People of the State of California, acting by and through San Francisco City Attorney David Chiu v. InComm Financial Services, Inc. et al

Filing 37

ORDER GRANTING MOTION TO REMAND. The case shall be REMANDED to the California Superior Court for the County of San Francisco. Signed by Judge William H. Orrick on 03/26/2024. (jmd, COURT STAFF) (Filed on 3/26/2024)

1
2
3
4

UNITED STATES DISTRICT COURT

5

NORTHERN DISTRICT OF CALIFORNIA

6
PEOPLE OF THE STATE OF
CALIFORNIA, ACTING BY AND
THROUGH SAN FRANCISCO CITY
ATTORNEY DAVID CHIU,

7
8
9

Plaintiff,

10

United States District Court
Northern District of California

ORDER GRANTING MOTION TO
REMAND
Re: Dkt. No. 28

v.

11

Case No. 3:23-cv-06456-WHO

INCOMM FINANCIAL SERVICES, INC.,
et al.,

12

Defendants.

13
14

The People of the State of California, by and through San Francisco City Attorney David

15
16

Chiu (“the City”), filed this lawsuit against defendants InComm Financial Services, Inc.

17

(“InComm”), TBBK Card Services, Inc. (“TBBK”), Sutton Bank (“Sutton”) and Pathward N.A.

18

(“Pathward”) in state court. The defendants removed the case to federal court based on diversity

19

jurisdiction, and now the City moves to remand it. Because the State of California is the real party

20

in interest here, and California is not a citizen of any state for the purposes of diversity

21

jurisdiction, there is no federal jurisdiction to hear this suit. For that and the following reasons,

22

the City’s motion is granted.
BACKGROUND

23
24
25

I.

FACTUAL BACKGROUND
The following facts are alleged in the plaintiff’s complaint. (“Compl.”) [Dkt. No. 1-1] Ex.

26

B. Defendant InComm is a South Dakota corporation headquartered in Georgia that provides

27

“payment-related services” to consumers and business. Id. ¶ 9. One of its products is called a

28

“Vanilla card.” Id. ¶ 9. These cards function as nonreloadable debit cards and, like debit cards,

United States District Court
Northern District of California

1

can be used as an alternative to cash. Id. ¶¶ 1, 21–22. They are sold directly to consumers and are

2

not intended or designed to be used for business purposes. Id. ¶ 26. They are sold in-store at

3

retailers throughout California and in San Francisco, and they can also be purchased online. Id.

4

¶ 31. The other defendants--TBBK, a South Dakota corporation headquartered in South Dakota;

5

Sutton, an Ohio corporation headquartered in Ohio; and Pathward, a Delaware corporation

6

headquartered in South Dakota--issue the Vanilla cards sold and serviced by Incomm, including

7

cards sold in San Francisco and throughout California. Id. ¶¶ 10–12.

8

The City alleges that Vanilla card purchasers and consumers have, since at least 2013, been

9

impacted by a practice called “card draining.” Id. ¶¶ 41, 43. This occurs when the funds on a card

10

are used or drained by a third-party without the cardholder’s permission, and often before the

11

cardholder has ever had the chance to use the card. Id. ¶¶ 41-43. The City alleges that this

12

“relatively unsophisticated crime” is made possible by InComm’s lax and inadequate security

13

measures. Id. ¶ 50. It asserts that InComm knows about the card draining, and knows how and

14

why its cards are drained, but has failed to implement reasonable security measures to make its

15

products less susceptible to theft. Id. ¶¶ 53–73. The City also alleges that the defendants fail to

16

provide refunds to Vanilla card consumers, in contravention of their legal obligations. Id. ¶¶ 74–

17

93.

18

The complaint asserts that consumers are likely to be misled about the security of the

19

Vanilla cards and about InComm’s refund process. See id. ¶¶ 94–103. It also alleges that the

20

defendants’ conduct harms consumers by forcing them to spend time and money waiting for

21

refunds, by shaming consumers when their cards are declined for lack of funds, and by

22

embarrassing consumers that give the cards as gifts, only to be told by the recipient that there were

23

no funds on the card. Id. ¶¶ 104–11.

24

II.

25

PROCEDURAL BACKGROUND
This lawsuit was filed in state court, alleging that the defendants violated California’s

26

Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq; see Compl. ¶¶ 118–24.

27

The City seeks an injunction, restitution, and civil penalties. See Compl. at pp. 41–42.

28

InComm removed the case to this court with the consent of the other defendants. [Dkt. No.
2

1

1.]. The City has moved to remand the case to state court. (“Mot.”) [Dkt. No. 28.]. InComm filed

2

an opposition. (“InComm Oppo.”) [Dkt. No. 30.]. Pathward also filed an opposition. (“Pathward

3

Oppo.”) [Dkt. No. 31.]. The City replied. (“Repl.”) [Dkt. No. 33.]. I vacated the hearing because

4

the motion was adequately presented on the papers.

5

United States District Court
Northern District of California

6

LEGAL STANDARD
Generally, a case can only be removed from state to federal court when the federal court

7

would have had original jurisdiction over it. 28 U.S.C. § 1441(a). Under 28 U.S.C. § 1332(a)(1),

8

federal diversity jurisdiction exists when each plaintiff is a citizen of a different state from each

9

defendant and the amount in controversy exceeds $75,000. Natural persons are the citizens of the

10

state in which they are domiciled—that is, the state in which they reside with intent to remain

11

permanently. See Adams v. W. Marine Prod., Inc., 958 F.3d 1216, 1221 (9th Cir. 2020).

12

But a state is not considered to be a citizen of anywhere, and where a state brings a case

13

under its own state law, federal courts do not have diversity jurisdiction. See Mississippi ex rel.

14

Hood v. AU Optronics Corp., 571 U.S. 161, 174 (2014) (citing Mo., Kan. & Tex. Ry. Co. v.

15

Hickman, 183 U.S. 53, 57 (1901) (“Missouri Railway”)). Therefore “neither a state nor a state

16

agency [can] be a party to a diversity action.” Dep’t of Fair Emp. & Hous. v. Lucent Techs., Inc.,

17

642 F.3d 728, 737 (9th Cir. 2011) (“Lucent”) (citation omitted). However, the “mere presence” of

18

the state as the party plaintiff does not defeat diversity jurisdiction unless its interests “satisfy the

19

real party to the controversy requirement.” Id. (citations omitted).

20

Whether a state is the real party in interest for diversity jurisdiction purposes is a question

21

of federal law, although the inquiry is informed by state law. In re Facebook, Inc., Consumer

22

Priv. User Profile Litig., 354 F. Supp. 3d 1122, 1124 (N.D. Cal. 2019). This rule is the same

23

when the plaintiff is not the state itself but has brought suit on behalf of the state, so long as the

24

state is the “real party in interest.” Id. at 1124.

25

“[R]emoval statutes should be construed narrowly in favor of remand to protect the

26

jurisdiction of state courts.” Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 764 (9th Cir.

27

2022) (citation omitted). “The defendant has the burden of proving by a preponderance of the

28

evidence that the requirements for removal jurisdiction have been met.” Id. at 746 (citation
3

1

omitted).
DISCUSSION

2

The crux of the motion requires me to decide whether the City or the State of California is

United States District Court
Northern District of California

3
4

the real party in interest. The parties agree that a state is not a citizen for diversity jurisdiction

5

purposes and agree that if a state brings a lawsuit under state law, there is no basis for federal

6

jurisdiction. See Mississippi, 571 U.S. at 174. The City argues that California is the real party in

7

interest given the nature of the proceedings, the UCL’s goal of protecting the public’s economic

8

and social well-being, the statutory authorization allowing the City to step into the shoes of the

9

State, and the relief requested. See generally Mot. In opposition, the defendants argue that the

10

City is the real party in interest because the lawsuit protects and promotes only San Francisco’s

11

interests and seeks relief that will benefit only the City. See generally Oppo.
Two cases guide the determination of whether the state is the real party in interest: Lucent,

12
13

642 F.3d 728, and Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012). See

14

California v. Purdue Pharma L.P., No. SACV 14-1080-JLS DFM, 2014 WL 6065907, at *2 (C.D.

15

Cal. Nov. 12, 2014). “[T]he overall test is whether the government official or entity’s lawsuit

16

would primarily vindicate state interests and primarily obtain relief for the state, rather than

17

serving primarily parochial interests and obtaining parochial relief.” In re Facebook, 354 F. Supp.

18

3d at 1129. This inquiry requires courts to consider the case as a whole and examine “the essential

19

nature and effect of the proceeding as it appears from the entire record.” Nevada, 672 F.3d at 670

20

(quoting Lucent, 642 F.3d at 740).

21

I.

22

THE NATURE OF THE PROCEEDINGS AS A WHOLE
The defendants argue that the City fails to allege any harm to the state as a whole and

23

instead presumes that the State is always a real party in interest whenever a government entity

24

brings suit under the UCL. Pathward Oppo. 5–6, 10; InComm Oppo. 8–11. In turn, the City

25

asserts that this lawsuit protects and promotes California consumers as a whole and so primarily

26

vindicates the State’s interest in enforcing its consumer protection laws. Mot. 7–10.

27
28

In examining the nature and proceedings as a whole, the guiding inquiry asks “what
interest California has in this litigation pursuant to its laws.” Lucent, 642 F.3d at 738. Though a
4

1

state’s quasi-sovereign interest in enforcing state law does not necessarily make it the real party,

2

see id., it is sufficient when that interest is the primary one in the case, Nevada, 672 F.3d at 671.

3
4

civil action brought by a governmental entity under [the UCL] is “fundamentally a law

5

enforcement action designed to protect the public and not to benefit private parties.”’” California

6

v. HomeAway.com, Inc., No. 2:22-CV-02578-FLA-JPRX, 2023 WL 2497862, at *2 (C.D. Cal.

7

Mar. 14, 2023) (citing City & Cnty. of San Francisco v. PG & E Corp., 433 F.3d 1115, 1125–26

8

(9th Cir. 2006)). “The public has a substantial and specific interest in enforcing consumer

9

protection laws.” Id. (citing Vasquez v. Super. Ct., 4 Cal. 3d 800, 808 (1971) (subsequent history

10
11

United States District Court
Northern District of California

Additionally, “the California Supreme Court and the Ninth Circuit have confirmed that ‘a

omitted)).
In Lucent, 642 F.3d at 735–36, the Ninth Circuit determined that the state agency, rather

12

than the State itself, was the real party in interest, where the discrimination lawsuit alleged that a

13

single individual was subjected to disability discrimination and retaliation at work. The plaintiff-

14

state agency argued that the State was the real party in interest because the statute at issue, the Fair

15

Employment and Housing Act, “state[d] that California has its own interest in such litigation,”

16

including “to protect and safeguard the right and opportunity of all persons to seek . . .

17

employment without discrimination,” avoid domestic unrest, support full utilization of workers,

18

and protect the interests of employees, employers, and the public in general. Id. at 738 (citing Cal.

19

Gov’t Code § 12920). But the Ninth Circuit determined that these were “general government

20

interest[s]” insufficient to satisfy the real party in interest requirement. Id. at 738–39 (citing

21

Missouri Railway, 183 U.S. at 60).

22

In contrast, in Nevada, 672 F.3d at 664, 670–71, the Ninth Circuit determined that the

23

State of Nevada was the real party in interest in a lawsuit brought by the state Attorney General

24

against an out-of-state bank for allegedly fraudulent mortgage and foreclosure practices. The

25

court noted that the Attorney General sued pursuant to a statute that specifically authorized it to

26

bring an action in the name of the state as a whole, and that the suit sought to protect hundreds of

27

thousands of aggrieved homeowners, which affected the state economy as a whole. See id. at 665,

28

670. Looking at the “case as a whole” and the “essential nature and effect of the proceeding,” the
5

1

United States District Court
Northern District of California

2

court determined that Nevada was the real party in interest. Id. at 670.
The Central District reached similar conclusions in two suits brought under the UCL. In

3

Purdue Pharma, 2014 WL 6065907, at *1–3, county counsel sued pharmaceutical manufacturers

4

for allegedly deceptive marketing that created an “epidemic” of opioid abuse. The court reasoned

5

that the UCL permits local prosecutors to bring cases in the name of the people of the State and

6

that this lawsuit sought to address harm ““jeopardizing the health and safety of all Californians,”

7

so the State was the real party in interest. Id. at *3 (citations omitted). Similarly in HomeAway,

8

2023 WL 2497862, at *1, the City Attorney sued an online platform for short-term housing rentals

9

for allegedly violating local law by failing to properly register hosts. The court again noted that a

10

suit brought by the government under the UCL is “fundamentally a law enforcement action

11

designed to protect the public,” and that because the lawsuit sought to eliminate unlawful business

12

practices that contributed to the statewide housing crisis, the State had a concrete interest in the

13

lawsuit. See id. at *2–3, 10 (citations omitted).

14

Here, the proceedings are akin to Nevada, Purdue Pharma, and HomeAway.com, because

15

they seek to assert statewide protections under the UCL and protect California consumers as a

16

whole. See id. at *2. The alleged harms widely affect California consumers and the state

17

economy, including the risk of serious financial harms created by unpaid or late bills, Compl.

18

¶¶ 109–10, embarrassment to consumers, id. ¶¶ 105–08, time wasted with customer service, id.

19

¶¶ 105–06, and the impact of unfair and fraudulent business practices on the state, id. ¶¶ 112–24.

20

By seeking to ameliorate these harms to state consumers, this lawsuit emphasizes and promotes

21

California’s strong state interest in ensuring a fair marketplace and effectively enforcing its

22

consumer protection laws—much like the state in Nevada, Purdue Pharma, and Homeaway, and

23

unlike the overly “general” interest discussed in Lucent, 642 F.3d at 740.

24

Importantly too, the statutory authorization to bring this suit on behalf of California shows

25

that the “essential nature” of the proceeding benefits state interests. See Nevada, 672 F.3d at 670.

26

The UCL specifically authorizes the city attorney of any “city and county”—like San Francisco—

27

to bring suits “in the name of the people of the State of California” against entities that engage in

28
6

United States District Court
Northern District of California

1

unfair competition. Cal. Bus. & Prof. Code § 17206(a).1 This parallels the statute in Nevada,

2

which allowed the attorney general to “bring an action in the name of the State of Nevada” against

3

entities that “engaged or [are] engaging in a deceptive trade practice.” 672 F.3d at 671 (quoting

4

Nev. Rev. Stat. § 598.0963(3)); see also In re Facebook, 354 F. Supp. 3d at 1125 (similar, under

5

Illinois law). It is unlike the general-purpose language of the statute in Lucent, which did not

6

specifically authorize suits on behalf of the state but rather merely explained the importance of

7

protecting and safeguarding the rights of the public. 642 F.3d at 738 (citing Cal. Gov’t Code

8

§ 12920). And it also counters the defendants’ arguments that the plaintiffs are improperly

9

assuming that all UCL lawsuits are brought on behalf of the state: instead, the Ninth Circuit and

10

California Supreme Court “have confirmed that a civil action brought by a governmental entity

11

under [this statute] is fundamentally a law enforcement action designed to protect the public and

12

not to benefit private parties.” Homeaway.com, Inc., 2023 WL 2497862, at *2 (quoting PG&E

13

Corp., 433 F.3d at 1125–26) (quotation marks omitted)(emphasis supplied); see also People v.

14

Pac. Land Rsch. Co., 20 Cal. 3d 10, 17 (1977). The State is the real party in interest.
The defendants also argue that the complaint fails to allege sufficient harm to California

15
16

citizens as opposed to residents in other states, but this is unpersuasive. First, contrary to

17

InComm’s assertion, the complaint names specific California residents allegedly harmed by the

18

defendants’ practices. See, e.g., Compl. ¶ 106. Second, the defendants cite no law to support their

19

argument that the plaintiff must show a certain proportion of harmed consumers reside in

20

California. See Pathward Oppo. 11; see also Cnty. of San Mateo, 32 F.4th at 764 (noting the

21

burden is on the defendant to show that the requirements for removal are met). Indeed, the

22

examples of alleged harm against consumers in other states are included to describe the harm, its

23

widespread nature, and the defendants’ knowledge; they do not preclude the State of California

24

from being the real party in interest. See Compl. ¶ 104-11. These arguments do not show that the

25
26
27
28

The defendants’ assertion that San Francisco’s population has fallen below the 750,000-person
threshold required by another subsection of this statute is unpersuasive, because the statute clearly
authorizes the city attorney of any “city and county” to bring such suits. Cal. Bus. & Prof. Code
§ 17206(a). The defendants do not appear to contest authorization under this subsection.
1

7

1

State is not the real party in interest.2
The nature of the proceedings show that California is the real party in interest.

2
3

II.

4

The City seeks three types of relief: injunctive relief under California Business and

5

Professions Code section 17200, restitution under section 17203, and civil penalties under

6

sections 17200 and17206. The defendants argue that these requests are available to many parties,

7

including private individuals, but that the State can only be the real party in interest where the

8

relief sought is available to the State alone. Pathward Oppo. 11.
As a preliminary matter, and contrary to the defendants’ framing, the nature of the relief

9

United States District Court
Northern District of California

NATURE OF THE RELIEF SOUGHT

10

requested is neither a standalone element nor dispositive for determining the real party in interest.

11

All cases discussing this jurisdictional inquiry address the relief requested as one consideration

12

among many, though it is often one of the most important. See, e.g., Homeaway.com, Inc., 2023

13

WL 2497862, at *4 (assessing the relief requested as well as other considerations in concluding

14

that the state was the real party in interest); Purdue Pharma, 2014 WL 6065907, at *3 (same); see

15

also Lucent, 642 F.3d at 738–39 (agreeing with defendants that the relief requested supported the

16

finding that the individual was the real party in interest, but relying on other considerations in final

17

determination). Recognizing its importance to the inquiry, I discuss it separately here.
The relief requested here favors finding that California is the real party in interest. First,

18
19

under the statute at issue, civil penalties are available only to the government, not to private

20

litigants. See Cal. Bus. & Prof. Code § 17206. Where relief is “available to [the government]

21

alone” rather than “to individual consumers,” this favors finding the State is the real party in

22

interest. Nevada, 672 F.3d at 671–72; see also Homeaway.com, Inc., 2023 WL 7497862, at *3

23

(reaching same conclusion based in part on relief requested); Purdue Pharma, 2014 WL 6065907,

24

at *3 (same). And though the defendants argue that the State cannot be the real party in interest

25
26
27
28

InComm’s extended arguments that the City’s allegations are merely “conclusory” and lack
merit, InComm Oppo. 3-5, are, of course, not arguments that I consider on a motion to remand
when determining if I have subject matter jurisdiction to even consider the merits of the case. See
In re Facebook, 354 F. Supp. 3d at 1136 (“Of course, we don’t yet know if [the plaintiff]’s claims
have merit, but that’s not the point. The point is that she has the right, on behalf of the State of
Illinois, to assert these claims and attempt to vindicate these interests.”).
8
2

United States District Court
Northern District of California

1

where penalties flow to the city, I agree with the court in Homeaway.com, Inc., 2023 WL

2

7497862, at *3, which rejected that argument and determined that where the money flows is less

3

important than what it is used for. Here, as there, the money is statutorily required to be used “to

4

advance a State interest—the enforcement of consumer protection laws.” Id. (citing Cal. Bus. &

5

Prof. Code § 17206(c)(4)). This supports the finding that the State is the real party in interest.

6

Second, while injunctive relief is available to individuals and the government, the State is

7

subject to a lower evidentiary standard, which other courts have found sufficient for serving state

8

interests. See Purdue Pharma, 2014 WL 6065907, at *3 (finding the relief sought showed that

9

California was the real party in interests because “as in Nevada, Plaintiff seeks injunctive relief

10

that is subject to a lesser evidentiary standard than for private individuals” (first citing Cal. Bus. &

11

Prof. Code §§ 17204, 17535; and then citing Nevada, 672 F.3d at 671)). Here, too, the relief

12

benefits state interests, which shows that the State is the real party in interest.

13

Third, the fact that the lawsuit seeks restitution for individual consumers does not negate

14

the state interest in this case. Indeed, the Ninth Circuit in Nevada rejected this very argument and

15

held that the state’s “sovereign interest in protecting its citizens and economy … is not diminished

16

merely because it has tacked on a claim for restitution.” Nevada, 672 F.3d 671 (9th Cir. 2012);

17

see also In re Facebook, 354 F. Supp. 3d at 1127 (same).

18

Finally, the defendants cite a case from the Eastern District of Pennsylvania that applied

19

California law and reached a contrary conclusion with respect to the real party in interest. See In

20

re Avandia Mktg., Sales Pracs. & Prod. Liab. Litig., 238 F. Supp. 3d 723, 729 (E.D. Pa. 2017).

21

But in a well-reasoned opinion, the Hon. Vince Chhabria determined that it likely misapplied the

22

law. See In re Facebook, 354 F. Supp. 3d at 1135. It is apparently the only case to find diversity

23

jurisdiction on parallel facts under California law. Judge Chhabria’s analysis is persuasive and

24

defendants’ reliance on that case is misplaced.

25
26
27
28

Accordingly, the requested relief supports my conclusion that the State is the real party in
interest.
*

*

*

The State of California, therefore, is the real party in interest in this lawsuit. Because
9

1

California is not a citizen, and this case was brought under California law, I do not have

2

jurisdiction. See Mississippi, 571 U.S. at 174.

3

CONCLUSION

4

For those reasons, the motion to remand is GRANTED. I ORDER that this case be

5
6
7

REMANDED to the California Superior Court for the County of San Francisco.
IT IS SO ORDERED.
Dated: March 26, 2024

8
9
William H. Orrick
United States District Judge

10

United States District Court
Northern District of California

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
10