Protecting Federal Claims by Using State Courts

The Supreme Court’s narrow view of Article III’s “case or controversy” standing requirement as set out in its 2021 and 2016 decisions in Ramirez and Spokeo (see NCLC’s Practice Implications of June 25 Supreme Court Ramirez Decision) has led to the wholesale dismissal of many consumer claims in federal court despite clear violations of federal consumer statutes.  This article examines a growing response by consumer litigators—to file federal claims in state court. 

State instead of federal standing requirements will apply if a federal claim is litigated in state court or if it is removed to federal court and the federal court remands the case to state court after it finds no Article III standing.  Standing in state court is determined by state standards that may be far more flexible than current federal views on standing. 

This article describes advantages and tactics in initiating federal claims in state court and then details a key resource when federal claims are litigated in state court—a just-updated, state-by-state analysis of state court standing rules with a focus on consumer claims.  A make-or-break question in much consumer litigation today is:  if a case is likely to fail to meet current federal court standing requirements, and instead is litigated in state court, will it meet state court standing requirements? 

The article also explains why federal court standing requirements do not apply to federal claims in state courts and lists advantages and disadvantages of litigating in state courts. Of course, the necessity of bringing a federal claim in state court will depend on whether the federal claim is likely to meet Article III standing requirements, and this article’s last section identifies resources to determine if the facts of a particular case as applied to a specific federal statutory violation risk such dismissal.

Filing Federal Claims in State Court: Changing the Odds of Success

In many states, when federal court standing is an issue, filing the case in state court can significantly improve a consumer’s odds of success.  Consumers have the right to file a federal claim in state court. If a state opens its courts to state claims, it must also do so for analogous federal claims.  See Haywood v. Drown, 556 U.S. 729 (2009); Howlett v. Rose, 496 U.S. 356 (1990).

One advantage of filing in state court is that the defendant may decide against removal to federal court and then state court, not federal court, standing rules will apply.  State courts are not bound by Article III’s case or controversy requirement or other federal rules of justiciability, even when state courts address issues of federal law; instead, state courts are governed by their own rules of standing.  ASARCO Inc. v. Kadish, 490 U.S. 605, 617 (1989). 

State court standing is described infra, and, while the answer will vary by state, in general state court standing is more flexible than Article III standing.  Moreover, there may be other advantages (and disadvantages) in litigating in state court, as discussed infra.

All Bad Choices for Defendants If They Remove to Federal Court

A defendant may remove a case to federal court only if the federal court would have had original jurisdiction over the action.  28 U.S.C. § 1441(a).  All defendants must agree to the removal.  28 U.S.C. § 1446(b)(2)(A).  A notice of removal must be filed in the federal district court within thirty days of the defendant’s receipt of the consumer’s pleadings.  28 U.S.C. § 1446(b)(1).

The defendant’s notice of removal must contain “a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a). Thus, when a defendant removes a consumer case to federal court, its removal petition must assert the grounds for federal court jurisdiction over the case.  Since Article III standing is jurisdictional, this will leave the defendant in a difficult position:  its strongest defense in federal court may be that the plaintiff lacks Article III standing, but if the defendant argues against standing it will be taking a position contrary to that asserted in its notice of removal. 

Not only may this lead to the case being remanded to state court, but, if there was no objectively reasonable basis for removal, the federal court’s order of remand may require the defendant to pay the plaintiff’s fees and expenses.  28 U.S.C. § 1447(c), as interpreted by Martin v. Franklin Capital Corp., 546 U.S. 132, 141 (2005). When a defendant argues against Article III jurisdiction after having removed a case, the federal court has solid grounds for finding that there was no objectively reasonable basis for removal.  A number of courts have required the defendant to pay the plaintiff’s fees and expenses in this scenario.  See cases cited at NCLC’s Fair Debt Collection § 11.15.13.  A defendant in this situation may even face Rule 11 sanctions. 

Both parties and the court should have an interest in resolving standing at an early stage after a case is removed to federal court, so that time and resources are not devoted to a case that is later remanded to state court. However, there are several ways that the question can arise in federal court, each of which presents different risks for the defendant.

One way that the question of Article III standing can come before the court is that the defendant may file a motion to dismiss for want of jurisdiction.  This is perhaps the riskiest option for the defendant, as the defendant will be arguing a position directly contrary to the notice of removal that it filed.

A second way that the question of Article III standing can arise after removal is that the federal court can raise it sua sponte.  If the court asks for briefing on whether there is Article III standing, the defendant may take the position that there is federal court standing for the consumer’s claim—just to keep the case out of state court.  From the defendant’s point of view, this is a safer approach, because the defendant is not contradicting its own notice of removal.  However, it can be a bewildering scene for a defendant to be arguing for a broad view of federal court Article III standing.

If the defendant does argue that there is Article III standing, the defendant’s arguments should be helpful to the consumer if the case stays in federal court and if standing comes up again in the trial court or on appeal.  The defendant’s support of standing should also help the consumer if the case is remanded to state court and state court standing becomes an issue.

A middle course for the defendant when the court raises standing sua sponte is to not argue one way or another that Article III standing exists in the federal court.  But, upon removal, it is the defendant that bears the burden of showing standing.  Failing even to try to meet this burden is strong evidence that removal was objectively unreasonable, entitling the consumer to the expenses and fees of dealing with removal. 

A final way in which the question of Article III standing can arise is that the plaintiff can make a motion to remand the case.  This again puts the defendant in a bind, because it forces the defendant to argue for a broad interpretation of Article III standing requirements or face sanctions, but it also creates difficult choices for the plaintiff, discussed later in this article.

Other Advantages for Consumers Where Federal Claims Start in State Court

If the consumer brings a federal claim in state court and, after removal to federal court, the court finds no Article III standing, the court must remand the case back to the state court. See 28 U.S.C. § 1447(c) (“If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.”).  See also the cases cited at NCLC’s Fair Credit Reporting § 11.3.1.2.

After remand to state court, the case can proceed even if the statute of limitations has already run, so long as the original state case was filed within the statute of limitations.  On the other hand, if the case had been initially filed in federal court, and the court instead dismissed the case, the question of whether a new case can be filed in state court after the limitations period has run will vary by state and may depend on whether state savings legislation tolls the limitations period after a federal case is dismissed without prejudice.

When a case is initially filed in federal court and the court finds no Article III standing, it must dismiss the case withoutprejudice.  Mack v. Resurgent Capital Servs., L.P., 2023 WL 3861896 (7th Cir. June 7, 2023).  Since Article III standing is jurisdictional, the court does not have jurisdiction to reach the merits and dismiss with prejudice.  Nevertheless, occasionally a federal court will improperly dismiss a case with prejudice.  A dismissal with prejudice bars refiling of the case in state court, forcing the plaintiff to appeal the federal dismissal if only to obtain a dismissal without prejudice. But where the case was initially filed in state court, by federal statute, after removal, a court that finds no federal court standing, “shall” remand the case back to state court. 28 U.S.C. § 1447(c).

Consumer Choices After a Case Is Removed to Federal Court

Even if a case remains in federal court after removal, the consumer is in a stronger position than if the case was filed initially in federal court. As described supra, the defendant may face sanctions if it argues that there is no Article III standing. If the court considers standing sua sponte, the defendant may even argue for Article III standing. 

If the question of Article III standing is raised sua sponte by the court, there is nothing inconsistent with the consumer, after initially filing in state court, arguing in federal court that there is Article III standing.  Where either of two courts has jurisdiction over a case, the consumer has the right to choose to file the case in state court.  If federal court standing is denied, the case will be remanded back to state court where standing requirements may be more flexible, and the statute of limitations will not have run in the interim.

If neither the defendant nor the court raises the standing issue, the plaintiff has the right to do so by filing a motion to remand.  There are a number of reasons the plaintiff might not want to do so. The consumer should not seek remand if the consumer would prefer to stay in federal court.  In addition, filing a remand motion may place the consumer in the position of having to argue for a restrictive interpretation of Article III standing, which may add to the body of decisions that are closing this forum to meritorious consumer claims. 

Even if the consumer prefers to litigate in state court, a remand motion can be seen as an admission that there is no Article III standing, which can hurt the consumer’s chances of the state court finding standing after a remand.  While many state courts have less restrictive standing requirements than federal courts, it is common for state courts to have some sort of injury requirement.  Arguing in federal court that there is no concrete injury will also likely preclude the consumer from seeking actual damages in state court for injuries that would have qualified as concrete injuries under federal standing law.

Some consumer practitioners file remand motions where the federal appellate decisions in their Circuit are clear that the plaintiff lacks Article III standing. These remand motions do not admit that there is no standing, but instead indicate that the consumer has chosen state court, point to the cases in the Circuit finding no standing, and state that the burden to prove Article III standing is on the party invoking federal jurisdiction. If the defendant—the party that invoked federal jurisdiction—does not meet this burden in response to the motion to remand, the case must be remanded. See, e.g., Thornley v. Clearview AI, Inc., 984 F.3d 1241 (7th Cir. 2021). There is a fine line, however, between arguing that the defendant has not met its burden of showing standing and admitting that there is no Article III standing.

Any doubts regarding the propriety of removal should be resolved in favor of the plaintiff’s choice of forum in state court. See, e.g., Morris v. Nuzzo, 718 F.3d 660, 668 (7th Cir. 2013).  Remand is particularly likely where the consumer’s complaint does not identify any harm that has been recognized as concrete by the relevant Circuit and seeks only statutory rather than actual damages. The defendant may be in a particularly difficult position to claim there is standing where its answer to the consumer’s complaint alleges lack of standing.

If the defendant agrees to settle the case before standing in federal court is resolved, it is prudent to add a settlement provision dealing with the possibility that the federal court, in reviewing the settlement, will hold sua sponte that it does not have Article III jurisdiction over the case and cannot enter the settlement.  A settlement provision can state that if that happens the defendant agrees that the case will be refiled in a state court that has jurisdiction for approval of the settlement.

NCLC’s Updated 50-State Analysis of State Court Standing Requirements

As described above, the key to filing federal claims in state court is that a state court may have more flexible standing rules than those in federal courts. To determine a specific state’s standing rules, NCLC has just updated its 50-state analysis of state court standing requirements, with updated findings in almost half the states since the first release of the analysis in March of 2022. See NCLC’s Consumer Class Actions Appx. G (NCLC gives access to this appendix both to subscribers to that treatise and to subscribers to seven other NCLC treatises, as described infra.).

The appendix analyzes standing decisions from the highest courts in all 50 states and the District of Columbia.  It finds that, two years after Ramirez was issued, only two state supreme courts—Texas and West Virginia—have cited the decision favorably in a majority opinion regarding the definition of a concrete injury under applicable state law standing requirements. See Mosaic Baybrook One, L.P. v. Simian, ___ S.W.3d ___, 2023 WL 3027992 (Tex. Apr. 21, 2023); State ex rel. W. Va. University Hospitals-East, Inc. v. Hammer, 866 S.E.2d 187, 196 (W. Va. 2021).  Moreover, two justices dissented from the West Virginia ruling, and in the next year the court held that the legislature’s grant of standing is sufficient. See State ex rel. Dodrill Heating & Cooling, L.L.C. v. Akers, 874 S.E.2d 265 (W. Va. 2022).

The high courts in only the District of Columbia, Kentucky, and South Carolina, plus possibly Texas, have adopted Spokeo’s standards for standing.  Far more common is for state courts to reject or ignore not only Ramirez and Spokeo, but even Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), the seminal decision setting forth the Supreme Court’s general test for standing, including the concrete injury requirement that Ramirez construed so harshly. See NCLC’s Consumer Class Actions Appx. G.3.1.

NCLC’s state-by-state standing analysis focuses on whether a state’s supreme court requires a showing of a concrete injury, whether its general test for standing differs from the U.S. Supreme Court’s, and whether it treats legislative creation of a right and a cause of action to enforce it as satisfying the state’s standing requirements. There are variations in standing approaches from state to state, so it is imperative that a consumer practitioner be familiar with the exact requirements for a particular state.

Because of the importance of this state-by-state determination, NCLC provides access to its just-updated 50-state standing analysis at NCLC’s Consumer Class Actions Appendix G not only to subscribers to NCLC’s Consumer Class Actions, but also to subscribers to seven other NCLC treatises.  These seven treatises focus on federal claims that are most likely to face federal court standing issues.  Subscribers to these seven treatises can access the 50-state analysis either by navigating directly to Consumer Class Actions Appendix G, or by going to these locations in their own treatises:

• NCLC’s Fair Debt Collection Appx. I;
• NCLC’s Fair Credit Reporting § 11.3.1.2 (see the last footnote);
• NCLC’s Federal Deception Law Appx. M;
• NCLC’s Truth in Lending Appx. I;
• NCLC’s Mortgage Servicing and Loan Modifications Appx. I;
• NCLC’s Mortgage Lending Appx. P;
• NCLC's Consumer Banking and Payments Law Appx. J.

Why Federal Standing Rulings Should Not Apply to State Courts

NCLC’s state-by-state analysis of state standing requirements also goes into detail why state courts should not follow Ramirez and Spokeo. Many state constitutions do not limit state courts’ jurisdiction to “cases and controversies,” which is the basis of the Supreme Court’s federal court standing limitations. See NCLC’s Consumer Class Actions Appx. G.4. In many of the states without a “cases or controversies” provision, courts hold that, when the legislature creates a cause of action, state courts have the power to hear it. See NCLC’s Consumer Class Actions Appx. G.3.2.  There is a strong argument that, without a basis in the state constitution, refusing to allow courts to hear a cause of action created by the legislature disregards the courts’ proper role and intrudes into the legislative prerogative. 

Federal courts are courts of limited jurisdiction, while the main trial court in a state is typically a court of general jurisdiction, created to exercise expansive jurisdiction.  Moreover, many state constitutions include an “open courts” provision, which may confer standing on persons who suffer the infringement of a legal right, regardless of whether it causes additional injury. See Committee to Elect Dan Forest v. Employees Political Action Committee, 853 S.E.2d 698 (N.C. 2021).

In states where the state constitution uses the same “case or controversy” language found in the U.S. Constitution, state courts often do turn to U.S. Supreme Court decisions.  But even then, the interpretation of the clause in a state constitution is a matter of state law, not federal law, and should be interpreted in the context of the state’s own constitution, history, and policy.  As noted above, few of these states have adopted Spokeo or Ramirez.

Potential Advantages and Disadvantages of Using State Courts for Federal Claims

Bringing federal claims in state court brings to the fore the question whether federal claims are better litigated in state or federal court.  The answer will vary from state to state and even from county to county. 

Far more universal though is the fact that defendants prefer federal court.  Defendants typically remove consumer claims filed in state court to federal court whenever there is potential federal jurisdiction, and in those cases, they often argue vigorously in favor of Article III standing to keep the case in federal court. 

That defendants prefer federal court does not necessarily mean that the consumer is better off in state court, but it does suggest that consumers may be able to obtain better rulings and settlements in a venue in which the defendant feels less comfortable.  There are several reasons for the defendant’s lack of comfort in state court.

Because federal claims are more frequently litigated in federal court, defense attorneys are better able to predict the outcome of a case in federal court. Attorneys specializing in defense of federal claims may be less experienced with a local state court procedures and judges and may find that more travel is required to a remote county court. State cases may be more time-intensive for both sides, which not only adds costs to the defendant, but increases the size of an attorney fee award in favor of a prevailing consumer.

As for why a consumer might prefer state court, here are a few considerations:

• State court cases are not vulnerable to being transferred elsewhere and consolidated in a multi-district litigation.
• State courts may treat more seriously state claims added to the federal claims and will not dismiss a case just because the federal claim is dismissed.
• Many consumer attorneys with a general practice may be most experienced with their local state court and may find federal court less familiar.
• Federal court class actions will require that each class member suffer injury, while this may not be the case with a state court class action, allowing recovery of statutory damages in the state court class action.
• As described earlier, state courts may treat certain types of harm that the relevant Circuit considers not to be concrete—such as confusion, annoyance, or denial of information that the law requires a consumer to receive—as meeting any injury requirement that the state court’s standing doctrine imposes and as eligible for actual damages.
• Consumers may fare better dealing with arbitration clauses in state than in federal court. See, e.g., Coinbase, Inc. v. Bielski, 2023 WL 4138983 (U.S. June 23, 2023) (where federal court finds arbitration requirement unenforceable and defendant seeks appellate review of that decision, the federal court must stay all proceedings pending resolution of the appeal).
• State court juries may be drawn from a more local pool than federal juries and may be more favorable to a consumer.
• Depending on the state or even the county, state court judges may be more sympathetic to consumer claims than a federal judge.  State court judges’ previous experience may have been with a general law practice, while federal judges often come out of large law firms that primarily do defense work.
• State court filing fees may be lower.

Potential disadvantages of bringing federal claims in state court include:

• State class action procedures may be more restrictive than federal ones.  For a state-by-state analysis of each state’s class action procedures, see NCLC’s Consumer Class Actions Appx. C.   
• More issues arise when a plaintiff brings a nationwide class action in a state court than in federal court.
• Out-of-state discovery and service of process may be more complicated.
• Just as in some cases state judges may be preferred, in other localities there may be a preference for federal judges, particularly where legal issues are more complex.
• State court judges may be less familiar with, and less comfortable with, federal consumer laws and class actions under them, and may have fewer research and staff support than federal judges.
• State appellate courts in some states are unfavorable to consumers, particularly in states that elect judges and where industry has campaigned heavily in favor of conservative candidates.
• Where a local attorney is the defendant (e.g., an FDCPA claim against the collection attorney instead of against a debt buyer or collection agency), a state court judge who sees that attorney often in court (or elsewhere) may not be as receptive to such a claim as a federal court judge.
• State court judges may not be as familiar with an award of significant attorney fees under a federal fee shifting statute as federal judges and will need to be shown federal court precedent.

When Is a Federal Claim at Risk of Dismissal on Article III Standing Grounds?

The main reason to bring a federal claim in state court is where state court standing rules are more flexible than those in federal court. The first consideration then in deciding whether to file a federal claim in state court is the risk that a federal court will dismiss the case on standing grounds.  Such a dismissal is often dependent on the specific federal statutory provision alleged to have been violated, so consumer practitioners should consider not only general Article III standing precedent, but specific precedent related to the statutory violation at issue.

For analysis of recent federal caselaw interpreting Ramirez as it applies to claims under specific provisions of a particular federal consumer statute, see these NCLC treatises:

• Fair Debt Collection § 11.15 (FDCPA);
• Fair Credit Reporting § 11.3 (FCRA);
• Federal Deception Law § 7.4 (TCPA);
• Consumer Class Actions § 10.3.2 (class action issues);
• Truth in Lending § 11.1a.3 (TILA);
• Mortgage Servicing and Loan Modifications § 3.12.2.2 (RESPA);
• Consumer Banking and Payments Law §§ 5.17.6.2, 5.17.6.2a, 5.17.6.2b, 5.17.6.2c (EFTA).

Acknowledgments

Thanks for their assistance with this article to Cassandra Miller of Edelman, Combs, Latturner & Goodwin, and to NCLC staff attorneys April Kuehnhoff, Stuart Rossman, Shennan Kavanagh, and Jon Sheldon.