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The Use by a Plaintiff’s Lawyer of “Artful Pleading” to Avoid Removal: Defense of Class Actions Issues

A class action defendant often benefits if it is able to remove the case to federal court whenever possible. Plaintiffs, however, know this, and often artfully draft their class action complaints with an eye toward avoiding federal court jurisdiction. “[I]n general, district courts have federal-question jurisdiction only if a federal question appears on the face of a plaintiff’s complaint. [Citations.] The artful pleading doctrine creates an exception to this general rule.” T & E Pastorino Nursery, 268 F.Supp.2d at 1247.

“Artful pleading exists where a plaintiff articulates an inherently federal claim in state-law terms. [Citations.] A federal court may exercise removal jurisdiction under the ‘artful pleading’ doctrine, even if a federal question does not appear on the face of a well-pleaded complaint, in three circumstances: (1) where federal law completely preempts state law; (2) where the claim is necessarily federal in character; and (3) where the right to relief depends on the resolution of a substantial, disputed federal question.” T & E Pastorino Nursery, at 1247.

If the plaintiff’s right to relief depends on the resolution of a substantial, disputed federal question, then removal is proper regardless of the disguises the plaintiff utilizes to hide the true nature of his or her claims. Thus, if a plaintiffs’ suit is couched in terms of state law but is founded on and wholly derivative of federal law, then removal is proper. As Sparta Surgical Corp. v. National Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1212 (9th Cir. 1998), held:

Here, although Sparta’s theories are posited as state law claims, they are founded on the defendants’ conduct in sus-pending trading and de-listing the offering, the propriety of which must be exclusively determined by federal law. The viability of any cause of action founded upon NASD’s conduct in delisting a stock or suspending trading depends on whether the association’s rules were violated.

“To bring a case within the [federal-question removal] statute, a right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff’s cause of action.” Gully v. First Nat’l Bank in Meridian, 299 U.S. 109, 112 (1936). “Claims brought under state law may ‘arise under’ federal law if vindication of the state right necessarily turns upon construction of a substantial question of federal law, i.e., if federal law is a necessary element of one of the well-pleaded claims.” Ultramar America Ltd. v. Dwelle, 900 F.2d 1412, 1414 (9th Cir. 1990).

A case “arises under” federal law either where federal law creates the cause of action or “where the vindication of a right under state law necessarily turn[s] on some construction of federal law.” Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 8-9, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983) (citations omitted). “[T]he presence or absence of federal-question jurisdiction is governed by the ‘well-pleaded complaint rule,’ which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff’s properly pleaded complaint.” Rivet v. Regions Bank, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998) (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987)) (internal quotation marks omitted).

Republican Party of Guam v. Gutierrez, 277 F.3d 1086, 1088-89 (9th Cir. 2002).

In the Ninth Circuit, a claim is “necessarily federal” if it is within the express terms of a statute granting federal courts exclusive jurisdiction over the subject matter of the claim. Thus, in Brennan v. Southwest Airlines, 134 F.3d 1405, 1409 (9th Cir. 1998), the Court concluded that a state court breach of contract suit against the airlines was essentially a suit for the refund of excise taxes that the airlines had improperly collected. The Court held that because the Internal Revenue Code provided the exclusive remedy for obtaining a refund of federal taxes, the state court action was removable. It held that the action was properly dismissed based on plaintiffs’ failure to exhaust administrative remedies and failure to sue the United States as a proper party.

Similarly, in California, ex rel. Lockyer v. Mirant Corp., 2002 WL 1897669 (N.D. Cal. 2002), the California attorney general brought a state court action alleging that wholesale electricity sellers violated California’s unfair business practices law. Sellers removed it to federal court; plaintiff’s motion for remand was denied. The complaint alleged only state law claims, but the court noted, “the AG’s complaints predicate violation of state law on violation of the FPA [Federal Power Act], a federal law.” Id., at *3. The court stated, “In the failed to file/overcharge cases, the AG predicates both of his S 17200 [sic] directly on the violation of the FPA. . . . The claims allege violation of the FPA as the only business practice challenged. Such claims necessarily involve resolution of a federal question: whether defendants violated the FPA.” Id., at *4-5. In addition, the court recognized that although the plaintiff did not seek a remedy available under the FPA, plaintiff still sought to enforce defendants’ duties under the FPA to file tariffs and charge just and reasonable rates. The court held that federal jurisdiction was proper. Id., at *5.

Mirant thus stands for the proposition that federal jurisdiction exists if the plaintiff cannot prevail unless he or she proves a federal law violation.

Put simply, plaintiffs cannot disguise a federal claim by artful pleading. For example, the Ninth Circuit has held that a state court complaint that articulates a federal tax case in state law terms is another example of artful pleading. In Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 769 (9th Cir. 1986), an employee filed a state court action against the employer for failure to pay the full wages agreed upon. The employer removed the case to federal court on the ground that the employee had artfully pleaded what was actually a challenge to the employer’s compliance with federal income tax withholding laws. The court upheld the removal and dismissed the complaint on the grounds that a federal question existed and that the employer was not liable to the employee for complying with its legal duty to withhold income taxes. (The district court also awarded the employer attorney fees, and double costs were awarded on appeal.)

Similarly, in Brennan v. Southwest Airlines, 134 F.3d 1405, 1409 (9th Cir. 1998), the court concluded that a state court breach of contract suit against the airlines was essentially a suit for the refund of excise taxes that the airlines had improperly collected. The court held that because the Internal Revenue Code provided the exclusive remedy for obtaining a refund of federal taxes, the state court action was removable. It held that the action was properly dismissed based on plaintiffs’ failure to exhaust administrative remedies and failure to sue the United States as a proper party.

A defendant must remove the action within 30 days, see 28 U.S.C.A. S 1446(b). (In a separate article, we explore whether the time for removal begins to run from service of the complaint, or from mere receipt of the complaint.) Accordingly, once served with a lawsuit, a defendant should determine immediately whether the claims asserted in the complaint are based on federal law and/or whether the action is otherwise removable to federal court. If it is, then the notice of removal must be filed promptly.