Federal Civil Procedure

There are both advantages and disadvantages to being in federal court. The federal courts are more rigorous than the state courts. And a common perception is that the judges are smarter, that their thinking is more rigorous, and that their grasp of the law is better. In the federal courts, the judge will often have been a litigation partner at a large law firm, or a lawyer from the prestigious United States Attorneys Office.

In the state courts, some of the judges may not have had much litigation experience before going onto the bench. They may have been a lawyer in one of the state agencies. So, as a general matter, if you have a complex piece of litigation, where you have the winning hand, you want to be in federal court.

So at the risk of making a generalization, the stronger player wants to be in federal court, where he hopes a less practiced adversary will run afoul of the many rules and rigor of the federal court. The weaker player wants to be in state court, which are less demanding and forgiving of mediocre lawyering.

The Plausibility Requirement. But there are some disadvantages even for the stronger player to federal court. It used to be that a complaint would survive a motion to dismiss if, under any conceivable set of facts to be proved at trial, the plaintiff could prevail.

But in 2007, the United States Supreme Court interpreted the Federal Rules of Civil Procedure to require that the complaint set forth enough facts to make it "plausible" that the plaintiff be entitled to the relief he seeks. That made it far harder for the plaintiff to survive a motion to dismiss. Sometimes, the plaintiff doesn't have the facts required to show plausibility because they are in the exclusive possession of the defendant.

Take, for example, the scienter element of a fraud claim. That element requires the plaintiff to allege facts showing that a misstatement of fact wasn't the result of negligence, but rather, of an intent to deceive. But often, the most telling facts showing scienter will be in the exclusive possession of the defendant, such as in internal e-mails.

So new "plausibility" requirement puts the plaintiff in a difficult catch-22: he can't start a law suit because he can't allege facts showing scienter, and, under normal circumstances, he can't take discovery to obtain those facts because he must first start a law suit and survive a motion to dismiss. So the "plausibility" requirement made it harder for the plaintiff to survive a motion to dismiss, and easier for a defendant to nip the new law suit in the bud.

Removal from the State Court to the Federal Court. Nonetheless, it remains true that the better lawyer wants to be in federal court, the weaker lawyer (or at least the lawyer with the weaker case) wants to be in state court. For that reason, big firms will typically transfer a law suit from state to federal court if the federal court has subject matter jurisdiction.

This process is called removing the case to federal court. It is done by filing a notice of removal in the federal court and state court. If the removal was defective for a technical reason, the plaintiff can move within thirty days to have the case sent back to state court-- a process called remanding. If the removal was improper because the federal court didn't have subject matter jurisdiction, there is no deadline for seeking remand.

The problem is that not every case can be brought in federal court. There are basically two bases for doing so: 1) what's called diversity jurisdiction, where the parties are citizens of different states, or a U.S. citizen and someone from a different country; and 2) what's called federal question jurisdiction, where the case raises question governed by a federal law.

Thus, in litigation arising out of international transactions, the case can often be brought in federal court based on diversity jurisdiction. And if the action arises out of some federal law, the case can be brought in federal court because a federal question is involved. Common federal causes of action include the racketeering statute, securities laws, trademark laws, antitrust law, and civil rights legislation.

The case shouldn't be brought in the federal courts unless the plaintiff is pretty sure that he can sustain federal jurisdiction. Frequently, a plaintiff will bring the action in federal court, spend the next year litigating whether the federal court has jurisdiction, have his complaint dismissed and have to start over again in state court. He hasn't just wasted a year: he's also spent a large part of his litigation budget. So if there's doubt about whether he can sustain federal jurisdiction, it's safer to start out in state court.

Removal and Remand

    Removal.  In some instances, where a case is initially brought in a state court, the defendant can remove it to a federal court if the case could have been brought in the federal court. The removal is accomplished by filing a notice of removal in the federal court and filing the notice in the state court.  But the removal must be undertaken within thirty days of when the defendant is served with legal process, and none of the defendants may be from the state where the action is brought.

    Remand.  If the removal has been improper, 28 U.S.C. § 1447 permits the defendant to move to send the case back to the state court.  It's called remanding  the case.  If the motion to remand is based on a technical defect, rather than a lack of subject matter jurisdiction in the federal court, the motion must be made within thirty days of the filing of the notice of removal.

    Remand Resulting from Joinder of Non-Diverse Defendants. Sometimes, after the case has been removed, a party adds a party that destroys the court's diversity jurisdiction.  It's called "joining" the party.  So, let's assume that, when the case was filed in state court, the plaintiff is from New York and the defendant is from Texas.  

    Defendant then removes the case to the federal court.  Defendant is able to do that because the federal court has diversity jurisdiction: all plaintiffs and all defendants are from different states.  But then, the plaintiff joins a New York defendant, which is a "non-diverse" defendant.

    As a result, the court lacks diversity subject matter jurisdiction because there is both a New York plaintiff as well as a New York defendant.  What happens now?

    The situation is governed by 28 U.S.C. § 1447(e), which grants the court discretion to either 1) deny the joinder of the new New York defendant, or 2) permit the joinder and remand the case back to the state courts.  In exercising that discretion the court considers 1) any delay in joining the non-diverse defendant, 2) prejudice to the defendants resulting from the joinder, 3) the likelihood that not permitting a joinder would result in similar  law suits taking place in both the federal and state courts, and 4) the plaintiff's motive in joining the non-diverse defendant.

    The fourth factor is focused on whether the plaintiff deliberately joined the non-diverse defendant to cause the case to be sent back to the state court.  Sometimes, there are tell-tale indications of such a motive.

    Suppose, for example, that a New York plaintiff sues a Texas insurance company claiming that the Texas insurance company engaged in a deceptive business practice.  Let's say that there are a dozen additional insurance companies engaged in the same practice, including one in New York.  And let's say the plaintiff adds the New York insurance company as a defendant, but no others.  

    Then, an inference arises that the New York plaintiff deliberately added a New York defendant for the express purpose of destroying the court's diversity jurisdiction.  After all, out of the dozen of additional insurance company, why did the New York plaintiff select a New York defendant to join?  Under such circumstances, it is likely that the court would deny the joinder, thereby preserving its diversity jurisdiction, and obviating the need to remand the case to the state court.

Under the Federal Rules of Civil Procedure, the action must be brought in the name of the real party in interest. It's important to bring the action in the name of the proper party, otherwise the first few months, and alot of lawyers fees, may be spent in correcting a mistake in naming the proper party.

But it's not always so obvious who the real party in interest is. For example, if a corporation is hurt, the real party in interest might appear to be the shareholders, who's ownership interest is diminished. But in fact, it's well established that the real party in interest is the corporation.

Similarly, if a pedestrian is hit by a motorist, it may seem that the real party in interest is his insurance carrier, who will be paying any judgment the pedestrian recovers. But in fact, the real party in interest is the motorist, not his insurance carrier.

It just goes to show that, with many legal questions, it isn't enough to answer the answer through an intellectual exercise. It's necessary to actually look at case law, because the answer provided by the law isn't necessarily the one that a layman would provide.

After the complaint is filed, a defendant may bring a motion to have it dismissed on various grounds-- including lack of subject matter jurisdiction, improper service, failure to state a claim, and lack of personal jurisdiction. Some of these terms are probably not familiar to lay persons.

For instance, lack of personal jurisdiction means that the defendant doesn't have sufficient contacts with the state to sue him there. To sue him in New York under such circumstances is considered a violation of his constitutional rights to due process.

In New York, a defendant may be sued here on any cause of action, provided that he has engaged in a systematic and continuous course of dealing with New York. For example, if he travels to New York regularly to take care of business needs there, that may constitute the kind of systematic and continuous contacts that renders him amenable to being sued in New York.

Quite often, after the complaint has been filed, the defendant makes a motion to dismiss the complaint for failing to state a claim. In so doing, the defendant is contending that, even if all the allegations in the complaint are true, the plaintiff is still not entitled to relief.

So for example, lets say that the complaint alleges a breach of contract that occurred more than six years ago. Under New York law, the statute of limitations for breach of contract is six years. Thus, even if the allegation of breach of contract were true, the complaint would be dismissed for failing to state a claim because the claim is barred by the statute of limitations.

It used to be that the complaint would withstand such a motion if it appeared that plaintiff could prove no set of facts in support of claim that would entitle him to relief. But in 2007, a conservative Supreme Court changed the rules.

Now, it must appear from the facts alleged by plaintiff that it is "plausible" that he's entitled to relief. Many cases are dismissed at the outset because the complaint failed to allege facts satisfying that standard. So from a plaintiff's point of view, it's now harder to get out of the starting gate; by the same token, from the defendant's point of view, it's now easier to prevent the plaintiff from getting out of the starting gate.

Admitting or Denying the Allegations of the Complaint. If the defendant doesn't succeed in having the complaint dismissed for failure to state, he must file an answer. The first part of the answer admits or denies the allegations of the complaint. A denial must be in good faith. That is, if the defendant denies an allegation that he knows to be true, both he and his lawyer can be forced to pay the plaintiff's attorneys fees.

Affirmative Defenses. The next part of the answer alleges what's called affirmative defenses. An affirmative defense contends, in essence, that, even if the complaint states a legally sufficient claim for relief, the plaintiff is nonetheless not entitled to recover because of certain facts and law.

Rule 8 of the Federal Rules of Civil Procedure lists eighteen of the better known affirmative defenses. One is "statute of limitations". What some people don't realize is that the law sets a deadline for suing under each of the causes of action provided by the law. For example, in New York, the statute of limitations for breach of contract is six years; the statute of limitations for negligence is three years. Thus, an affirmative defense of statute of limitations contends, in essence, that even if the complaint states a valid claim for relief, the law suit has been brought too late, and no relief can be granted.

I raise this for several reasons-- first, to illustrate the logic of an affirmative defense; second to elaborate on the statute of limitations affirmative defense. But most importantly to underscore this: DON'T SIT ON YOUR CAUSE OF ACTION.

As soon as you sense that something improper has taken place, raise it with a lawyer. See if you have a cause of action, and if so, note in your calendaring software the last date for asserting the claim. Every week, my phone rings with callers who tell me heart-breaking stories of having been victimized, leaving them with valuable causes of action. But in many cases, they've waited too long, and their claims are barred by the statute of limitations.

Here's a description of review of the other common affirmative defenses.

• Statute of Frauds. In some instances, a contract must be in writing to be enforceable. The statutes requiring a written contract are called statutes of fraud. Thus, where a plaintiff alleges that a contract was breached, the defendant may allege an affirmative defense that the circumstances were such that the contract was required to be in writing. This is referred to as a statute-of-frauds defense.
• Accord and Satisfaction. The essential elements of an accord and satisfaction are a dispute as to the amount due, and a knowing acceptance by the creditor of a lesser amount, such as the acceptance of a check in full settlement of a disputed claim.
• Duress.  A valid claim of duress has two components, (1) threats of an unlawful act by one party which (2) compels performance by the other party of an act which it had a legal right to abstain from performing. 
          However, there must be an objective reason for fear on the part of the person asserting the duress defense.  It isn't enough that the person has a subjective fear.  So, for example, if one party threatens the other with criminal prosecution for a particular crime, but the statue of limitations for that crime has already run, the threatened party has no objective basis for concern, and the duress defense should fail.
          Furthermore, the law requires that the threatened party promptly disaffirm the contract the contract.  That is, the threatened party must repudiate the contract as being unenforceable.  Failure to do so results in the threatened party affirming the contract, making the duress defense unavailable to him.
  
• Equitable Estoppel. A party invoking defense of equitable estoppel must establish: (1) conduct that amounts to false representation or concealment of material facts, or, at least, is calculated to convey impression that facts are otherwise than and inconsistent with, those that party subsequently seeks to assert; (2) intention, or at least expectation, that such conduct will be acted upon by other party; (3) and, in some situations, knowledge, actual or constructive, of real facts.
• Failure of Consideration. Failure of consideration exists wherever one who has promised to give some performance fails without his or her fault to receive in some material respect the agreed quid pro quo for that performance. Failure of consideration gives the disappointed party the right to rescind the contract.

The Counterclaim. The final part of the answer sets forth any claims the defendant has against the plaintiff. It's a truism that sometimes the best defense is a good offense.

That's certainly true in litigation. As a general rule, the plaintiff's claim and the defendant's counterclaim are tried together. So the strategic value of counterclaim is that it makes it impossible for the plaintiff to take his claim to trial without also permitting the defendant to take his counterclaim to trial. This will give most plaintiffs pause of thought, and gives the defendant a lever for bringing the plaintiff to the bargaining table for settlement talks.

Assuming that the plaintiff's complaint survives the motion to dismiss, the parties then enter into the most time consuming part of the litigation: discovery. Discovery is a period when the parties, for the most part, serve requests that the other side produce documents or answer questions called interrogatories. It's an opportunity to find out what kind of cards your adversary is holding.

In addition to seeking documents and serving interrogatories, the parties can require the other side to appear for a question-and-answer period called a deposition. The questions and answers are made under oath, and are transcribed by a stenographer. Ultimately, the testimony at the deposition may be read to the jury or judge at trial.

But that's only true of testimony by your adversary. For example, if the plaintiff makes statements helpful to himself, those statements can't be read to a jury. But if the defendant makes statements helpful to the plaintiff, the plaintiff can read those statements to a jury. So it's a mistake for the witness at the deposition, called the deponent, to run at the mouth in a misguided effort to advance his cause. His statements can't be read to the jury, and the chances are that he'll inadvertently say something helpful to the other side.

After the conclusion of discovery, the parties are permitted to make what's called a motion for summary judgment. The moving party asserts to the court that it is unnecessary to conduct a trial because the facts are not in dispute, and the moving party is entitled to judgment under the law. The other side then must submit evidence that raises a question of fact as to a relevant issue, such that it is necessary to proceed to trial.

Take for example, a fraud claim. The elements of such a claim are 1) the making of a statement, 2) the statement is false, 3) the statement is made with an intent to deceive, 4) the plaintiff reasonably relied on the statement and 5) the plaintiff suffered loss as a result of such reliance.

So, for example, an investor may contend that 1) the issuer of securities made statements about its profits in the prospectus, 2) the statements were false, 3) the issuer stood to make a large sum of money by selling the securities, thereby giving rise to an inference that the falsehoods were intentional, 4) the investor relied on the statements in buying the securities and 5) after the truth came out, the securities declined in value.

In opposing such a motion, the issuer may submit evidence, for example, suggesting that the investor knew the statements were false, and that he therefore did not reasonably rely on the statements. In such an event, the motion might be denied if the court finds that there is an issue about reliance that must be decided by a jury.