Litigation

Fulbright Alert: Clarifying the Judicial Code: Revisions to Federal Court Removal, Venue, and Jurisdiction Laws


By Layne E. Kruse, Darryl Wade Anderson and John J. Byron

The new year brings new rules for federal court litigants. On January 6, 2012, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 ("Act") takes effect. In the most sweeping change to the Judicial Code since 1990, the Act settles statutory confusion and circuit disagreement by refining federal rules related to removal, venue, and jurisdiction. Generally, the changes are pro-defendant. This Article highlights the major revisions.[1] 

  1. Removal

In accord with the American Law Institute's Federal Judicial Code Revision Project, Congress made several changes to the removal statutes.

  • a. Thirty Days Allowed to Remove for Each Defendant

Perhaps the most notable change is to provide each defendant in a multi-defendant suit with a 30-day window to remove.  Since the old statute only referenced a single defendant, courts disagreed on how to interpret it in cases with multiple defendants.To resolve the dispute, Congress adopted the later-served defendant rule in the Act, under which each defendant, no matter when they are added to the lawsuit, has its own 30-day time period to seek removal.

  • b. "Rule of Unanimity" Codified and Extended

The Act also codifies the Supreme Court created "rule of unanimity." Specifically, the Act requires all defendants who have been properly joined and served to consent to removal. To accompany the later-served defendant rule, the Act allows earlier-served defendants to join in or consent to removal by a later-served defendant. A plaintiff who adds defendants after a lawsuit has progressed now runs the risk of removal, even if the original defendant had failed to remove within 30 days.

  • c. If Plaintiff Drops Non-Diverse Defendants After One Year, Other Defendants Allowed to Remove if Bad Faith

The Act authorizes a district court to allow removal after the 1-year removal period for diversity cases if it finds that the plaintiff acted in "bad faith" to prevent removal based on diversity of citizenship. This could increase the number of removals, or, alternatively, plaintiffs' lawyers may attempt to keep all defendants in the case through trial. Moreover, if nondiverse defendants are granted summary judgment, the remaining defendants may be able to remove at that time based on this exception.

  • d. Amount in Controversy Changed

The Act also modifies removal's amount in controversy rules. In cases in which the initial pleading seeks nonmonetary relief or state practice does not allow a specific monetary demand or permits recovery of damages in excess of the amount demanded, defendants may now assert the amount in controversy in the notice of removal. 

Moreover, the Act allows removal after the 30-day removal period if defendants later discover that there is a sufficient amount in controversy. In other words, more removals will come later if defendants believe the damage amount has increased.

  • e. Discretion to Hear Unrelated State Law Claims Eliminated

The Act resolves concerns over the troublesome "separate and independent" claim provision. In so doing, the Act strips federal courts of discretion to hear unrelated state law claims in cases removed based on federal question jurisdiction. The revisions make plain that the inclusion of an unrelated state law claim does not defeat the defendant's ability to remove an otherwise properly removable action based on federal law claims. However, the revisions require the court to sever the claims over which it does not have original or supplemental jurisdiction and "remand the severed claims to the State court from which the action was removed."

  1. Venue
    1. Distinction Between Diversity and Federal Question Venue Eliminated

The Act establishes a single approach to venue that governs regardless of whether the action is based on diversity or federal question jurisdiction. Two primary changes accompany this structural change. First, instead of allowing venue in any district of the state in which any defendant resides, the Act limits venue in multiple-defendant cases to a district of the state in which all defendants reside. Second, the Act no longer distinguishes between diversity and federal question cases with respect to the "fallback venue" provision and establishes "fallback venue" in "any judicial district in which any defendant is subject to the court's personal jurisdiction with respect to such action."

  • b. Residency for Natural Persons Clarified

The Act also puts to rest a circuit split on residency for venue purposes. In so doing, the Act adopts a standard under which the residency of a natural person is that person's state of domicile, making the venue residency standard consistent with the standard used to determine citizenship for diversity purposes.

  • c. "Local Action" Rule Abrogated

The Act jettisons the "local action" rule, which provided that certain kinds of actions pertaining to real property had to be brought in the district in which the property was located. The elimination of the "local action" rule alleviates problems caused in suits for damages due to trespass, because the district often was not able to assert jurisdiction over the defendant in the place where the property was located.

  • d. Transfer By Consent

In an expansion of permissible venues, the Act now also allows an action to be transferred to any district or division to which all parties have consented, even if the action could not have originally been brought in that district or division.

  1. Jurisdiction

The Act clarifies diversity jurisdiction rules with respect to resident aliens and corporations with foreign contacts. With respect to resident aliens, the Act strikes language from 28 U.S.C. § 1332 to make clear that resident aliens are not deemed citizens for diversity jurisdiction purposes. The practical implication is that two resident aliens in a suit against one another cannot invoke federal court diversity jurisdiction, even if they are domiciled in different states.

With respect to foreign corporations, the Act establishes that all corporations, foreign or domestic, are regarded as citizens of both their place of incorporation and their principal place of business. The practical implication here is the "denial of diversity jurisdiction in two situations: (1) where a foreign corporation with its principal place of business in a state sues or is sued by a citizen of that same state, and (2) where a citizen of a foreign country (alien) sues a U.S. corporation with its principal place of business abroad."

  1. Conclusion

The Act makes significant changes to some of the basic rules underlying federal litigation. As a consequence, defendants will likely enjoy greater rights to remove cases from state court, at later times over the life of a case. Venue rules have also been streamlined and clarified. And disputes involving foreign persons or entities with significant foreign operations will require a closer look to determine if federal jurisdiction actually exists.

This article was prepared by Layne E. Kruse (lkruse@fulbright.com or 713 651 5194), Darryl W. Anderson (danderson@fulbright.com or 713 651 5562) and John J. Byron (jbyron@fulbright.com or 713 651 5261) from Fulbright's Litigation Practice Group.

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[1] For a more detailed analysis, see Report Number 112-10 issued by the House of Representatives Committee on the Judiciary.