Overlooked in the Tort Reform Debate: Abusive Litigation by Defendants

It is common these days to hear conservative politicians and corporate representatives charging that plaintiffs' lawyers--especially plaintiffs' tort lawyers--are abusing the courts by effectively extorting exorbitant awards from the defendants they target. On this view, the problem is most pronounced in state court, where local trial lawyers and their clients cast themselves as David to out-of-state defendants' Goliath.

"Tort reform," we are told, is the answer--especially reform that will enable defendants to move more cases out of the state courts and into the defendant-friendly federal judiciary.

Omitted from this account is any thoughtful attention to the litigation practices of tort defendants and their counsel. But manipulative, abusive litigation is a two-way street, and tort reformers should be equally concerned about abuses on the defense side.

In this column, I will focus on one particularly worrisome and growing phenomenon: the problem of defendants wrongfully transferring state cases to federal court.

Federal Courts' Power to Hear State Law Cases

To understand how defendants may act abusively in this area, we must first have some sense of the contours of federal and state jurisdiction.

Most civil lawsuits in this country are filed in state, not federal, court. State courts have broad jurisdiction over a wide array of cases, whereas federal courts' jurisdiction is more limited.

Still, some cases fall within both state and federal jurisdiction, and thus can be heard in either state or federal court. Some tort cases filed in state court, for example, may also satisfy the requirements for federal "diversity" jurisdiction--which covers, among other things, cases between citizens of different states where the matter in controversy exceeds $75,000.

Assume, for example, that an Alabama resident injured in a lawn mower accident sues the New Jersey-based manufacturer for $100,000, asserting a manufacturing defect theory under state law. In those circumstances, the case can likely be filed either in Alabama state court or in a federal court in Alabama.

Why can diversity cases end up in federal court even though they raise no questions of federal law? Diversity jurisdiction is based in part on a concern that state courts might unduly favor their own state residents over out-of-state parties. The Alabama state court, the theory goes, may be inclined to favor the Alabama plaintiff, whereas a federal court may be more likely to give the New Jersey defendants a fairer hearing.

Removal: The Defendant's Right to Move Certain State Cases to Federal Court

Diversity jurisdiction may give plaintiffs the option of filing in either state or federal court, but most plaintiffs choose state court to pursue the home-court advantage mentioned above. Thus, in part to effectuate diversity jurisdiction's promise of a fair hearing, federal law allows defendants sued in state court to "remove" the case to federal court, provided the case satisfies federal jurisdictional requirements.

To return to the Alabama lawn mower case, this means that if the plaintiff sues in Alabama state court, the defendant can remove the case to federal court on the ground that the case could have been filed in federal court in the first place, pursuant to federal diversity jurisdiction.

The critical point about removal--and the reason it is so prone to abuse--is that it is automatic. That is, a defendant sued in state court has the unilateral power to remove a case to federal court, and the state court has no power to review the propriety of the removal. Once the state court is notified of the removal, it can do nothing but abort (or at least suspend) the state proceedings.

The Problem: Wrongful Removal

But what if the removal is erroneous? What if a particular case does not satisfy diversity (or other federal) jurisdictional requirements, but the defendant removes it anyway? Indeed, what if the removal is obviously wrong--what if, for instance, all the parties in the lawn mower case are plainly Alabamans, thus defeating diversity jurisdiction?

In these circumstances, it falls to the plaintiff--or the federal court itself--to challenge the removal after the fact, in the federal court to which the case was removed.

Therein lies the problem, and the opportunity for abuse. Contesting removal can be costly, easily running into the tens of thousands of dollars and beyond. In large tort cases, the defendant (typically a corporation) can easily pay the bill for its side of the litigation. But the plaintiff (often an individual with a contingency-fee attorney) may be strapped for cash.

Mindful of the cost issue, defendants may seek to exploit it. Defense counsel may remove cases that they know do not belong in federal court, simply to force the resource-constrained plaintiff's team to spend time and money contesting the removal. At some point, these mounting litigation costs may lead the plaintiff and his counsel to opt for settling the case for a fraction of its full value, or even to abandon the case altogether.

At the extreme, defendants may even repeatedly force litigation costs on the same plaintiff repeatedly. In one case in Mississippi, for example, the defendant life insurance company wrongfully removed the case to federal court four times, only to have it sent back to state court each time. The defendant's fourth effort at removal came after the trial had already begun in state court. Though clearly improper, it had the effect of derailing the state court proceedings: A court can't keep trying a case that has been automatically transferred to another court.

Another case in Louisiana featured an attempt by an insurance company to remove a case even though it had not been named as a defendant. (The company may have been trying to secure a litigation advantage for other similarly situated insurers that had been named as defendants.) It is hard to understand wrongful removals like these as anything other than knowing abuses of the litigation process. But the plaintiff had to expend funds, and waste time, challenging the abuse.

Systematic Evidence That Wrongful Removal is a Growing Problem

Admittedly, isolated anecdotes like these may not provide a reliable picture of litigation trends overall. Too often, the tort reform debate is driven by a few stories of outlandish litigation abuse, as though that is enough to justify overhauling the entire system. It isn't.

Here, however, the anecdotes are confirmed by system-wide empirical data. Professor Theodore Eisenberg and I have been studying nationwide trends in removal and remand, and have also looked extensively at the key tort jurisdiction of Alabama.

Here's a summary of what we've found so far:

First, over the last decade, tort filings in state court are down. Across 17 states between 1993 and 2002, the total number of tort filings decreased 5%; across 35 states during that same period, tort filings decreased 4%.

Second, despite the shrinking pool of state-court filings, diversity-based tort removals from state to federal court have not commensurately declined over the last decade. One would think fewer cases means fewer removals. Instead, defendants are removing nearly the same number of diversity tort cases despite shrinking state court tort dockets.

Third, cases removed from state to federal court account for an increasing proportion of the federal courts' docket. Indeed, the most recent data suggest that about 30% of diversity cases now come to federal court via removal, as opposed to being filed in federal court originally. That's about a one-third increase in the last decade.

Finally, and most importantly, remand rates are increasing over time. (A court "remands" a case when it sends it back to the state court in which it was initially filed.) In recent years, more than 20% of diversity tort cases removed to federal court were remanded to state court. That's a substantial increase over the remand rate in the early 1990s.

This last point is critical. It establishes that just as more and more of the federal courts' docket is taken up with cases removed from state court, more and more of those removals are wrongful.

Strong Evidence of Removal Abuse in Alabama

The numbers are even more stark in Alabama--a jurisdiction that, ironically, tort reform advocates often associate with abusive tactics by plaintiffs' lawyers. It turns out that Alabama appears to be the site for substantial abuse by defendants and their lawyers.

The remand rate in Alabama has steadily increased over the last two decades, and substantially exceeds the national average. In the late 1990s, upwards of 60% of diversity removals to two federal district courts in Alabama were subsequently sent back to state court. Simply put, a huge proportion of the Alabama federal courts' docket is taken up with cases wrongfully removed from state court.

One might object, however, that the fact that a removal is ultimately deemed improper does not necessarily mean the defendant knowingly engaged in wrongful removal. An erroneous removal might simply be an honest mistake--attributable, perhaps, to complexity and confusion in the law. And to the extent the law is too complicated to yield accurate predictions, aren't defense counsel entitled, in zealously representing their clients, to err on the side of removal?

This objection makes some sense in theory, and undoubtedly some erroneous removals are honest mistakes. The data from Alabama, however, provide reason to doubt that this is the primary explanation in most cases.

If it were true that everyone was proceeding in good faith in the face of legal confusion, then we might expect an error rate in plaintiffs' remand motions that is comparable to defendants' rate of erroneous removal. That is, if uncertainty about the law led each side to err on the side of over-protecting its interests, then plaintiffs should have a high rate of unsuccessful remand motions just as Alabama defendants engage in a high rate of erroneous removal. Indeed, we might expect plaintiffs to seek remands in virtually every removed case.

But we don't see that, at least not in the Alabama districts that Professor Eisenberg and I have examined thus far. To the contrary--plaintiffs appear to be quite adept at distinguishing between legitimate and illegitimate removals. Indeed, in one Alabama federal district, when plaintiffs seek remand, the court finds the removal to have been erroneous in about 80% of the cases.

Unless one hypothesizes an Alabama plaintiffs' bar that is far more legally sophisticated than their counterparts on the defense side, it seems likely that defense counsel also can distinguish fairly well between legitimate and illegitimate removals, but seek illegitimate removals anyway. That is, it appears that the extremely high rate of erroneous removal in Alabama is best attributed to knowingly wrongful removal.

Wrongful Removal Costs Courts, and the Taxpayer

As I have discussed, wrongful removal can run up the cost of litigation in a way that threatens a plaintiff's ability to continue pursuing his case. Perhaps more significantly, however, wrongful removal also imposes a toll on the courts--whether or not the defendant knows it is wrongful.

When a state court case is removed to federal court only to be sent back to state court, the time and cost incurred in that detour is a deadweight loss to the judicial system. Federal court resources are expended on a case that had no business being there, and the parties ultimately end up back in state court having made no progress toward resolving the merits of their case.

At a time when budgetary constraints are a constant concern at virtually every level of government, responsible tort reform should take account of the costs imposed by wrongful removal.

What to Do?

How should tort reformers respond? A number of options may be worth considering.

First, Congress could provide for mandatory fee-shifting in the case of erroneous removal. That is, it could require defendants to pay the fees and costs that plaintiffs incur when they successfully contest an erroneous removal. The federal removal statute already permits such fee-shifting as a matter of discretion, but it might be worth making the provision mandatory, or at least formalizing a presumption in favor of fee-shifting. There is some appeal to this idea: if a defendant removes a case only to see it ultimately sent back to state court where it began, shouldn't the defendant pay for the detour?

Second, Congress and/or the federal courts themselves could provide for more robust sanctions to be levied against defense counsel who engage in egregiously abusive removal. Rule 11 of the Federal Rules of Civil Procedure already provides a background sanctions regime in federal litigation generally, but it might be worth considering a more aggressive removal-specific protocol.

Finally, even if neither these nor any other affirmative reforms are implemented, it bears emphasizing where we are in the tort reform debate. Far from addressing the problem of wrongful removal, much of the defendant-friendly legislation currently being proposed would make it easier to remove cases from state to federal court. If nothing else, the emerging data on systematic removal abuse suggests that Congress should think twice before amending the law to increase the opportunities for such abuse.

Wrongful removal appears to be a growing phenomenon. Better that Congress do nothing than enact legislation exacerbating the problem.