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June 14, 2013

Naming Local Employees to Defeat Diversity Jurisdiction Won’t Keep You in State Court Says Fifth Circuit

This week, the Fifth Circuit Court of Appeals handed defendants a victory in the latest skirmish with a plaintiff over whether to proceed in a federal or state forum. Mumfrey v. CVS Pharmacy, Inc. 2013 WL 2476402 (5th Cir. June 10, 2013). Mumfrey, a wrongful termination action, addressed a common tactic used by plaintiffs in naming local employee defendants to defeat federal diversity jurisdiction.  The Fifth Circuit affirmed the denial of plaintiff’s motion to remand, holding that there “was no reasonable possibility for recovery against the individual defendants under Texas law.”  Thus, the citizenship of those employees which would have otherwise defeated complete diversity, could be disregarded for purposes of removal.

In an attempt to remain in what they perceive to be the more favorable venue of state court, plaintiffs will often name local employees of an out-of-state corporate defendant, including sales representatives, pharmacists or even cashiers, when their claims are really ones against the corporate defendant. This is commonly attempted in pharmaceutical and other mass tort litigation, but can (as in Mumfrey) rear its head in other contexts as well.

Under the removal statute (see 28 U.S.C. § 1441(b)(2)), an action may not be removed to federal court where there is a lack of complete diversity among plaintiffs and defendants or, even where complete diversity exists, there is a “properly joined and served” defendant who is a citizen of the forum state.  As courts throughout the country have recognized, the presence of such a defendant can be ignored for purposes of determining the propriety of removal,  where such defendant has been “fraudulently joined,” or “improperly joined.”  

As the Fifth Circuit has held:  “The test of [improper] joinder is whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant, [restated,] there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant.” 

In Mumfrey, the Texas plaintiff originally sued in Texas state court. He named his former employer, a pharmacy that was not a citizen of Texas, as well as his local supervisors and a store manager. Although there was a lack of complete diversity, the pharmacy removed the action to federal court, asserting that the Texas individual defendants were improperly joined to the lawsuit.  Plaintiff moved to remand to state court and the district court denied the motion. 

On appeal after a bench trial in favor of the pharmacy, the Fifth Circuit affirmed both the denial of remand and the judgment.  Applying Texas law, the Fifth Circuit concluded that there was no basis for a claim against  the local individual defendants because the complaint did “not allege that the individual defendants were acting to serve their own personal interest.”  Indeed, plaintiff conceded that those defendants “were acting in the scope of their employment at the time of the retaliatory acts.”  Moreover, the pharmacy “never complained or disciplined the individual defendants for their behaviors” which indicated that that they had not acted contrary to the interests of their pharmacy employer.  Accordingly, the Fifth Circuit concluded that there “was no reasonable possibility for recovery against the individual defendants under Texas law” and the individual defendants were improperly joined.  

The Fifth Circuit further addressed a timeliness of removal issue, holding that it was an amended complaint expressly seeking more than $75,000 in damages, and not plaintiff’s original complaint that triggered defendant’s 30 day clock for removal. The original complaint did not “affirmatively reveal[] on its face” that the plaintiff sought more than the minimum jurisdictional amount.  

The takeaway from this decision is that (at least under Texas law) employees cannot be held responsible for what in essence are the torts of their employer.  Nor can such local employees be used as pawns in the jurisdictional battles between plaintiffs and corporate defendants.  As Mumfrey illustrates, where the employee’s only culpable conduct is serving the interests of the employer, that may well shield local employees from personal liability and keep the real target of plaintiff’s claims, the out-of-state corporate defendant, in federal court.

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Download: Ruling (pdf 205244 bytes)