(Reuters) - The facts in Encompass Insurance v. Stone Mansion Restaurant(2018 WL 3999885), a case decided this week by the 3rd U.S. Circuit Court of Appeals, are idiosyncratic, to say the least. But the 3rd Circuit’s decision — the first appellate ruling on a jurisdictional defense tactic that has bedeviled trial courts around the country — is going to be a boon to pharmaceutical companies and other corporations based in New York, Pennsylvania and Delaware. If they’re technologically savvy, businesses in the 3rd Circuit should now be able to take advantage of a strategy known as “snap removal” to avoid litigating in their home state courts.
In snap removals, as law professors led by Arthur Hellman of the University of Pittsburgh explained in a 2016 paper for the Federal Courts Law Review, defendants capitalize on a loophole in the 1948 revision of the Judicial Code. To stop plaintiffs from defeating federal court diversity jurisdiction by naming local defendants they didn’t actually intend to litigate against, Congress enacted a rule that precludes diversity jurisdiction if a home-state defendant has been “properly joined and served.” In other words, plaintiffs can’t just tack on a local defendant to keep their claims in state court. They have to serve the defendant with their complaint.
Thanks to electronic filing, the law profs explained, complaints often hit state dockets before they’re served on defendants. So defendants monitoring state dockets — like, say, a frequently-sued pharmaceutical company — can quickly remove a state court case to federal court in that brief window of time between the filing of the complaint and service on the defendants. Thus the locution “snap removal,” which was apparently coined by U.S. District Judge Jane Boyle of Dallas in her 2015 decision in Breitweiser v. Chesapeake Energy (2015 WL 6322625). Judge Boyle called snap removals “an emerging litigation tactic.” In a 2015 amicus brief at the 3rd Circuit, the trial lawyers’ group American Association for Justice contended that some businesses even employ “docket trolls” scour state dockets for the sole purpose of slipping through the service loophole to move cases against them to federal court. (The 3rd Circuit didn’t end up examining the issue in the case AAJ briefed.)
Trial courts have come out every which way on snap removals. As the law profs’ paper documents, some have hewed to the strict language of the statute and refused to remand cases to state court. Some have focused on whether the defendant that removed the case is locally-based. Judge Boyle in the Chesapeake case, for instance, said it would be “absurd” to find diversity jurisdiction when a home-state defendant uses the “properly joined and served” loophole to remove a case to federal court.
The 3rd Circuit’s ruling this week in the Encompass case removes any doubt that defendants in Pennsylvania, New Jersey and Delaware have carte blanche on snap removals. The case involved a $600,000 settlement between the estate of a drunk driver and the woman who was his passenger. The driver’s insurer, Illinois-based Encompass, sued the Pittsburgh restaurant Stone Mansion in the Allegheny County Court of Common Pleas, claiming the restaurant was liable for continuing to serve drinks to Encompass’ client after he was intoxicated. Stone Mansion’s lawyers said they would accept service of the lawsuit. But when Encompass sent them the complaint and a service acceptance form, Stone Mansion’s lawyers balked at signing. Soon after, they removed the case to federal court in Pittsburgh. That looked like a very smart move when U.S. District Judge Arthur Schwab, after denying a remand motion, dismissed the case.
Encompass’s lawyers at Robb Leonard Mulvihill appealed both the jurisdictional and dismissal rulings to the 3rd Circuit. Stone Mansion was represented at the 3rd Circuit by Margolis Edelstein.
In their August 22 opinion, 3rd Circuit Judges Michael Chagares, Kent Jordan and Julio Fuentes upheld federal court jurisdiction. The appeals court said the plain language of the forum-defendant rule is unambiguous and “precludes removal on the basis of in-state citizenship only when the defendant has been properly joined and served.” It’s true, the 3rd Circuit said, that Stone Mansion’s evasion of service of the state-court complaint may have been “unsavory.” But its removal of the case to federal court was nevertheless proper, according to the appeals court.
And Judge Schwab’s remand denial was not an “absurd or bizarre result” of the forum-defendant rule, the 3rd Circuit held. “Congress’ inclusion of the phrase ‘properly joined and served’ addresses a specific problem — fraudulent joinder by a plaintiff — with a bright line rule,” wrote Judge Chagares for the panel. “Permitting removal on the facts of this case does not contravene the apparent purpose to prohibit that particular tactic.”
The appeals court acknowledged that its ruling might well encourage a different tactic — machinations by defendants to ward off service in order to remove state-court suits to federal court. But it said that consequence is not the court’s problem. “We do not perceive that the result in this case rises to the level of the absurd or bizarre. There are simply no grounds upon which we could substitute Encompass’ interpretation for the literal interpretation,” the opinion said. “Reasonable minds might conclude that the procedural result demonstrates a need for a change in the law; however, if such change is required, it is Congress — not the judiciary — that must act.”
The Encompass decision is likely to be extremely influential as lower courts look at snap removals, said Pitt law prof Hellman, lead author on the 2016 paper discussing the tactic. No other federal circuit has issued a ruling on snap removals. (It’s rare for remand rulings even to reach the federal circuits, the law profs’ paper said.) And Encompass isn’t going to challenge the 3rd Circuit decision because the appeals court ended up reversing Judge Schwab on the dismissal of its case against Stone Mansion. Encompass surely isn’t going to seek additional review of a decision that revived its case, albeit in federal court instead of state court. (Lawyers for both Encompass and Stone Mansion declined to comment, citing the ongoing case.)
So the 3rd Circuit ruling will remain binding precedent for lower courts in Pennsylvania, New Jersey and Delaware — which are already the most active jurisdictions, Hellman said, for snap removals to federal court.
But it will also guide courts in other jurisdictions, Hellman said, because the 3rd Circuit effectively deemed irrelevant all of the factors trial judges have considered in analyzing whether snap removal leads to absurd outcomes. The facts of the Encompass case were “extreme,” Hellman said. Encompass named only one defendant, and sued in that defendant’s home court. The insurer actually followed the defendant’s instructions for service and sent the complaint to its lawyers. They explicitly cited federal-court removal in refusing to accept service. None of that mattered to the 3rd Circuit.
“This wipes out all of the distinctions courts have drawn,” Hellman said. “Because this case presents the most extreme circumstances, it cuts off debate.”
Hellman, like the 3rd Circuit judges in the Encompass case, believes the answer to defendants’ snap removal gamesmanship lies with Congress. He and his co-authors have proposed a new clause in the judicial code to allow plaintiffs to counter snap removals by serving in-state defendants within the time limits set out in the Federal Rules of Civil Procedure then seeking remand within 30 days. “If this provision is enacted, the incidence of snap removal can be expected to diminish sharply, as defendants come to recognize that the stratagem will no longer enable them to circumvent the forum-defendant rule,” the profs’ paper said. “To the extent that defendants do remove before any in-state defendants have been served, the plaintiff can secure remand by promptly serving at least one such defendant.”
Congress, of course, has lots of other things to worry about. For the time being, anyway, if defendants want to slip through a loophole to beat state-court jurisdiction, the 3rd Circuit has said that’s just fine.
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