Wednesday, September 30, 2015

House Judiciary Committee Hearing on "Fraudulent Joinder Prevention Act"

The House Judiciary Committee held a hearing yesterday on a bill entitled “The Fraudulent Joinder Act of 2015.”  Minority witness, Professor Lonny Hoffman, testified against the bill.

The bill, H.R. 3624, provides:

Section 1447(c) of title 28, United States Code, is amended by adding at the end the following:

“A motion for remand, and any opposition thereto, may include affidavit or other evidence showing a plausible claim for relief against each nondiverse defendant, or the lack thereof, or indicating a good faith intention to prosecute the action against each nondiverse defendant or to seek a joint judgment, or the lack of such a good faith intent. The district court shall deny a motion to remand if it finds that the complaint does not state a plausible claim for relief against a nondiverse defendant under applicable state law or there is no good faith intention to prosecute the action against a nondiverse defendant or to seek a joint judgment.”

Professor Hoffman explains the bill’s effect: “The bill would replace the existing common law fraudulent joinder test with a statutory test that places the burden on the plaintiff to prove that her claims against the non-diverse defendant are ‘plausible’ and brought in ‘good faith.’ Overall, the bill would make proving fraudulent joinder much easier than it is under current law.”

One of the majority witnesses, Elizabeth Milito, Senior Executive Counsel of the National Federation of Independent Business Small Business Legal Center, asserted the need for the bill:

[F]or a small business owner being served with lawsuit generates significant trepidation, disgust, and yes, uncertainty.

Because litigation entails angst and great expense for small businesses, NFIB is pleased to see this Committee’s attention focused on the issue of fraudulent joinder. Fraudulent joinder remains a source of confusion and unnecessary litigation in our courts and impacts far too many innocent small businesses. The situation unfolds as follows: plaintiffs’ attorneys will name a small business – such as a local pharmacy or insurance agent – with little connection to the complaint in order to deny the federal courts of jurisdiction. In many instances, the plaintiff has no intention of imposing liability on the fraudulently joined party. With courts divided over the standard for finding that a defendant is fraudulently joined, the small business is forced to engage in protracted litigation when all they want is to be dismissed from the case entirely.


In opposition to the bill, Professor Hoffman’s introduction summarizes his testimony:

There is no warrant for amending 28 U.S.C. §1447. More than a century old, fraudulent joinder law is well-settled and strikes the proper balance among competing policies in how it evaluates the joinder of non-diverse defendants. With recognition that there are sound reasons for not trying to exhaustively examine the merits of the plaintiff’s claims immediately after removal, courts across the circuits uniformly impose a high burden on the defendant to demonstrate that a non-diverse defendant’s joinder was improper. That burden can only be met if the defendant establishes that the joinder of the diversity-destroying party in the state court action was made without a reasonable basis of proving any liability against that party. By greatly expanding the scope of the fraudulent joinder inquiry, this bill would displace the well-functioning law with wasteful adjudications that district courts are ill-equipped to undertake at the remand stage, burdening the judicial system and raising litigation costs for all parties, especially for plaintiffs on whom this bill imposes the burden of proof. Finally, by requiring that courts resolve merits inquiries that under current law are decided by state courts, the proposed amendments to §1447 raise federalism concerns.


Interestingly, another majority witness, Cary Silverman, a partner at the law firm of Shook Hardy & Bacon, referred in his testimony to Hilda Bankston, who I have called, in an earlier article, the “poster child” for the Class Action Fairness Act.  Mr. Silverman testified:

In product liability lawsuits against pharmaceutical manufacturers, plaintiffs’ lawyers have a history of naming local pharmacies.  The pharmacy often faces claims premised on a general duty to warn of the risks of a drug, even though this role goes beyond a pharmacist’s ordinary duty to correctly fill a prescription.  During consideration of the Class Action Fairness Act (“CAFA”), Congress and the American public became familiar with the story of Hilda Bankston, the former owner of the Bankston Drug Store.  Her store was called “ground zero” for pharmaceutical litigation because, as the only pharmacy in plaintiff-friendly Jefferson County, Mississippi, Bankston Drug Store was named in numerous lawsuits targeting out-of-state drug makers.

(footnotes omitted)

In my article, I quoted Bankston's congressional testimony in favor of CAFA in which she testified that her drugstore had been named in “hundreds of lawsuits.”  However, an investigative reporter, Stephanie Mencimer, shed doubt on this claim in her book Blocking the Courthouse Door: How the Republican Party and its Corporate Allies are Taking Away Your Right to Sue.  Mencimer described how she traveled to the Jefferson County, Mississippi courthouse in 2005 in search of the alleged “hundreds of lawsuits” against Bankston-Rexall Drugs, but found only one.

N.B. This post was edited to add the number of the bill and to add that Professor Arthur D. Hellman of the University of Pittsburgh School of Law also submitted a statement that will be included in the hearing record and also posted on SSRN.  Professor Hellman supports the "basic thrust of the bill" but makes several drafting suggestions.

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