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Renegade Swish, L.L.C. v. Wright

United States Court of Appeals, Fifth Circuit

May 22, 2017

RENEGADE SWISH, L.L.C., Plaintiff - Appellee
EMILY A. WRIGHT, Defendant-Appellant

         Appeal from the United States District Court for the Northern District of Texas

          Before STEWART, Chief Judge, and HIGGINBOTHAM and COSTA, Circuit Judges.

          PATRICK E. HIGGINBOTHAM, Circuit Judge.

         The issue in this case is whether Plaintiff Renegade Swish had an objectively reasonable basis to remove to federal court. Finding that it did not, we VACATE that portion of the district court's order that concluded otherwise and REMAND for the district court to consider anew whether costs and fees are warranted.


         Plaintiff-Counter Defendant Renegade Swish, LLC ("Renegade Swish") employed Defendant-Counter Plaintiff Emily Wright ("Wright") between 2012 and 2015. In June of 2015, Renegade Swish sued Wright in state court for breach of employment agreement-related claims. Wright counterclaimed based on unpaid bonuses and Fair Labor Standards Act ("FLSA") violations. Soon after, Renegade Swish nonsuited its claims without prejudice and moved to realign the parties in the state court.

         Before the state court decided on the motion to realign, Renegade Swish noticed its removal to federal court, asserting that removal was proper because "the affirmative civil claims pending in the lawsuit arise under the Constitution, laws, or treaties of the United States." It argued that the district court case of Sadeghian v. City of Aubrey, Texas, [1] "illustrates that removal by a counter-defendant, after non-suiting its initial claim, is proper when the counterclaim asserted raises a federal question." In its notice of removal, Renegade Swish also re-urged that the parties be realigned. And upon being removed, Renegade Swish formally moved in federal court to realign the parties.

         After the case arrived in federal court, Wright moved for remand and attorney's fees. Citing the Supreme Court case of Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., [2] Wright argued that Renegade Swish "lacked an objectively reasonable basis for seeking removal" and requested costs pursuant to 28 U.S.C. § 1447(c). Renegade Swish countered that it was the "functional defendant."

         On February 22, 2016, the district court denied Renegade Swish's motion to realign, granted Wright's motion to remand, and awarded her costs and fees. It relied on Holmes Group to conclude that "Wright's FLSA counterclaim against Renegade Swish cannot serve as the basis for federal-question jurisdiction" and found that Holmes Group effectively overruled Sadeghian.[3]

         Renegade Swish moved for partial reconsideration of the district court's February 22 order under Federal Rule of Civil Procedure 59(e). Renegade Swish did not challenge the remand order; it only sought reconsideration of the award of costs and fees, arguing that it had an "objectively reasonable" basis to remove. It argued that there was a split in district court authority, that Holmes Group "did not definitively resolve the conflict, " and that there were no credible allegations of forum shopping or increased litigation costs.

         On June 23, 2016, in a one-page order, the district court granted Renegade Swish's motion to reconsider. The court reasoned that "in light of the split of district-court authority as to whether removal under the circumstances involved in this case was proper, Renegade Swish had an objectively reasonable basis for attempting to remove this action from state court." The court noted that "[t]o the extent that [it] previously concluded that [Holmes Group] 'effectively overrules' the decision in Sadeghian [], the Court now believes it may have painted with too broad a brush." The district court thus vacated the portion of its previous order assessing costs and fees against Renegade Swish.

         Wright now appeals.


         Renegade Swish removed this action to the district court based on federal question jurisdiction under 28 U.S.C. §§ 1331, 1441. This Court has jurisdiction under 28 U.S.C. § 1291. "Although this Court may not review a district court's remand for lack of subject matter jurisdiction, we may review the district court's award of attorney fees."[4]


         The district court originally awarded Wright fees under 28 U.S.C. § 1447(c), [5] but upon a motion for reconsideration, reversed course. The only question on appeal is whether Renegade Swish had an "objectively reasonable basis" for removal such that awarding fees to Wright was improper.[6] The parties dispute whether this Court reviews this question de novo or for abuse of discretion.

         This Court "review[s] the district court's decision not to award costs and attorney's fees under § 1447(c) for abuse of discretion."[7] Wright does not dispute this, but suggests that because she appeals an order decided pursuant to Rule 59(e) on a point of law, de novo review is appropriate, an argument not without merit.[8] Indeed, there is some uncertainty in our doctrine regarding the standard of review on the objective reasonableness of removal, [9] but we need not resolve it today. Even assuming arguendo that we review for abuse of discretion-a deferential standard[10] that here favors Renegade Swish- Renegade Swish plainly lacked an objectively reasonable basis to remove. In September 2015, when Renegade Smith removed, the Supreme Court had established that a defendant's counterclaim could not furnish federal question jurisdiction.

         Wright argues that Holmes Group stands for the principle that "a counterclaim asserting a federal question may not serve as the basis for removal of an action." She avers that Holmes Group is determinative, though also points to Fifth Circuit precedent to support her argument. Wright argues that Holmes Group overruled Sadeghian v. City of Aubrey, the first case upon which Renegade Swish relies, as did Blanco v. Equable Ascent Financial.[11]Wright further argues that Hickman v. Alpine Asset Management, [12] another case upon which Renegade Swish relies, is not controlling, did not incorporate Holmes Group, and is distinguishable on the basis of the parties consenting to removal and realignment.

         Renegade Swish responds that it was unable to receive a hearing and ruling on its motion to realign in the state court before the deadline for removal. It argues that federal court authority-namely Sadeghian- supported its decision to seek removal. Renegade Swish contends that because the law regarding its ability to remove was unsettled, it had "an objectively reasonable basis" to remove. It avers that Holmes Group is not so clearly controlling, and that a Western District of Missouri case, Hickman, supports its position.

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.

         Pursuant to 28 U.S.C. § 1331, [13] the 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."[14] The well-pleaded complaint rule is well-established:

[W]hether a case is one arising under the Constitution or a law or treaty of the United States, in the sense of the jurisdictional statute, ... must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose.[15]

         In Holmes Group, a case concerning the Federal Circuit's appellate jurisdiction, the Supreme Court elaborated on the function of the well-pleaded complaint rule in the presence of federal question counterclaims. After Plaintiff Holmes Group sued Defendant Vornado in federal district court for trade-dress infringement claims, Defendant Vornado "asserted a compulsory counterclaim alleging patent infringement."[16] The district court ruled in favor of the plaintiff, after which Defendant Vornado appealed-not to the Tenth Circuit, but to the Court of Appeals for the Federal Circuit.[17] Because "the Federal Circuit's jurisdiction is fixed with reference to that of the district court, and turns on whether the action arises under federal patent law[, ]"[18] the Supreme Court considered whether the Federal Circuit had "appellate jurisdiction over a case in which the complaint d[id] not allege a claim arising under federal patent law, but the answer contain[ed] a patent-law counterclaim."[19]

         The Court referred to its 28 U.S.C. § 1331 "arising under" jurisprudence. As the Court explained, the Federal Circuit's grant of jurisdiction is found in 28 U.S.C. § 1295.[20] In 2002, when Holmes Group was decided, § 1295 granted the Federal Circuit jurisdiction "of an appeal from a final decision of a district court of the United States . . . if the jurisdiction of that court was based, in whole or in part, on section 1338 of this title . . ."[21] Section 1338, in turn, granted district courts jurisdiction "of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks."[22] Because § 1338(a) "use[d] the same operative language as 28 U.S.C. § 1331, the statute conferring general federal-question jurisdiction . . . '[l]inguistic consistency' require[d] [the Court] to apply the same test to determine whether a case arises under § 1338(a) as under § 1331."[23]

         The Court began by noting that "[t]he well-pleaded-complaint rule has long governed whether a case 'arises under' federal law for purposes of § 1331."[24] Relevant here, the Court reminded that "[t]he well-pleaded-complaint rule also governs whether a case is removable from state to federal court pursuant to 28 U.S.C. § 1441(a)[.]"[25] Applying the rule, Holmes Group found "it [wa]s undisputed that petitioner's well-pleaded complaint did not assert any claim arising under federal patent law[, ]" and concluded that "[t]he Federal Circuit therefore erred in asserting jurisdiction over th[e] appeal."[26]

         The Court directly rejected Defendant Vornado's argument that a counterclaim could provide the basis for "arising under" jurisdiction, [27] noting that it had "declined to adopt proposals that 'the answer as well as the complaint ... be consulted before a determination [is] made whether the case 'ar[ises] under' federal law ... .'"[28] The Court further reasoned that "[a]llowing a counterclaim to establish 'arising under' jurisdiction would . . . contravene the longstanding policies underlying our precedents."[29]

         The Supreme Court reaffirmed this principle in Vaden v. Discover Bank.[30] In Vaden, the Court held that there was no federal question jurisdiction when a plaintiff's claims were based on state law and a defendant's counterclaims were preempted by federal law.[31] It explained, "[t]his Court's decision in Holmes Group . . . held that federal-question jurisdiction depends on the contents of a well-pleaded complaint, and may not be predicated on counterclaims."[32] The Vaden Court recounted that its ruling in Holmes Group was "emphatic[]"-"[w]ithout dissent, the Court held . . . that a federal counterclaim, even when compulsory, does not establish 'arising under' jurisdiction."[33] In short, Holmes Group and Vaden extinguished any possibility that a counterclaim can establish federal question jurisdiction. Our own case law is in agreement.[34] In the face of such precedent, Renegade Swish lacked an objectively reasonable basis to seek removal.

         Additionally, the text of 28 U.S.C. § 1441 itself counsels against Renegade Swish's ability to remove. Section 1441(a) grants the power to remove to "defendants, "[35] yet Renegade Swish is the original plaintiff. Although it argues it was the "functional" defendant after Wright asserted FLSA counterclaims, Renegade Swish removed before the parties were realigned-and there is no guarantee that they would have been. "Perhaps events could have unfolded differently, " but, just as the Court in Vaden refused to read into Section 4 of the Federal Arbitration Act, 28 U.S.C. § 1441 "does not invite federal courts to dream up counterfactuals when actual litigation has defined the parties' controversy."[36] Renegade Swish's "hypothesizing about the [realignment] that might have [occurred] does not provide a basis for federal-court jurisdiction."[37] This Court "evaluate[s] the objective merits of removal at the time of removal, "[38] and at the time of removal, Renegade Swish was the plaintiff. Furthermore, "allowing responsive pleadings by the defendant to establish 'arising under' jurisdiction would undermine the clarity and ease of administration of the well-pleaded-complaint doctrine, which serves as a 'quick ...

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