There are two basic ways to get federal jurisdiction under Article III: there must be a federal question or diversity of citizenship.* And most of the time, diversity jurisdiction requires all the plaintiffs to be citizens of different states than all the defendants. But you might not know the rules about “sham defendants.” A single non-diverse defendant stops a federal court from having jurisdiction—and so that defendant stops the other defendants from removing the case to federal court. But how do you spot a sham defendant? The Ninth Circuit recently addressed the until-now-unanswered question of how much you have to plead to keep your defendants real.

Ruth Thrower’s estate and successors filed a wrongful-death lawsuit in state court against the nursing home where Ruth had been staying when she died. They also sued the nursing home’s administrator. The nursing home’s owner removed to federal court, arguing federal courts had diversity jurisdiction because the single non-diverse defendant—the administrator—was a sham defendant. The district court wasn’t convinced and remanded the case to state court.

Because the district court also awarded attorneys’ fees, the nursing home was able to appeal the entire order to the Ninth Circuit. (Remand orders, by themselves, cannot be appealed.) The Ninth Circuit held that there was no federal diversity jurisdiction because the administrator was a proper defendant.

The nursing home’s owner argued that the Ninth Circuit should apply Rule 12(b)(6)’s well-pleaded-complaint standard to test whether the administrator was a sham defendant. Because the complaint didn’t allege any particular act or omission by the administrator, their argument went, the complaint did not state any cause of action against the administrator. And if the complaint didn’t state a cause of action against the administrator then he was a sham defendant and there was complete diversity—the nursing home could remove the case to federal court.

The Ninth Circuit held that “the test for fraudulent joinder and for failure to state a claim under Rule 12(b)(6) are not equivalent.” Although there are some similarities, “[a] claim against a defendant may fail under Rule 12(b)(6), but that defendant has not necessarily been fraudulently joined. . . . A standard that equates fraudulent joinder with Rule 12(b)(6) conflates a jurisdictional inquiry with an adjudication on the merits.” The remand bar seems to be set a notch lower: “[I]f there is a possibility that a state court would find that the complaint states a cause of action against any of the [non-diverse] defendants,” then there’s no federal jurisdiction. (Italics in the opinion.)

And in Thrower’s case, it was fairly possible that the claims against the non-diverse defendant would stand. The administrator was, after all, in charge of the nursing home where Thrower died. Whether or not the claims against the administrator were detailed enough was an argument over the wording in the complaint, not the “viability” of the claim against him.

Read the Ninth Circuit’s opinion here.

* We shall sail right by “all Cases of admiralty and maritime Jurisdiction . . . .”

Sometimes you have to get the federal government’s permission to do something. But if the government won’t give you permission then the Administrative Procedure Act allows you to sue the permitting agency. Before you can sue the agency, the action has to be final. The Sixth Circuit just considered a claim where the agency action might have seemed unending but wasn’t final.

The Marquette County (Michigan) Road Commission wanted to build a county road and needed to fill 25 acres of wetlands to build it. But before it could fill in the wetlands the Commission needed a Clean Water Act discharge permit. Michigan is one of two states that directly manage the discharge-permit application process, so the Commission sent an application to the Michigan Department of Environmental Quality.

But the federal EPA has the last word. If EPA objects to a permit application, then a state “shall not issue the permit unless [it] has taken the steps required by EPA to eliminate the objection.” A state can either revise the permit, deny the permit, or ask for a public hearing. After the public hearing, if the EPA still objects, then the state is back to the other two options: revise the permit or deny the permit.

As the Sixth Circuit’s Judge Batchelder wrote, “[t]he Section 404 permitting process has the potential to be onerous, and proved to be so for the Road Commission.” The Commission submitted a permit proposal to Department of Environmental Quality, then a revised permit proposal. The EPA objected. So the Commission revised its proposal several times more. The EPA objected. So the Commission requested a public hearing on the application. After the hearing, EPA objected. The Commission sued.

EPA moved to dismiss the complaint under Rule 12(b)(6), arguing that there was no final agency action under the APA. The Western District of Michigan agreed, and the Sixth Circuit affirmed.

The Sixth Circuit noted that “when EPA lodged objections, the permit review process continued precisely as directed by statute. . . .Only when the Road Commission, tired of the rigmarole the CWA imposes, declined to submit its most recent materials . . . did the Road Commission itself discontinue the permitting process.” Curiously it was the Michigan state agency that could have provided the needed finality: If the Department of Environmental Quality had simply denied the permit based on EPA’s objections then the process would have (finally) ended, and the Commission could have sued. But as the Sixth Circuit concluded, “[i]n the absence of any decision from either agency to ultimately deny or grant the permit, however, we have nothing to review.”

Read the Sixth Circuit’s decision here.

I once heard someone say that if your defense has a name then it has to go in your answer. If you don’t put that defense in the answer you might lose it. But it’s worth remembering that waiver and timing can be two different questions. Once you’ve preserved your defense by putting it in your answer you then have to decide when to push that defense. The Sixth Circuit recently considered—and rejected—the argument that the only time to push a claim-preclusion defense is in a Rule 12 motion.

David and William Raub sued their property owners’ association, town, and county, claiming the defendants conspired against them in retaliation for a lawsuit the Raubs filed a decade ago. The association responded that the Raubs had already brought—or could have brought—these same claims in another set of lawsuits. The Eastern District of Michigan agreed and dismissed the suit (awarding attorneys’ fees to the association along the way).

The Sixth Circuit affirmed. On appeal the Raubs argued that the association wasn’t allowed to raise the claim preclusion argument at summary judgment. Rather, the Raubs claimed, the only time to argue preclusion is on a Rule 12(b)(6) motion to dismiss or a Rule 12(c) judgment on the pleadings. The Sixth Circuit disagreed: “Defendants are allowed to raise res judicata at summary judgment, especially when the defense would not have been effective at the time the plaintiff filed suit.” And in this case the preclusion argument could not have been raised on a Rule 12 motion. “[T]wo of the cases that precluded the Raubs’ claims did not reach a final decision until months after the Raubs filed their complaint. . . . It was thus entirely permissible for the defendants to raise res judicata when they moved for summary judgment.”

It’s important to notice that the association didn’t wait until summary judgment to spring a preclusion trap on the Raubs. “[E]ach defendant listed res judicata as an affirmative defense and referenced the pending state cases in their answers.” So this case wasn’t about waiver, just timing. Had the defendants not mentioned preclusion in their answers this analysis might have turned out differently.

The Sixth Circuit’s opinion is here.

You know that you don’t have a live appeal unless you have an appealable order. And you don’t have an appealable order unless the order is a final decision under 28 U.S.C. § 1291 or an order that allows an interlocutory appeal. You can ask the district court to certify an order for interlocutory appeal, but if the court declines then you’re left with few options. One option you don’t have—as the Fourth Circuit has now reminded us—is to voluntarily dismiss your claims then appeal the order dismissing your claims.

Erin Keena sued the coupon clearinghouse Groupon after receiving a refund that she could only use to buy more Groupon goods and services. Groupon responded by noting that Keena had agreed to arbitrate any disputes with Groupon when she signed up for Groupon. The Western District of North Carolina ordered arbitration.

Keena decided that the costs of arbitration outweighed the possible recovery; she moved to amend the arbitration order so that it would dismiss her complaint with prejudice (and, in the alternative, asked for certification of an interlocutory appeal). The district court assented to Keena’s request and dismissed her complaint but declined to certify the order for interlocutory appeal. Then Keena appealed.

The Fourth Circuit dismissed Keena’s appeal for lack of jurisdiction. While Keena’s appeal was pending, the U.S. Supreme Court held that a voluntary dismissal did not create a final decision as required by Section 1291. After the Supreme Court’s decision, the Fourth Circuit requested supplemental briefing; Groupon argued there was no difference between the appeal rejected by the Supreme Court and Keena’s appeal. The Fourth Circuit agreed.

The Fourth Circuit held that allowing a plaintiff to voluntarily dismiss a complaint just to secure a final, appealable decision would usurp the Court of Appeals’ authority to decide what interlocutory orders it allows as appeals. And “the final-judgment rule will not tolerate that effort.” The “tactic also fails to account for the longstanding principle that a party is not entitled to appeal from a consensual dismissal of her claims.” (And if you think standing might be an issue here then you’re not alone: The Supreme Court decision that resolved Keena’s attempted appeal was 5-3, with the minority concurring in dismissal on just that basis).

Read the Fourth Circuit’s opinion here.

Title 28 U.S.C. § 1291 allows federal courts of appeal to review “final decisions of the district courts.” But sometimes a plaintiff and a defendant are in a hurry to get wherever the lawsuit is going. They conclude that a decision by the court of appeals might speed things up. What can they do to get to that final decision? While parties in a hurry consider what route to take, they should read a recent decision by the Sixth Circuit that clearly marks one way out-of-bounds.

Local 392 of the Plumbers, Pipe Fitters & Mechanical Equipment Service Union sued three mechanical-services companies claiming that the companies had broken a collective-bargaining agreement. The Southern District of Ohio granted summary judgment holding that two of the companies were bound by the collective-bargaining agreement but one was not. The union appealed. But since the district court had yet to set damages that ruling wasn’t final. So the parties entered into a “Stipulated Judgment Order” setting damages, which candidly stated that the union and the companies agreed “to the entry of this judgment for the sole purpose of proceeding with the appeal.”

The Sixth Circuit ordered briefing on whether the “Stipulated Judgment Order” was a final order for the purposes of Section 1291. The parties agreed that the order was final; the Sixth Circuit did not, and dismissed the appeal.

The Sixth Circuit noted that a decision is final “if it ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” A judgment cannot be final unless it “make[s] the parties bring all of their issues—liability, damages, and whatever else they choose to litigate—in a single appeal.” But under the stipulated judgment order in this case, if the Sixth Circuit had reversed any of the district court’s decisions “the parties . . . [would have been] free to litigate ‘any issues’ on remand.” The stipulated order would have allowed the union and the companies to “pause the litigation, appeal, then resume the litigation on whatever issues they like . . . .” The Sixth Circuit held the stipulated order wasn’t an end to the litigation, but a detour. And it would be a detour around Title 28—a route the parties are not allowed to take.

Read the Sixth Circuit’s opinion here.