Is it Time to Repeal 28 U.S. Code Sec. 1332 - The Federal Diversity Jurisdiction Rule?

Simmons and Fletcher, P.C. Profile Image

Practice Areas: Personal Injury

Think back to the days of horse-drawn wagons when small rural towns were king.  You know, before there was mass transit, international airports and 75 mph highways. Before, there was the internet or even cell phones. In those days one of rural man’s many fears was the fear of getting sued in a foreign jurisdiction where the “local boy” lawyers and litigants worked on the same ranches with the jury and the judge and you knew no one. Your fear was that you would not get a fair shake in court. As it was often called, you could get “good-ole-boyed.”

To protect litigants from being “hometowned” or “good-ole-boyed,” the Federal government passed the Diversity Jurisdiction Rule. 28 U.S.Code Sec. 1332  in 1948. Under 28 U.S. Code Sec. 1332(a), a case may be removed from the local state court, where local judges are elected by local people to the bench for set terms, to federal court, where judges are appointed by the federal government for life. There are minimum requirements for a case to be removed.  Currently, the amount in controversy must be at least $75,000.00 and all defendants must “reside” in different states than the plaintiffs. If any defendant resides in the same state as any plaintiff, there cannot be diversity jurisdiction.

Why Removal to Federal Court is Important

The cost of pursuing a claim and the requirements therefore are very different in many state courts than they are in federal court. Take Texas for example. In Texas we can prove the authenticity of a persons medical bills by having the medical professional or their custodian sign an affidavit.  In federal court, you must send out a formal subpoena duces tecum and sworn questions presented and certified by a notary to obtain the same records.  The cost to obtain records by affidavit can often be thousands of dollars less than by subpoena duces tecum.  Second, there are specific rules requiring that Plaintiff produce expert reports for every expert who may testify along with a 3 year history of all cases the expert has testified in. This requirement does not exist in state court in Texas.  The time a treating physician must spend to do a detailed report discussing treatment and causation and prepare a list of all prior testimony can be extensive. As a result, they do often charge a hefty fee of several thousand dollars for their time preparing such.  This is in addition to the fees they charge to actually give testimony.

The Federal Diversity Jurisdiction Rule Vs Corporations

The problem with this rule is that, when created, they really did not anticipate how this law would affect multi-state corporations.  Under the law, a corporation is considered a resident of the state in which it is incorporated and/or where it’s principal offices are located. So no matter how many corporations are spread across the United States, the corporation is a foreigner in 48-49 of those states (depending upon whether the principal office is in the same state as where it is incorporated).

Take, for example, Walmart. Like many corporations, there are several entities that make up Walmart. It has subsidiaries and sister corporations lie Walmart Inc., Walmart Texas, Walmart Superstores, Inc.  and so forth.  But all of them have their incorporation in either Delaware (a very popular place to incorporate due to favorable tax laws) or Arkansas. Now, we all know there is a Walmart (or two, or ten) in almost every town in Texas.  But if you were sue Walmart for damages of over $75,000.00 due to a slip and fall due after an employee mopped the floors and forgot to put out a wet floor sign, Walmart would remove that case to Federal Court on grounds of Diversity.

Surely, our predecessors who created the diversity jurisdictional rules did not envision treating a corporation that is in almost every town across the State of Texas (and many other states) as a foreigner who needs the protection for the Federal Courts to avoid being “treated unfairly by local judges and juries.” Seriously, everyone knows what Walmart is but, how many people are even aware of what state Walmart is incorporated in?  This is clearly an unintended use of the federal diversity rules that needs to be rectified. Perhaps it is time to repeal this antiquated law.

From the Author: More Reading On Corporate Use Of The Diversity Rule

Swipe to view more