People v. Incomm Fin. Servs.

1

PEOPLE OF THE STATE OF CALIFORNIA, ACTING BY AND THROUGH SAN FRANCISCO CITY ATTORNEY DAVID CHIU, Plaintiff, v. INCOMM FINANCIAL SERVICES, INC., et al., Defendants.

No. 3:23-cv-06456-WHO

United States District Court, N.D. California

March 26, 2024

ORDER GRANTING MOTION TO REMAND RE: DKT. NO 28

WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE

The People of the State of California, by and through San Francisco City Attorney David Chiu (“the City”) filed this lawsuit against defendants InComm Financial Services, Inc. (“InComm”), TBBK Card Services Inc. (“TBBK”), Sutton Bank (“Sutton”) and Pathward N.A. (“Pathward”) in state court. The defendants removed the case to federal court based on diversity jurisdiction, and now the City moves to remand it. Because the State of California is the real party in interest here, and California is not a citizen of any state for the purposes of diversity jurisdiction, there is no federal jurisdiction to hear this suit. For that and the following reasons, the City's motion is granted.

BACKGROUND

I. FACTUAL BACKGROUND

The following facts are alleged in the plaintiff's complaint. (“Compl.”) [Dkt. No. 1-1] Ex. B. Defendant InComm is a South Dakota corporation headquartered in Georgia that provides “payment-related services” to consumers and business. Id. ¶ 9. One of its products is called a “Vanilla card.” Id. ¶ 9. These cards function as nonreloadable debit cards and, like debit cards, can be used as an alternative to cash. Id. ¶¶ 1, 21-22. They are sold directly to consumers and are not intended or designed to be used for business purposes. Id. ¶ 26. They are sold in-store at retailers throughout California and in San Francisco, and they can also be purchased online. Id. ¶ 31. The other defendants--TBBK, a South Dakota corporation headquartered in South Dakota; Sutton, an Ohio corporation headquartered in Ohio; and Pathward, a Delaware corporation headquartered in South Dakota--issue the Vanilla cards sold and serviced by Incomm, including cards sold in San Francisco and throughout California. Id. ¶¶ 10-12.

The City alleges that Vanilla card purchasers and consumers have, since at least 2013, been impacted by a practice called “card draining.” Id. ¶¶ 41, 43. This occurs when the funds on a card are used or drained by a third-party without the cardholder's permission, and often before the cardholder has ever had the chance to use the card. Id. ¶¶ 41-43. The City alleges that this “relatively unsophisticated crime” is made possible by InComm's lax and inadequate security measures. Id. ¶ 50. It asserts that InComm knows about the card draining, and knows how and why its cards are drained, but has failed to implement reasonable security measures to make its products less susceptible to theft. Id. ¶¶ 53-73. The City also alleges that the defendants fail to provide refunds to Vanilla card consumers, in contravention of their legal obligations. Id. ¶¶ 7493.

The complaint asserts that consumers are likely to be misled about the security of the Vanilla cards and about InComm's refund process. See id. ¶¶ 94-103. It also alleges that the defendants' conduct harms consumers by forcing them to spend time and money waiting for refunds, by shaming consumers when their cards are declined for lack of funds, and by embarrassing consumers that give the cards as gifts, only to be told by the recipient that there were no funds on the card. Id. ¶¶ 104-11.

II. PROCEDURAL BACKGROUND

This lawsuit was filed in state court, alleging that the defendants violated California's Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq; see Compl. ¶¶ 118-24. The City seeks an injunction, restitution, and civil penalties. See Compl. at pp. 41-42.

InComm removed the case to this court with the consent of the other defendants. [Dkt. No.1.].

The City has moved to remand the case to state court. (“Mot.”) [Dkt. No. 28.]. InComm filed an opposition. (“InComm Oppo.”) [Dkt. No. 30.]. Pathward also filed an opposition. (“Pathward Oppo.”) [Dkt. No. 31.]. The City replied. (“Repl.”) [Dkt. No. 33.]. I vacated the hearing because the motion was adequately presented on the papers.

LEGAL STANDARD

Generally, a case can only be removed from state to federal court when the federal court would have had original jurisdiction over it. 28 U.S.C. § 1441(a). Under 28 U.S.C. § 1332(a)(1), federal diversity jurisdiction exists when each plaintiff is a citizen of a different state from each defendant and the amount in controversy exceeds $75,000. Natural persons are the citizens of the state in which they are domiciled-that is, the state in which they reside with intent to remain permanently. See Adams v. W. Marine Prod., Inc., 958 F.3d 1216, 1221 (9th Cir. 2020).

But a state is not considered to be a citizen of anywhere, and where a state brings a case under its own state law, federal courts do not have diversity jurisdiction. See Mississippi ex rel. Hood v. AU Optronics Corp., 571 U.S. 161, 174 (2014) (citing Mo., Kan. & Tex. Ry. Co. v. Hickman, 183 U.S. 53, 57 (1901) (“MissouriRailway”)). Therefore “neither a state nor a state agency [can] be a party to a diversity action.” Dep't of Fair Emp. & Hous. v. Lucent Techs., Inc., 642 F.3d 728, 737 (9th Cir. 2011) (“Lucent”) (citation omitted). However, the “mere presence” of the state as the party plaintiff does not defeat diversity jurisdiction unless its interests “satisfy the real party to the controversy requirement.” Id. (citations omitted).

Whether a state is the real party in interest for diversity jurisdiction purposes is a question of federal law, although the inquiry is informed by state law. In re Facebook, Inc., Consumer Priv. User Profile Litig., 354 F.Supp.3d 1122, 1124 (N.D. Cal. 2019). This rule is the same when the plaintiff is not the state itself but has brought suit on behalf of the state, so long as the state is the “real party in interest.” Id. at 1124.

“[R]emoval statutes should be construed narrowly in favor of remand to protect the jurisdiction of state courts.” Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 764 (9th Cir. 2022) (citation omitted). “The defendant has the burden of proving by a preponderance of the evidence that the requirements for removal jurisdiction have been met.” Id. at 746 (citation omitted).

DISCUSSION

The crux of the motion requires me to decide whether the City or the State of California is the real party in interest. The parties agree that a state is not a citizen for diversity jurisdiction purposes and agree that if a state brings a lawsuit under state law, there is no basis for federal jurisdiction. See Mississippi, 571 U.S. at 174. The City argues that California is the real party in interest given the nature of the proceedings, the UCL's goal of protecting the public's economic and social well-being the statutory authorization allowing the City to step into the shoes of the State, and the relief requested. See generally Mot. In opposition, the defendants argue that the City is the real party in interest because the lawsuit protects and promotes only San Francisco's 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, 642 F.3d 728, and Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012). See California v. Purdue Pharma L.P., No. SACV 14-1080-JLS DFM, 2014 WL 6065907, at *2 (C.D. Cal. Nov. 12, 2014). “[T]he overall test is whether the government official or entity's lawsuit would primarily vindicate state interests and primarily obtain relief for the state, rather than serving primarily parochial interests and obtaining parochial relief.” In re Facebook, 354 F.Supp.3d at 1129. This inquiry requires courts to consider the case as a whole and examine “the essential nature and effect of the proceeding as it appears from the entire record.” Nevada, 672 F.3d at 670 (quoting Lucent, 642 F.3d at 740).

I. 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 instead presumes that the State is always a real party in interest whenever a government entity brings suit under the UCL. Pathward Oppo. 5-6, 10; InComm Oppo. 8-11. In turn, the City asserts that this lawsuit protects and promotes California consumers as a whole and so primarily vindicates the State's interest in enforcing its consumer protection laws. Mot. 7-10.

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 state's quasi-sovereign interest in enforcing state law does not necessarily make it the real party, see id., it is sufficient when that interest is the primary one in the case, Nevada, 672 F.3d at 671.

Additionally, “the California Supreme Court and the Ninth Circuit have confirmed that ‘a civil action brought by a governmental entity under [the UCL] is “fundamentally a law enforcement action designed to protect the public and not to benefit private parties.”'” California v. HomeAway.com, Inc., No. 2:22-CV-02578-FLA-JPRX, 2023 WL 2497862, at *2 (C.D. Cal. Mar. 14, 2023) (citing City & Cnty. of San Francisco v. PG & E Corp., 433 F.3d 1115, 1125-26 (9th Cir. 2006)). “The public has a substantial and specific interest in enforcing consumer protection laws.” Id. (citing Vasquez v. Super. Ct., 4 Cal.3d 800, 808 (1971) (subsequent history omitted)).

In Lucent, 642 F.3d at 735-36, the Ninth Circuit determined that the state agency, rather than the State itself, was the real party in interest, where the discrimination lawsuit alleged that a single individual was subjected to disability discrimination and retaliation...