Marren v. Stout et al
Filing
23
ORDER DENYING WITHOUT PREJUDICE 5 Motion to Dismiss; GRANTING 17 Motion to Remand to State Court. Signed by Judge David Ezra. (rg)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
§
§
§
Plaintiff,
§
§
vs.
§
§
PATRICIA PLIEGO STOUT,
§
INDIVIDUALLY AND AS
PRESIDENT OF ALAMO TRAVEL §
MANAGEMENT, LLC d/b/a ALAMO §
§
TRAVEL GROUP, INC.,
§
§
Defendants.
JACQUELINE MARREN,
Cv. No. SA:12-CV-00631-DAE
ORDER: (1) GRANTING PLAINTIFF’S MOTION TO REMAND;
(2) DENYING WITHOUT PREJUDICE AS MOOT
DEFENDANTS’ MOTION TO DISMISS
On March 6, 2013, the Court heard oral argument on Plaintiff’s
Motion to Remand to State Court (doc. # 17). Jeff Small, Esq., and Olga Brown,
Esq., appeared at the hearing on behalf of Plaintiff; Margaret Cheryl Kirby, Esq.,
appeared on behalf of Defendants. After reviewing the Motion and the supporting
and opposing memoranda, the Court GRANTS Plaintiff’s Motion to Remand
(doc. # 17) and DENIES WITHOUT PREJUDICE AS MOOT Defendants’
Motion to Dismiss (doc. # 5).
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BACKGROUND
On June 1, 2012, Plaintiff Jacqueline Marren filed suit in the 438th
Judicial District Court of Bexar County, Texas, against Defendants Alamo Travel
Management, LLC d/b/a Alamo Travel Group, Inc. (“Alamo Travel”); and Patricia
Pliego Stout (“Stout”), individually and as President of Alamo Travel. (Marren v.
Stout, Civ. No. 2012-CI-09064; doc. # 1-3 ¶¶ 3, 4.)
Plaintiff worked for Defendant Alamo Travel from 2005 through
June 4, 2010. (Id. ¶ 8.) According to the Complaint, Defendant Alamo Travel
classified Plaintiff as an “employee” from 2005 through June 8, 2008; thereafter,
coinciding with Plaintiff’s relocation from San Antonio to Las Vegas, Alamo
Travel reclassified her as an “independent contractor.” (Id.) Plaintiff alleges that
she performed the same duties in Las Vegas as she had in San Antonio but was
denied benefits such as a 401(k) and paid vacation due to her improper
reclassification. (Id.) When Plaintiff raised concerns regarding her worker
classification, she “was never given a direct answer.” (Id.)
Worried that she was violating the law by paying federal income taxes
as an independent contractor rather than an employee, on May 5, 2010, Plaintiff
filed “an SS-Determination”—Form SS-8, Determination of Worker Status for
Purposes of Federal Employment Taxes and Income Tax Withholding—with the
2
Internal Revenue Service (“IRS”). (Id. ¶ 9.) Approximately one month later, on
June 4, 2010, Alamo Travel fired Plaintiff. (Id. ¶ 11.) Then, on November 11,
2011, the IRS determined that between June 2008 and June 4, 2010, Plaintiff had
in fact been an employee of Alamo Travel and that additional taxes were due from
both parties. (Id.)1
Plaintiff alleges three causes of action arising from this incident.
First, Plaintiff alleges wrongful discharge under the Sabine Pilot doctrine, which
prohibits employers from firing an employee based solely on her refusal to perform
an illegal act. (Id. ¶¶ 15–16; Sabine Pilot Serv., Inc. v. Hauck, 687 S.W.2d 733,
735 (Tex. 1985)). Plaintiff claims that as a result of this wrongful termination she
“was damaged by loss of the Health and welfare benefits, past wages, and future
wages and mental anguish.” (Id. ¶ 14.)
Second, Plaintiff alleges negligent misrepresentation, claiming that
Defendant Alamo Travel negligently misrepresented to her in the course of its
business “that the only way she could continue to work for Alamo Travel was to
accept employment under the status of an independent contractor and that it was a
legal classification of her worker status.” (Id. ¶¶ 17–18.) Plaintiff claims that she
1
It seems that Plaintiff meant to attach a copy of the IRS’s determination to her
Reply to Defendants’ Response to the Motion to Remand (see doc. # 21 ¶ 14
3
relied on Defendant’s misrepresentation to her detriment, “result[ing] in the
following damages[:] loss of Health and Welfare Benefits, reduction in wages, loss
of other benefits that Alamo Travel was required to pay and future wages.”
(Id. ¶ 19.)
Third and finally, Plaintiff alleges that Defendants committed fraud
(1) when they represented to her that “relocating to Las Vegas with her family
would not affect her employment with Alamo Travel and that she would continue
as an ‘employee’” (id. ¶ 20); and (2) when, a few days before Plaintiff’s departure
for Las Vegas, Defendant Stout represented to Plaintiff “that she would have to be
classified as an ‘independent contractor’ in order to meet the legal requirements of
her employment status in Nevada” (id. ¶ 21). Defendants made these material
representations, alleges Plaintiff, “with the intent to deprive [her] of her Health and
Welfare Benefits, 401K contributions and other employee benefits required of an
employer servicing a government contract . . . .” (Id. ¶ 22.)
On June 26, 2012, Defendants timely removed the case pursuant to
28 U.S.C. § 1441(b), arguing that this Court has federal-question jurisdiction
because “[t]he gravamen of Plaintiff’s claims is that Defendants failed to abide by
their statutory duty under FICA [the Federal Insurance Contributions Act,
(directing the Court to “Exhibit A (IRS Determination Letter dtd [sic] October 28,
4
26 U.S.C. §§ 3101–3128] to classify plaintiff as an employee . . . .” (Doc. # 1 ¶ 9.)
(See doc. # 1 at 1.) On the following day, Defendants filed the Motion to Dismiss
for Failure to State a Claim that is now before the Court. (Doc. # 5.) The Court
scheduled a hearing on Defendants’ Motion for Monday, January 22, 2013.
(Doc. # 16.) Over the weekend preceding the hearing, Plaintiff filed a Motion to
Remand to State Court, arguing that this case does not present a federal question
sufficient to justify the exercise of federal jurisdiction over her state-law claims.
(Doc. # 17.) In light of Plaintiff’s Motion, the Court granted Defendants leave to
file a response and scheduled a hearing on both Motions for March 6, 2013.
DISCUSSION
I.
Plaintiff’s Motion to Remand to State Court
A. Legal Standard
“It is axiomatic that the federal courts have limited subject matter
jurisdiction and cannot entertain cases unless authorized by the Constitution and
legislation.” Coury v. Prot, 85 F.3d 244 (5th Cir. 1996). Pursuant to Article III
and 28 U.S.C. § 1331, federal courts have jurisdiction over civil actions “arising
under” federal law. This grant of jurisdiction is to be strictly construed, however,
and doubts are resolved against federal jurisdiction. See Boelens v. Redman
2011”)).). However, no such exhibit was attached to the Reply.
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Homes, Inc., 748 F.2d 1058, 1067 (5th Cir. 1984). The court must begin with the
presumption that it does not have jurisdiction, and “the burden of establishing
federal jurisdiction rests on the party seeking the federal forum.” Howery v.
Allstate Ins. Co., 243 F.3d 912, 916 (5th Cir.), cert. denied, 534 U.S. 993 (2001)
(citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)).
The parties may not create federal jurisdiction by consent. Fed. R. Civ. P.
12(h)(3); Elam v. Kansas City S. Ry. Co., 635 F.3d 796, 802 (5th Cir. 2011).
A defendant may remove a case from state to federal court if the case
could have been filed in federal court originally. Caterpillar Inc. v. Williams, 482
U.S. 386, 392 (1987) (citing 28 U.S.C. § 1441(a)). A removing defendant bears
the burden of establishing by a preponderance of the evidence that the federal court
has subject-matter jurisdiction. De Aguilar v. Boeing Co., 47 F.3d 1404, 1408 (5th
Cir. 1995). The removal statutes are to be construed “strictly against removal and
for remand.” Eastus v. Blue Bell Creameries, L.P., 97 F.3d 100, 106 (5th Cir.
1996); see also Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108–109
(1941) (acknowledging “the Congressional purpose to restrict the jurisdiction of
the federal courts on removal” and the need for “strict construction of such
legislation”). A district court must remand a case if, at any time before final
judgment, it appears the court lacks subject-matter jurisdiction. See 28
6
U.S.C. § 1447(c); Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 571
(2004); In re 1994 Exxon Chem. Fire, 558 F.3d 378, 392 (5th Cir. 2009).
B. Federal-Question Jurisdiction
The presence or absence of a federal question necessary to support
removal is governed by the well-pleaded complaint rule, under which “federal
jurisdiction exists only when a federal question is presented on the face of the
plaintiff’s properly pleaded complaint.” Caterpillar Inc., 482 U.S. at 392–93. The
well-pleaded complaint rule recognizes that the plaintiff is the “master of the
claim,” and a plaintiff may—except in cases of complete federal preemption—
“avoid federal jurisdiction by exclusive reliance on state law.” Id. To support
removal based on federal-question jurisdiction, a defendant must show that the
plaintiff has (1) alleged a federal claim, Am. Well Works Co. v. Layne & Bowler
Co., 241 U.S. 257, 260 (1916); (2) alleged a state cause of action that Congress has
transformed into an inherently federal claim by completely preempting the field,
Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 65 (1987); or (3) alleged a state-law
claim that necessarily raises a disputed and substantial issue of federal law that a
federal court may entertain without disturbing federal/state comity principles,
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005).
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In the instant case, the Complaint alleges only state-law causes of
action: wrongful discharge, negligent misrepresentation, and fraud.
(See doc. # 1-3 ¶¶ 15–24.) Moreover, Defendants conceded at the hearing that
Plaintiff’s claims are not preempted by federal law. Instead, Defendants argue that
this Court has federal-question jurisdiction because each of Plaintiff’s state-law
causes of action raises a substantial federal issue that is actually disputed: whether
Defendants did, in fact, violate federal law by misclassifying Plaintiff as an
independent contractor for tax purposes. (Doc. # 20 ¶ 13.)
In order to demonstrate that there is a federal issue embedded in
Plaintiff’s state-law claims that is sufficient to support federal-question
jurisdiction, Defendants must demonstrate that “(1) resolving a federal issue is
necessary to resolution of the state-law claim; (2) the federal issue is actually
disputed; (3) the federal issue is substantial; and (4) federal jurisdiction will not
disturb the balance of federal and state judicial responsibilities.” Singh v. Duane
Morris LLP, 538 F.3d 334, 338 (5th Cir. 2008) (emphasis added) (citing Grable,
545 U.S. at 314). If any one of these four prongs is not satisfied, a court should not
exercise federal-question jurisdiction.
For the reasons that follow, the Court finds that Defendants have
satisfied the first and second prongs of the Singh test but have not satisfied the
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third and fourth prongs. Accordingly, the Court concludes that it does not have
federal-question jurisdiction over this case and that it is therefore appropriate to
grant Plaintiff’s Motion to Remand to State Court.
i. Resolving a Disputed Federal Issue Is Necessary to Resolution of
Plaintiff’s State-Law Claims
a. Wrongful Termination
There can be little doubt that resolution of a federal issue is necessary
to resolution of Plaintiff’s state-law claims. Plaintiff’s first claim is for wrongful
termination under Sabine Pilot, which requires a plaintiff to prove that: (1) she was
required to commit an illegal act that carries criminal penalties; (2) she refused to
engage in the illegality; (3) she was discharged; and (4) the sole reason for her
discharge was her refusal to commit the unlawful act. White v. FCI USA, Inc.,
319 F.3d 672, 676 (5th Cir. 2003) (citing Sabine Pilot Serv., Inc. v. Hauck, 687
S.W.2d 733, 735 (Tex. 1985)). Plaintiff claims that she can satisfy these four
elements by proving that “her discharge was for no other reason then [sic] for her
refusal to cooperate with Defendant Alamo Travel Group’s intentional acts of
underpaying federal taxes while at the same time soliciting and servicing lucrative
federal government contracts.” (Doc. # 1-3 ¶ 16.) In other words, Plaintiff alleges
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that she would have violated a law carrying criminal penalties if she had continued
to file her taxes as an independent contractor.
Defendants are correct that this wrongful termination claim, while a
creature of Texas state law, necessarily hinges on the determination of two
questions of federal law: (1) whether Plaintiff was, in fact, wrongly classified as an
independent contractor; and (2) whether Plaintiff would have been criminally
liable if she had continued to file her taxes as an independent contractor.2 (Doc. #
20 ¶ 17.)
b. Negligent Misrepresentation
Plaintiff’s second claim is one for negligent misrepresentation. The
Texas Supreme Court “has . . . adopted the tort of negligent misrepresentation as
2
Plaintiff insists that she need not prove, in order to succeed on her Sabine Pilot
claim, that the actions she refused to perform were actually illegal—just that she
“had a ‘good faith, reasonable [belief] that the requested act might be illegal.’”
(Doc. # 21 ¶ 13 (quoting Johnston v. Del Mar Dist. Co., 776 S.W.2d 768, 771–72
(Tex. App.—Corpus Christi 1989, writ denied).) While that is indeed the holding
of Del Mar, the Court agrees with the majority of Texas state courts that have
concluded that Del Mar represented an “unlawful expansion of Sabine Pilot,”
which is a narrow, judicially created exception to the employment-at-will doctrine.
Camunes v. Frontier Enters., Inc., 61 S.W.3d 579, 871 (Tex. App.—San Antonio
2001, writ denied); see also Mayfield v. Lockheed Eng’g & Sci. Co., 970 S.W.2d
185, 187–88 (Tex. App.—Houston [14th Dist.] 1998, pet. denied); Ran Ken, Inc. v.
Schlapper, 963 S.W.2d 102, 107 (Tex. App.—Austin 1998, pet. denied).
Accordingly, the Court agrees with Defendants that, in order for Plaintiff to prevail
on a Sabine Pilot claim, a court would have to find that she refused to commit an
act that would actually have subjected her to criminal penalties.
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described by the RESTATEMENT (SECOND) OF TORTS § 552.” McCamish,
Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex.
1999) (citing Fed. Land Bank Ass’n of Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex.
1991). Under this formulation, liability for negligent misrepresentation is limited
to circumstances in which (1) a professional—such as an attorney, auditor, or
doctor—“supplies false information for the guidance of others in their business
transactions”; (2) the party receiving the information justifiably relies upon the
information; (3) the professional “fails to exercise reasonable care or competence
in obtaining or communicating the information”; and (4) the relying party suffers a
pecuniary loss as a result. Restatement (Second) of Torts § 552 (1965).
Plaintiff alleges that Defendants negligently informed her that “the
only way she could continue to work for Alamo Travel was to accept employment
under the status of an independent contractor and that it was a legal classification
of her worker status.” (Doc. # 1-3 ¶ 17.) Plaintiff claims that she justifiably relied
on Defendants’ misrepresentations regarding her worker classification and suffered
a pecuniary loss (in the form of lost employee benefits) as a result. (Id. ¶ 19.)
Defendants are again correct that “[t]o prove her negligent
misrepresentation cause of action, Plaintiff must prove that [D]efendants’
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representations about employment and tax law were, in fact, misstatements.”
(Doc. # 20 ¶ 18.)
c. Fraud
Plaintiff’s final claim is one for fraud. Under Texas law, the elements
of fraud are: (1) a false, material representation was made; (2) the representation
was either known to be false when made or was made without knowledge of its
truth; (3) the representation was intended to be acted upon; (4) it was relied upon;
and (5) that reliance caused injury. See Formosa Plastics Corp. v. Presidio Eng’rs
& Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).
Plaintiff alleges that “Defendant Alamo Travel represented to Plaintiff
Marren [that] relocating to Las Vegas . . . would not affect her employment . . . and
that she would continue as an ‘employee’”; and, later, “that she would have to be
classified as an ‘independent contractor’ in order to meet the legal requirements of
her employment status in Nevada” (doc. # 1-3 ¶ 21). The Complaint alleges that
Defendants knowingly made these false representations “with the intent that
Plaintiff act on [them] and . . . accept employment based on [them].” (Id. ¶ 24.)
Plaintiff further claims that she “accepted and relied on” these representations in
moving to Las Vegas and “sustained monetary and other injuries as a result . . . .”
(Id.)
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Again, Defendants are correct that Plaintiff, who must prove that
Defendants intentionally made a false representation, can do so only by reference
to federal tax law. (Doc. # 20 ¶ 20.) In other words, to determine whether
Defendants made false representations, a court would have to look to federal tax
law to determine whether Plaintiff was correctly classified. Accordingly,
Defendants have satisfied the first prong of the federal-question test laid out in
Singh.
ii.
The Federal Issues Are Disputed
Plaintiff argues in her Reply (doc. # 21) that the federal issues in this
case are not “disputed” because
the Internal Revenue Service has found that Alamo Travel is liable for back
federal income tax withholding, back Federal Insurance Contributions Act
tax (FICA), and back Federal Unemployment Tax Act (FUTA) tax, plus
interest and penalties based on its misclassification of plaintiff as a contract
worker rather than as an employee. See Exhibit A (IRS Determination
Letter dtd October 28, 2011). Further, on information and belief Alamo
travel has paid those back payroll taxes. There are no substantial “embedded
federal issues” to be decided.
Id. ¶ 14. Again, the Court has not seen “Exhibit A,” since it appears that Plaintiff
inadvertently failed to attach it.
Plaintiff also appears to argue that there is no dispute concerning
whether Plaintiff would have committed an illegal act by continuing to file her
taxes as an independent contractor (see id. ¶ 16). Plaintiff’s only support for this
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assertion, however, is a citation to I.R.C. § 7201 and a Sixth Circuit case affirming
a conviction on four counts of evading the payment of federal income taxes. (Id.)
In other words, Plaintiff appears to be arguing that since the statutes speak for
themselves, there can be no real dispute that Defendants attempted to force
Plaintiff to commit acts that would have subjected her to criminal liability.
The Court finds this argument unavailing. In their Answer,
Defendants denied Plaintiff’s allegations, including the allegation that the IRS
concluded Plaintiff had been improperly classified (see doc. # 6 ¶ 11) and the
allegation that Plaintiff was terminated for refusing to commit an “illegal act” (see
id. ¶ 16). Accordingly, the Court concludes that these federal issues are, indeed,
“disputed.”
iii.
The Disputed Federal Issues Are Not Substantial
The third prong of the Singh test—whether the disputed federal issue
is “substantial”—is what dooms Defendants’ argument for removal. While there is
no bright-line rule regarding whether a state-law claim presents a “substantial”
federal question, the Supreme Court has identified a number of factors that weigh
in favor of such a finding: (1) that the case presents a nearly pure issue of law that
would control many other cases rather than an issue that is fact-bound and
situation-specific; (2) that the federal government has an important interest in the
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issue, particularly if the case implicates a federal agency’s ability to vindicate its
rights in a federal forum; and (3) that a determination of the federal question will
be dispositive of the case. See Empire Healthchoice Assur., Inc. v. McVeigh, 547
U.S. 677, 700–01 (2006) (analyzing Grable, 545 U.S. at 313). It is instructive to
begin the “substantiality” analysis with a discussion of two recent Supreme Court
cases—Grable and Empire Healthchoice—addressing the issue.
In Grable & Sons Metal Products, Inc. v. Darue Engineering &
Manufacturing, the plaintiff filed a state-law claim to quiet title, alleging that the
defendant’s record title was invalid because the IRS, in seizing the plaintiff’s
property to satisfy a federal tax deficiency, had failed to give the plaintiff proper
notice pursuant to 26 U.S.C. § 6335(a). 545 U.S. at 310–11. Although the
complaint did not set forth a federal cause of action, the Court recognized that the
state-law claim presented a “substantial” question regarding the interpretation of
federal law—specifically, did § 6335(a) require that Grable receive personal
service, or was service by certified mail sufficient? “The meaning of the federal
tax provision,” held the Court, “is an important issue of federal law that sensibly
belongs in a federal court.” Id. at 315 (emphasis added). Moreover, the
interpretation for which Grable was arguing implicated the ability of the federal
government (i.e., the IRS) “to vindicate its own administrative action . . . .” Id.
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“‘[I]t is plain,’” the Court concluded, “‘that a controversy respecting the
construction and effect of the [federal] laws is involved and is sufficiently real and
substantial’” to support the exercise of federal jurisdiction. Id. at 316 (alteration in
original; emphasis added) (quoting Hopkins v. Walker, 244 U.S. 486, 489 (1939)).
Just a year later, in Empire Healthchoice Assurance, Inc. v. McVeigh,
the Supreme Court made clear that Grable should be read narrowly—that it would
justify federal-question jurisdiction in only a “slim category” of cases. 547 U.S.
677, 681 (2006). In Empire Healthchoice, the Court addressed whether the Federal
Employees Health Benefits Act of 1959, which “preempt[s] any State or local law
. . . [that] relates to health insurance or plans,” id. at 677 (citing
5 U.S.C. § 8909(m)(1)), allowed an insurance carrier that provided benefits in
accordance with the Act to bring reimbursement claims in federal court. Id. The
dispute arose when an individual that Empire Healthchoice (“Empire”) had insured
filed a state-law tort claim for injuries suffered in an accident. Id. at 678. The
parties in the tort case settled, and Empire—which had paid for the insured’s
medical expenses—filed suit in federal court to recover a portion of the settlement
claim. Id. Empire argued, inter alia, that its reimbursement claim arose under
federal law “because federal law [was] a necessary element of [its] claim for
relief.” Id. at 700 (internal quotation marks omitted). The Court disagreed,
16
emphasizing again that “it takes more than a federal element to open the ‘arising
under’ door.” Id. at 701 (quoting Grable, 545 U.S. at 313). A crucial factor in
Grable’s substantiality analysis, said the Court, was the presence of a “nearly ‘pure
issue of law,’ one that could be settled once and for all and thereafter would govern
numerous tax sale cases.” Id. at 700 (emphasis added) (quoting Hart and
Wechsler’s The Federal Courts and the Federal System 65 (2005 Supp.)
[hereinafter Hart & Wechsler]). By contrast, the federal issue in Empire
Healthchoice—“the extent to which the reimbursement should take account of
attorney’s fees”—was “fact-bound and situation-specific,” making the exercise of
federal jurisdiction inappropriate. Id. at 701. While the case did involve federal
law, then, the Court concluded that there was no pressing need for a federal court
to hear it: “The state court in which the personal-injury suit was lodged is
competent to apply federal law, to the extent it is relevant . . . .” Id.
For the reasons that follow, the Court concludes that Plaintiff’s
claims—while they do require the application of federal law—do not raise a
“substantial federal question” within the meaning of Supreme Court precedent.
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a. The Federal Issues in This Case Are Fact-Bound and
Situation-Specific
As the Supreme Court explained in Empire Healthchoice, central to
the Court’s decision in Grable was the fact that the case “presented a nearly ‘pure
issue of law,’ one ‘that could be settled once and for all and thereafter would
govern numerous tax sale cases.’” Empire Healthchoice, 547 U.S. at 700 (quoting
Hart & Wechsler 65 (2005 Supp.) (emphasis added). “Whether Grable was given
notice within the meaning of the federal statute is . . . an essential element of its
quiet title claim,” said the Court, “and the meaning of the federal statute is actually
in dispute . . . .” Grable, 545 U.S. at 315 (emphasis added).
The Fifth Circuit followed this reasoning in Singh v. Duane Morris
LLP, concluding that a federal question was not “substantial” in part because it
was “predominantly one of fact.” 538 F.3d at 339. In that case, the plaintiff,
Singh, had brought a malpractice action in state court against the attorney who had
represented him in a trademark infringement action. Id. at 337. The defendant
removed the case to federal court, arguing—correctly—that “resolving the
malpractice claim necessarily require[d] resolving a federal question—to-wit,
whether Singh could have established secondary meaning in his trademark.” Id.
In other words, the defendant pointed out that in order for Singh to prevail, the
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presiding court would have to determine—under federal trademark law—that the
evidence that he had failed to present would have established secondary meaning.
The Fifth Circuit held that this federal question was “not substantial.” Id. at 338.
Looking to Grable, the court noted that the federal issue there was substantial
because “‘the meaning of the federal tax provision is an important issue of federal
law’” and because “the IRS notice requirements implicate the government’s
‘strong interest in the prompt and certain collection of delinquent taxes.’” Id. at
339 (emphasis added) (quoting Grable, 545 U.S. at 314). “In contrast,” said the
court,
this case involves no important issue of federal law. Instead, the federal
issue is predominantly one of fact—whether Singh had sufficient evidence
that his trademark had acquired secondary meaning. Though obviously
significant to Singh’s claim, that issue does not require “resort to the
experience, solicitude, and hope of uniformity that a federal forum offers.”
Id. (quoting Grable, 545 U.S. at 312). As in Empire Healthchoice, therefore, the
court’s determination that the state-law claim did not present a “substantial”
question of federal law rested primarily on its determination that the case merely
required a court to apply federal law to the facts, not to settle a dispute over the
meaning of federal law. See Empire Healthchoice, 547 U.S. at 701 (distinguishing
Grable on the ground that it presented a “nearly ‘pure issue of law,’” unlike the
“fact-bound and situation-specific” claim at issue in the case before it); see also
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Adventure Outdoors Inc. v. Bloomberg, 552 F.3d 1290, 1300 (11th Cir. 2008)
(finding that a federal question was not substantial because the “meaning of the
relevant federal law” was clear and not actually in dispute; only the application of
the law to the facts was); Bennett v. Sw. Airlines Co., 484 F.3d 907, 910 (7th Cir.
2007) (Easterbrook, J.) (denying federal-question jurisdiction in a case involving
“a fact-specific application of rules that come from both federal and state law
rather than a context-free inquiry into the meaning of a federal law”).
Just as in Empire Healthchoice and Singh, the instant case does not
require a court to determine the meaning of a federal law. The construction of the
federal law regarding classifications of workers as employees or independent
contractors—which merely incorporates by reference “the usual common law
rules” on the subject, see I.R.C. § 3121(d)(2)—is not in dispute in this case; only
the application of that law to the facts is. In other words, neither party argues that
an ambiguous provision of federal law should be interpreted in a way that would
guarantee them victory in this case. Cf. Grable, 545 U.S. at 315 (“[T]he meaning
of the federal statute . . . appears to be the only legal or factual issue contested in
the case.”). Nor is any party questioning the constitutionality of the federal law
classifying workers for tax purposes or criminalizing intentional tax evasion. Cf.
Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 201–02 (1921) (holding that
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federal jurisdiction was proper because of the significant federal interest in
determining the constitutionality of a federal statute). Instead, both parties argue
that, under well-settled law, the facts of this case will support a finding (1) that
Plaintiff was incorrectly (in Plaintiff’s view) or correctly (in Defendants’ view)
classified; and (2) that Defendants did (in Plaintiff’s view) or did not (in
Defendants’ view) ask Plaintiff to violate a federal criminal law.
As the Grable Court explained, the Supreme Court’s precedent on
federal-question jurisdiction “captures the commonsense notion that a federal court
ought to be able to hear claims recognized under state law that nonetheless turn on
substantial questions of federal law, and thus justify resort to the experience,
solicitude, and hope of uniformity that a federal forum offers on federal issues.”
545 U.S. at 312. That need for uniformity is simply not implicated here. This case
turns not on the interpretation of a disputed provision of federal law but on the
application of common-law principles to the specific facts of Plaintiff’s
employment. See I.R.C. § 3121(d)(2) (explaining that the distinction between an
employee and an independent contractor for federal tax purposes is based on “the
usual common law rules applicable in determining the employer-employee
relationship”) (emphasis added). Accordingly, this factor weighs in favor of a
finding that the federal questions in this case are not “substantial.” See Empire
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Healthchoice, 547 U.S. at 681 (finding no “substantial” federal question where the
federal issue was “fact-bound and situation-specific”); see also Isbell v. Stewart &
Stevenson, Ltd., 9 F. Supp. 2d 731, 734 (S.D. Tex. 1998) (holding that the need to
apply federal criminal law in a Sabine Pilot claim does not present a substantial
federal question because “[t]he state court is able to identify the elements of these
basic criminal statutes and no complex interpretation of these laws is necessary”
and because “[t]he federal statutes are not central to [a Sabine Pilot] claim, which
is a unique creature of state law”).
Hughes v. Chevron Phillips Chemical Co. LP, 478 F. App’x 167 (5th
Cir. 2012), the unpublished Fifth Circuit case on which Defendants rely, in fact
supports the conclusion that the federal questions in this case are not substantial.
Defendants cite Hughes for the broad proposition that there is “federal jurisdiction
over state-law claims involving interpretation of federal tax law . . . .” (Doc. # 20 ¶
3.) “Resolution of the federal question in Grable,” argue Defendants, “depended
on interpretation of the same federal law that is in issue in this case—federal tax
law” (id. ¶ 4), so this Court must have federal-question jurisdiction over Plaintiff’s
claims. That conclusion, however, does not follow; while Hughes, like Grable,
involved a dispute over the meaning of federal law, the instant case does not. In
Hughes, the plaintiff argued that he [did] not have ‘wages,’ ‘salary,’ or ‘income,’
22
as those terms are defined under federal law, and that the Code sections dealing
with levy and garnishment appl[ied] only to excise taxes on alcohol and tobacco.”
Id. at 171. In other words, the plaintiff “[sought] to interpret the federal tax code in
a manner that exempt[ed] him from its reach.” Id. at 171 (emphasis added). Thus,
just as in Grable, “[t]he meaning of the federal tax provision” was at issue. Id.
(emphasis added) (quoting Grable, 545 U.S. at 315). Because this case does not
involve a dispute about the meaning of federal law—a “nearly pure issue of law,”
Empire Healthchoice, 547 U.S. at 700—the first factor of the Empire Healthchoice
analysis weighs against a finding that the federal questions in this case are
“substantial.”
b. The Federal Government Has Little Interest in This Case
The second factor, whether the federal government has an important
interest in the resolution of the federal question, also weighs against a finding that
Plaintiff’s claims raise a substantial federal question. As the Supreme Court
explained in Empire Healthchoice, the federal question in Grable was substantial in
part because “[t]he dispute there centered on the action of a federal agency (IRS)
and its compatibility with a federal statute . . . .” 547 U.S. at 700. In other words,
the interpretation of federal law for which Grable was arguing implicated the
ability of the federal government “to vindicate its own administrative action . . . .”
23
Grable, 545 U.S. at 315. By contrast, the federal question in Empire Healthchoice
was not substantial in part because “the reimbursement claim was triggered, not by
the action of any federal department, agency, or service, but by the settlement of a
personal-injury action launched in state court”; the federal government did not
have a direct stake in the outcome of the case. Empire Healthchoice, 547 U.S. at
700. Similarly, in Singh (in which the Fifth Circuit vacated the district court’s
order for lack of jurisdiction), the court contrasted Grable, in which the disputed
“IRS notice requirements implicate[d] the government’s strong interest in the
prompt and certain collection of delinquent taxes,” with the case before it, to which
no federal agency was a party. 538 F.3d at 339; see also Adventure Outdoors, 552
F.3d at 1301 (finding that the case was “unlikely to impact the federal
government’s interests or its ability to vindicate [its] interests through
administrative action” because “the plaintiffs [had] not challenged the actions of
. . . the agency charged with enforcing [the relevant federal laws]”).
As in Empire Healthchoice, Singh, and Adventure Outdoors, Plaintiff
has not challenged the actions of any federal agency. Plaintiff is not seeking a tax
refund and has not accused the IRS of any wrongdoing. Instead, under the
Plaintiff’s theory, the IRS was an innocent third party that, like Plaintiff, merely
relied on the misrepresentations Defendants made. In this respect, Plaintiff’s suit
24
is very similar to Mikulski v. Centerior Energy Corp., 501 F.3d 555 (6th Cir. 2007)
(en banc). In that case, even though the parties disagreed about the interpretation
of a provision of the tax code (meaning the first prong of the substantiality analysis
worked in their favor), the court nonetheless concluded that the federal issue was
“not substantial” because the federal government had only limited interest in the
outcome of the suit. Id. at 570. The court noted that “no federal agency” was
involved in the suit; and “[u]nlike Grable, in which the IRS’s prevailing practice
was alleged to violate due process, this case [would] have no res judicata effect
that would apply to the IRS, no matter which court, federal or state, decides the
case.” Id. The federal government, explained the court, “has only a limited
interest in private tort or contract litigation over the private duties involved [in the
collection of taxes].” Id. (emphasis added). While “[t]he IRS undoubtedly has an
interest in collecting taxes, . . . it is of no consequence to the IRS whether this case,
or any like it, is resolved in federal court rather than the state court.” Id.
Similarly, the IRS’s important interest in collecting taxes will not be
affected by the outcome of this case. The IRS is not a party to this case and
accordingly would not be bound by a court’s determination of Plaintiff’s proper
employment classification. See Comm’r of Internal Revenue v. Bosch’s Estate,
387 U.S. 456, 457 (1967) (holding that “federal authorities are not bound” by
25
state-court determination of facts affecting federal tax liabilities if the United
States was not a party to the state proceedings); Cappaert v. United States, 426
U.S. 128, 146–47 (holding that the United States was not barred from re-litigating
its water rights in federal court since it was not a party to the state proceedings)
(1976); Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 329
(1971) (“[Litigants] who never appeared in a prior action [] may not be collaterally
estopped without litigating the issue . . . . Due process prohibits estopping them
despite one or more existing adjudications of the identical issue which stand
squarely against their position.”); Settlement Funding, LLC v. TransAmerica
Occidental Life Ins. Co., 555 F.3d 422 (5th Cir. 2009) (“[T]he United States was
not a party to the [state] class action and is thus not bound by it.”). Because the
Plaintiff in this case—unlike the plaintiff in Grable—has not challenged the IRS’s
actions, the case will have no res judicata effect that would apply to the IRS in any
future case. See Mikulski, 501 F.3d at 571 (noting, in a case to which the IRS was
not a party, that “[t]he government’s ability to collect taxes . . . [will not be]
affected by the resolution of the dispute between these two parties[,] . . . [because]
[t]he government is free to interpret and apply the tax code as it sees fit, without
the slightest regard for this lawsuit”). In other words, a state court’s determination
that Defendants deliberately misclassified Plaintiff as an independent contractor
26
would not require the IRS to treat her as an employee, to collect or refund taxes, or
to take or refrain from taking any other action in Plaintiff’s or any other case.
If, at some point in the future, either party wishes to recover from the
IRS taxes allegedly erroneously assessed or collected, they may do so—after
exhausting administrative remedies by filing a claim with the IRS itself. See
I.R.C. § 7422(a) (“No suit or proceeding shall be maintained in any court for the
recovery of any internal revenue tax alleged to have been erroneously or illegally
assessed or collected . . . or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed
with the Secretary . . . .”). The instant case, however, is not one for a tax refund;
and a determination, in state or federal court, of Plaintiff’s proper classification
would not bind the IRS in a future action.
Another factor relevant to a determination that the federal government
has a strong interest in a state-law claim is whether Congress has created a private
remedy for violations of the federal statute involved. See Merrell Dow
Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 812 (1986) (“The significance of
the necessary assumption that there is no federal private cause of action . . . cannot
be overstated. For the ultimate import of such a conclusion . . . is that it would
flout congressional intent to provide a private federal remedy for the violation of
27
the federal statute.”); see also Singh, 538 F.3d at 338–39 (noting that Merrell Dow
“held that where Congress has provided no private remedy for the violation of a
. . . statute, the fact that violation of the statute is an element of a state tort claim is
insufficient to establish a substantial federal interest”). While the Fifth Circuit has
yet to address the question, other courts of appeals have concluded that FICA,
which is a tax-raising statute rather than a benefit-conferring statute, does not
create a private right of action to remedy employee misclassifications. See
Umland v. PLANCO Fin. Servs., Inc., 542 F.3d 59, 67 (3d Cir. 2008); McDonald
v. S. Farm Bureau Life Ins. Co., 291 F.3d 718, 726 (11th Cir. 2002); see also
Glanville v. Dupar, 727 F. Supp. 2d 596, 600 (S.D. Tex. 2010) (“This court
believes that if the Fifth Circuit were to consider this issue, it would follow the
reasoning of the Third and Eleventh Circuits to find no implied private right of
action under FICA.”). As the Fifth Circuit noted, “[t]he Merrell Dow Court
reasoned that because Congress had established no private remedy for violations of
the statute, it had no substantial interest in seeing the statute applied in state tort
cases.” Singh, 538 F.3d at 339. Similarly, in the instant case, the fact that
Congress has not created a private right of action to remedy employee
misclassifications weighs against a finding that the federal government has a
“substantial interest in seeing the statute applied in state tort cases.” Id.
28
Accordingly, both because the United States is not a party to this case
and because Congress has not created a private right of action under FICA, the
Court concludes that the second factor—the federal government’s interest in the
litigation—weighs against a finding that this case presents a “substantial” federal
question.
c. The Federal Issues Are Not Dispositive of the Case
The third factor that Empire Healthchoice suggested was relevant to
an analysis of the substantiality of a federal question is whether the federal issue
would be “dispositive of the case.” Empire Healthchoice, 547 U.S. at 700. In
Mikulski, the Sixth Circuit concluded that this factor weighed against a finding that
the federal question before it was “substantial” because even “[i]f the plaintiffs
prevail[ed] on their construction of [the statute],” they still had to “prove the
remaining elements of fraudulent misrepresentation (such as intent) or breach of
contract (such as the existence of a contract).” Mikulski, 501 F.3d at 571. The
Eleventh Circuit came to the same conclusion in Adventure Outdoors, noting that
even “[i]f the trial court conclude[d] that federal law does not prohibit participation
in simulated straw purchases”—that is, even if the court found that the plaintiffs
had not violated federal law—the plaintiffs could not succeed on their defamation
claim without showing, “among other things, that the defendants’ statements were
29
not privileged.” 552 F.3d at 1301. In both cases, then, the fact the plaintiff would
not automatically prevail if a court found in his favor on the federal issue weighed
against a finding that the federal issue was “substantial.”
In the instant litigation, the federal issues embedded in Plaintiff’s
claims quite clearly do not dispose of the case. Even if a court finds that Plaintiff
was misclassified as an independent contractor and that she would have been
subject to criminal penalties if she had continued to file her taxes as one, Plaintiff
would still need to prove, in order to succeed on her Sabine Pilot claim, (1) that she
actually refused to file her taxes as an independent contractor and (2) that the sole
reason for her discharge was her refusal to do so. See White v. FCI USA, Inc., 319
F.3d 672, 676 (5th Cir. 2003).
Similarly, even if a court finds that Plaintiff was misclassified as an
independent contractor, in order to succeed on her negligent misrepresentation
claim, Plaintiff would still have to establish (1) that Defendants qualified as the
type of “professional” (most commonly an attorney, auditor, accountant, or doctor)
that could be liable to Plaintiff for negligent misrepresentation; (2) that Defendants
supplied her with false information “for the guidance of [her] business
transactions”; (3) that Defendants “fail[ed] to exercise reasonable care or
competence in obtaining or communicating the information”; and (4) that Plaintiff
30
suffered a pecuniary loss as a result. See McCamish, Martin, Brown & Loeffler v.
F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999).
Finally, even if a court finds that Plaintiff was misclassified as an
independent contractor, in order to succeed on her fraud claim, Plaintiff must prove
(1) that Defendants knew that their misrepresentations about Plaintiff’s proper
classification were false or made them without knowledge of their truth or falsity;
(2) that Defendants intended that Plaintiff rely on their misrepresentations; (3) that
Plaintiff did so rely; and (4) that her reliance caused her injury. See Formosa
Plastics Corp. v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.
1998).
Contrary to the situation in Grable, therefore, finding in favor of
Plaintiff on the aforementioned federal issues would not be “dispositive of the
case.” Empire Healthchoice, 547 U.S. at 700. Accordingly, the third
“substantiality” factor also weighs against a finding that federal-question
jurisdiction is appropriate in this case.
In light of the fact that all three “substantiality” factors—whether the
case presents a nearly pure issue of law, whether the federal government has an
important interest in the issue, and whether a determination on the issue will be
dispositive—weigh against a finding that the federal issues embedded in Plaintiff’s
31
claims are “substantial,” the Court concludes that Defendants have not satisfied the
third prong of the test for federal-question jurisdiction described in Singh.
iv. Exercising Federal Jurisdiction Would Disturb the Balance of
Federal and State Judicial Responsibilities
The fourth and final prong of the test for federal-question jurisdiction
laid out in Singh is whether federal jurisdiction will disturb the balance of federal
and state judicial responsibilities. Singh, 538 F.3d at 338. In Grable, the Court
observed that “the presence of a disputed federal issue and the ostensible
importance of a federal forum are never necessarily dispositive; there must always
be an assessment of any disruptive portent in exercising federal jurisdiction.” 545
U.S. at 314. In Grable, therefore, the Supreme Court explained that federal courts
must weigh “the importance of having a federal forum for the issue” against “the
consistency of such a forum with Congress’s intended division of labor between
state and federal courts.” Id. at 319. Finding that the substantial federal question
in the case before it was rare, the Court concluded that exercising federal-question
jurisdiction would “portend only a microscopic effect on the federal-state division
of labor” and was therefore appropriate. Id. at 313.
The same cannot be said about this case. Adopting Defendants’
reasoning and holding that federal-question jurisdiction exists in any case in which
32
a court must look to and apply federal tax law would, as the Supreme Court was
careful to avoid in Grable, “herald[] a potentially enormous shift of traditionally
state cases into federal courts.” 545 U.S. at 319; see also Merrell Dow, 478 U.S. at
811 (denying jurisdiction over a state tort claim involving a federal issue while
expressing concern over “the increased volume of federal litigation”). Under
Defendants’ reasoning, a federal court would have jurisdiction over almost any
state-law tort claim in which the plaintiff alleged as an element that the defendant
failed to comply with a provision of the federal tax code. For example,
Defendants’ reasoning would support the exercise of federal-question jurisdiction
over almost all malpractice claims brought against tax attorneys, since a court
would have to look to federal tax law to determine whether the attorney had
breached his or her duty. See Singh, 538 F.3d at 340 (noting with disapproval that,
under the plaintiff’s theory, “federal jurisdiction could extend to every instance in
which a lawyer commits alleged malpractice during the litigation of a federal
claim” and that “[t]hat would constitute a substantial usurpation of state authority
in an area in which states have traditionally been dominant”). Barring a strong
interest in a federal forum, claims for wrongful termination, negligent
misrepresentation, and fraud—traditionally state-law claims—should be litigated
in state court; and, for the reasons already given, there is no pressing need for this
33
or any other federal court to take jurisdiction over the instant case, which does not
present a substantial federal question.
The fact that the state court will have to refer to federal law to
determine whether Plaintiff was correctly classified is not problematic. It is
“axiomatic” that state courts “are generally presumed competent to interpret and
apply federal law.” Mikulski, 501 F.3d at 560, 561 (citing Zwickler v. Koota, 389
U.S. 241, 245 (1967)). As the Eleventh Circuit explained in Adventure Outdoors,
“[i]n resolving the federal issue, the state court would be guided by federal court
interpretations of the relevant criminal statutes.” 552 F.3d at 1300–01; see also
Idaho v. Coeur d’Alene Tribe of Idaho, 521 U.S. 261, 293 (1997) (O’Connor,
Scalia, and Thomas, JJ., concurring in part and concurring in the judgment) (“Nor
does acknowledging the interpretive function of federal courts suggest that state
courts are inadequate to apply federal law.”) (emphasis added). Indeed, as the
Seventh Circuit recently noted, “there is nothing unusual about a court having to
decide issues that arise under the law of other jurisdictions; otherwise there would
be no field called ‘conflict of laws’ and no rule barring removal of a case from
state to federal court on the basis of a federal defense.” Hays v. Cave, 446 F.3d
712, 714 (7th Cir. 2006). Again, the Supreme Court specifically stated in Grable
that it did not hold “the expansive view that the mere need to apply federal law in a
34
state-law claim will suffice to open the ‘arising under’ door,” 545 U.S. at 313
(emphasis added); and in Empire Healthchoice it expressed confidence that, upon
remand, the state court would be “competent to apply federal law, to the extent it
[was] relevant . . . .” Id. In this case, the Court has no doubt that a Texas state
court would be perfectly capable of determining whether, under well-settled law,
Plaintiff was misclassified as an independent contractor—particularly because the
relevant federal law states that the distinction between an employee and an
independent contractor for federal tax purposes is based on “the usual common law
rules applicable in determining the employer-employee relationship . . . .”
I.R.C. § 3121(d)(2) (emphasis added); see also Mertens Law of Fed. Income
Taxation § 47A:8 (“The determination of employee status [for purposes of federal
income tax] is to be made by common law concepts.”).
For the reasons given, the Court concludes that Defendants have
failed to show that exercising federal jurisdiction would not disturb the balance of
federal and state judicial responsibilities and, therefore, that Defendants have not
satisfied the fourth and final prong of the Singh test for federal-question
jurisdiction.
35
*
*
*
This Court, as a court of limited jurisdiction, must construe the
jurisdictional statutes strictly and resolve any doubts against federal jurisdiction.
Boelens, 748 F.2d at 1067; see also Eastus, 97 F.3d at 106 (acknowledging that the
removal statutes are to be construed “strictly against removal and for remand”).
The Supreme Court has cautioned that courts should make “principled, pragmatic
distinctions” and “careful judgments about the exercise of federal judicial power.”
Merrell Dow, 478 U.S. at 813–14. The burden of establishing federal jurisdiction
rests on the party seeking the federal forum—Defendants, in this case—and, for
the reasons given above, the Court finds that Defendants have failed to satisfy two
of the four requirements for federal-question jurisdiction described in Grable and
Singh. Accordingly, the Court grants Plaintiff’s motion and remands this case to
state court.
II.
Defendants’ Motion to Dismiss for Failure to State a Claim
In light of the Court’s determination that this matter should be
remanded to state court, Defendants’ Motion to Dismiss (doc. # 5) is denied
without prejudice as moot.
36
CONCLUSION
For the reasons given, Plaintiff’s Motion to Remand to State Court
(doc. # 17) is GRANTED, and Defendants’ Motion to Dismiss (doc. # 5) is
DENIED WITHOUT PREJUDICE AS MOOT.
IT IS SO ORDERED.
DATED: San Antonio, Texas, March 18, 2013.
_____________________________
David Alan Ezra
Senior United States District Judge
37
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