United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 8, 2010 Decided January 18, 2011
No. 08-5044
IN RE: LORAZEPAM & CLORAZEPATE ANTITRUST LITIGATION,
BLUE CROSS & BLUE SHIELD OF MASSACHUSETTS, ET AL.,
APPELLEES
v.
MYLAN LABORATORIES, INC. AND MYLAN
PHARMACEUTICALS, INC.,
APPELLANTS
Consolidated with 08-5045
Appeals from the United States District Court
for the District of Columbia
(No. 1:99-mc-00276)
Jonathan M. Jacobson argued the cause for appellants.
With him on the briefs were Seth C. Silber, D. Bruce Hoffman,
and Ryan A. Shores. Neil K. Gilman entered an appearance.
Martin R. Lueck argued the cause for appellees. With him
on the brief were Sara A. Poulos, James R. Safley, Sarah E.
2
Hudleston, Robert T. Rhoad, and Ryan C. Tisch. Jeffrey
Downey and Bethany M. Wimsatt entered appearances.
Before: SENTELLE, Chief Judge, WILLIAMS and RANDOLPH,
Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
RANDOLPH.
RANDOLPH, Senior Circuit Judge: This is an appeal from
the judgment of the district court, entered after a jury trial,
awarding plaintiffs $76,823,943. The plaintiffs invoked
diversity jurisdiction and alleged violations of state antitrust
laws. Our opinion deals only with defendants’ motion on appeal
to dismiss for lack of jurisdiction.
Plaintiffs are four health insurance companies. They sued
Mylan, a manufacturer of generic drugs, and two other compa-
nies engaged in the business of selling chemicals for
pharmaceuticals. In support of diversity jurisdiction, plaintiffs
alleged that they were citizens of Minnesota, Massachusetts and
Illinois, and that defendants were citizens of Delaware, Pennsyl-
vania, New York, New Jersey and West Virginia. Their
principal claim, sounding exclusively in state law, was that
defendants entered into exclusive licensing agreements enabling
Mylan to raise the prices the insurance companies paid for two
prescription anti-anxiety medications.
The insurance companies sued, in their words, “on behalf of
themselves and as claims administrators for their self-funded
customers.” In the insurance industry, “self-funded customers”
are entities—typically large corporations—providing health
benefits directly to their employees using their own funds. See
generally Allison K. Hoffman, Oil and Water: Mixing Individ-
ual Mandates, Fragmented Markets, and Health Reform, 36 AM.
3
J.L. & MED. 7, 17-18 (2010). These entities contract with
insurance companies such as plaintiffs, who provide claims-
processing and other services to them in plaintiffs’ role as
“third-party administrators.” It is the self-funded customers who
bear the financial risks associated with providing insurance
coverage.
On the eve of trial, Mylan and its co-defendants filed a
motion challenging the insurance companies’ authority to bring
damages claims on behalf of their self-funded customers. The
district court first granted the motion but later allowed the
claims to proceed under Rule 17 of the Federal Rules of Civil
Procedure. Rule 17(a)(1) requires every action to “be prose-
cuted in the name of the real party in interest.” The court,
however, “may not dismiss an action for failure to prosecute in
the name of the real party in interest until, after an objection, a
reasonable time has been allowed for the real party in interest to
ratify, join, or be substituted into the action.” Fed. R. Civ. P.
17(a)(3).
The district court found that the insurance companies were
not the real parties in interest “with respect to the claims for
damages suffered by their self-funded customers.” But it al-
lowed the insurance companies to seek ratification of the
claims. To do so, the insurance companies sent letters to their
self-funded customers, giving them about a week to respond.
The letters stated that if the customer did not opt out, it will be
deemed to have consented to the insurance companies’
representing it and would be bound by the result of the
litigation. (We express no opinion on the validity of this
ratification procedure.)
The suit proceeded to trial. The jury found Mylan and its
co-defendants liable and determined that their violations were
willful. Judgment was entered, and this appeal followed.
4
After the parties had filed their briefs, and a few days before
oral argument, defendants filed a motion to dismiss, arguing for
the first time that the district court lacked jurisdiction because at
least one (Minnesota Mining and Manufacturing Corporation
(3M))—and potentially more—of plaintiffs’ self-funded
customers were from the same state as at least one of the
defendants. The existence of these customers, defendants
argued, destroyed “complete diversity” and stripped the court of
power to hear the case.
The first question this argument raises is whether plaintiffs’
self-funded customers must be counted as parties for diversity
of citizenship purposes. We think they must. The claims of the
self-funded customers were asserted at the outset. Those
customers, not the named plaintiffs, were the ones who felt the
effect of defendants’ alleged violations with regard to the claims
asserted on their behalf. And they were the ones who had the
right to sue under the substantive law. See, e.g., Mass. Gen.
Laws ch. 93A § 9. The plaintiff insurance companies no longer
contend that the contracts with their self-funded customers
validly assigned the asserted claims to them. At most, plaintiffs’
authority extended to acting as agent for the self-funded
customers in recovering damages on their claims. See Advanced
Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 17-18
(2d Cir. 1997). The self-funded customers are therefore the
“real and substantial” parties with respect to the claims asserted
on their behalf. See Associated Ins. Mgmt. Corp. v. Ark. Gen.
Agency, 149 F.3d 794, 796 (8th Cir. 1998); Airlines Reporting
Corp. v. S & N Travel, Inc., 58 F.3d 857, 862 (2d Cir. 1995). As
such, they must be treated as parties for diversity purposes.
Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 460-61 (1980);
Associated Ins. Mgmt. Corp., 149 F.3d at 796.
The effect of the self-funded customers on the district
court’s diversity jurisdiction turns on principles established in
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three Supreme Court decisions dating from the early 1800’s.
The first, Capron v. Van Noordan, 6 U.S. (2 Cranch) 126
(1804), was a diversity action for trespass. The complaint
alleged that the defendant was a citizen of North Carolina, but
it did not allege that the plaintiff was a citizen of a different
state. After verdict for the defendant, the plaintiff appealed on
the ground that his complaint was jurisdictionally defective.
The Supreme Court agreed and set aside the judgment. The
absence of jurisdiction, the Court held, could be raised for the
first time on appeal even by the party who invoked federal
jurisdiction. That a party may raise jurisdictional issues for the
first time on appeal has been repeatedly reaffirmed. See, e.g.,
Mansfield, Coldwater & L. M. Ry. v. Swan, 111 U.S. 379, 382-
83 (1884); Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83,
93-96 (1998); Grupo Dataflux v. Atlas Global Grp., L.P., 541
U.S. 567, 570-71 (2004).
The plaintiffs here complain that defendants were derelict
in not raising their jurisdictional objection at an earlier stage.
The defendants all but admit this. There are approximately
1,400 of these self-funded customers. Counsel for the defen-
dants explains that only when he began preparing for oral
argument did he realize their significance for diversity purposes.
As far as jurisdiction is concerned, it does not matter if he
should have recognized this sooner. Capron holds that the
parties cannot confer jurisdiction by consent. A corollary, long
established, is that a party does not waive a jurisdictional
objection by failing to raise it, at least so long as the jurisdic-
tional defect appears on the face of the record. See Ins. Corp. of
Ir. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702
(1982); Dan B. Dobbs, Beyond Bootstrap: Foreclosing the Issue
of Subject-Matter Jurisdiction Before Final Judgment, 51 MINN.
L. REV. 491, 507-24 (1967).
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The second case is Strawbridge v. Curtiss, 7 U.S. (3
Cranch) 267 (1806). Although the Court’s opinion was short
and obscure, it has come to mean that, under the diversity statute
(now 28 U.S.C. § 1332), “diversity jurisdiction does not exist
unless each defendant is a citizen of a different state from each
plaintiff.” Owen Equip. & Erection Co. v. Kroger, 437 U.S.
365, 373 (1978). Thus the presence of just one nondiverse
plaintiff—here 3M—destroys diversity jurisdiction under
§ 1332.
Plaintiffs do not dispute this point, but they invoke the
supplemental jurisdiction statute, codified at 28 U.S.C. § 1367,1
1
28 U.S.C. § 1367 provides, in part:
(a) Except as provided in subsections (b) and (c) or as
expressly provided otherwise by Federal statute, in any civil
action of which the district courts have original jurisdiction,
the district courts shall have supplemental jurisdiction over all
other claims that are so related to claims in the action within
such original jurisdiction that they form part of the same case
or controversy under Article III of the United States
Constitution. Such supplemental jurisdiction shall include
claims that involve the joinder or intervention of additional
parties.
(b) In any civil action of which the district courts have
original jurisdiction founded solely on section 1332 of this
title, the district courts shall not have supplemental
jurisdiction under subsection (a) over claims by plaintiffs
against persons made parties under Rule 14, 19, 20, or 24 of
the Federal Rules of Civil Procedure, or over claims by
persons proposed to be joined as plaintiffs under Rule 19 of
such rules, or seeking to intervene as plaintiffs under Rule 24
of such rules, when exercising supplemental jurisdiction over
such claims would be inconsistent with the jurisdictional
requirements of section 1332. . . ..
7
to avoid its consequences. Their argument is that once the
district court had jurisdiction (under § 1332) over claims
between the named plaintiffs and the defendants, the district
court could exercise supplemental jurisdiction over claims of the
self-funded customers. In support, plaintiffs cite Exxon Mobil
Corp. v. Allapattah Services, Inc., 545 U.S. 546 (2005). The
Court there held that § 1367 authorized jurisdiction over claims
of plaintiffs who did not meet § 1332’s amount-in-controversy
requirement as long as those claims were part of the same
Article III “case or controversy” as the claims of plaintiffs who
met all of the requirements of § 1332(a). Id. at 549. In doing
so, the Court determined that Congress, in enacting § 1367,
implicitly overruled Supreme Court precedent that had denied
jurisdiction over such claims. Id. at 569-71.
Plaintiffs’ reading of Allapattah would, in effect, abolish
the complete diversity requirement of Strawbridge v. Curtiss.
Whenever a claim is brought by one diverse party against
another, § 1367 would authorize the court to hear, as part of the
same case, claims brought by nondiverse parties. The Supreme
Court might have given this reading to § 1367, essentially
treating citizenship like the amount-in-controversy requirement
at issue in Allapattah. But the Court made it clear that it was not
overruling Strawbridge: a “failure of complete diversity, unlike
the failure of some claims to meet the requisite amount in
controversy, contaminates every claim in the action.” Id. at 564.
The presence of a nondiverse party, in other words, deprives the
district court of jurisdiction over any of the claims; it follows
that there is nothing to which supplemental jurisdiction may
attach. Id. at 554.
The third case is Mollan v. Torrance, 22 U.S. (9 Wheat.)
537, 539 (1824), which holds that the court’s jurisdiction
“depends upon the state of things at the time of the action
brought . . ..” Plaintiffs argue—or more accurately, assert—that
8
not until the district court entered its Rule 17 order did the self-
funded customers become real and substantial parties for
diversity purposes. Therefore, they say, there was diversity
jurisdiction at the time they commenced the action. But it was
not the district court’s ruling that brought the self-funded
customers into the case. Plaintiffs did that when they started the
lawsuit. The district court’s Rule 17 order simply allowed
plaintiffs to continue asserting their customers’ claims so long
as the customers acquiesced. See Associated Ins. Mgmt. Corp.,
149 F.3d at 797.
Ordinarily a finding that the district court lacked jurisdic-
tion would lead us to vacate the court’s judgment and remand
for dismissal. See, e.g., LoBue v. Christopher, 82 F.3d 1081,
1082 (D.C. Cir. 1996). But the posture of this case suggests a
different disposition. Rule 21 of the Federal Rules of Civil
Procedure provides that “[o]n motion or on its own, the court
may at any time, on just terms, add or drop a party.” Fed. R.
Civ. P. 21. This Rule allows the district court to dismiss so-
called “jurisdictional spoilers”—parties whose presence in the
litigation destroys jurisdiction—if those parties are not indis-
pensable and if there would be no prejudice to the parties.
Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 830-32
(1989). The courts of appeals, though not technically governed
by Rule 21, may exercise the same power or may remand to the
district court for it to make the Rule 21 inquiry in the first
instance. Id. at 837-38; Long v. Dist. of Columbia, 820 F.2d
409, 416-17 (D.C. Cir. 1987).
It might be thought that the ability to dismiss nondiverse
parties and retain jurisdiction over the rest of the case is in
tension with Mollan, as well as Allapattah’s holding that the
presence of a nondiverse party “contaminates” the entire action,
therefore stripping the district court of jurisdiction in toto. This
tension is resolved through the fiction that Rule 21 relates back
9
to the date of the complaint. See LeBlanc v. Cleveland, 248 F.3d
95, 99 (2d Cir. 2001). This way, the court may proceed as if the
nondiverse parties were never part of the case. With those
parties effectively scrubbed from the complaint, they are not
present to contaminate the other claims. The fiction also allows
the district court to save its prior rulings, and the jury’s findings,
which otherwise were entered without jurisdiction. C.L. Ritter
Lumber Co. v. Consol. Coal Co., 283 F.3d 226, 229-30 (4th Cir.
2002).
The prudent course here is to remand to the district court to
proceed under Rule 21. It is open to the district court to decide
that plaintiffs’ self-funded customers are not indispensable
parties to the case. See Fed. R. Civ. P. 19. For the most part,
the identity and citizenship of the self-funded customers are not
in the record. Evidentiary issues may arise, and the district court
may need to determine which, if any, of the self-funded custom-
ers may be dismissed in order to restore complete diversity.
Since this may also affect damages, the district court may have
to conduct a partial retrial on that issue.
We decline to issue any opinion on the merits of defen-
dants’ objections to the jury award until such time as jurisdiction
is secured.
The case is remanded to the district court for further
proceedings consistent with this opinion.
So ordered.