Photo of Michelle Yeary

A few weeks ago we blogged about courts that adhere to the Twiqbal pleading standard in deciding whether a defendant has been fraudulently joined and therefore whether a case should remain in federal court or be remanded.  The focus of our post was on whether courts were applying Twiqbal or some lesser federal standard for determining whether the plaintiff had asserted a viable claim against the allegedly fraudulently joined defendant.  However, we did allude to a third option considered by some courts – applying the pleading standards of the state in which the case was originally filed.  We didn’t delve into the Erie aspects of the fraudulent joinder analysis at that time, but a new decision caught our eye and made us go back and take a second look.
The post noted above was actually a follow-up itself to our post on  Johnson v. DePuy Orthopaedics, Inc., 2012 U.S. Dist. LEXIS 74450 (N.D. Ohio May 30, 2012) – in which the court did apply Twiqbal to a fraudulent joinder analysis and concluded the defendant was fraudulently joined and denied plaintiff’s motion to remand.  In deciding the proper standard to apply, the court rejected plaintiff’s argument that it should apply Kentucky’s pleading standard:

In diversity actions, federal courts apply state substantive law and federal procedural law. Under Fed. R. Civ. P. 81(c)(1), “The[] [federal] rules apply to a civil action after it has been removed from a state court.”  Federal procedural rules also apply pending a resolution of the district court’s jurisdiction.

Id. at *6-7 (citations omitted).  The Johnson court also relied on controlling Sixth Circuit law which provides that “when deciding motions to remand that involve allegations of fraudulent joinder. . . . the proper standard for evaluating that evidence remains akin to that of a Rule 12(b)(6) motion to dismiss.”  Walker v. Philip Morris USA, Inc., 2011 WL 5119441 at *7 (6th Cir. 2011) (vacating order denying remand finding that trial court “went beyond the relevant inquiry—whether Plaintiffs have a colorable claim under Kentucky law—and instead inquired whether Plaintiffs had adequate evidentiary support for their claim, the traditional Rule 56 inquiry.”).
Now, whether it is a full-blown Rule 12(b)(6) Twiqbal analysis or something more like Twiqbal-light (see prior post), it appeared that the rule in the Sixth Circuit was to at least apply a “federal” standard.  So, we were a bit surprised when we happened across Freitas v. McKesson Corp.,  2012 U.S. Dist. LEXIS 91256 (E.D. Ken. Jul. 2, 2012) (part of Darvocet MDL) – a decision by another court in the Sixth Circuit that openly rejects Johnson.  If Freitas had concluded that the Walker decision required use of a Twiqbal-light analysis, we would have shrugged our shoulders and moved on.  But, it didn’t.  Rather, it applies California’s pleadings standard to a motion to remand.
Plaintiff Freitas is one of eleven plaintiffs (6 from California and 5 from Oklahoma) who joined together (we also don’t agree with the court’s decision that the plaintiffs were properly joined) to sue 18 defendants – only one of which, McKesson, was from California.  The lawsuit was filed in California and the non-diverse defendants removed the case to federal court based on the fraudulent joinder of McKesson – a pharmaceutical distributor.  The case was tagged to the Darvocet MDL and therefore transferred to the Eastern District of Kentucky.  Freitas 2012 U.S. Dist. LEXIS at *3-5, *7.  Defendants argued, among other things, that plaintiffs’ claims against McKesson were factually deficient under Twiqbal and therefore were not viable and could not be used as a basis for remand.  Id. at *21-22.  The court rejected defendants’ position in favor of plaintiffs’ contention that California’s more lenient pleading standards should apply:

The test for fraudulent joinder is whether a reasonable basis exists for pre­dicting that the plaintiff’s claims against the non-diverse defendant could succeed under state law.  It makes little sense to measure the state-law viability of such claims, which were originally filed in state court, by federal pleading standards.

Id. at *22 (emphasis in original, citations omitted).  In reaching its conclusion, the Freitas court completely rejected Johnson and its reliance on Rule 81, id. at *23 n.10, finding instead that “Sixth Circuit precedent and common sense dictate the use of state pleading rules to de­termine whether McKesson is fraudulently joined.”  Id. at *23.  And under the “notice pleading” requirements of California, the Freitas court found plaintiffs’ allegations were sufficient to state a claim.  Id. at *23-29.
Unfortunately, Freitas isn’t the only court to favor state pleading requirements over federal standards in the fraudulent joinder context – this seems to be especially true where the state in question has not adopted Twiqbal but rather still uses notice pleading like California.  In Stillwell v. Allstate Ins. Co., 663 F.3d 1329 (11th Cir. 2011), for instance, the district court found that plaintiff’s allegations against an insurance agent were “conclusory and lacking in factual specificity,” and therefore held the agent had been fraudulently joined.  Id. at 1334.  On appeal, the Eleventh Circuit rejected scrutinizing the complaint under 12(b)(6) standards when determining fraudulent joinder, holding that to determine whether a state would find a cause of action they must apply the pleading standards of that state, in this case — Georgia  — another notice pleading state.  Id. at 1334-35.  See also Wong v. Michaels Stores, Inc., 2012 U.S. Dist. LEXIS 28791 (E.D. Cal. March 5, 2012); Edwea, Inc. v. Allstate Ins. Co., 2010 U.S. Dist. LEXIS 129582 (S.D. Tex. Dec. 8, 2010).
So, if legal minds differ as to whether federal courts are bound by Erie and Rule 81 to apply Twiqbal to the fraudulent joinder issue, maybe the question needs to be re-framed – should courts use state court pleadings standards in deciding whether plaintiff has stated a colorable claim to defeat diversity jurisdiction?  Our answer would be no.  Let’s start with jurisdictions that apply the reasonable basis standard for determining fraudulent joinder (1st, 3rd, 5th, 6th, 7th, 8th, and 10th Circuits).  Arriaga v. New England Gas Co., 483 F. Supp. 2d 177, 185 (1st Cir. 2007); Boyer v. Snap-On Tools, Inc., 913 F.2d 108, 111 (3d Cir. 1990); Travis v. Irby, 326 F.3d 644, 647 (5th Cir. 2003); Walker, 2011 WL 5119441 at *4; Schur v. LA Weight Loss Ctr, 577 F.3d 752, 764 (7th Cir. 2009); Filla v. Norfolk & Southern Ry., 336 F.3d 806 (8th Cir. 2003); Nerad v. AstraZeneca Pharmaceutical, Inc., 203 Fed. Appx. 911, 913 (10th Cir. 2006).   The reasonable basis standard asks whether “there is any reasonable possibility that the plaintiff could prevail against the non-diverse defendant.”  See Schur, 577 F.3d at 764.  This sounds familiar.  In Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), the Supreme Court stated that “a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct.”   In other words, is there a “reasonable basis” to find plaintiff has stated a claim under state law is the question for both fraudulent joinder and Rule 12. Certainly sounds like Twiqbal should apply in these jurisdictions – which means Freitas should have at least applied something close to the federal standard and not abandoned “reasonable basis” in favor of “general allegations.”
We acknowledge that, under this reasoning, application of Twiqbal might be a tougher battle in those jurisdictions that use the “no possibility of recovery” standard for fraudulent joinder (2nd, 4th and 11th Circuits).  See Pampillonia v. RJR Nabisco, Inc., 138 F.3d 459, 461 (2d Cir. 1998); Hartley v. CSX Transp., Inc., 187 F.3d 422, 424 (4th Cir. 1999); Crowe v. Coleman, 113 F.3d 1536, 1538 (11th Cir. 1997). Under the no possibility standard, a defendant must show “that there is no possibility, based on the pleadings, that a plaintiff can state a cause of action against the non-diverse defendant in state court.”  See Pampillonia, 138 F.3d at 461.  Applying our similarity test, this sounds more like the federal pleadings standard pre-Twiqbal, under which courts would not dismiss a claim unless “it appear[ed] beyond doubt that the plaintiff [could] prove no set of facts in support of his claim which would entitle him to relief.”  Conley v. Gibson, 355 U.S. 41, 46 (1957).
But, just as the Supreme Court moved on from Conley to embrace Twiqbal for Rule 12, our common sense says that the same should be true for fraudulent joinder.  Under Twiqbal, the Supreme Court has decided that while the pleading standard should be somewhat generous, it should not “unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”  Iqbal, 556 U.S. at 678–79.   Likewise, a fraudulent joinder standard should not lock the doors of removal to a defendant facing “nothing more than conclusions.” By allowing a plaintiff to destroy diversity simply by stating legal conclusions with no basis in fact, courts side step the general principles of judicial fairness and efficiency on which Twiqbal are premised.  If claims are to be judged under Rule 12 not on law alone, but on whether plaintiff has a reasonable factual basis to support his legal claim – the same should be true in deciding whether a plaintiff has sufficiently plead a claim for purposes of fraudulent joinder.
We haven’t cited every case on this issue, but we hope we’ve given you something to think about (and investigate further) the next time you are faced with a fraudulently joined defendant.