Supreme Court Sets Limits on CAFA Removal

Financial Services Law

A third party brought into a lawsuit by a counterclaim filed by the original defendant is not entitled to remove the case to federal court under the Class Action Fairness Act (CAFA), the U.S. Supreme Court has ruled.

The justices looked to the use of the term “defendant” in the statute and determined it referred only to the party sued by the original plaintiff—not a party added by a counterclaim.

What happened

The dispute began in 2016, when Citibank filed a debt collection lawsuit against George W. Jackson in North Carolina state court seeking to recover charges incurred on the defendant’s Home Depot credit card. Jackson responded with a counterclaim against the bank as well as class action claims against Home Depot and Carolina Water Systems.

Citibank then dismissed its claims against Jackson, and Home Depot filed a notice of removal to federal court, pursuant to CAFA. Jackson objected, and a federal court judge granted his motion to remand the case to state court, ruling that Home Depot was not a “defendant” eligible to remove a case from federal to state court under CAFA.

The U.S. Court of Appeals for the Fourth Circuit affirmed, and the Supreme Court granted cert.

In an opinion authored by Justice Clarence Thomas, the Court agreed with the lower courts. Neither under the general removal statute, 28 U.S.C. § 1441(a), nor CAFA did the use of the term “defendant” encompass a third-party counterclaim defendant like Home Depot, the justices said.

Home Depot was a defendant to Jackson’s counterclaim, but the removal statute refers to “‘civil action[s],’ not ‘claims,’” the Court clarified, and “a counterclaim is irrelevant to whether the district court has ‘original jurisdiction over the civil action.’”

The majority (comprising Justices Thomas, Ruth Bader Ginsberg, Stephen Breyer, Sonia Sotomayor and Elena Kagan) rejected Home Depot’s argument that their interpretation of “defendant” ran counter to the history and purposes of removal by preventing a party involuntarily brought into state court proceedings from removing the claim against it.

“[T]he limits Congress has imposed on removal show that it did not intend to allow all defendants an unqualified right to remove,” the Court said.

To read the opinion in Home Depot U.S.A., Inc. v. Jackson, click here.

Why it matters

The Supreme Court’s decision narrows the class of defendants that are able to remove to federal court class actions filed in state court, a popular option for companies facing such litigation. However, given that third-party counterclaims are not the most common scenario, the opinion should have a limited impact.