Chase v. Kia Motors America, Inc.

1

2

3

4 UNITED STATES DISTRICT COURT

5 NORTHERN DISTRICT OF CALIFORNIA

6

7 JOHN CHASE, et al., Case No. 22-cv-09082-JCS

8 Plaintiffs,

ORDER REMANDING SUA SPONTE

9 v. FOR LACK OF JURISDICTION

10 KIA MOTORS AMERICA, INC., et al.,

Defendants.

11

12 I. INTRODUCTION

13 Defendant Hyundai Capital America d/b/a Kia Finance (“Kia Finance”) removed this case

14 from the California Superior Court for the County of Alameda,1 asserting that a federal claim that

15 Plaintiffs added in arbitration while state court proceedings were stayed rendered the case

16 removable once the stay was vacated. Plaintiffs John Chase and Hillary Chase move to remand on

17 the basis that Kia Finance’s removal was untimely, arguing that Kia Finance should have removed

18 when Plaintiffs first raised their federal claim in arbitration. Defendants Kia Motors America, Inc.

19 (“Kia Motors”) and Michael C. Stead, Inc. d/b/a Michael Stead’s Hilltop Ford Kia (“Hilltop”) join

20 Kia Finance in opposing remand.

21 The Court held a hearing on February 24, 2023. Contrary to all parties’ positions, the

22 federal claim never became part of the case before the Superior Court, and thus is not part of the

23 case before this Court. This Court therefore lacks subject matter jurisdiction and REMANDS the

24 case sua sponte on that basis. Lacking jurisdiction, the Court does not reach the procedural

25 arguments asserted by the parties.2

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1 In state court, this case was assigned case number RG19010993.

1 II. BACKGROUND

2 A. Procedural History

3 This case began with automotive defect and warranty claims under California law that

4 Plaintiffs filed in the Alameda County Superior Court. On August 16, 2019, the parties filed a

5 stipulation in the state court action to stay proceedings pending arbitration. After acknowledging

6 that Defendants had demanded that Plaintiffs submit their claims to arbitration, the relevant

7 portion of the stipulation reads as follows:

8 The Parties hereby stipulate and agree as follows:

9 1. The dispute between the Parties as described in the complaint shall

be submitted to arbitration at JAMS so that each of Plaintiffs’ causes

10 of action against Defendants may be fully resolved via binding

arbitration.

11

2. All proceedings in this matter, including current discovery

12 deadlines, shall be stayed pending the completion of arbitration, save

for Case Management Conferences or other status conferences set by

13 the Court in its discretion to monitor the status of arbitration. The

Parties respectfully suggest that such a status conference be set

14 approximately one year from now to permit time to conduct the

arbitration and a receive a final, binding award. . . . .

15

16 Notice of Removal (dkt. 1) Ex. A at 96.

17 On August 20, 2019, the Superior Court signed and entered the parties’ proposed order,

18 which states that the “Court accepts the above stipulation of the parties to submit this matter to

19 binding arbitration,” “[t]he matter is STAYED pending the completion of arbitration,” and a status

20 conference would occur the following year “to monitor the status of arbitration.” Id. at 104. The

21 parties then proceeded with arbitration.

22 In September of 2020, Plaintiffs requested and obtained leave from the arbitrator to add

23 claims by John Chase under the Fair Credit Reporting Act (“FCRA”)—a federal law—and its

24 California analogue against Kia Finance, and filed an addendum to their arbitration demand

25 asserting those additional claims. Conn Decl. (dkt. 10-1) ¶¶ 2–4 & Exs. A, B; Notice of Removal

26 Ex. B at 58–60. Kia Finance filed a dispositive motion as to the new claims, but the arbitrator

27 denied that motion and allowed those claims to proceed. Conn Decl. ¶¶ 8–9 & Exs. D, E.

1 arbitration was pending. In three such statements filed in January through October of 2022, Kia

2 Finance noted that “Plaintiffs allege . . . FCRA claims,” and also that “[t]his case is currently in

3 arbitration with the Evidentiary [sic] hearing anticipated to occur in 2022.” Conn Decl. Ex. G at 2,

4 Ex. H at 2, Ex. I at 2.

5 On September 12, 2022, Plaintiffs moved in the Superior Court to vacate the order staying

6 the case pending arbitration and to lift the stay under section 1281.98 of the California Code of

7 Civil Procedure, arguing that Kia Finance had failed to pay an arbitration fee when required.

8 Notice of Removal Ex. A at 320–25. That statute provides in relevant part:

9 (a)

(1) In an employment or consumer arbitration that requires . . .

10 that the drafting party pay certain fees and costs during the pendency

of an arbitration proceeding, if the fees or costs required to continue

11 the arbitration proceeding are not paid within 30 days after the due

date, the drafting party is in material breach of the arbitration

12 agreement, is in default of the arbitration, and waives its right to

compel the employee or consumer to proceed with that arbitration as

13 a result of the material breach.

14 [. . .]

15 (b) If the drafting party materially breaches the arbitration agreement

and is in default under subdivision (a), the employee or consumer may

16 unilaterally elect to do any of the following:

17 (1) Withdraw the claim from arbitration and proceed in a court

of appropriate jurisdiction. If the employee or consumer withdraws

18 the claim from arbitration and proceeds with an action in a court of

appropriate jurisdiction, the statute of limitations with regard to all

19 claims brought or that relate back to any claim brought in arbitration

shall be tolled as of the date of the first filing of a claim in any court,

20 arbitration forum, or other dispute resolution forum.

21 [. . .]

22 Cal. Civ. Proc. Code § 1281.98.

23 Plaintiffs’ motion “request[ed] that the Court: (a) enter an order vacating the Court’s

24 August 20, 2019 Order staying this case pending the completion of arbitration; and (b) permit

25 Plaintiffs to proceed in this action in the Alameda County Superior Court under Plaintiffs’ original

26 Complaint,” and indicated in a footnote that “[u]pon the Court vacating the August 20, 2019

27 Order, Plaintiffs will seek leave to file a First Amended Complaint to allege additional causes of

1 A at 321 & n.1. That motion did not specifically reference Plaintiffs’ claim under the FCRA.

2 Defendants argued that section 1281.98 did not apply to the facts at hand and that it was

3 preempted by the Federal Arbitration Act (“FAA”), among other reasons to deny the motion, but

4 in an order dated December 6, 2022, the Superior Court rejected those arguments and granted

5 Plaintiffs’ motion. See Notice of Removal Ex. A at 609–15.3 Since the merits of that decision are

6 not before this Court, this order does not recount the details of Defendants’ arguments or the

7 Superior Court’s reasoning. The Superior Court’s order did not address Plaintiffs’ FCRA claim or

8 other claims added in arbitration, but merely stated that Plaintiffs’ motion was granted and that the

9 stay was vacated, and set a case management conference for May 9, 2023. Id. at 609. Plaintiffs

10 never filed an amended complaint in the Superior Court. Conn Decl. ¶ 7.

11 Kia Finance removed to this Court on December 22, 2022, asserting federal question

12 jurisdiction based on Plaintiffs’ FCRA claim, and contending that removal was timely because

13 “[w]hen the State Court ordered the matter from arbitration back to State Court on December 6,

14 2022 and lifted the stay, this was the first time that the operative complaint in State Court included

15 a federal cause of action.” See Notice of Removal ¶¶ 9, 16.

16 B. The Parties’ Arguments

17 Plaintiffs argue that the state court action became removable when they first added their

18 FCRA claim in arbitration, and that Kia Finance missed the thirty-day deadline to remove after

19 that development. Mot. (dkt. 10) at 6–7. They assert that state courts cannot stay the deadline for

20 removal to federal court. Id. at 7. Plaintiffs contend that Kia Finance improperly waited until

21 after it received an adverse ruling in state court—the decision to vacate the stay—before belatedly

22 removing to what it considered a more favorable forum. Id. at 8. According to Plaintiffs, Kia

23 Finance should at the very least have removed when Plaintiffs first filed their motion to vacate the

24 stay, as opposed to waiting to see how the Superior Court ruled on it. Id. at 8–9. Plaintiffs

25 indicate that they intend to bring a separate motion for attorneys’ fees if their present motion to

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3 The Superior Court’s initial tentative ruling would have denied the motion on the grounds that

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Plaintiffs had waived their right to withdraw from arbitration and were estopped from doing so,

1 remand is granted. Id. at 9–10.

2 Plaintiffs’ motion does not clearly address the question of whether their FCRA claim ever

3 became part of the case before the Superior Court. The closest it comes to acknowledging any

4 uncertainty as to that issue is in one sentence of the introduction section that begins with a

5 qualifying phrase: “To the extent that the FCRA claim asserted in arbitration can form the basis

6 for federal question jurisdiction (the only basis that [Kia Finance] asserts), [Kia Finance] had 30

7 days from the date of receipt [of the addendum to Plaintiffs’ arbitration demand] to remove the

8 case.” Id. at 2. Other portions of the motion simply assert that the case was removable at that

9 earlier time. Id. at 7 (“At the time that Plaintiffs filed an Addendum to their Arbitration Demand

10 on September 14, 2020, the lawsuit had been pending for over a year and the action was

11 removable.”).

12 Defendants argue that under Ninth Circuit law, the inclusion of a federal claim in

13 arbitration does not in itself establish federal jurisdiction over an action to review the arbitration

14 award. Opp’n (dkt. 18)4 at 5 (citing Carter v. Health Net of Cal., Inc., 374 F.3d 830, 836 (9th Cir.

15 2004)). They contend that there is no authority supporting Plaintiffs’ position that a defendant

16 should remove a stayed state court action when a federal claim is raised in arbitration, noting that

17 state courts retain merely “vestigial” jurisdiction during arbitration. Id. at 5–7. Since, in

18 Defendants’ view, the case was not removable at the time the claim was added in arbitration, they

19 argue that their removal was timely after the Superior Court granted Plaintiffs’ motion to vacate

20 the stay. Id. at 7. Even if Plaintiffs are correct that Defendants could have removed the case

21 earlier, Defendants argue that equitable and policy-based concerns favor excusing that procedural

22 defect and allowing removal once the state court vacated its stay. Id. at 8–11. Defendants’ brief

23 does not specifically address whether the Superior Court’s order was sufficient to bring new

24 claims raised in arbitration into the state court action.

25 In their reply, Plaintiffs rely on a decades-old line of cases treating separately-filed actions

26 to compel arbitration and confirm an award as part of the same proceeding for the purpose of

27

1 determining removal deadlines and which party should be treated as the defendant. Reply (dkt.

2 20) at 2–4. According to Plaintiffs, this Court should treat all proceedings in arbitration as part of

3 the case before the Superior Court, including the FCRA claim when Plaintiffs added it to their

4 demand. Id. Plaintiffs distinguish the Ninth Circuit’s decision in Carter on the basis that

5 arbitration there initially occurred independently of any judicial proceeding, and the only cases

6 brought in state court were petitions to confirm or vacate the arbitration award after arbitration

7 was complete. Id. at 4–5. Plaintiffs argue that a footnote of a district court decision stating that

8 federal claims raised in arbitration do not give rise to removal jurisdiction is dicta and “easily

9 misconstrued.” Id. at 5–6 (addressing Blaker v. Credit One Bank, N.A., No. 18-cv-2108-CAB-

10 JMA, 2018 WL 5307470 (S.D. Cal. Oct. 26, 2018)). They contend that the state court’s stay and

11 state law authority regarding the nature of arbitration is largely irrelevant, because state law and

12 state courts cannot alter the application of the removal statutes, and because the Superior Court

13 retained jurisdiction to consider subsequent petitions related to the same arbitration agreement. Id.

14 at 6–8. Plaintiffs also argue for the first time that Kia Finance lost its status as a “defendant” by

15 filing a counterclaim in arbitration, id. at 8–9, and that equity and policy have no bearing on the

16 question of statutory interpretation at issue, id. at 9–14.

17 III. MOTION FOR LEAVE TO FILE SURREPLY

18 At 9:03 PM two days before the hearing, nearly two weeks after Plaintiffs filed their reply,

19 Kia Finance filed a three-page administrative motion for leave to file a surreply (without attaching

20 a proposed surreply) to address new arguments in Plaintiffs’ reply, specifically identifying only

21 the argument that Kia Finance lost its status as a defendant. See dkt. 21. Since surreplies are

22 generally disfavored, since Kia Finance provided no explanation for its delay in bringing this

23 perfunctory motion at the eleventh hour, and since the Court’s reasoning does not turn on the sort

24 of procedural distinction at issue in the only new argument Kia Finance identified, the Court

25 previously denied that motion for leave to file. See dkt. 23 (text-only docket entry denying the

26 administrative motion).

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1 IV. ANALYSIS OF JURISDICITON AND REMAND

2 A. Legal Standard

3 Federal courts have limited subject matter jurisdiction and may only hear cases falling

4 within their jurisdiction. Generally, a defendant may remove a civil action filed in state court if

5 the action could have been filed originally in federal court. 28 U.S.C. § 1441.

6 The removal statutes are construed restrictively so as to limit removal jurisdiction.

7 Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108−09 (1941). The Ninth Circuit recognizes

8 a “strong presumption against removal.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992)

9 (internal quotation marks omitted). Any doubts as to removability should be resolved in favor of

10 remand. Matheson v. Progressive Specialty Ins. Co., 319 F.3d 1089, 1090 (9th Cir. 2003). The

11 defendant bears the burden of showing that removal is proper. Valdez v. Allstate Ins. Co., 372

12 F.3d 1115, 1117 (9th Cir. 2004). A district court may remand a case to state court sua sponte if it

13 determines that jurisdiction is lacking. 28 U.S.C. §1447(c); see Smith v. Mylan, Inc., 761 F.3d

14 1042, 1043 (9th Cir. 2014).

15 The only basis for subject matter jurisdiction asserted here, federal question jurisdiction,

16 encompasses claims “arising under the Constitution, laws, or treaties of the United States.” 28

17 U.S.C. § 1331. The general test for federal jurisdiction on removal “makes the plaintiff the master

18 of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law.”

19 Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). But even where a plaintiff asserts only

20 state law claims, “federal jurisdiction over a state law claim will lie if a federal issue is:

21 (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal

22 court without disrupting the federal-state balance approved by Congress.” Gunn v. Minton, 568

23 U.S. 251, 258 (2013). That exception for state claims that raise federal issues applies only

24 “[w]here all four of these requirements are met,” id., and no party here argues that Plaintiffs’

25 original claims under state law meet that standard. A case may not be removed based on an actual

26 or anticipated federal defense or counterclaim. Vaden v. Discover Bank, 556 U.S. 49, 60 (2009).

27 With some exceptions not applicable here, “if the case stated by the initial pleading is not

1 through service or otherwise, of a copy of an amended pleading, motion, order or other paper from

2 which it may first be ascertained that the case is one which is or has become removable.” 28

3 U.S.C. § 1446(b)(3). This thirty-day “removal clock does not start until a paper makes a ground

4 for removal ‘unequivocally clear and certain.’ ” Dietrich v. Boeing Co., 14 F.4th 1089, 1091 (9th

5 Cir. 2021). A case that is removed too late is subject to remand, although a plaintiff’s right to seek

6 remand on that basis can be waived if not raised in a timely motion, and a district court may not

7 remand for that procedural defect sua sponte. See Smith v. Mylan Inc., 761 F.3d 1042, 1045–46

8 (9th Cir. 2014); Fristoe v. Reynolds Metals Co., 615 F.2d 1209, 1212 (9th Cir. 1980); Carillo v.

9 FCA USA, LLC, 546 F. Supp. 3d 995, 999 n.1 (C.D. Cal. 2021).

10 B. The FCRA Claim Did Not Support Removal When Raised in Arbitration

11 Plaintiffs argue that the FCRA claim gave rise to federal question jurisdiction supporting

12 removal of the state court action when Plaintiffs first added that claim in arbitration. The Court

13 disagrees.

14 As a matter of California law, “[a]n arbitration has a life of its own outside the judicial

15 system.” Titan/Value Equities Grp., Inc. v. Superior Court, 29 Cal. App. 4th 482, 489 (1994)

16 (citation and internal quotation marks omitted).

17 Code of Civil Procedure section 1281.4 requires a court to stay an

action submitted to arbitration pursuant to an agreement of the parties.

18 Beyond that, the court’s role is fairly limited. Once a petition is

granted and the lawsuit is stayed, the action at law sits in the twilight

19 zone of abatement with the trial court retaining merely vestigial

jurisdiction over matters submitted to arbitration. During that time,

20 under its “vestigial” jurisdiction, a court may; appoint arbitrators if

the method selected by the parties fails (§ 1281.6); grant a provisional

21 remedy “but only upon the ground that the award to which an

applicant may be entitled may be rendered ineffectual without

22 provisional relief” (§ 1281.8, subd. (b)); and confirm, correct or

vacate the arbitration award (§ 1285).

23

Absent an agreement to withdraw the controversy from arbitration,

24 however, no other judicial act is authorized.

25 Id. at 487 (cleaned up). The state court also retains jurisdiction over subsequent petitions filed in

26 court regarding the same arbitration agreement, Cal. Civ. Proc. Code § 1292.6, and to consider

27 motions to lift a stay under section 1281.98 and proceed in court instead of through arbitration,

1 No. S278484 (Cal. Feb. 7, 2023).

2 Although a state court may in some circumstances be called upon to provide relief

3 affecting arbitration, the arbitration is a separate proceeding from the case filed (and stayed)

4 before the court. The recent appellate decision in Williams makes clear that even when a state

5 court grants a motion to vacate a stay under section 1281.98, it is not actually dismissing the

6 arbitration, but instead recognizing the plaintiff’s withdrawal from arbitration and resuming its

7 own judicial proceedings on that basis:

8 The trial court’s limited jurisdiction over the contractual arbitration,

to be sure, does not extend to the power to dismiss the arbitration

9 proceedings, once commenced. But the trial court neither dismissed

the arbitration proceedings nor relied on its limited jurisdiction over

10 the arbitration itself. Having announced their election to withdraw

from the arbitration, plaintiffs by their motion to vacate the stay of the

11 litigation properly invoked the court’s vestigial jurisdiction over the

action at law. This “vestigial jurisdiction” extends to determining

12 whether the arbitration proceedings resulted in an award on the

merits, in which case the action at law should be dismissed because

13 of the res judicata effects of the arbitration award; if it did not, then

the action at law may resume to determine the rights of the parties.

14 The trial court merely confirmed that arbitration had concluded

without an award on the merits—as a result of plaintiffs’ unilateral

15 exercise of their statutory rights—then acted within its jurisdiction to

vacate its own prior order and allow the action at law to emerge from

16 the twilight zone of abatement.

17 Williams, 86 Cal. App. 5th at 1069.

18 The Court is aware of no case in California or in this circuit allowing removal based on

19 the premise that new claims raised in arbitration are effectively part of the case pending before a

20 state court where those claims were never presented by a complaint, either at the time those claims

21 are raised in arbitration or when the state court lifts the stay on the claims actually presented to it.

22 Plaintiffs cite no case allowing immediate removal when a federal claim is added during

23 arbitration. Defendants cite no authority indicating that claims added in arbitration automatically

24 “transfer” to a court case that had been stayed upon the stay being lifted.

25 One out-of-circuit district court decision cited for the first time in a footnote of Plaintiffs’

26 reply held that discovery papers in arbitration gave rise to federal question jurisdiction because

27 they made clear that the plaintiff was pursuing an ERISA claim, but held that although the

1 generally Moran v. Stevens Transp., Inc., No. 3:10-CV-0153-K, 2010 WL 1488034 (N.D. Tex.

2 Apr. 12, 2010). It is not clear whether that court treated the discovery papers as indicating an

3 intent to add a new claim, or as demonstrating that the negligence claim that the plaintiff asserted

4 in both state court and arbitration actually arose under ERISA. If the latter, the case is of no use to

5 Plaintiffs here, whose FCRA claim is distinct from anything they asserted in their original

6 complaint. If the former, this Court finds it inconsistent with the majority view—discussed in

7 more detail below in the context of Defendants’ arguments—that merely foreshadowing a new

8 claim is not sufficient to establish removal jurisdiction, and thus not persuasive. The Moran court

9 does not appear to have considered the question of whether the mislabeled or nascent ERISA

10 claim ever became part of the case before the state court, which is what the defendants removed.

11 Plaintiffs also cite the Eastern District of California’s decision in Lion Raisins, Inc. v.

12 Fanucchi, 788 F. Supp. 2d 1167 (E.D. Cal. 2011), which held removal based on a proposed

13 amended arbitration demand improper. Plaintiffs quote a section of that case where the court held

14 that even assuming for the sake of argument that a mere proposal to amend the demand and add a

15 purported federal claim were sufficient to establish removability—the court separately held that it

16 was not—the defendants’ removal more than thirty days after that proposal was untimely. Mot. at

17 6 (quoting Lion Raisins, 788 F. Supp. 2d at 1172).5 The court went on to explain that the proposed

18 amended arbitration demand, like a motion to amend a complaint in court, was not sufficient to

19 support removal before it was allowed by the arbitrator, because the applicable arbitration rules

20 required the arbitrator’s consent to add new claims. Lion Raisins, 788 F. Supp. 2d at 1172–74.

21 The court appears to have assumed without discussion that a federal claim first raised in

22 arbitration, if allowed by the arbitrator, is sufficient to support immediate removal of a state court

23 action related to that arbitration. This Court does not find Lion Raisins persuasive as to that

24 underlying issue that it did not specifically address.

25

5 Defendants also focus on this part of Lion Raisins in their opposition brief, inaccurately

26

representing the filing at issue as an actual rather than proposed amended demand. Opp’n at 7–8.

The Court notes for the sake of precision that all of the reasoning of Lion Raisins cited in this

27

order and by the parties appears in a magistrate judge’s report, which is included within the same

1 Otherwise, the closest case the parties have cited to the facts at issue is Blaker v. Credit

2 One Bank, N.A., No. 18-cv-2108-CAB-JMA, 2018 WL 5307470 (S.D. Cal. Oct. 26, 2018). The

3 plaintiffs in that case brought state law claims in state court, and although the parties were citizens

4 of different states, the amount in controversy on the original claims did not meet the threshold for

5 diversity jurisdiction. Id. at *1, *3. The state court granted a motion by the defendant to compel

6 arbitration and stayed the case pending arbitration. Id. at *1. The plaintiffs filed an arbitration

7 demand “that was virtually identical to the state court complaint,” but later filed an amended

8 demand that added a federal claim under the Telephone Consumer Protection Act (“TCPA”). Id.

9 Still later, they filed a brief indicating that based on their new TCPA claim, they were pursuing

10 damages well over the $75,000 threshold for diversity jurisdiction. Id. The arbitrator entered a

11 substantial award in favor of the plaintiffs. Id. When the plaintiffs filed a petition in state court to

12 confirm the award, the defendant removed to federal court, and the plaintiffs moved to remand on

13 the basis that removal was untimely. Id.

14 Much like in this case, “both parties appear[ed] to agree that there [was] federal question

15 jurisdiction . . . , [but] the Court [was] unconvinced.” Id. at *2. The court reasoned that “[t]he

16 operative complaint in this lawsuit plainly does not assert a claim under the TCPA or any other

17 federal statute” and did not require resolution of any substantial federal issue. Id. The court also

18 noted that petitions to confirm arbitration awards do not fall within federal question jurisdiction

19 merely because an arbitration award resolved federal claims. Id. at *2–3 (citing Carter, 374 F.3d

20 at 836). In a footnote, the court made clear that its reasoning applied not only to the particular

21 posture of the case at the time arbitration concluded and the plaintiffs sought to confirm the award,

22 but also to the question of whether the case was removable at the time the plaintiffs first raised

23 their TCPA claim in arbitration. Id. at *3 n.4 (“Plaintiffs also contend that the case became

24 removable when they included a TCPA claim in their amended claim in the arbitration. As

25 discussed above, the inclusion of the TCPA claim in the arbitration did not create federal question

26 subject matter jurisdiction, so it could not have made the case removable.”). This Court finds

27 Blaker persuasive as to the issue of federal question jurisdiction, which is the portion of that

1 The Blaker court went on to reason that although the increased amount in controversy

2 during arbitration brought the case within the scope of diversity jurisdiction, the defendant’s

3 removal on that basis was untimely, both because it fell outside § 1446(c)(1)’s deadline of one

4 year from filing the case (which is specific to diversity jurisdiction and thus not applicable here),

5 and because removal occurred more than thirty days after the plaintiffs’ brief in arbitration made

6 clear that they were seeking more than $75,000 in damages. Id. at *4. The question of how

7 damages sought in arbitration affect the amount in controversy in a related civil action is complex.

8 If the brief had concerned damaged only on claims presented to the court in the original complaint,

9 it might more clearly implicate the amount in controversy on those stayed claims, and thus put the

10 defendant on notice that the civil action was removable. It is less clear that the Blaker court was

11 correct to treat damages on a new claim not presented to the Superior Court as a component of the

12 amount in controversy before any effort was made in court to assert that claim or confirm those

13 additional damages. In any event, that holding was not necessary to the outcome of the case (the

14 removal was still untimely at least based on the one-year deadline), and this Court is not faced

15 with questions of the amount in controversy for diversity jurisdiction. This Court need not decide

16 whether Blaker was correct in its analysis of when the defendant had notice of the amount in

17 controversy.

18 Plaintiffs argue that because “Blaker clearly finds that when a party discovers the basis for

19 federal jurisdiction during the course of arbitration, it is required to immediately remove the

20 stayed state court proceedings to federal court or forfeit the right to remove,” the court could not

21 have meant what it said in its footnote indicating that the case did not become removable when the

22 plaintiffs added their TCPA claim in arbitration. Reply at 5–6. That argument ignores Blaker’s

23 distinction in its treatment of grounds for federal question jurisdiction as compared to clues

24 regarding the amount in controversy for diversity jurisdiction. Even if there were any inherent

25 contradiction between the two portions of that decision, which is far from clear, this Court finds

26 Blaker’s analysis of federal question jurisdiction persuasive.

27 Plaintiffs’ other authority is inapposite. They argue that the case was removable when they

1 deadline “ ‘commences to run from the date of the first court action relating to the arbitration.’ ”

2 Mot. at 7 (quoting Old Dutch Farms, Inc. v. Milk Drivers & Dairy Emp. Union Loc. 584, 222 F.

3 Supp. 125, 130 (E.D.N.Y. 1963)). The sixty-year-old out-of-circuit district court decision on

4 which they rely concerned prompt removal of a state court petition to compel arbitration, filed as a

5 case-initiating document in court, and seeking to compel participation in arbitration proceedings

6 that had been active for at least several months. Old Dutch Farms, 222 F. Supp. at 127, 130. It

7 says nothing about removal of a stayed state court case based on claims asserted in arbitration

8 running parallel to that case.

9 Other cases cited by Plaintiffs, many of roughly the same vintage as Old Dutch Farms or

10 even older, recognize a subsequent petition to confirm or vacate an award as being part of the

11 same proceeding as an earlier petition to compel arbitration (or similar filing), for the purpose of

12 determining removal deadlines and which party is the defendant. See, e.g., Marchant v. Mead-

13 Morrison Mfg. Co., 29 F.2d 40, 43 (2d Cir. 1928); Lesser Towers, Inc. v. Roscoe-Ajax Const. Co.,

14 258 F. Supp. 1005, 1012 (S.D. Cal. 1966); Minkoff v. Budget Dress Corp., 180 F. Supp. 818, 825

15 (S.D.N.Y. 1960).6 Still other cases are further removed from the issue here, recognizing more

16 generally that a court that compels arbitration retains jurisdiction to address future petitions

17 regarding the same agreement to arbitrate, without addressing removal. E.g., Smiga v. Dean

18 Witter Reynolds, Inc., 766 F.2d 698, 705 (2d Cir. 1985). None of those cases indicate that a new

19 claim raised in arbitration can render a case instantly removable. Treating the initial petition to

20 compel and the later petition to confirm as the same case, such that a party that could have

21 removed (but did not) at the outset of a case when haled to court on a petition to compel—or a

22 party that initiated proceedings in state court with such a petition—cannot later seek removal after

23 an adverse decision, does not show that the arbitration itself is effectively a proceeding before the

24 state court such that new claims raised in arbitration can support removal of a court case in which

25

26

6 Some of the decisions from New York recite a then-existing New York law providing that

arbitration itself is considered a “special proceeding” of the state court. E.g., Minkoff v. Budget

27

Dress Corp., 180 F. Supp. 818, 820 (S.D.N.Y. 1960). To the extent that provision informed the

1 those claims have never been asserted.

2 The Court is satisfied that a claim first asserted in arbitration while a state court case is

3 stayed does not automatically become part of the controversy before the state court. This holding

4 is consistent with Ninth Circuit and Supreme Court authority holding that federal claims raised in

5 arbitration proceedings that are instituted without a court order do not necessarily give rise to

6 federal question jurisdiction on a subsequent petition to confirm or vacate the award. Badgerow v.

7 Walters, 142 S. Ct. 1310 (2022); Carter v. Health Net of Cal., Inc., 374 F.3d 830, 836 (9th Cir.

8 2004). Reinforcing that conclusion, Plaintiffs themselves made clear in their motion to vacate the

9 stay that they did not believe the FCRA claim had automatically become part of the case before

10 the Superior Court, because they anticipated filing a motion to amend their complaint to assert that

11 claim. Notice of Removal Ex. A at 321 & n.1. Because the arbitration was a separate proceeding

12 from the state court action, and it was not clear merely from Plaintiffs asserting a federal claim in

13 that proceeding that the state court would ever be faced with resolving such a claim (or any other

14 substantial federal issue), the addition of the FCRA claim in arbitration did not establish federal

15 question jurisdiction sufficient to remove the state court action at the time that claim was added.

16 C. The Order Vacating the Stay Does Not Support Removal

17 Defendants’ view that the FCRA claim supported removal immediately upon the state

18 court vacating its stay fares no better. Defendants assert in their notice of removal that the

19 Superior Court “transfer[red] the matter to binding arbitration” on the parties’ stipulation, and that

20 it then “ordered the matter from arbitration back to State Court” when it found that Defendants

21 defaulted under section 1281.98. Notice of Removal ¶¶ 3, 9; see also Opp’n at 2 (“[T]he parties

22 stipulated to transfer the case to binding arbitration . . . .”). Neither of those assertions is accurate.

23 In the first instance, the Superior Court merely stayed proceedings on Plaintiffs’ original

24 complaint—which did not include any federal claim—and allowed the parties to pursue

25 arbitration. The stay order did not in itself “transfer” any claims to arbitration, which was instead

26 initiated when Plaintiffs filed a demand for arbitration with JAMS. See Notice of Removal Ex. A

27 at 249–75; id. Ex. B. In the second instance, the Superior Court only lifted that stay, allowing

1 see generally Williams, 86 Cal. App. 5th at 1069 (addressing the nature of a motion to lift a stay

2 based on a defendant’s default in arbitration under section 1281.98). As noted above, that was the

3 relief that Plaintiff requested in their motion, which specifically contemplated that new claims

4 raised on arbitration would come before the Superior Court only upon Plaintiffs later filing a

5 motion for leave to amend their complaint. Notice of Removal Ex. A at 321 & n.1. Nothing in

6 the Superior Court’s order granting that motion indicates that it intended to treat those new claims

7 as part of the case before it. See Notice of Removal Ex. A at 609–15.7

8 Section 1281.98 allows a plaintiff, upon establishing a defendant’s default through

9 nonpayment, to “[w]ithdraw the claim from arbitration and proceed in a court of appropriate

10 jurisdiction.” Cal. Civ. Proc. Code § 1281.98(b)(1). But it does not require the plaintiff to do so,

11 nor does it specify a particular manner in which the plaintiff must “proceed in . . . court.” A

12 plaintiff might move to lift a stay of claims previously filed (as occurred here, with respect to the

13 original complaint that did not include a claim under the FCRA), might move for leave to assert

14 claims that had not previously been filed in an existing action (as Plaintiffs indicated they intended

15 to do with respect to claims they added in arbitration), might file a new action, or might choose

16 not to pursue certain claims at all.

17 Defendants suggest that the arbitrator’s treatment of other claims indicates that claims

18 would be transferred to the Superior Court when arbitration concluded. Opp’n at 2–3, 9. Relying

19 on the Broughton-Cruz doctrine,8 the arbitrator determined that claims for public injunctive relief

20

21

7 At the hearing on the present motion, Defendants asserted for the first time that Plaintiffs and the

Superior Court judge indicated at the hearing on the motion to vacate the stay that work done in

22

arbitration would carry over to the state court proceeding. Assuming for the sake of argument that

the Court can accept those representations without record evidence, they do not change the

23

outcome. Defense counsel conceded that the Superior Court judge did not explicitly deem

Plaintiffs’ complaint amended. Resolving all doubt in favor of remand, see Matheson, 319 F.3d at

24

1090, it is not clear that the FCRA claim ever formally became part of the case, or that the state

court would have treated as such without Plaintiffs moving to amend their complaint.

25

8 This Court and the Ninth Circuit have previously held that doctrine to be preempted by the FAA,

but the arbitrator’s different conclusion on that point is not relevant to the present motion to

26

remand. See Lee v. Postmates Inc., No. 18-cv-03421-JCS, 2018 WL 4961802, at *10 (N.D. Cal.

Oct. 15, 2018) (citing Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928, 934–37 (9th Cir.

27

2013)).

1 were beyond the scope of arbitration, and ordered that those claims would “be stayed until the

2 conclusion of these proceedings, and then returned to the Superior Court for further action.”

3 Nassihi Decl. Ex. 3 at 8–9. At least some of those claims were in the complaint presented to the

4 Superior Court, and Defendants have not cited any procedural mechanism by which the arbitrator

5 could unilaterally inject new claims into the state court action. The Court understands the

6 arbitrator’s ruling as using imprecise language to indicate that any new claims for public

7 injunctive relief would remain available for Plaintiffs to pursue in state court—if they so chose,

8 and if the state court permitted them to do so. To the extent the arbitrator may have purported to

9 indicate that he would actively “return” any new claims to the state court upon the conclusion of

10 arbitration, it is not clear that he the power to do so. Regardless, that order by the arbitrator

11 pertained only to state law claims that have no effect on this Court’s jurisdiction, and said nothing

12 about Plaintiffs’ FCRA claim.

13 The Superior Court’s order only lifted the stay as to the claims Plaintiffs asserted in their

14 original complaint. Since that original complaint did not include a claim under the FCRA or any

15 other federal law, this case did not include any federal claim at the time it was removed

16 D. Plaintiffs’ Stated Intent to Amend Does Not Alter the Outcome

17 Plaintiffs’ motion to vacate the stay made clear that they intended to seek leave to amend

18 their complaint to add the new claims asserted in arbitration, presumably including their FCRA

19 claim. Notice of Removal Ex. A at 321 & n.1. The parties do not specifically address whether

20 that stated intent gave rise to removal jurisdiction. The Court holds that it did not.

21 Most courts to consider the issue have held that a motion for leave to amend to assert a

22 federal claim does not itself render a case removable before the state court grants such leave. E.g.,

23 Freeman v. Blue Ridge Paper Prod., Inc., 551 F.3d 405, 410 (6th Cir. 2008) (noting, as one basis

24 for this conclusion, that “removal before the state court actually amends the complaint may have

25 the anomalous effect that the removed case lacks federal jurisdiction at the time that it is

26 removed”); Sullivan v. Conway, 157 F.3d 1092, 1094 (7th Cir. 1998); Owings v. Deere & Co., 441

27 F. Supp. 2d 1011 (S.D. Iowa 2006). McDonough v. UGL UNICCO, 766 F. Supp. 2d 544, 546

1 (N.D. Cal. Oct. 18, 2004). Particularly where “no motion to amend has been filed, much less an

2 amended complaint,” a plaintiff’s mere “intent to pursue a federal claim, expressed in a brief or

3 motion, is [not] grounds for removal.” Desmond v. BankAmerica Corp., 120 F. Supp. 2d 1201,

4 1204 (N.D. Cal. 2000).

5 This Court is not persuaded by the small minority of cases that have taken the opposing

6 view, at least with respect to the potential addition of a federal claim. E.g., Neal v. Trugreen Ltd.

7 P’ship, 886 F. Supp. 527 (D. Md. 1995) (holding that a plaintiff’s motion to dismiss a

8 counterclaim, which put the defense on notice of the plaintiff’s intent “that a Title VII claim based

9 upon the alleged facts would be added to the complaint as soon as a Right to Sue letter was

10 received,” rendered a case removable); Webster v. Sunnyside Corp., 836 F. Supp. 629 (S.D. Iowa

11 1993) (holding that a motion for leave to add a federal claim triggered the deadline to remove).9

12 The removal deadline runs from when “it may first be ascertained that the case is one which is or

13 has become removable,” 28 U.S.C. § 1446(b)(3) (emphasis added), not when a defendant first

14 learns that a case might become removable if future contingencies are satisfied—here, if and only

15 if: (1) the plaintiffs follow through on a statement of intent to add a claim; and (2) the state court

16 grants leave for the plaintiffs to do so. See Sullivan, 157 F.3d at 1094.

17 Plaintiffs’ suggestion in their motion to vacate the stay that they would later file a motion

18 for leave to amend their complaint and add the FCRA claim did not render the case removable.

19 E. This Court Lacks Jurisdiction

20 Because Plaintiffs have never amended their complaint to assert a federal claim before the

21 Superior Court, see Conn Decl. ¶ 7, this case never implicated federal question jurisdiction under

22 28 U.S.C. § 1331, and never became removable on that basis—not when Plaintiffs first asserted

23 their FCRA demand before the arbitrator, not when Defendants acknowledged that arbitration

24 demand in case management statements to the Superior Court, not when Plaintiffs moved to

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9 The Court expresses no opinion as to cases finding that a motion for leave to amend put a

defendant on notice of an increased amount in controversy for the purpose of diversity

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jurisdiction, perhaps on the premise that the motions at issue merely elucidated the amount in

1 vacate arbitration and proceed on their original complaint, and not when the Superior Court

2 granted that motion. Perhaps the state court might allow Plaintiffs to add such a claim in the

3 future; perhaps not. For now, there is no federal claim in the case, and this Court lacks subject

4 matter jurisdiction.10

5 Despite all parties’ failure to recognize that defect in their briefs, issues of subject matter

6 jurisdiction cannot be waived and must be considered sua sponte by the Court. Because

7 jurisdiction is lacking, the Court REMANDS the case sua sponte.

8 F. Attorneys’ Fees

9 Plaintiffs indicate that they might bring a motion for attorneys’ fees if their motion to

10 remand is granted. Mot. at 9–10.

11 Pursuant to 28 U.S.C. § 1447(c), “[a]n order remanding the case may require payment of

12 just costs and any actual expenses, including attorney fees, incurred as a result of the removal.” 28

13 U.S.C. § 1447(c). “Absent unusual circumstances, courts may award attorney’s fees under

14 § 1447(c) only where the removing party lacked an objectively reasonable basis for seeking

15 removal. Conversely, when an objectively reasonable basis exists, fees should be denied.” Martin

16 v. Franklin Capital Corp., 546 U.S. 132, 141 (2005). “[D]istrict courts retain discretion to

17 consider whether unusual circumstances warrant a departure from the rule in a given case.” Id. In

18 Lussier v. Dollar Tree Stores, Inc., the Ninth Circuit cautioned that “removal is not objectively

19 unreasonable solely because the removing party’s arguments lack merit, or else attorney’s fees

20 would always be awarded whenever remand is granted.” 518 F.3d 1062, 1065 (9th Cir. 2008).

21 Rather, the objective reasonableness of the removal depends on the clarity of the applicable law

22 and whether such law “clearly foreclosed” the defendant's arguments for removal. Id. at 1066–67.

23 Defendants failed to carry their burden for removal and identified no authority supporting

24

10 Plaintiffs briefly argue in their reply that the case became removable when Defendants asserted

25

preemption by the FAA in opposing Plaintiffs’ motion to vacate the arbitrations stay under

section 1281.98 of the California Code of Civil Procedure more than thirty days before Defendants

26

removed the case. Reply at 5. “Federal pre-emption is ordinarily a federal defense to the

plaintiff’s suit. As a defense, it does not appear on the face of a well-pleaded complaint, and,

27

therefore, does not authorize removal to federal court.” Metro. Life Ins. Co. v. Taylor, 481 U.S.

] removal in similar circumstances. That said, this order remands the case sua sponte for lack of

2 || jurisdiction, not for the procedural defects asserted in Plaintiffs’ motion, which the Court has

3 found no more persuasive than Defendants’ arguments. This Court has previously found that fees

4 || expended raising complex and unnecessary issues, while overlooking more straightforward

5 grounds for remand, were not reasonably incurred. See Rubin v. Cannon, No. 22-cv-02474-JCS,

6 || 2022 WL 2158973, at *2 (N.D. Cal. June 7, 2022), recommendation adopted, 2022 WL 17371168

7 || (N.D. Cal. June 24, 2022). The parties should be prepared to address the salience of these issues if

8 || Plaintiffs elect to pursue attorneys’ fees.

9 If Plaintiffs decide to proceed with a motion for attorneys’ fees, the parties are ORDERED

10 ‘|| to meet and confer via videoconference to attempt to resolve that issue without court action before

11 the parties incur additional fees to prepare, file, and oppose such a motion. If those discussions are

unsuccessful, Plaintiffs may file a motion for attorneys’ fees no later than March 17, 2023.

g 13 || V. CONCLUSION

14 This case is REMANDED sua sponte for lack of subject matter jurisdiction. Except as

3 15 discussed above in explaining the conclusion that jurisdiction is lacking, the Court does not reach

a 16 || the procedural questions raised by Plaintiffs’ motion to remand and by Defendants in response to

3 17 || that motion. The Clerk shall remand the case to the Superior Court for the County of Alameda

18 and close the file in this Court.

19 Plaintiffs may bring a motion for attorneys’ fees no later than March 17, 2023, subject to

20 || the caveats addressed above.

21 IT ISSO ORDERED.

22 || Dated: February 24, 2023 5 Z □□

23 Ot Magistrate lodge

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