People of the State of California v. InComm Financial Services

Background

The City filed this lawsuit in state court against InComm Financial Services, Inc., TBBK Card Services, Inc., Sutton Bank, and Pathward N.A. The complaint alleged that consumers of Vanilla cards had been affected by “card draining,” in which third parties used card funds without permission. It also alleged that the defendants had inadequate security measures and failed to provide refunds. The complaint asserted a claim under California’s Unfair Competition Law and sought an injunction, restitution, and civil penalties.

The defendants removed the case to federal court based on diversity jurisdiction. Diversity jurisdiction generally requires that all plaintiffs be citizens of different states from all defendants and that the amount in controversy exceed $75,000. The City moved to remand, meaning to return the case to state court.

Real Party in Interest

The court explained that California is not considered a citizen of any state for diversity-jurisdiction purposes. A state’s presence as the named plaintiff does not automatically defeat diversity jurisdiction when a local government brings the lawsuit, however. The key question was whether the City or the State of California was the “real party in interest”—the party whose interests the lawsuit primarily seeks to protect and whose relief it primarily seeks to obtain.

The court concluded that California was the real party in interest. It found that the lawsuit sought to protect California consumers as a whole and to enforce California’s consumer-protection laws statewide. The California statute also authorized a city attorney to sue in the name of the people of the State of California. The court determined that the alleged consumer and economic harms, including financial losses, wasted time, and embarrassment, supported finding a statewide interest rather than only local interests.

The requested relief also supported that conclusion. Civil penalties under the statute are available only to the government, and the court noted that the penalties must be used to advance the state interest in enforcing consumer-protection laws. The availability of restitution for individual consumers did not eliminate California’s broader sovereign interest in protecting its residents and economy. The court also determined that the defendants’ arguments about the alleged harm to California residents did not show that California was not the real party in interest.

Disposition

Because California was the real party in interest, and because the case was brought under California law, the court concluded that it lacked diversity jurisdiction. The court did not decide the merits of the allegations against the defendants. Judge William H. Orrick granted the motion to remand and ordered the case remanded to the California Superior Court for the County of San Francisco.