December 18, 2020 In Litigation

Should Your Case Be in Federal Court or State Court?

When does a dispute belong in state court and when does it belong in federal court?  The answer to that question is often a mystery to non-lawyers.  We will explore the basics below.

Whether a federal court has jurisdiction over a dispute is determined by several federal statutes.  In civil cases, the three main statutes are 28 U.S.C. § 1331 (federal question jurisdiction), 28 U.S.C. § 1332 (diversity of citizenship jurisdiction), and 28 U.S.C. § 1367 (supplemental jurisdiction over state law claims).  Although not discussed herein, it should be noted that there are numerous other federal statutes that confer federal jurisdiction over certain types of matters, including admiralty and maritime cases, antitrust cases, matters involving the United States Postal Service, cases involving patents, trademarks or copyrights, and others.

Generally, cases that do not belong in federal court can be filed in any state court that has jurisdiction over the defendant, which is ordinarily any state where the defendant resides, is incorporated, or regularly conducts business.  Of course, whether a particular state court has jurisdiction over a particular matter or party can be limited by state laws.

Federal Question Jurisdiction

28 U.S.C. § 1331 states, “The [federal] district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”  Therefore, generally, if a lawsuit is based upon a federal statute then it can be heard in federal court.  Federal question jurisdiction may also be appropriate under United States Supreme Court precedent even though all claims involved are state law claims as long as an important federal issue is necessarily involved in the case (this is a simplified explanation of the test set forth in Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005)).

Diversity of Citizenship Jurisdiction

Pursuant to 28 U.S.C. § 1332, federal courts have jurisdiction over disputes involving citizens of different states where the amount in controversy exceeds $75,000.  The Supreme Court has interpreted this requirement to mean that there must be “complete diversity.” In other words, all plaintiffs must be from different states from all defendants.  Whether diversity exists is determined as of the time the action is filed.

An individual is a citizen of the state where he or she is domiciled, meaning the last state in which they resided and had an intent to remain.

A corporation is deemed to be a citizen of the state in which it is incorporated and the state where it has its principle place of business.  According to the Supreme Court in Hertz Corp. v. Friend, 559 U.S. 77, 130 S. Ct. 1181 (2010), a corporation has its principle place of business where its “nerve center is located,” meaning “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities,” which will usually be its main corporate office.

A partnership and limited liability company is a citizen of all states in which its partners or members are citizens.  Therefore, if a partner or member is itself a corporation, partnership or limited liability company, the court must also “look through” those entities to determine the states of which they are citizens when determining whether there is diversity of citizenship jurisdiction.

Supplemental Jurisdiction

Pursuant to 28 U.S.C. § 1367, where a federal court has jurisdiction over a case, it can also entertain additional claims based solely on state law, albeit with some exceptions.  Those exceptions include, but are not limited to, where the state law claim raises a novel or complex issue of state law, the state law claim substantially predominates over the federal claims or the federal claims have been dismissed.

Removal and Remand

If a case is filed in state court, a defendant can move the case to federal court under certain circumstances. This is called “removal” and is governed by 28 U.S.C. § 1441.  A case can be removed by the defendant if there is a basis for federal jurisdiction as explained above.  To properly effectuate removal to federal court, the defendant must file a “notice of removal” with both the state and federal court that sets forth the basis for federal court jurisdiction, and must provide a copy of the notice of removal to the plaintiff.  If there is more than one defendant, all defendants who have been served with the lawsuit must consent to removal for it to be effective.

There are some exceptions to the right to remove a case to federal court, and some of them are mentioned below.

First, a case cannot be removed to federal court just because the defendant intends to assert a defense or counterclaim based upon federal law; instead, the plaintiff’s claim must be based upon federal law for the case to be removable based upon federal question jurisdiction.

Second, a case cannot be removed to federal court more than thirty days after the filing of the first document indicating that there is federal court jurisdiction, or if more than a year has passed since the action was initially filed.

Third, a defendant may not remove a case to federal court if he/she/it is a citizen of the state where the state court action was filed.  This is called the “forum defendant rule.”  For example, if a corporation from Alabama sues a person from New York in New York state court for $100,000, the defendant may not remove the case to federal court because he is a citizen of New York.  However, courts have held that if the local defendant removes the case to federal court before officially being served with the lawsuit, the forum defendant rule does not apply and the removal is permitted.  See, Doe v. Valley Forge Military Academy and College, No. 19-1693 (E.D. Pa. Jul. 15, 2019).

Sometimes a plaintiff will include a “non-diverse” local defendant in a lawsuit to avoid being in federal court.  If a defendant can prove to the court that another defendant has been “fraudulently joined,” which is where the plaintiff obviously does not have a valid claim against a local defendant and has only sued the local defendant to avoid diversity of citizenship jurisdiction.

If a case has been improperly removed by a defendant, the plaintiff can seek to have the case “remanded” back to state court as permitted by 28 U.S.C. § 1447.  If a case was frivolously removed to federal court, the case the court has the power to punish the defendant by awarding attorneys’ fees to the plaintiff along with remanding the case.

Conclusion

If you plan to sue, or if you are sued, it is important to contact an attorney immediately, because the clock is running.  An experienced litigation attorney will know whether the case should be heard in state court or federal court based upon legal, practical, and strategic considerations.

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