Diversity: Mend It, Don’t End It: A Reply to Michael Wallace

Paul Clement*

"Abolish diversity," has long been a rallying cry among some Washington conservatives. The object of their outrage is not the stated justification for some modern race-based quota, but a basis for federal-court jurisdiction as old as the nation. Despite the historical pedigree of federal diversity jurisdiction, many conservatives have argued that it has outlived its usefulness -- that state courts enjoy comparative expertise in adjudicating claims arising under state law, and that federal courts should be reserved for federal questions. What is more, it is argued that the elimination of diversity jurisdiction would have the salutary benefit of reducing the caseload of federal judges. While skeptics of the value of diversity jurisdiction have not yet succeeded in securing its elimination, on several occasions Congress has raised the amount in controversy requirement.

In the face of this general skepticism of diversity jurisdiction, Michael Wallace, in the Fall issue of this newsletter, offered an intriguing proposal that, far from abandoning diversity jurisdiction, warmly embraced it and proposed its expansion. Specifically, Mr. Wallace suggested dropping the requirement of complete diversity (no defendant may share the citizenship of any plaintiff), which has long been required by statute, see Strawbridge v. Curtiss, 2 L. Ed. 435 (1806), but never mandated by the Constitution, see State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523 (1967). Instead, Wallace would require only minimal diversity (federal jurisdiction as long as any defendant's citizenship differs from that of any plaintiff’s) in cases of removal. Diversity jurisdiction, therefore, is expanded under Wallace's proposal when the out-of-state defendant seeks removal, so that the plaintiff cannot choose to sue in federal court in the first instance in the absence of complete diversity. This is a substantial expansion of federal jurisdiction: Diversity jurisdiction would be available to any defendant sued outside its home state as long as the existing amount in controversy requirement ($75,000) was satisfied.

In defending the proposed move from complete diversity to minimal diversity, Wallace observes that the behavior of both plaintiffs and defendants suggests that plaintiffs enjoy perceived benefits in at least some state courts in some cases. The tendencies of plaintiffs to go to great lengths to join in-state co-defendants and of out-of-state defendants to concoct innovative theories of removal are otherwise difficult to explain. Wallace then points out that the Constitution authorizes diversity jurisdiction precisely to remedy the perception or reality that state courts may discriminate against out-of-state defendants. Moving away from the statutory complete diversity requirement, in Wallace's view, would further the purposes of diversity jurisdiction by providing more out-of-state defendants with a federal forum. Wallace goes further in arguing that to the extent that the perception that out-of-state defendants receive unfavorable treatment in state courts reflects a reality of discrimination, rather than just its appearance, expanding diversity jurisdiction also would accomplish procedurally some of the goals that tort reform proposals attempt to achieve substantively.

Wallace is certainly on to something when he highlights the unfairness of denying a federal forum to an out-of-state defendant solely because of the presence of an in-state co-defendant who was joined precisely to deny the out-of-state defendant the option of removal. Such situations suggest the weakness of the complete diversity requirement as the sole criterion for federal diversity jurisdiction. If as a policy matter we believe that out-of-state defendants deserve the option of a federal forum, it is difficult to understand why they should lose that option because of the presence of another party who just happens to be on the same side of the "v." This is especially true in the many cases in which the in-state co-defendant may well have a greater community of interest with the in-state plaintiff than with the out-of-state defendant. Certainly the presence of a nominal in-state defendant does little to ameliorate any perception of unfairness on the part of the out-of-state defendant. Nonetheless, with the complete diversity requirement, the in-state defendant's presence consigns the out-of-state defendant to life in state court.

Wallace's recommendation, however, does have one major, perhaps fatal, flaw: By removing the complete diversity requirement without altering the amount in controversy, Wallace's proposal would vastly expand the size of the federal courts' diversity caseload. At a time when many people from all sides of the political debate are concerned about the expanding jurisdiction and workload of federal courts, a proposal to expand diversity jurisdiction may well be a non-starter. Indeed, a number of people would grant Wallace's premise that the complete diversity requirement arbitrarily discriminates against certain out-of-state defendants, but draw the opposite conclusion. Conceding that it makes little sense to treat an out-of-state defendant differently based solely on the presence or absence of a nominal in-state defendant, they would argue that the proper way to ensure equal treatment is to abandon diversity jurisdiction altogether. They would no doubt point to the resulting decline in federal court caseload as the main advantage of such a proposal.

Between these two extremes, there is another option that would accomplish many of the same objectives as the Wallace proposal, but would leave the current size of the federal courts' diversity docket unchanged. This proposal would involve simultaneously increasing the current amount in controversy requirement from its current $75,000 level to say $250,000, and then imposing a new higher amount in controversy level of say $5,000,000, beyond which the traditional requirement of complete diversity would be waived. The numbers could be adjusted to ensure that the number of diversity suits stays constant (or the two amount in controversy requirements could be adjusted to increase or decrease the number of diversity suits).

Lifting the complete diversity requirement only for suits above a relatively high dollar amount has two distinct advantages over simply moving to a minimal diversity requirement. First, and most obviously, it does not add to the caseload of the federal courts. What is more, it concentrates limited federal court resources on the types of cases out-of-state defendants fear the most. Relative to the status quo, this proposal substitutes cases with an in-state co-defendant with more than $5,000,000 on the line for cases with complete diversity and less than $250,000 at risk. I would venture to guess that given the Hobson's choice, most defendants would rather be in the latter situation and would choose to remove the former to federal court if they could only remove one. Accordingly, providing the added assurance of a federal forum in high stakes, minimal diversity cases better allocates scarce federal judicial resources.

But even beyond holding the line on the expansion of the federal court workload and concentrating federal jurisdiction where it is needed (or at least desired) the most, there is an additional benefit to the adoption of a high upper limit beyond which the complete diversity requirement is relaxed. Mr. Wallace markets his proposal as achieving a measure of tort reform. However, for this claimed benefit to hold true, it is not enough for out-of-state defendants to harbor the perception that they are disadvantaged in state court. There must be a reality of discrimination as well as a perception. There may well be such a reality, and its existence would certainly vindicate the framers' provision of federal jurisdiction in cases of diversity of citizenship. Moreover, as Wallace points out, it shows no disrespect for the vast majority of fair and efficient state courts to claim, as he does, that certain plaintiffs are adept at finding courts that are neither. But nonetheless, premising a policy on the admission of a reality of disparate treatment may prove difficult, particularly for many conservatives who have argued that there is a fundamental parity in the quality of justice in state and federal courts in other contexts, such as habeas review.

To the extent there is actual discrimination against out-of-state defendants in state court, the proposed two-tiered diversity structure and Wallace's proposal both provide relief (although Wallace's proposal would provide relief to more defendants because it would put more cases in federal court). The key point is that the two-tiered proposal outlined above would achieve a degree of tort reform even if there is only a perception of discrimination against out-of-state defendants in state court.

As long as some plaintiffs who perceive an advantage to staying in state court tailor their complaint to limit the amount in controversy to avoid removal to federal court, the proposal will achieve some tort reform benefits whether or not the plaintiffs' perceived advantages of staying out of federal court turn out to be true in reality. Just as some plaintiffs today go to considerable lengths to name an in-state co-defendant to ensure that their complaint is "removal-proof," it seems likely that some plaintiffs would take the additional step of limiting the amount sought in their pleading to avoid the possibility of removal.

To be sure, only a relatively small number of plaintiffs will tailor their complaints to avoid the possibility of removal. The legitimate amount in controversy would need to be in the ballpark of the upper limit, and there would need to be an in-state defendant involved in the case before the upper limit would even enter a plaintiff's calculus. However, there are reported cases of plaintiffs seeking to recover amounts less than their actual damages to avoid much lower amount in controversy requirements. See, e.g., Rocket Oil & Gas Co. v. Arkansas Louisiana Gas Co., 435 F. Supp. 1306 (1977) (removal denied because plaintiff sought judgment for $9, 858.13); Erwin v. Allied Van Lines, 239 F. Supp. 144 (1965) (removal denied because plaintiff sought judgment for exactly $10,000). Moreover, the Supreme Court has had occasion to observe that: "If [the plaintiff] does not desire to try his case in the federal court he may resort to the expedient of suing for less than the jurisdiction amount, and though he would be justly entitled to more, the defendant cannot remove." St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 294 (1938). Accordingly, in light of the latitude that plaintiffs generally have in pleading for an amount of punitive damages, such an upper limit might work much like a punitive damages cap in some cases. This affect along with the perceived or actual benefit to out-of-state defendants involved in cases with an amount at risk in excess of the upper limit make this two-tiered proposal worth considering as a modest effort toward reform of the civil justice system.

Many of the advantages of this proposed two-tiered system could be achieved by waiving the requirement of complete diversity for all diversity suits while raising the amount in controversy requirement substantially, say to $2,500,000, to keep the total number of federal diversity suits constant. Such an approach would be closest to the spirit of Mr. Wallace's original proposal while still maintaining the current federal-court workload. However, favoring this proposal over the two-tiered system suggested above requires accepting unequivocally the arguments that the presence of an in-state defendant is irrelevant and that the amount in controversy is the only relevant criterion for allocating the scarce resource of federal diversity jurisdiction.

The two-tiered proposal, on the other hand, recognizes that both the presence of an in-state defendant and the amount in controversy are relevant factors. Rather than accepting that the presence of an in-state co-defendant is irrelevant to whether the out-of-state defendant will be the victim of real or perceived discrimination, the two-tiered approach recognizes that, all other factors being equal, the presence of an in-state co-defendant provides some protection to an out-of-state defendant.

Therefore, under the two-tiered proposal, if there is too little at stake, federal jurisdiction would be denied even in the absence of an in-state co-defendant (just as it is in the status quo). If there is a great deal at risk, federal jurisdiction would be provided without regard to the presence of an in-state defendant. But in between the extremes, the presence of an in-state co-defendant would be the deciding factor. It is certainly a close call as to whether a single high amount in controversy requirement for all suits with minimal diversity is preferable to the two-tiered approach. It strikes me that the notion that underlies the current statutory requirement of complete diversity is sufficiently valid to retain the complete diversity requirement as a factor in some cases, while eliminating it as a dispositive requirement in all. But both approaches have advantages over the status quo because they better allocate scarce judicial resources and provide a modest measure of tort reform to the extent that plaintiffs purposefully tailor their complaints to stay under the amount in controversy cap.

If nothing else, considering the proper role of the presence of in-state co-defendants and the amount in controversy can help continue the debate started by Mr. Wallace as to how to ration scarce federal judicial resources most efficiently. Many people may not feel strongly enough about the usefulness of diversity jurisdiction to expand it as significantly as Mr. Wallace proposes. But if diversity jurisdiction is going to be retained, it should certainly be reserved for those cases where it can provide the most comfort to out-of-state defendants. The complete diversity requirement is at best a blunt instrument for accomplishing that objective. And if the move away from the complete diversity requirement also would provide a measure of tort reform, then with respect to diversity jurisdiction, it is time to mend it, not end it.

*Paul Clement is Chief Counsel to the U.S. Senate Judiciary Subcommittee on the Constitution, Federalism & Property Rights. He also serves as Chairman of the newly formed Class Actions Subcommittee of the Federalist Society Litigation Practice Group. Michael Wallace’s piece, the subject of this reply, appears in Volume One of Litigation News (Fall 1997).


2001 The Federalist Society