. 28 U.S.C. ' 1391(c)(2). If a defendant is not a resident of the United States, such defendant may be sued in any judicial district, and joinder of such a defendant shall be disregarded when determining proper venue with respect to other defendants. 28 U.S.C. ' 1391(c)(3). A corporation whose residency is within a state which has multiple judicial districts is deemed to reside in any district in the state within which its contacts would be sufficient to subject it to personal jurisdiction if that district were a separate state. 28 U.S.C. ' 1391(d). If there is no district in which such applies, the corporation shall be deemed to reside in the district within which it has the most significant contact.

Implication of New Venue Provisions on Franchise Litigation

The new Act provides for a change of venue to any district or division to which all parties consent, even if the venue would not have originally been permitted by law. 28 U.S.C. ' 1404(a). This modification should help franchisors enforce forum selection clauses in their franchise agreements, assuming that state law does not impose an anti-waiver provision to void such a provision in the franchise agreement.

Summary

The Act provides solutions to some practical realities. Like all amendments, there will be loose ends. For the most part, however, the modifications are useful in clarifying some areas with which courts have struggled. The severance provision will help avoid constitutional issues raised by permitting removal of federal claims and remand of state claims to which the district court does not have original or supplemental jurisdiction. The rule provides clarity on instances in which there are multiple defendants served at different times by stating that each defendant has 30 days from the time it is served. The new bad faith exception to the one-year bar for removal will be helpful to defendants whose hands have been tied as to removal after one year, even if it became apparent that the amount in controversy actually exceeds $75,000, based on later pleadings or discovery.

Earsa Jackson is a partner in the Dallas office of Strasburger & Price, LLP. She can be contacted at [email protected] or 214-651-2394.