Compulsory arbitration cases historically posed problems for diverse defendants seeking to remove a personal injury case to federal court. Specifically, some plaintiffs personal injury attorneys may file a case initially as an arbitration matter and then either transfer the case to major jury after the 30-day period for removal has expired, or simply file a de novo appeal to the award since the arbitration limit no longer applies to any resulting jury verdict. In other cases, a plaintiffs attorney may attempt to transfer a major case to the arbitration program when threatened with removal. At the moment, we will put to one side whether the use of the arbitration program for the purpose of defeating federal jurisdiction is clever lawyering or bad faith, and refer to these herein as an incongruous arbitration case.

Regardless of how the tactic is characterized, the arbitration limits in Pennsylvania state courts are universally below $75,000; thus, an initial pleading demanding arbitration theoretically does not satisfy the amount in controversy requirement to invoke federal diversity jurisdiction. To add to the ambiguity, plaintiffs attorneys may demand arbitration on the cover sheet of the pleading, but craft their damage averments and ad damnum clauses in some ambiguous fashion to argue later the initial pleading did in fact provide notice to the defendant that damages exceeded $75,000. Accordingly, a defense attorney presented with such a pleading faces the dilemma of either prematurely removing a case that may not initially satisfy federal jurisdiction (potentially subjecting himself or herself to sanctions if the case is remanded); or waiving removal by failing to timely file the notice of removal within 30 days of the filing of the ambiguous pleading.

Recent case law and amendments to the removal statute suggest solutions to the dilemma posed by the incongruous arbitration case. In Alston v. Wal-Mart Stores East, No. 12-3491 (E.D. Pa. September 20, 2012), the plaintiff, Louise Alston, a Pennsylvania resident, initially filed suit in the Philadelphia Court of Common Pleas as a “major jury” case and claimed damages “in an amount in excess of the jurisdictional amount requiring submission to arbitration.” Within 30 days of filing her complaint, Wal-Mart requested that Alston agree to limit her damages to $75,000 to avoid removal to federal court. In response, Alston voluntarily transferred her case to the Philadelphia Compulsory Arbitration Program, where damages are limited to $50,000. Rather than remove the case at that time and risk potential sanctions, Wal-Mart answered Alston’s complaint and in new matter, inter alia, averred, “Plaintiff’s damages, if any, are limited to an amount not in excess of $75,000 at the arbitration and/or trial of this matter.” Alston denied these averments in her reply to the defendant’s new matter, and Wal-Mart removed the case to federal court based upon the pleadings that indicated that the amount in controversy was sufficient.

After the notice of removal was filed, Alston filed a motion for remand and claimed “that the notice of removal should have been filed within 30 days of … service of the complaint.” Wal-Mart responded to the timeliness argument by asserting “that it was unclear from the complaint that the action was initially removable, and plaintiff’s transfer of the action to the Philadelphia Arbitration Program, where damages are capped at $50,000, further beclouded the issue.” Wal-Mart further argued that Alston’s reply to new matter was an “other paper” under 28 U.S.C. §1446(b)(3), from which it could be first ascertained that the case was removable. While claiming that the initial pleading did provide notice of an amount in controversy in excess of $75,000, Alston simultaneously contended that the amount in controversy was not satisfied because the arbitration program limited recovery to $50,000.

In denying Alston’s motion to remand, U.S. District Judge Edmund V. Ludwig of the Eastern District of Pennsylvania agreed that the initial complaint’s general allegations of injury and demand in excess of the arbitration limits were insufficient to commence the 30-day period for removal, particularly since she transferred the case to the arbitration program. Accordingly, the court found that the notice of removal filed within 30 days of the plaintiff’s reply to the new matter was timely under the circumstances. Within the context of the removal statute, the plaintiff’s reply to new matter constituted an “other paper” under 28 U.S.C. §1446(b) that activated the 30-day removal period. The court also concluded that the limits on Alston’s recovery while the case was in the arbitration program did not outweigh the “other evidence of record — plaintiff’s demand in excess of the arbitration limits, her refusal to stipulate to a $75,000 cap on her damages, and her denial of new matter stating her damages were capped at $75,000.” Based upon that record, the Alston court concluded that there was no legal certainty that her damages could not exceed $75,000 and removal was proper.

In denying Alston’s motion to remand an arbitration case, Ludwig followed the lead of several other opinions from this district. For example, in Howard v. Wal-Mart Supercenter, No. 09–CV–4530 (E.D. Pa., November 30, 2009), U.S. District Judge J. Curtis Joyner of the Eastern District of Pennsylvania refused to remand an arbitration case under similar circumstances. In Howard, the plaintiff claimed that the amount in controversy did not exceed $75,000. Like the pleadings filed in Alston, Blondell Howard’s complaint stated general allegations of injury and designated the case as an arbitration matter. There, however, the complaint was even more ambiguous with respect to the amount in controversy. As described by the court:

“Plaintiff avers that she ‘demands judgment in an amount not in excess of $50,000 dollars, plus all reasonable attorneys fees, costs, and any other relief the court deems necessary.’” However, “paragraph 8 of the complaint reads: ‘If arbitration hearing is appealed, the plaintiff demands a jury trial in an amount in excess of $50,000 dollars.’”

Faced with these inconsistent averments, Wal-Mart answered with new matter as follows: “Plaintiff’s damages, if any, are limited to an amount not in excess of $50,000/$75,000 at the arbitration and/or trial de novo in this matter.” In her reply to the new matter, Howard denied these averments. Wal-Mart also sent a proposed stipulation seeking a limitation on damages through all phases of the case to $75,000. Based upon the plaintiff’s refusal to stipulate to a damage limitation and her denial of new matter, the court denied Howard’s motion to remand the case despite its designation below as an arbitration case.

The removal of an incongruous arbitration case based upon a pleading filed after the initial complaint is consistent with the 2011 amendments to the federal removal statute. The federal removal statutes were amended to address jurisdictions like Pennsylvania where the amount in controversy is not always discernible from the initial pleading. As amended, 28 U.S.C. §1446(c)(A) states that the removing party “may assert the amount in controversy if the initial pleading seeks … (ii) a money judgment but the state practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded.” Under Pennsylvania state practice, Pennsylvania Rule of Civil Procedure 1021(b), “any pleading demanding relief for unliquidated damages shall not claim any specific sum.” Therefore, the amended removal statute allows a diverse defendant to remove most personal injury cases because Pennsylvania pleading practice does permit demands for a sum certain. However, Rule 1021(c) also requires an initial pleading to state whether the amount claimed “does or does not exceed the jurisdictional amount requiring arbitration.” Pleading that the case falls within the jurisdictional limits of arbitration is not a binding limit on damages since the case can be transferred out of the arbitration program administratively or the award can be appealed for any reason and the limits no longer apply. In other words, Pennsylvania practice “permits recovery of damages in excess of the amount demanded” even in arbitration cases. Accordingly, the provisions of 42 U.S.C. §1446(c)(3)(A) appear to apply squarely to a complaint seeking damages below the jurisdictional limit for arbitration.

As amended, the removal statute makes clear that the 30-day period for removal does not begin with service of a complaint claiming damages below the arbitration limit “because the amount in controversy does not exceed the [jurisdictional] amount.” As set forth in the recent district court cases discussed above, a reply to new matter can be considered “other paper” within the meaning of the removal statutes. (See also Bishop v. Sam’s East, NO. 08-4550 at *11-13 (E.D. Pa. Jun. 23, 2009).) However, prior to the recent 2011 amendments to the removal statute, district courts considering documents served after the initial 30 days noted the absence of appellate authority as to what exactly constituted qualifying “other paper.” (See Inaganti v. Columbia Properties Harrisburg LLC, No. 10-1651 (E.D. Pa. May 25, 2010); Bishop, (noting absence of a U.S. Court of Appeals for the Third Circuit decision on this issue).) Accordingly, the 2011 amendment stating that “information relating to the amount in controversy in the record of the state proceeding, or in responses to discovery, shall be treated as an ‘other paper’ under Subsection (b)(3)” was a welcome clarification.

Based upon the recent amendments to the removal statute and the recent decisions of several district court judges, the solution to the dilemma of an incongruous arbitration complaint involves seeking “other paper” that relates to the issue of the amount in controversy. Alston and Howard suggest that filing and serving new matter on the amount in controversy issue can clarify the true extent of damages being sought. Under this line of authority, removal is certainly appropriate if the plaintiff denies new matter that the amount in controversy is less than $75,000. The district courts cited herein also considered the plaintiff’s refusal to stipulate that damages were less than $75,000, and this is a worthwhile exercise to avoid removing a case that the plaintiff truly intends to be resolved within the arbitration limits. In Inaganti, the defendant served requests for admission seeking an admission that damages sought did not exceed $75,000. Both the 2011 amendments and U.S. District Judge Ronald Buckwalter of the Eastern District of Pennsylvania’s 2010 opinion in the Inaganti case indicate that responses to discovery can serve as a basis for removal as well. Again, even if the filing of an incongruous arbitration complaint can be justified as clever lawyering, it is more difficult to justify wasting judicial and client resources to conduct a pointless arbitration. Accordingly, defense counsel representing a diverse party should promptly institute efforts to discern the true extent of damages claimed upon receiving an arbitration case.

With respect to the question of whether using the arbitration program as a removal avoidance tactic is clever lawyering or bad faith, the amended removal statute appears to provide some insight. Before the 2011 amendments, there was a strict one-year deadline to remove a diversity case. Accordingly, even if a plaintiff intentionally used the arbitration program solely to avoid removal, failed to cooperate in discovery while the case was in arbitration, and failed to meaningfully participate in the actual arbitration, then the case could not be removed if more than one year passed from the commencement of the action. Significantly, the amended rules at 28 U.S.C. §1446(c) now permit removal of a diversity case more than one year after filing if there is evidence that the plaintiff “acted in bad faith in order to prevent a defendant from removing the action.” Accordingly, the use of the arbitration program as a removal avoidance tactic not only permits removal beyond the initial 30 days after the filing of the complaint, but also appears to eliminate the one-year deadline for removal. Indeed, the amended statute is specific on that very point: “If the notice of removal is filed more than one year after commencement of the action and the district court finds that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal, that finding shall be deemed bad faith under paragraph (1).” Misusing the arbitration program to avoid removal would appear to be deliberate conduct designed to obscure the actual amount in controversy. Moreover, efforts by the plaintiff to deliberately avoid responding to new matter or requests for admissions on the amount in controversy issue could certainly be considered additional evidence of bad faith. Given that there is no longer any real incentive to delaying full disclosure, and there is clear case law from this district addressing the removal of incongruous arbitration cases, it may be that this tactic will fade into obscurity. •

Patrick McDonnell devotes his practice to civil litigation and has tried over 100 civil cases to verdict in federal and state courts throughout the region. He is a shareholder in the Law Offices of McDonnell & Associates, a 14-person litigation boutique with offices in King of Prussia, Pa., and Cherry Hill, N.J.

John McConnell is an associate at the firm. His practice is devoted to personal injury, products liability, premises liability and premises security. McConnell is a member of the Loyola University Philadelphia alumni chapter board of directors.