Nov. 16, 2022 – The 30-day deadline for removing a case to federal court begins to run only once a plaintiff specifies a damages figure, the U.S. Court of Appeals for the Seventh Circuit has ruled.
In Rock Hemp Corp. v. Dunn, No. 22-1171 (Oct. 11, 2022), the Seventh Circuit also held that a federal statute that authorizes a federal court to remand a removed case to state court does not authorize such a remand on the ground of waiver.
Two Complaints, No Damages Amount
Rock Hemp Corporation (Rock Hemp) contracted with CBDINC to buy 6,000 hemp seeds. Adam Dunn, Ryan Davies, and Shawn Kolodny (Appellees) used CDBINC as a fictitious business name.
The contract contained an arbitration clause. Under the clause, the parties were required to submit any dispute arising out of the contract to binding arbitration.
After it bought the seeds, Rock Hemp sued the Appellees in a state court in Wisconsin; the complaint was filed before May 10, 2021.
Rock Hemp alleged that the seeds were of poor quality and made multiple tort and contract claims, including fraudulent representation, misrepresentation, and breach of warranty.
After the Appellees moved to dismiss the lawsuit, Rock Hemp filed an amended complaint.
Instead of specifying a damages amount, each complaint stated that damages were “an amount to be determined, plus pre-judgment interest, all taxable costs and fees, actual attorney[’s] fees, [and] exemplary and/or punitive damages as applicable.”
The Appellees moved to dismiss the second complaint.
Case Removed to Federal Court
On June 15, 2021, Rock Hemp’s attorney emailed the appellee’s attorney and stated that Rock Hemp sought $250,000 in damages. On June 22, the appellees removed the case to the U.S. District Court for the Western District of Wisconsin.
Rock Hemp responded with a motion to remand the case to state court. The Appellees then filed a motion to dismiss for improper venue.
The district court denied Rock Hemp’s motion. The district court granted the Appellees’ motion, on the grounds that Rock Hemp’s claims were subject to the arbitration clause.
Rock Hemp then filed for reconsideration under FRCP 60, relating to relief from a judgment or order. The district court denied that motion and Rock Hemp appealed.
Precedent Squarely on Point
Writing for a three-judge panel, Judge Joel Flaum explained that under 28 U.S.C. section 1446, the deadline for removing a case to federal court is 30 days, calculated from either: 1) the date the initial pleading is received by the defendant, if the case is removable based on the initial pleading; or 2) the date the defendant receives a copy of an amended pleading, motion, order, or other paper that allows the defendant to ascertain that the case is removable.
Rock Hemp argued that the two complaints it filed in state court gave the Appellees notice that its claims exceeded the $75,000 amount-in-controversy requirement for diversity jurisdiction under 28 U.S.C. section 1332.
Because the Appellees didn’t remove the case until 30 days after the filing of its complaints, Rock Hemp argued, removal was untimely.
In support of its argument, Rock Hemp cited Wis. Stat. section 895.043(6), which specifies that punitive damages may not exceed twice the amount of any compensatory damages or $200,000, whichever is greater.
Judge Flaum pointed out that in Walker v. Trailer Transit, Inc., 727 F.3d 819 (7th Cir. 2013), the Seventh Circuit held that the 30-day clock for the deadline to remove a case never began to run because a plaintiff never disclosed a specific damages demand, even though he claimed he was entitled to 71% of the defendant’s profits.
Walker was squarely on point, Flaum concluded.
“Walker makes explicit that inquiry into the subjective knowledge of the defendant and assessment of what the defendant should have discovered is improper,” Judge Flaum wrote.
“It is also not reasonable to conclude that Appellees should have assumed the amount in controversy threshold was met based off their knowledge that the seeds cost $6,020, even in light of Rock Hemp’s punitive damages claim.”
Waiver Cannot Defeat Removal
Rock Hemp also argued that the Appellees waived their right to remove the case by participating in the state court litigation.
Flaum pointed out that in Rothner v. City of Chicago, 879 F.2d 1402 (7th Cir. 1989), the Seventh Circuit held that 28 U.S.C. section 1446 could not be interpreted to authorize a federal court to remand a removed case on the ground of waiver.
Rock Hemp argued that Rothner was no longer good law because Congress deleted the wording in 28 U.S.C. section 1447 that the Rothner court had relied upon in holding that it had the authority to review the case.
But that fact was immaterial, Judge Flaum reasoned, because Congress had made no substantive changes to the relevant wording in 28 U.S.C. section 1446 since 1949.
“The post-Rothner amendments to section 1447 did not impact Rothner’s conclusion that ‘section 1446(b) cannot be interpreted to authorize remands on the grounds of waiver,’” Flaum wrote.
Arbitration Clause Claim
Rock Hemp also argued that the contract – and with it the arbitration clause – was void because the Appellees had induced it to enter into the contract by fraud.
But Flaum pointed out that the U.S. Supreme Court held in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.E.2d 1270 (1967) that a party may not escape an arbitration clause by claiming that it was fraudulently induced to agree to the contract as a whole.
Under that holding, Flaum noted, a court may only consider a claim that the party was fraudulently induced to enter into the arbitration clause itself.
“Rock Hemp only alleges that Appellees fraudulently misrepresented the quality of the seeds sold,” Judge Flaum wrote. “These alleged misrepresentations do not vitiate the formation of the arbitration clause.”