Third Circuit Adopts Rule That Removal of State Litigation to Federal Court Does Not Confer Personal Jurisdiction over the Defendant

Adrienne C. Rogove

In the last few years, the United States Supreme Court and federal courts in New Jersey and Pennsylvania have provided additional guidance on what circumstances give rise to personal jurisdiction over foreign Defendants. The Third Circuit addressed the issue of consent to jurisdiction in Danziger & DeLlano v. Morgan Verkamp, LLC, in its January 15, 2020, decision where it held that removing a case to federal court is not a waiver of the defense of personal jurisdiction. In Danziger, two law firms were engaged in a dispute over whether the plaintiff firm was entitled to a referral fee following the defendant firm’s settlement of a qui tam action allegedly referred by the Plaintiff Danziger (“Danziger”).

Danziger is a Texas law firm. Danziger alleged it referred potential qui tam clients to Morgan and Verkamp, LLC (“Morgan Verkamp”), an Ohio law firm. Danziger claimed it formed an oral contract with Morgan Verkamp to collect one-third of the attorneys’ fees as a referral fee in connection with a qui tam case filed on behalf of Michael Epp. The Epp case was settled for “hundreds of millions of dollars.” Danziger & DeLlano v. Morgan Verkamp, LLC, __ F.3d __ (3d Cir. 2020) (slip op. at 4).

When Danziger discovered the settlement, it filed a writ of summons in Pennsylvania state court. Pursuant to the writ of summons, Danziger was able to seek pre-complaint discovery. Approximately a year and a half later, and following discovery disputes, Morgan Verkamp asked the court to compel Danziger to file a complaint. After Danziger filed its complaint in Pennsylvania state court, Morgan Verkamp removed the case to federal court. It then moved to dismiss the complaint based on lack of personal jurisdiction. Danziger opposed the motion and suggested in the alternative, that the District Court transfer the case to Texas. The District Court dismissed the complaint with prejudice for lack of personal jurisdiction. It did not transfer the case. Id. (slip op. at 4-5).

Danziger appealed, arguing that Pennsylvania courts had specific personal jurisdiction over Morgan Verkamp, that Morgan Verkamp waived any objection to personal jurisdiction by engaging in discovery pursuant to the writ of summons and by removing the suit to federal court in Pennsylvania, and that the District Court erred in failing to transfer the case to a different forum. Id. (slip op. at 5-6).

The Third Circuit affirmed the dismissal and rejected any argument that Pennsylvania had specific personal jurisdiction over Morgan Verkamp because none of Danziger’s six contract or intentional tort claims arose out of or related to Morgan Verkamp’s activities in Pennsylvania. The basis for the suit was Morgan Verkamp’s refusal to pay Danziger the promised referral fee. But the alleged oral contract for a referral fee was not formed or breached in Pennsylvania. No communications regarding, or misappropriation of, the referral fee took place in Pennsylvania. Rather, these acts took place in e-mail or phone communications in Texas and Ohio. Danziger argued that Morgan Verkamp’s litigation of the Epp qui tam case in federal court in Pennsylvania, gave rise to personal jurisdiction over Morgan Verkamp. The Third Circuit held that this fact was insufficient to confer personal jurisdiction over Morgan Verkamp.

In determining whether Danziger’s claims “arose out of or related to” Morgan Verkamp’s contacts with the forum state, the Third Circuit examined the standard the plaintiff must satisfy based on the claims it asserted. For contract claims, the plaintiff must show that the defendant’s contacts with the forum must have been instrumental in either the formation of the contract or its breach. For tort claims, the standard is less restrictive. The defendant must have benefited enough from the forum state’s laws to make the burden of facing litigation there proportional to the benefits, citing O’Connor v. Sandy Lane Hotel Co., 496 F. 3d 312, 323 (3d Cir. 2007). For intentional torts, the defendant ‘“[must have] expressly aimed [its] tortious conduct at the forum’ to make the forum ‘the focal point of the tortious activity.’” Id. (slip op. at 8) (quoting IMO Industries, Inc. v. Kiekert AG, 155 F. 3d 254 (1998)).

Based on these standards, the Third Circuit found that none of Danziger’s claims arose out of or related to the defendant’s activities in the forum state. Litigation of the Epp case in Pennsylvania did not satisfy the contacts required to support personal jurisdiction there. Id. (slip. op. at 9).

The Third Circuit also rejected the argument that Morgan Verkamp waived its right to challenge personal jurisdiction by taking part in the pre-discovery process pursuant to the writ of summons. The writ of summons was not considered a “pleading” pursuant to which defendants could raise preliminary objections based on personal jurisdiction. “Preliminary objections may be filed only in response to a ‘pleading.’” Id. (slip op. at 11). Because the writ of summons was not a pleading, Morgan Verkamp did not consent to jurisdiction by engaging in pre-complaint discovery.

Addressing an issue of first impression in the Third Circuit, the Court held that removal to federal court “does not waive defenses that a defendant would otherwise have in state court,” because a “defendant brings its defense with it to federal court.” Id. (slip op. at 12-13). Finally, the Court held that there was no abuse of discretion when the District Court did not transfer the case to Texas or Ohio because Danziger was not precluded by statute of limitations or otherwise from filing its claim in another jurisdiction. Id. (slip op. at 13-14).

In sum, the Third Circuit found that the District Court properly dismissed the case for lack of personal jurisdiction over the defendant, and that engaging in pre-complaint discovery after the Plaintiff filed its Complaint and removing the case to federal court in Pennsylvania did not amount to consent to jurisdiction.