Gregory P. Joseph

The Supreme Court issued decisions in June 2005 that expanded supplemental jurisdiction under 28 U.S.C. § 1367 and federal question jurisdiction under § 1331. This article examines some of the implications of these two decisions for individual, mass and class actions, and the Class Action Fairness Act of 2005.

Expanded Supplemental Jurisdiction. In Exxon Mobil Corp. v. Allapattah Servs., 125 S.Ct. 2611 (2005), the Supreme Court held that, where complete diversity is present and at least one named plaintiff satisfies the amount-in-controversy requirement, the district court possesses supplemental jurisdiction over the claims of other plaintiffs that do not satisfy the jurisdictional amount but form part of the same Article III case or controversy. The Court held that § 1367 overruled Zahn v. International Paper Co., 414 U.S. 291, 301 (1973), which required that each plaintiff in a Rule 23(b)(3) class action must satisfy the amount-in-controversy requirement. But Exxon Mobil is not limited in its reach to class actions.

The Exxon Mobil Court reasoned that, while the presence of one non-diverse party contaminates the complaint and deprives the federal courts of diversity jurisdiction, ‛[t]here is no inherent logical connection between the amount-in-controversy requirement and § 1332 diversity jurisdiction.“ 125 S.Ct. at 2622. It ruled that, if the district court has original jurisdiction over a single claim brought by a single plaintiff, it has original jurisdiction over the action. With jurisdiction over the action, the district court may exercise supplemental jurisdiction over other claims — brought by the same or other plaintiffs — that are not placed outside the court’s jurisdiction by § 1367(b).

Section 1367(b) is a bit uneven in the limitations that it imposes on the broad grant of supplemental jurisdiction conferred by § 1367(a). Section 1367(b) withholds supplemental jurisdiction over claims brought by named plaintiffs against parties joined under Rules 14 (third party practice), 19 (necessary parties), 20 (permissively-joined parties) or 24 (intervenors). The basic thrust appears to be to prevent plaintiffs from obtaining a federal forum by intentionally omitting a party who ought to be in the case.

But § 1367(b) does not impose the same strictures on jurisdiction over claims brought by prospective other plaintiffs. Rather, it withholds supplemental jurisdiction only over claims by persons proposed to be joined as plaintiffs under Rule 19 (necessary parties) or Rule 24 (intervenors). That means that there is no supplemental jurisdiction if, for example, a prospective plaintiff is a necessary party under Rule 19 but there is supplemental jurisdiction if the plaintiff is permissively joined under Rule 20. The Supreme Court commented that this result ‛may seem odd, but it is not absurd.“ Id. at 2624.

Exxon Mobil’s holding extends beyond class actions. This is demonstrated by the Exxon Mobil Court’s reversal of the companion case before it, Ortega v. Star-Kist Foods, Inc., 370 F.3d 124 (1st Cir. 2004).

Ortega was a personal injury action in which the minor plaintiff’s claim exceeded the jurisdictional amount but her parents’ claims for emotional distress and medical expenses did not. The Supreme Court reversed the First Circuit’s determination that there was no supplemental jurisdiction. As noted by Justice Ginsburg in dissent, ‛Beatriz Ortega's family members can remain in the action because their joinder is merely permissive, see Fed. Rule Civ. Proc. 20. If, however, their presence was ‘needed for just adjudication,’ Rule 19, their dismissal would be required. The inclusion of those who may join, and exclusion of those who should or must join, defies rational explanation....“ 125 S.Ct. at 2637 n.8. It is, however, what the text of the statute mandates, under the majority’s interpretation.

Therefore, after Exxon Mobil:

1. Under § 1367, diverse plaintiffs whose claims do not satisfy the amount-in-controversy requirement but who are not necessary parties within Rule 19 may join their claims to those of any other diverse plaintiff whose claim does satisfy the jurisdictional amount, provided that all claims form part of the same case or controversy within Article III.

2. This holding applies to individual, mass and class actions. In the class action context, only one named plaintiff must satisfy the amount-in-controversy requirement.

3. Diverse plaintiffs whose claims satisfy the amount-in-controversy requirement may join their claims together, regardless of whether they are necessary parties under Rule 19. This is dictated by the general diversity statute, § 1332, and the supplemental jurisdiction statute is irrelevant.

Expanded Federal Question Jurisdiction. The Supreme Court held in Grable & Sons Metal Prods., Inc. v. Darue Engr’g & Mfg., 125 S.Ct. 2363 (2005), that federal question jurisdiction may exist over a state law claim that entails an important, embedded federal issue. The cause of action in Grable was a quiet title action, a quintessential state law claim. The property had been seized from the plaintiff and sold by the IRS to satisfy a tax delinquency. Five years later, the plaintiff sued the purchaser claiming that the purchaser’s title was invalid because the IRS had not given notice of the seizure to the plaintiff in the manner prescribed by a federal statute. The purchaser removed the action under § 1331 arguing that the claim of title depended on the interpretation of the federal tax law notice statute.

The Supreme Court found that federal question jurisdiction existed, stressing that the presence of a contested federal issue is necessary but not alone sufficient to confer federal jurisdiction. Grable identifies three salient factors to be considered:

First, the federal issue must be ‛a substantial one, indicating a serious federal interest in claiming the advantages thought to be inherent in a federal forum.“ 125 S.Ct. at 2367.

Second, to avoid disrupting ‛the state-federal line drawn (or at least assumed) by Congress,“ the court must assess ‛any disruptive portent in exercising federal jurisdiction.“ Id. at 2368. This is a quantitative question, at least in part: Will too many claims be moved from state to federal court? Thus, the mere fact that a federal statue or regulation may form the basis of a state law claim of negligence per se is insufficient, in itself, to warrant a federal forum because to rule otherwise would signal ‛a potentially enormous shift of traditionally state cases into federal courts.“ Id. at 2370 (reaffirming a prior decision declining to find federal question jurisdiction over a state law claim premised on violation of federal mislabeling and other statutes).

Third, the absence of a federal cause of action is some evidence that Congress did not intend to provide a federal forum. Id. However, it is by no means dispositive, as Grable itself reflects, given the absence of any federal cause of action relating to the federal tax notice statute. The Supreme Court stressed that ‛it is the rare state quiet title action that involves contested issues of federal law,“ such that ‛jurisdiction over actions like Grable’s would not materially affect, or threaten to affect, the normal currents of litigation.“

Therefore, under Grable, federal question jurisdiction exists over a state law claim if:

1.The state law claim necessarily raises a contested federal issue.

2.The issue is actually disputed and substantial.

3.The federal courts may entertain the claim without disturbing the congressionally-approved balance of state and federal judicial responsibilities (i.e., there will be no flood of claims moving from state to federal court), and

4.The absence of a federal cause of action is some evidence militating against the assumption of federal jurisdiction, but is not dispositive.

An example of the type of claim to which Grable could apply would be a corporate derivative action the gravamen of which is that the directors breached their fiduciary duties by permitting a securities fraud (10b-5 violation) to occur, saddling the corporation with the costs of defending a securities action and potentially paying out a verdict or settlement. Federal question jurisdiction may exist because, inter alia, Congress withheld state jurisdiction over 10b-5 claims, there is a federal interest in the uniform application of the securities laws, and this type of claim hardly floods the courts. Moreover, Fed. R. Civ. P. 23.1 provides a procedural mechanism for a federal derivative action.

However, circumstances will be critical. For example, if a pending federal securities action has already concluded by a verdict or judicial decision, and if that decision is binding on the derivative plaintiff (because, e.g., the corporation was a defendant in the federal action and the plaintiff stands in the shoes of the corporation in the derivative action), there may be little federal interest to support assuming jurisdiction over the state derivative action. The same result, moreover, may be accomplished by staying the state action pending the result of the federal securities action. Further, if the securities claim embedded in the state law derivative action were to arise under the Securities Act of 1933, rather than the Securities Exchange Act of 1934, there may be deemed to be no significant federal interest at all because the state courts are vested with jurisdiction to decide many 1933 Act claims.

CAFA Implications. The heart of CAFA is its expansion of federal diversity jurisdiction. With a few limited exceptions, it confers federal jurisdiction over any putative class action if (i) the claims of all plaintiffs, aggregated together, exceed $5 million, and (ii) at least one plaintiff is diverse from at least one defendant (28 U.S.C. § 1332(d)(2), (6), (8)).

Generally, CAFA dictates that the federal court must decline jurisdiction if, inter alia, two-thirds or more of all class members are citizens of the state in which the action was originally filed, and the ‛primary defendants“ are citizens of that state as well (§ 1332(d)(4)(B)). Further, CAFA provides that the federal court may decline to exercise jurisdiction if between one-third and two-thirds of all class members are citizens of the state in which the action was originally filed and the ‛primary defendants“ are citizens of that state as well (§ 1332(d)(3)).

Exxon Mobil and Grable now provide alternative bases for jurisdiction in many class and mass actions. The number of plaintiffs in the forum state may no longer form a basis for mandatory or permissive remand if the criteria (enumerated above) of either Exxon Mobil or Grable are satisfied. Nor is the aggregate value of the plaintiffs’ claims germane. These facts have significant implications for plaintiffs in drafting complaints — whether they want to invoke or avoid federal jurisdiction.

It is important to bear in mind the expansion of federal jurisdiction under Exxon Mobil and Grable are in effect discretionary. Although § 1367(a) is drafted in nominally mandatory terms (‛shall have supplemental jurisdiction“), § 1367(c) provides four discretionary grounds for declining federal jurisdiction, the last of which consists of ‛in exceptional circumstances, ... compelling reasons for declining jurisdiction.“ The statutory balance struck in CAFA could, but need not, be deemed ‛compelling.“ This is particularly true since the point of CAFA was generally to move class actions from state to federal court, and in light of the many difficulties inherent in counting plaintiffs at the many stages of litigation that CAFA requires.

Similarly, Grable requires a discretionary determination by the district court as to whether assuming jurisdiction would disturb the congressionally-approved balance of state and federal judicial responsibilities, and CAFA certainly must be considered in striking that balance. But CAFA is content-neutral, and the essence of Grable jurisdiction is content-specific.

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Mr. Joseph, of Gregory P. Joseph Law Offices LLC, New York, is a Fellow of the American College of Trial Lawyers and former Chair of the American Bar Association Section of Litigation. He may be reached at gjoseph@josephnyc.com. © 2005 Gregory P. Joseph