In Re Lorazepam & Clorazepate Antitrust Litigation

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 8, 2010 Decided January 18, 2011

No. 08-5044

IN RE: LORAZEPAM & CLORAZEPATE ANTITRUST LITIGATION,

BLUE CROSS & BLUE SHIELD OF MASSACHUSETTS, ET AL.,

APPELLEES

v.

MYLAN LABORATORIES, INC. AND MYLAN

PHARMACEUTICALS, INC.,

APPELLANTS

Consolidated with 08-5045

Appeals from the United States District Court

for the District of Columbia

(No. 1:99-mc-00276)

Jonathan M. Jacobson argued the cause for appellants.

With him on the briefs were Seth C. Silber, D. Bruce Hoffman,

and Ryan A. Shores. Neil K. Gilman entered an appearance.

Martin R. Lueck argued the cause for appellees. With him

on the brief were Sara A. Poulos, James R. Safley, Sarah E.

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Hudleston, Robert T. Rhoad, and Ryan C. Tisch. Jeffrey

Downey and Bethany M. Wimsatt entered appearances.

Before: SENTELLE, Chief Judge, WILLIAMS and RANDOLPH,

Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

RANDOLPH.

RANDOLPH, Senior Circuit Judge: This is an appeal from

the judgment of the district court, entered after a jury trial,

awarding plaintiffs $76,823,943. The plaintiffs invoked

diversity jurisdiction and alleged violations of state antitrust

laws. Our opinion deals only with defendants’ motion on appeal

to dismiss for lack of jurisdiction.

Plaintiffs are four health insurance companies. They sued

Mylan, a manufacturer of generic drugs, and two other compa-

nies engaged in the business of selling chemicals for

pharmaceuticals. In support of diversity jurisdiction, plaintiffs

alleged that they were citizens of Minnesota, Massachusetts and

Illinois, and that defendants were citizens of Delaware, Pennsyl-

vania, New York, New Jersey and West Virginia. Their

principal claim, sounding exclusively in state law, was that

defendants entered into exclusive licensing agreements enabling

Mylan to raise the prices the insurance companies paid for two

prescription anti-anxiety medications.

The insurance companies sued, in their words, “on behalf of

themselves and as claims administrators for their self-funded

customers.” In the insurance industry, “self-funded customers”

are entities—typically large corporations—providing health

benefits directly to their employees using their own funds. See

generally Allison K. Hoffman, Oil and Water: Mixing Individ-

ual Mandates, Fragmented Markets, and Health Reform, 36 AM.

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J.L. & MED. 7, 17-18 (2010). These entities contract with

insurance companies such as plaintiffs, who provide claims-

processing and other services to them in plaintiffs’ role as

“third-party administrators.” It is the self-funded customers who

bear the financial risks associated with providing insurance

coverage.

On the eve of trial, Mylan and its co-defendants filed a

motion challenging the insurance companies’ authority to bring

damages claims on behalf of their self-funded customers. The

district court first granted the motion but later allowed the

claims to proceed under Rule 17 of the Federal Rules of Civil

Procedure. Rule 17(a)(1) requires every action to “be prose-

cuted in the name of the real party in interest.” The court,

however, “may not dismiss an action for failure to prosecute in

the name of the real party in interest until, after an objection, a

reasonable time has been allowed for the real party in interest to

ratify, join, or be substituted into the action.” Fed. R. Civ. P.

17(a)(3).

The district court found that the insurance companies were

not the real parties in interest “with respect to the claims for

damages suffered by their self-funded customers.” But it al-

lowed the insurance companies to seek ratification of the

claims. To do so, the insurance companies sent letters to their

self-funded customers, giving them about a week to respond.

The letters stated that if the customer did not opt out, it will be

deemed to have consented to the insurance companies’

representing it and would be bound by the result of the

litigation. (We express no opinion on the validity of this

ratification procedure.)

The suit proceeded to trial. The jury found Mylan and its

co-defendants liable and determined that their violations were

willful. Judgment was entered, and this appeal followed.

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After the parties had filed their briefs, and a few days before

oral argument, defendants filed a motion to dismiss, arguing for

the first time that the district court lacked jurisdiction because at

least one (Minnesota Mining and Manufacturing Corporation

(3M))—and potentially more—of plaintiffs’ self-funded

customers were from the same state as at least one of the

defendants. The existence of these customers, defendants

argued, destroyed “complete diversity” and stripped the court of

power to hear the case.

The first question this argument raises is whether plaintiffs’

self-funded customers must be counted as parties for diversity

of citizenship purposes. We think they must. The claims of the

self-funded customers were asserted at the outset. Those

customers, not the named plaintiffs, were the ones who felt the

effect of defendants’ alleged violations with regard to the claims

asserted on their behalf. And they were the ones who had the

right to sue under the substantive law. See, e.g., Mass. Gen.

Laws ch. 93A § 9. The plaintiff insurance companies no longer

contend that the contracts with their self-funded customers

validly assigned the asserted claims to them. At most, plaintiffs’

authority extended to acting as agent for the self-funded

customers in recovering damages on their claims. See Advanced

Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 17-18

(2d Cir. 1997). The self-funded customers are therefore the

“real and substantial” parties with respect to the claims asserted

on their behalf. See Associated Ins. Mgmt. Corp. v. Ark. Gen.

Agency, 149 F.3d 794, 796 (8th Cir. 1998); Airlines Reporting

Corp. v. S & N Travel, Inc., 58 F.3d 857, 862 (2d Cir. 1995). As

such, they must be treated as parties for diversity purposes.

Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 460-61 (1980);

Associated Ins. Mgmt. Corp., 149 F.3d at 796.

The effect of the self-funded customers on the district

court’s diversity jurisdiction turns on principles established in

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three Supreme Court decisions dating from the early 1800’s.

The first, Capron v. Van Noordan, 6 U.S. (2 Cranch) 126

(1804), was a diversity action for trespass. The complaint

alleged that the defendant was a citizen of North Carolina, but

it did not allege that the plaintiff was a citizen of a different

state. After verdict for the defendant, the plaintiff appealed on

the ground that his complaint was jurisdictionally defective.

The Supreme Court agreed and set aside the judgment. The

absence of jurisdiction, the Court held, could be raised for the

first time on appeal even by the party who invoked federal

jurisdiction. That a party may raise jurisdictional issues for the

first time on appeal has been repeatedly reaffirmed. See, e.g.,

Mansfield, Coldwater & L. M. Ry. v. Swan, 111 U.S. 379, 382-

83 (1884); Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83,

93-96 (1998); Grupo Dataflux v. Atlas Global Grp., L.P., 541

U.S. 567, 570-71 (2004).

The plaintiffs here complain that defendants were derelict

in not raising their jurisdictional objection at an earlier stage.

The defendants all but admit this. There are approximately

1,400 of these self-funded customers. Counsel for the defen-

dants explains that only when he began preparing for oral

argument did he realize their significance for diversity purposes.

As far as jurisdiction is concerned, it does not matter if he

should have recognized this sooner. Capron holds that the

parties cannot confer jurisdiction by consent. A corollary, long

established, is that a party does not waive a jurisdictional

objection by failing to raise it, at least so long as the jurisdic-

tional defect appears on the face of the record. See Ins. Corp. of

Ir. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702

(1982); Dan B. Dobbs, Beyond Bootstrap: Foreclosing the Issue

of Subject-Matter Jurisdiction Before Final Judgment, 51 MINN.

L. REV. 491, 507-24 (1967).

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The second case is Strawbridge v. Curtiss, 7 U.S. (3

Cranch) 267 (1806). Although the Court’s opinion was short

and obscure, it has come to mean that, under the diversity statute

(now 28 U.S.C. § 1332), “diversity jurisdiction does not exist

unless each defendant is a citizen of a different state from each

plaintiff.” Owen Equip. & Erection Co. v. Kroger, 437 U.S.

365, 373 (1978). Thus the presence of just one nondiverse

plaintiff—here 3M—destroys diversity jurisdiction under

§ 1332.

Plaintiffs do not dispute this point, but they invoke the

supplemental jurisdiction statute, codified at 28 U.S.C. § 1367,1

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28 U.S.C. § 1367 provides, in part:

(a) Except as provided in subsections (b) and (c) or as

expressly provided otherwise by Federal statute, in any civil

action of which the district courts have original jurisdiction,

the district courts shall have supplemental jurisdiction over all

other claims that are so related to claims in the action within

such original jurisdiction that they form part of the same case

or controversy under Article III of the United States

Constitution. Such supplemental jurisdiction shall include

claims that involve the joinder or intervention of additional

parties.

(b) In any civil action of which the district courts have

original jurisdiction founded solely on section 1332 of this

title, the district courts shall not have supplemental

jurisdiction under subsection (a) over claims by plaintiffs

against persons made parties under Rule 14, 19, 20, or 24 of

the Federal Rules of Civil Procedure, or over claims by

persons proposed to be joined as plaintiffs under Rule 19 of

such rules, or seeking to intervene as plaintiffs under Rule 24

of such rules, when exercising supplemental jurisdiction over

such claims would be inconsistent with the jurisdictional

requirements of section 1332. . . ..

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to avoid its consequences. Their argument is that once the

district court had jurisdiction (under § 1332) over claims

between the named plaintiffs and the defendants, the district

court could exercise supplemental jurisdiction over claims of the

self-funded customers. In support, plaintiffs cite Exxon Mobil

Corp. v. Allapattah Services, Inc., 545 U.S. 546 (2005). The

Court there held that § 1367 authorized jurisdiction over claims

of plaintiffs who did not meet § 1332’s amount-in-controversy

requirement as long as those claims were part of the same

Article III “case or controversy” as the claims of plaintiffs who

met all of the requirements of § 1332(a). Id. at 549. In doing

so, the Court determined that Congress, in enacting § 1367,

implicitly overruled Supreme Court precedent that had denied

jurisdiction over such claims. Id. at 569-71.

Plaintiffs’ reading of Allapattah would, in effect, abolish

the complete diversity requirement of Strawbridge v. Curtiss.

Whenever a claim is brought by one diverse party against

another, § 1367 would authorize the court to hear, as part of the

same case, claims brought by nondiverse parties. The Supreme

Court might have given this reading to § 1367, essentially

treating citizenship like the amount-in-controversy requirement

at issue in Allapattah. But the Court made it clear that it was not

overruling Strawbridge: a “failure of complete diversity, unlike

the failure of some claims to meet the requisite amount in

controversy, contaminates every claim in the action.” Id. at 564.

The presence of a nondiverse party, in other words, deprives the

district court of jurisdiction over any of the claims; it follows

that there is nothing to which supplemental jurisdiction may

attach. Id. at 554.

The third case is Mollan v. Torrance, 22 U.S. (9 Wheat.)

537, 539 (1824), which holds that the court’s jurisdiction

“depends upon the state of things at the time of the action

brought . . ..” Plaintiffs argue—or more accurately, assert—that

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not until the district court entered its Rule 17 order did the self-

funded customers become real and substantial parties for

diversity purposes. Therefore, they say, there was diversity

jurisdiction at the time they commenced the action. But it was

not the district court’s ruling that brought the self-funded

customers into the case. Plaintiffs did that when they started the

lawsuit. The district court’s Rule 17 order simply allowed

plaintiffs to continue asserting their customers’ claims so long

as the customers acquiesced. See Associated Ins. Mgmt. Corp.,

149 F.3d at 797.

Ordinarily a finding that the district court lacked jurisdic-

tion would lead us to vacate the court’s judgment and remand

for dismissal. See, e.g., LoBue v. Christopher, 82 F.3d 1081,

1082 (D.C. Cir. 1996). But the posture of this case suggests a

different disposition. Rule 21 of the Federal Rules of Civil

Procedure provides that “[o]n motion or on its own, the court

may at any time, on just terms, add or drop a party.” Fed. R.

Civ. P. 21. This Rule allows the district court to dismiss so-

called “jurisdictional spoilers”—parties whose presence in the

litigation destroys jurisdiction—if those parties are not indis-

pensable and if there would be no prejudice to the parties.

Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 830-32

(1989). The courts of appeals, though not technically governed

by Rule 21, may exercise the same power or may remand to the

district court for it to make the Rule 21 inquiry in the first

instance. Id. at 837-38; Long v. Dist. of Columbia, 820 F.2d

409, 416-17 (D.C. Cir. 1987).

It might be thought that the ability to dismiss nondiverse

parties and retain jurisdiction over the rest of the case is in

tension with Mollan, as well as Allapattah’s holding that the

presence of a nondiverse party “contaminates” the entire action,

therefore stripping the district court of jurisdiction in toto. This

tension is resolved through the fiction that Rule 21 relates back

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to the date of the complaint. See LeBlanc v. Cleveland, 248 F.3d

95, 99 (2d Cir. 2001). This way, the court may proceed as if the

nondiverse parties were never part of the case. With those

parties effectively scrubbed from the complaint, they are not

present to contaminate the other claims. The fiction also allows

the district court to save its prior rulings, and the jury’s findings,

which otherwise were entered without jurisdiction. C.L. Ritter

Lumber Co. v. Consol. Coal Co., 283 F.3d 226, 229-30 (4th Cir.

2002).

The prudent course here is to remand to the district court to

proceed under Rule 21. It is open to the district court to decide

that plaintiffs’ self-funded customers are not indispensable

parties to the case. See Fed. R. Civ. P. 19. For the most part,

the identity and citizenship of the self-funded customers are not

in the record. Evidentiary issues may arise, and the district court

may need to determine which, if any, of the self-funded custom-

ers may be dismissed in order to restore complete diversity.

Since this may also affect damages, the district court may have

to conduct a partial retrial on that issue.

We decline to issue any opinion on the merits of defen-

dants’ objections to the jury award until such time as jurisdiction

is secured.

The case is remanded to the district court for further

proceedings consistent with this opinion.

So ordered.