Opinion
Case Number C 09-1186 JF (PVT).
June 16, 2009
ORDER (1) GRANTING MOTION TO REMAND AND (2) TERMINATING MOTION TO DISMISS AS MOOT
This disposition is not designated for publication in the official reports.
[re: docket nos. 5, 8, 12]
Pursuant to 28 U.S.C. § 1447(c), the People of the State of California ("the People") move to remand the instant case to the Santa Cruz Superior Court on the ground that the parties are not diverse. Defendants oppose the motion, arguing that diversity jurisdiction exists because the real party in interest is the County of Santa Cruz. Also before the Court is a motion by Defendants to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). The Court has considered the moving and responding papers filed by the parties, the oral arguments presented at the hearing on May 29, 2009, and the supplemental briefing submitted following the hearing. For the reasons set forth below, the motion to remand will be granted, and the motion to dismiss will be terminated as moot.
I. BACKGROUND
This action arises from an ongoing dispute over the legality of various advertisements for Defendants' products. All named Defendants are either Ohio corporations or individual citizens of Ohio. See Compl. ¶¶ 6-9, 19-22. The operative complaint alleges that since March 2006, Defendants have marketed and sold coin holders by advertising that a purchaser will receive "free" coins with the purchase of any coin holder. Id. ¶ 23. It is further alleged that the coin holder is never sold without the free coins, which obscures the question of whether the coins are in fact free. Id.
On February 10, 2009, the People filed the instant action, alleging that Defendants' advertising methods violate certain provisions of California's Unfair Competition Law ("UCL"), Cal. Bus. Prof. Code § 17200 et seq.; the California False Advertising Law ("FAL"), Cal. Bus. Prof. Code § 17500 et seq., and § 5 of the Federal Trade Commission ("FTC") Act, 15 U.S.C. § 45. The complaint seeks injunctive relief and civil penalties pursuant to §§ 17536 and 17537. Compl. ¶ 33. The prayer also contains a request for restitution. Id. at 11.
Defendants subsequently removed the action pursuant to 28 U.S.C. § 1441(a), asserting that this Court has original jurisdiction under 28 U.S.C. § 1332 based on diversity of citizenship among the "real" parties in interest and the total amount in controversy. Defendants assert that removal was proper — and that the Court should deny the instant motion — because the real party in interest is the County of Santa Cruz, a citizen of California for purposes of diversity jurisdiction. In response, the People contend that the UCL confers a right upon local district attorneys to bring actions on behalf of the state in its sovereign capacity, and the state is not a "citizen" within the meaning of § 1332.
II. LEGAL STANDARD
Pursuant to 28 U.S.C. § 1441(a), a defendant may remove an action to federal court if the plaintiff could have filed the action in federal court initially. 28 U.S.C. § 1441(a). See also Ethridge v. Harbor House Rest., 861 F.2d 1389, 1393 (9th Cir. 1988) ("removal of a case from state to federal court in the first instance is a question of federal subject matter jurisdiction."). In the Ninth Circuit, there is a "strong presumption" against removal and "the defendant always has the burden of establishing that removal is proper." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992) (citation omitted). A district court must "strictly construe the removal statute against removal jurisdiction." Id. "Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance." Id.III. DISCUSSION
In order to establish federal diversity jurisdiction, a plaintiff must show that a dispute has arisen between citizens of different states and that the sum or value in controversy exceeds $75,000. 28 U.S.C. § 1332(a). To determine if diversity jurisdiction exists, courts must examine the citizenship of the real parties to the controversy, not the citizenship of nominal or formal parties. Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 460-461 (1980). "[A] State is not a `citizen' for purposes of the diversity jurisdiction." Moor v. Alameda County, 411 U.S. 693, 717 (1973). See also Dep't of Fair Employment Hous. ("DFEH") v. Lucent Techs., No. C 07-3747, 2007 WL 2947421, at *1 (N.D. Cal. Oct. 9, 2007) ("The State of California is not a `citizen' for diversity jurisdiction purposes under 28 U.S.C. § 1332."); California v. Steelcase, Inc., 792 F. Supp. 84, 86 (C.D. Cal. 1992), overruled on other grounds by California v. Dynegy, Inc., 375 F.3d 831, 849 (9th Cir. 2004) ("for diversity purposes, a state is not a citizen of itself. Therefore, it cannot sue or be sued in a diversity action."). In contrast, "a political subdivision of a State, unless it is simply `the arm or alter ego of the State,' is a citizen of the State for diversity purposes." Moor, 411 U.S. at 717.The People contend that a civil suit under the UCL and FAL may be brought by a district attorney on behalf of the state because such an action essentially is a law enforcement action designed to protect the public as a whole. See People v. Pac. Land Research Co., 20 Cal. 3d 10, 17 (1977) ("An action filed by the People seeking injunctive relief and civil penalties is fundamentally a law enforcement action designed to protect the public and not to benefit private parties."). In response, Defendants contend that under Missouri, Kansas Texas Ry. Co. v. Hickman, 183 U.S. 53, 59-60 (1901) (" Missouri Railway"), a "general governmental interest" is insufficient for a state to be considered the real party in interest for purposes of the removal statute.
A. Statutory Right Under the UCL
The UCL expressly confers authority upon "the Attorney General or a district attorney or . . . a city attorney in a city and county" to bring an action "in the name of the people of the State of California." Cal. Bus. Prof. Code § 17204. See also Cal. Bus. Prof. Code § 17206(a) ("Any person who engages . . . in unfair competition shall be liable for a civil penalty . . . which shall be assessed and recovered in a civil action brought in the name of the people of the State of California by the Attorney General, by any district attorney . . ."). Accordingly, the plain language of the statute appears to authorize a district attorney — in this case Santa Cruz County District Attorney Bob Lee — to bring a consumer protection action on behalf of the State of California. See also Steelcase Inc., 792 F. Supp. at 86 ("The People are the same party as the State of California (State) and the district attorney has the authority to bind the State.") (citing People v. Mendez, 234 Cal. App. 3d 1773, 1783 (1991)).
Relevant case law supports this conclusion. In California v. Check `N Go of California, No. C 07-02789, 2007 WL 2406888 (N.D. Cal. Aug. 20, 2007), the city attorney for the City of San Francisco filed an action on behalf of the State of California against several payday lenders, alleging violations of several state statutes including the UCL. Id. at *2. After removing the action from state court, the defendants argued that diversity jurisdiction existed because the real party in interest was the City of San Francisco rather than the State of California. See id. at *6. The district court rejected this contention, holding that the UCL expressly authorizes the city attorney to bring a claim on behalf of California. Id. at *7. In addition, the district court found the issue of whether the City was an arm of the state or a separate entity to be irrelevant because it was the city attorney, and not the City itself, who filed the action. See id.
In Steelcase, the district attorney for the County of Los Angeles brought an action alleging causes of action under the UCL and California's Cartwright Act. 792 F. Supp. at 85. In its opposition to the People's motion to remand, the defendant argued that the County was the real party in interest because it was the actual purchaser of the products at issue. Id. The district court rejected this argument, noting that the express language of the UCL confers authority upon the district attorney to bring a claim on behalf of the People. Id. In addition, the court concluded that the requested remedies — civil penalties and injunctive relief — were characteristic of a law enforcement action brought on behalf of the general public. See id. at 86 ("Civil penalties are not damages recovered for the benefit of private parties; they are more akin to a criminal enforcement action and are brought in the public interest."). See also State v. Altus Fin., S.A., 36 Cal. 4th 1284, 1308 (2005) ("civil penalties under the UCL" have a "public, penal objective" and "when the Attorney General seeks an injunction that will protect the public and prevent defendants from committing future unlawful acts, he is fulfilling primarily a law enforcement function.").
B. Applicability of Missouri Railway
Defendants argue that Steelcase and Check `N Go were wrongly decided because neither case analyzed properly the respective interests of the state and the local entity, and — more importantly — failed to follow or even discuss Missouri Railway. Opp. at 10. In Missouri Railway, the state board of railroad commissioners brought an action against a railroad for charging excess tolls for passage over a particular bridge in Missouri. See 183 U.S. at 57. The Supreme Court was presented with the issue of whether the board of commissioners, which was authorized by statute to bring actions in the name of the state against any railroad in violation of applicable state law, was an arm of the state for purposes of removal. See id. at 54-56. Under the statute, any "forfeitures and penalties" recovered were to be paid into the school fund of the county in which the action was brought. Id.
The Supreme Court noted that from the face of the record before it, removal appeared to have been improper because the action had been brought by the state. Missouri Railway, 183 U.S. at 58. However, the Court observed that the pertinent inquiry for purposes of diversity jurisdiction is the identity of the "real" parties in interest. See id. at 58. Holding that "the state is such real party when the relief sought is that which inures to it alone, and in its favor the judgment or decree, if for the plaintiff, will effectively operate," id. at 59, the Court concluded that the real parties in interest were the people who used the railroad bridge. Id. at 59-60 ("The parties interested are the railway company, on the one hand, and they who use the bridge, on the other; the one interested to have the charges maintained as they have been, the others to have them reduced in compliance with the order of the commissioners. They are the real parties in interest, and in respect to whom the decree will effectively operate."). The Court reasoned that any benefit to the state in the form of payments to the school fund or potential costs to the state in the event of an adverse judgment were "incidental" in nature and thus did not affect the analysis. Id. at 61 ("the voluntary assumption by the state of the costs in some contingencies of the litigation, or the indirect and remote pecuniary results which may follow from a disobedience of the orders of the court, do not make it the party to whom alone the relief sought inures, and in whose favor a decree for the plaintiff will effectively operate.").
Defendants argue that the remedies sought in the instant case similarly will not inure to the state alone, and thus it is the County of Santa Cruz that stands to derive actual benefit from the instant action. However, the implications of a literal application of Missouri Railway have been considered — and rejected — in multiple district court decisions. In California v. Time Warner, Inc, No. CV 08-4446, 2008 WL 4291435 (C.D. Cal. Sept. 17, 2008), attorneys from the City of Los Angeles brought UCL and FAL claims on behalf of the State of California with respect to Time Warner's acquisition of competitor cable and internet providers. See id. at *1-2. The district court acknowledged explicitly the holdings in Moor and Missouri Railway, but it also noted that " Missouri Railway has been subsequently limited and distinguished." Id. at *2 (citing State of West Virginia v. Morgan Stanley Co., 747 F. Supp. 332, 337 (S.D. W. Va. 1990)). In particular, the district court concluded that a state was a party to litigation so long as it has some real interest, "pecuniary or otherwise." Id. The court pointed out that civil penalties may be recovered under the UCL only when the action is brought on behalf of the People, and such funds may be used only for enforcement of consumer protection laws and not for a locality's general fund. See id. ("The UCL . . . requires that the `funds shall be for the exclusive use by the Attorney General, the district attorney, the county counsel, and the city attorney for the enforcement of consumer protection laws.'") (quoting Cal. Bus. Prof. Code § 17206(c)). Noting that "[t]his court is compelled to remand when there is any doubt as to the right of removal," id. at *3, the district court remanded the action, concluding that "the State's interest in the enforcement of its consumer protection laws establishes enough of an interest to create doubt that the real party of interest is only the City of Los Angeles." Id.
According to Morgan Stanley, "[a] narrow reading of Missouri would suggest that the state is the real party in interest for diversity purposes only when the relief sought inures to the benefit of the state alone. However, subsequent cases have not been so limiting. So long as the state is more than a nominal or formal party and has a real interest, pecuniary or otherwise, in the outcome of the litigation, it has been held that the State is a real party to the controversy and removal on diversity grounds is improper." 747 F. Supp. at 338.
Other district courts similarly have limited Missouri Railway. In Illinois v. LiveDeal, Inc., No. 08-3287, 2009 WL 383434 (C.D. Ill. Feb. 12, 2009), the state attorney general brought an action on behalf of consumers for violation of a state consumer protection statute and sought injunctive relief, restitution to aggrieved consumers, and civil penalties. Id. at *2. On a motion to remand, the district court was presented with the issue of "whether the State of Illinois is the real party in interest when, in addition to injunctive relief and civil fines, it also seeks restitution for individual citizens." Id. at *1. The court granted the motion, expressly rejecting the defendants' argument that under Missouri Railway a state is the real party only when the benefits of the action inure to the state alone, and concluding that the appropriate test is whether a state has a "substantial stake in the outcome of the suit." Id. at *3 (citation omitted). The court found that the state did have such an interest, noting that the request for "wide-ranging injunctive relief . . . weigh[ed] heavily in favor of finding a state interest," and that the amount of civil penalties sought greatly would outweigh any restitution paid to individual consumers. Id.
In Wisconsin v. Abbott Laboratories, 341 F. Supp. 2d 1057 (W.D. Wis. 2004), the attorney general filed an action on behalf of the state, its citizens, and certain private Wisconsin-based organizations. Id. at 1059. The defendants argued that pursuant to Missouri Railway the claims brought on behalf of the state and those brought by private citizens and organizations should be severed from each other, with the latter claims remaining in federal court. Id. at 1061-63. While acknowledging that the state "appear[ed] to be wearing two hats by requesting relief for itself and for private parties," the district court nonetheless found that Missouri Railway did not compel it to retain jurisdiction over any of the claims for relief because the state had a "substantial stake" in the entire action. Id. at 1063 ("lower courts have not strictly construed the language in Missouri, but instead have focused on the state's interest, monetary or otherwise, in the context of the entire case.").
In the instant action, the State of California plainly has a substantial interest in the outcome of the instant litigation. If the People prevail, the injunctive remedies they obtain will provide a benefit to all of the citizens of the state. In addition, the potential civil penalties appear to outweigh any restitution, as each individual penalty is an order of magnitude greater than the individual purchase price of Defendants' product. When these practical considerations are coupled with the unambiguous language of the statute and the consistent view of the California courts as to the nature of a UCL action, it is apparent that remand is appropriate.
The additional authorities relied upon by Defendants are distinguishable. In Lucent, the DFEH brought an action on behalf of a specific individual who allegedly had been subject to employment discrimination. 2007 WL 2947421, at *1. Noting that pursuant to Missouri Railway the "central factor in determining the real party in interest is which party stands to receive the benefit of the requested relief," the court denied the agency's motion to remand. Id. at *2. The district court based its decision to deny remand on the fact that an individual, rather than the DFEH or the state, would be the direct beneficiary of a favorable resolution. Id. ("Any monetary damages such as salary compensation, emotional distress damages or punitive damages would be paid to [the aggrieved person] individually.). Under these circumstances, the court found that "DFEH's argument that it is the real party in interest based on its interest in protecting its citizens from unlawful employment discrimination and enforcing its police powers is too broad. A State's general governmental interest in protecting the welfare of all its citizens is not sufficient to make it the real party in interest." Id.
In California v. M P Investments, 213 F. Supp. 2d 1208 (E.D. Cal. 2002), the district court was presented with a question of whether a city attorney could bring a claim on behalf of the state pursuant to Cal. Code. Proc. § 731, an anti-nuisance statute that expressly authorizes a city attorney to bring an action on behalf of the state. Id. at 1212. However, the State and the Attorney General expressly objected to the suit being brought on behalf of the People, and the city attorney conceded that he was acting on behalf of the locality rather than the state. Id. at 1213-14. See also Time Warner, 2008 WL 4291435, at *2 n. 1.
III. ORDER
"By enacting UCL and FAL, and expressly limiting any civil penalties to the enforcement of consumer protection laws, the State of California has made it an interest of the State to enforce compliance with consumer protection laws." Time Warner, 2008 WL 4291435, at *2. For the reasons discussed above, this Court finds Time Warner persuasive in terms of both its interpretation of Missouri Railway and the ultimate result. If Defendants' position were adopted, almost any UCL action brought by the state against a foreign corporation or citizen would be removable to federal court. Defendants' allegations of alleged bad faith and misconduct by the Santa Cruz District Attorney's Office in bringing the instant action do not overcome the strong presumption in favor of remand. To the extent that the circumstances of this case present a relatively close question, any doubt with respect to jurisdiction must be resolved in favor of the non-removing party. See Gaus, 980 F.2d at 566; Time Warner, 2008 WL 4291435, at *3.
Good cause therefor appearing, the People's motion for remand is GRANTED, and Defendants' motion to dismiss is TERMINATED as moot. The People's request for costs and fees incurred in connection with bringing the instant motion will be DENIED. The action is hereby remanded to the Santa Cruz Superior Court for lack of jurisdiction. The Clerk of the Court shall close the file.
Because removal was not unreasonable, an award of costs and fees is not appropriate. See Time Warner, 2008 WL 4291435, at *3; Check `N Go, 2007 WL 2406888, at *7.
IT IS SO ORDERED.