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Employee’s FLSA counterclaim was not reasonable basis for employer to remove case to federal court

By Lorene D. Park, J.D.

Under settled Supreme Court precedent concerning the well-pleaded complaint rule, a federal counterclaim, even if compulsory, does not provide federal question jurisdiction, explained the Fifth Circuit. Based on this clear precedent, an employer that nonsuited its contract claim and removed the case to federal court based on an employee’s FLSA counterclaim lacked an objectively reasonable basis for removal. Consequently, a district court’s conclusion otherwise was vacated and the case remanded to determine if the employee was entitled to attorneys’ fees under 28 U.S.C. § 1447(c) (Renegade Swish, LLC v. Wright, May 22, 2017, Higginbotham, P.).

Removal based on federal counterclaim. After Renegade Swish sued a former employee in state court for breach of an employment agreement, the employee counterclaimed based on unpaid bonuses and FLSA violations. Soon after, the employer nonsuited its claims without prejudice and moved to realign the parties in the state court. Before that motion was decided, the employer removed the case to federal court, asserting that “the affirmative civil claims pending in the lawsuit arise under the Constitution, laws, or treaties of the United States.” Relying on a district court case, the employer argued that removal by a counter-defendant, after non-suiting its claim, is proper when the counterclaim raises a federal question. The employer also moved to have the federal court realign the parties.

Remand and attorneys’ fees. The employee moved for remand and sought attorneys’ fees pursuant to 28 U.S.C. § 1447(c). Citing the Supreme Court case of Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., she argued that the employer “lacked an objectively reasonable basis for seeking removal.” The employer countered that it was the “functional defendant.” The district court granted her motion, but then reversed course on reconsideration. The employee appealed, with the only question before the Fifth Circuit being whether the employer had an “objectively reasonable basis” for removal.

Well-pleaded complaint rule and federal counterclaims. Reversing, the appeals court reasoned: “Under 28 U.S.C. § 1331, district courts have original jurisdiction of suits involving federal questions. The Supreme Court has explained that ‘under the present statutory scheme as it has existed since 1887, a defendant may not remove a case to federal court unless the plaintiff’s complaint establishes that the case ‘arises under’ federal law.’”

The appeals court further explained that, in Holmes Group, the Supreme Court elaborated on the function of the well-pleaded complaint rule in the presence of federal question counterclaims. The High Court made clear that a federal counterclaim, even when compulsory, does not establish “arising under” jurisdiction. Subsequently, the Supreme Court reaffirmed this principal in Vaden v. Discover Bank.

Employer had no reasonable basis to remove. In the face of such precedent, concluded the appeals court, the employer in this case lacked an objectively reasonable basis to seek removal. The court noted that its decision was further supported by Section 1441, which grants removal power to “defendants.” Here, the employer was the plaintiff in the original case. While it argued that it was the “functional” defendant, it removed before the parties were realigned, and there was no guarantee they would have been realigned.

Moreover, the appeals court found no actual district court split as to whether removal is proper on the basis of federal counterclaims after a plaintiff nonsuits its claims, so it rejected the employer’s assertion that a split of authority provided a reasonable basis for removal.

Because the employer did not have an objectively reasonable basis for removal, the Fifth Circuit vacated that part of the district court’s order and remanded for the lower court to consider anew whether costs and fees would be warranted.