17 January 2006

The Supreme Court's Other Ruling

Both of today's U.S. Supreme Court decisions involved construing the meaning of federal statutes with federalism implications.

The main focus of media reports on today's rulings from the U.S. Supreme Court is on the Gonzales v. Oregon physician assisted suicide case. But, that case was really the narrower case and will have a smaller public impact. It concerned an Oregon law which permitted physicians to administer prescription drugs to cause the death of terminally ill patients in particular circumstances with the patient's consent. The Court made the narrow ruling (by a 6-3 vote) that the Oregon law was not pre-empted by the federal controlled substances act (whose main purposes is to criminalize certain kinds of recreational drug use), because unlike medical marijuana, the substances involved were not ones that had no medical purposes (as determined by the federal government), and once a medical purpose as acknowledged, the intent of the act was not to discern precisely what purposes were indeed legitimate medical purposes, a matter that the act did not intend to divest from the state. The Court did not rule on whether Congress could regulate physican assisted suicide nationally, only that it had not done so in a law primarily directed at the use of drugs like heroin and cocaine without a prescription. The ruling impacts the small number of people who elect physician assisted suicide in Oregon each year. I know of no other state that has such a law. Even if the Court had ruled against Oregon, the federal government's theory would not have prohibited doctors from providing patients with fatal doses of a non-prescription drug or substance (carbon monoxide, for example). And, the high court's ruling affirmed the decision of both the trial court and the 9th Circuit Court of Appeals in the case.

The other case decided, Wachovia Bank, N.A. v. Schmidt, in contrast, has far reaching implications in a large class of lawsuits involving interstate corporations. It also unanimoulsly reversed a lower court ruling, and has added a new layer of complication to the already intricate field of federal jurisdiction and venue, by finding both that the same word "location" means two very different things when used in two different parts of the same statute, and that a corporation's domicile is different for purposes of federal court jurisdiction on one hand, and state court jurisdiction and venue on the other. On the other hand, it does provide a clear rule of the road for purposes of resolving this preliminary matter, and, because it is a case involving the interpretation of how a statute has defined the matter, rather a question of the power granted to Congress to define federal court jurisdiction, Congress could elect to redefine the relevant terms in a manner contrary to the U.S. Supreme Court's resolution of the issue if it chooses to do so.

A little background is helpful in understanding what is at stake in this case. It is settled law that a state court has jurisdiction try hear any case involving a corporation which has a regular office for the transaction of business (a bank branch, for example) regarding any matter, because for this purpose a corporation is deemed to reside in every state where it has such an office. The suit in this case involved some South Carolina bank customers who sued Wachovia Bank in state court in South Carolina. But, the South Carolina courts would have had jurisdiction to try the case under the U.S. Constitution, even if none of the people bringing the suit had any connection at all with South Carolina and the events all happened outside of the State of South Carolina. A South Carolina Court might be constitutionally required to apply the substantive (but not procedural) law of another state in reaching its decision if there really was no connection between the facts and South Carolina, and a judge in South Carolina could voluntarily decide not to decide the case because it would be inconvenient for those involved (this is the doctrine of forum non conveniens), but it could choose to allow the suit to go forward is it wanted to do so.

The same rule applies to venue decisions in federal court involving national banks. Suppose that you bring a lawsuit against a federal bank with a branch in Colorado, alleging that it violated federal labor laws at its Rocky Mountain branches involving a number of Western States. No one disputes that this case goes in federal court, since it involves a lawsuit for violating a federal law, but the bank might argue that the lawsuit should be brought in Delaware, where its headquarters is located, rather than Colorado, for example. The bank would lose if it made this argument. For purposes of venue, as for purposes of state court jurisdiction, a federal bank is deemed to be domiciled in every state where it has a branch office.

But, there are two main ways to get into federal court. One is because the suit claims that a federal law was violated. The other is because the people bringing the lawsuit and the people sued do not have state residences in common. This second rational is called diversity jurisdiction. In a diversity case, federal procedural rules are applied, but state substantive law governs.

If the rule that a national bank is domiciled in every state where it has a principal office is adopted, as a lower court did in this case (arguing that Congress used the same word, "location", in the diversity jurisdiction statute for national banks as it did for the venue statute for national banks), interstate national banks would almost never be permitted to remove cases arising under state law from state court to federal court (something that was also true prior to 1994 when national banks were allowed to have offices in more than one state).

The bank in the Wachovia case, however, argued that for diversity jurisdiction purposes, a federal bank should be considered a citizen only of the state in which it is incorporated and the state in which it has its principal offices. Thus, a national bank with branch offices in all fifty states can remove all suits against it to federal court, except suits brought by citizens of one or two of those states. The issue hadn't come up until now because until 1994, national banks weren't allowed to have offices in more than one state.

The bank won.

This is not too stunning an opinion. The same rule already applied to all other corporations. But, it does cast a spotlight on a generally bad rule, 28 U.S.C. 1332(c)(1), which allows multi-state corporations to move purely intrastate transactions between the corporation's regular branch offices in a state and residents of that state, involving purely state law into federal court when the amount in dispute exceeds $75,000, in any state other than their state of incorporation (often Delaware) and the state where they have their principal offices (sometimes also in a small state such as South Dakota, which is not central to the day to day operations of the business itself).

This is, simply put, a waste of federal judicial resources on cases with a very weak federal interest (the usual justification for diversity jurisdiction is the out of state defendant's lack of familiarity with local court procedures, something almost never true in a case where a business has a branch in the state), an unfair privilege granted to interstate corporations, and an approach that has the undesirable effect of having case law in areas of state law that often involve interstate corporations developed primarily in federal courts, rather than the courts of the state whose law is applied. Congress should amend 28 U.S.C. 1332 to instead provide that for diversity purposes, a corporation is deemed to be domiciled in every state where it has an regular office, just as it is for purposes of state court jurisdiction.

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