Wednesday, April 27, 2011

Joined at the Hip?: Is the Fraudulent Misjoinder Doctrine the Fraudulent Joinder Doctrine's Twin or a Red-Headed Stepchild?

Courts have long recognized fraudulent joinder as an exception to the complete diversity rule....Fraudulent joinder occurs when a plaintiff files a frivolous or illegitimate claim against a non-diverse defendant solely to prevent removal....When determining if a party has been fraudulently joined, a court considers whether there is any reasonable basis in fact or law to support a claim against a nondiverse defendant. 

A more recent, somewhat different, and novel exception to the complete diversity rule is the fraudulent misjoinder doctrine which one appellate court  and several district courts have adopted. Fraudulent misjoinder occurs when a plaintiff sues a diverse defendant in state court and joins a viable claim involving a nondiverse party, or a resident defendant, even though the plaintiff has no reasonable procedural basis to join them in one action because the claims bear no relation to each other. In such cases, some courts have concluded that diversity is not defeated where the claim that destroys diversity has "no real connection with the controversy" involving the claims that would qualify for diversity jurisdiction. In re Prempro Products Liability Litigation, 591 F.3d 613 (8th Cir. 2010). 

While somewhat recent, the Eleventh Circuit's opinion creating the fraudulent misjoinder doctrine was more than 15 years ago in Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353 (11th Cir. 1996). And, as the Eighth Circuit noted last year in Prempro, the Eleventh Circuit remains the only appellate court to adopt the doctrine although other appellate courts have acknowledged it. And, in Prempro, the Eleventh Circuit joined the ranks of these other appellate courts, acknowledging the doctrine but finding that it did not need to adopt or apply it given the facts before it. As the Eighth Circuit also noted, several district courts have adopted the doctrine, but several other district courts have refused to adopt it. Moreover, as E. Farish Percy, a professor at The University of Mississippi School of Law, noted in her article, Defining the Contours of the Emerging Fraudulent Misjoinder Doctrine, 29 Harv. J.L. & Pub. Pol'y 569 (2006), even courts that have adopted the doctrine are sharply split over how to apply it. So, what will and should happen with the doctrine in the future?

Let's start at the start. In Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353 (11th Cir. 1996), plaintiffs brought a putative class action in Alabama state court, which eventually alleged (1) fraud violations arising from the sale of automobile service contracts; and (2) fraud violations arising from the sale of extended service contracts in connection with the sale of retail products. Like some of the plaintiffs, some of the automobile class defendants resided in Alabama while Lowe's Home Centers, the merchant class defendant, was a resident of North Carolina, unlike any plaintiff. Lowe's removed the action to federal court and successfully moved to sever the claims against it, with the district court concluding that there was "no allegation of joint liability between Lowe's and any other defendant and no allegation of conspiracy" and that "there was an improper and fraudulent joinder, bordering on a sham." The Eleventh Circuit later affirmed, finding that

Although certain putative class representatives may have colorable claims against resident defendants in the putative "automobile" class, these resident defendants have no real connection with the controversy involving Appellants...and Appellee Lowe's in the putative "merchant" class action. We hold that the district court did not err in finding an attempt to defeat diversity jurisdiction by fraudulent joinder. We do not hold that mere misjoinder is fraudulent joinder, but we do agree with the district court that Appellants' attempt to join these parties is so egregious as to constitute fraudulent joinder.

While the Eleventh Circuit referred to the plaintiffs' joinder of the two classes as "fraudulent joinder," this type of joinder was clearly a different species than previous fraudulent joinders. The Eleventh Circuit did not find that the plaintiffs claims against the automobile class defendants were illegitimate; instead, it found that the joinder of these claims with the claims against Lowe's was illegitimate, which is why subsequent courts have referred to the holding in Tapscott as the fraudulent misjoinder doctrine.

As the Eighth Circuit noted in Prempro

Courts' reactions to Tapscott have been mixed. Some district courts have adopted the doctrine as a means of ensuring defendants their statutory right of removal to the federal courts and precluding plaintiffs from preventing removal to federal court. See, e.g., In re Diet Drugs, No. 98-20478, 1999 WL 554584 (E.D.Pa. July 16, 1999)(unreported) (explaining that plaintiffs' egregious misjoinder “wrongfully deprives Defendants of their right of removal.”); Reed v. American Medical Sec. Group, Inc., 324 F.Supp.2d 798, 805 (S.D.Miss. 2004) (adopting the fraudulent misjoinder doctrine because “diverse defendants ought not be deprived of their right to a federal forum by such a contrivance as this.”). See also Laura J. Hines & Steven S. Gensler, Driving Misjoinder: The Improper Party Problem in Removal Jurisdiction, 57 Ala. L. Rev. 779, 825 (2006).

But, as the Eighth Circuit also noted,

Other courts have criticized Tapscott, arguing that questions of joinder under state law do not implicate federal subject matter jurisdiction, federal jurisdiction is to be narrowly construed, and the fraudulent misjoinder doctrine has created an unpredictable and complex jurisdictional rule. See, e.g., Osborn v. Metropolitan Life Ins. Co., 341 F.Supp.2d 1123, 1127 (E.D.Cal. 2004) (rejecting fraudulent misjoinder because "the last thing the federal courts need is more procedural complexity."); Rutherford v. Merck & Co., 428 F.Supp.2d 842, 851 (S.D.Ill. 2006) (holding that Tapscott is an improper expansion of federal diversity jurisdiction, and misjoinder should be resolved by a state court); 14B Charles Alan Wright et al., Federal Practice and Procedure § 3723, at 876 (4th ed.2009) (explaining that fraudulent misjoinder adds "a level of complexity-and additional litigation-to a federal court's decision regarding removal.").

So, who is right? Well, first, let's consider why some courts have rejected the doctrine. These courts mainly have rejected the doctrine on two grounds. In Osborn, the Eastern District of California refused to adopt the doctrine because, inter alia, defendants should move to sever in state court and then remove within 30 days of severance as permitted by 28 U.S.C. Section 1446(b) rather initially removing and asking for severance. As the court itself noted, however, this could lead to problems in which severance is not accomplished within the 1 year time limit for removal in 28 U.S.C. Section 1446(b) (which seems to me to be enough of a reason for courts to adopt the doctrine). 

Second, the Eastern District of California rejected the doctrine because it "adds to the complexity of a federal court's decision as to removal and...even in the Eleventh Circuit not all procedural misjoinder rises to the level of fraudulent joinder.  And, in Rutherford, the Southern District of Illinois artfully explained in rejecting the doctrine that "[m]any courts have foundered on shoals of tautology in trying to define fraudulent misjoinder." Instead, the court noted that courts have split over many aspects of the doctrine and then concluded that

just as no clear standards for the application of the Tapscott doctrine have emerged, the Court predicts that no such standards will emerge. The Court is well aware from its experience that determinations about proper joinder are of necessity highly discretionary, involving intensely case-specific decisions about the fairest and most economical way to adjudicate particular claims....The Court fails to see how the adoption of the Tapscott doctrine, which elevates a court's discretion concerning joinder into a jurisdictional principle, is likely to promote predictable results at either the trial court level or on review. In sum, the Court has refused to follow Tapscott in the past,...and the Court will continue to do so until such time as the doctrine of fraudulent misjoinder is adopted by the Supreme Court of the United States or the Seventh Circuit Court of Appeals.

So, basically, courts have rejected the fraudulent misjoinder doctrine because it is unnecessary in many cases and is difficult to apply.  But is the Southern District of Illinois correct that no clear standards will emerge? It is certainly possible, but I don't see any reason why they couldn't emerge when appellate courts start applying the doctrine. And, I think that in her aforementioned article, Professor Percy does a dynamite job of setting forth what those standards should be.

State v. Federal Law

First, Professor Percy notes that "[c]ourts are divided on whether to analyze alleged fraudulent misjoinder pursuant to the state or federal procedural rule governing permissive joinder of parties." And, she argues for application of state joinder rules for 5 reasons:

-"If joinder is permissible under state rules but impermissible under federal rules, no intent to wrongfully defeat removal jurisdiction can be inferred from such joinder simply because it fails to meet the federal threshold for joinder of claims;"

-"The language of the removal statute itself suggests that state procedural law controls;"

-"Applying the federal rule to determine misjoinder violates Rule 82 of the Federal Rules of Civil Procedure if such application inappropriately expands federal jurisdiction;"

-"No district court has provided a compelling explanation for its reference to the federal joinder rule when evaluating allegations of fraudulent misjoinder;" (check out the article for all of these explanations)

-"The use of state joinder rules is supported by legislative history." (again, check out the article for all of the details)

Misjoined Plaintiffs

Second, while most courts adopting the fraudulent misjoinder doctrine have extended the doctrine to misjoined plaintiffs, at least one court has reached the contrary conclusion. According to Professor Percy, "[g]iven the Supreme Court's holding that '[t]he Federal courts may and should take such action as will defeat attempts to deprive wrongfully parties entitled to sue in the Federal courts of the protection of their rights in those tribunals,' it is appropriate for courts to apply the fraudulent misjoinder doctrine to cases where diverse plaintiffs have misjoined non-diverse plaintiffs in an attempt to defeat removal."

What Standard?

Professor Percy notes that "[o]f all the unresolved issues concerning the application of the fraudulent misjoinder doctrine, establishing an appropriate definitional test appears to have posed the most difficulty to district courts." Some courts use the language of Tapscott and find fraudulent misjoinder only when plaintiffs engage in "egregious misjoinder." Other courts find that "mere misjoinder" is sufficient to trigger the doctrine. And still other courts apply the doctrine using the same standard that they apply to fraudulent joinder casesi.e., the apply the fraudulent misjoinder doctrine when the plaintiff had no reasonable basis for joining the jurisdictional spoiler. Professor Percy finds that courts should follow this latter approach, concluding that

Using the "reasonable basis for the joinder" test to define fraudulent misjoinder is most consistent with Supreme Court precedent, is most sensitive to federalism concerns, avoids the difficulties posed by the egregious misjoinder and mere misjoinder standards, and relieves courts of the burden of having to develop an entirely new framework for evaluating fraudulent procedural misjoinder because it simply mimics the traditional fraudulent joinder framework.

Remand or Dismiss?

Finally, Professor Percy points out that courts applying the fraudulent misjoinder doctrine have split over whether to sever and remand misjoinded claims or sever and dismiss (without prejudice) such claims. Profesor Percy advocates he former option, contending that 

Arguably, the federal district court has no jurisdiction over the misjoined claim, and therefore has no authority to dismiss the claim. Moreover, it is more efficient for the federal court to remand the misjoined claim back to the state court where it was filed. If the plaintiff no longer desires to prosecute the misjoined claim, the plaintiff can easily dismiss the claim in state court. If, however, the court dismisses the claim brought by or against the misjoined party without prejudice, and the plaintiff intends to pursue it in state court, the plaintiff will be forced to refile the claim in state court. Thus, the more expedient approach is simply to remand the misjoined claims to state court.


So, will we ever achieve uniformity under the fraudulent misjoinder doctrine, or is the Southern District of Illinois correct that no clear standards will emerge? Well, the way that I see it, appellate courts eventually will have to start adopting or refusing to adopt the doctrine. It is possible, but extremely unlikely, that these appellate courts will act uniformly. But, once they do start acting, it is going to create circuit splits. And, once these circuit splits sharpen, the issue is bound to reach the Supreme Court. And, when it does, the hope would be that the Supremes will lay down some uniform standards for application of the doctrine. My guess is that those standards look a lot like the standards set forth in Profesor Percy's article.

-Colin Miller

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I believe the procedural misjoinder doctrine has a place in removal jurisprudence. From a policy standpoint, it seems as justified as traditional fraudulent joinder. Both are common-law-based answers to the problem of plaintiffs abusing their position as master of the complaint to artificially limit a defendant's right to access a federal forum. Procedural misjoinder also solves the problem without having to tangle directly with the voluntary-involuntary rule, which would presumably bar removal if the state court severed the procedurally misjoined claim. I tried to address some of these issues a few years ago in Everybody Plays the Fool, Sometimes; There's No Exception to the Rule: Procedural Misjoinder is Not an Exception to the Voluntary-Involuntary Rule, 60 Baylor L. Rev. 993 (Fall 2008).

I am surprised so few Courts of Appeals have directly addressed procedural misjoinder in the 15 years since Tapscott. But, I agree that the cases will probably come with time, and that the Supreme Court will eventually step in to resolve any circuit splits that arise. I suppose I am not as pessimistic as the Southern District of Illinois, because I see no reason to believe our common law system will somehow fail for this particular doctrine.

Posted by: Jeff | Apr 27, 2011 7:00:17 PM

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