On March 31, 2016, the United States Court of Appeals for the Fifth Circuit increased the burden on Plaintiffs seeking to remand cases to state court by reaffirming application of federal pleading standards to the determination of whether a non-diverse defendant has been improperly joined to defeat diversity jurisdiction. Int'l Energy Ventures Mgmt., LLC v. United Energy Group Ltd., 2016 WL 1274030 (5th Cir. Mar. 31, 2016).
In International Energy, a Texas plaintiff brought claims against Bermudian and Texan defendants for commercial injuries arising out of the sale of oil and gas interests. The defendants removed the action to federal court, and, in response to Plaintiff’s motion to remand, argued that the non-diverse defendants were improperly joined solely to defeat diversity jurisdiction. The district court agreed and denied the motion to remand.
On appeal the Fifth Circuit affirmed the denial, and took the opportunity to clarify the procedure and standard for determining whether a party has been “improperly joined.” The Court explained that a defendant is improperly joined if it is established that (1) the plaintiff has stated a claim against a diverse defendant that he fraudulently alleges is non-diverse, or, more commonly, (2) the plaintiff has not stated a claim against a defendant that he properly alleges is non-diverse. Under the second test, the court must find that based on the plaintiff’s pleadings, “there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against” the non-diverse defendant. The Fifth Circuit acknowledged, however, that confusion had grown among federal district courts, and even some panels of the Fifth Circuit, as to whether the pleadings were to be judged by the more liberal state pleading standards or the relatively strict federal pleading standards. For example, under Texas’ lenient “fair notice” pleading standard, a pleading need only set out the “nature and basic issues of controversy and testimony probably relevant.” In contrast, to satisfy federal pleading standards, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.”
The International Energy Court held that “a federal court must apply the federal pleading standard” to the improper joinder analysis, and provided several reasons in support. First, and fundamentally, the improper-joinder analysis is about determining the federal court's jurisdiction, and “when determining the scope of its own jurisdiction, a federal court does so without reference to state law, much less state law governing pleadings.” Second, the Court cited prior Fifth Circuit and United States Supreme Court caselaw requiring application of federal standards to questions of federal jurisdiction generally. In particular, the Court reaffirmed its earlier decision in Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568 (5th Cir.2004) (en banc), cert. denied 544 U.S. 992 (2005), which held that the federal standard applied to the improper joinder analysis. Finally, the International Energy Court noted the practical reasons for federal courts to use a federal test. Most importantly, district courts are intimately familiar with that test and are able to apply it uniformly.
The International Energy decision will be significant going forward because it resolves uncertainty in the pleading standard in favor of the stricter federal standard, and may curtail plaintiffs’ ability to circumvent federal jurisdiction with unfounded claims against non-diverse parties.