Legal Definitions - manufactured diversity

Manufactured diversity refers to a legal strategy where parties intentionally arrange their citizenship or corporate structure to create "diversity of citizenship" jurisdiction in federal court, even though the underlying dispute might not naturally qualify. This is often done to gain access to federal court, perhaps believing it offers advantages over state court.

To understand manufactured diversity, it's helpful to first understand diversity of citizenship. Federal courts generally have jurisdiction over cases that involve a federal law or the U.S. Constitution. However, they can also hear certain cases based on state law if the parties are citizens of different states and the amount of money in dispute exceeds $75,000. This is known as diversity of citizenship jurisdiction. Manufactured diversity occurs when parties deliberately alter their circumstances to meet these "different states" requirements, rather than having them arise organically.

Courts often scrutinize attempts at manufactured diversity to prevent parties from improperly using federal courts for disputes that should remain in state court. If a court finds that diversity was artificially created solely to gain federal jurisdiction, it may dismiss the case.

Here are a few examples illustrating manufactured diversity:

• Example 1: Assigning a Claim to an Out-of-State Party

  Imagine a dispute between two individuals, both residents of Texas, over a breach of contract. The plaintiff, a Texas resident, wants to sue the defendant, also a Texas resident, but prefers to litigate in federal court. To achieve this, the Texas plaintiff formally *assigns* their right to sue to a newly formed shell corporation or a trusted friend who is a resident of Oklahoma, solely for the purpose of bringing the lawsuit. The Oklahoma entity then files the lawsuit against the Texas defendant in federal court.

  How this illustrates manufactured diversity: The original dispute was between two Texans, lacking diversity of citizenship. By assigning the claim to an Oklahoma entity, the plaintiff intentionally created diversity between the Oklahoma plaintiff and the Texas defendant, thereby "manufacturing" federal jurisdiction where none naturally existed.

• Example 2: Creating an Out-of-State Corporation for Litigation

  A group of investors, all living in California, wants to sue a California-based technology company for fraud. Instead of suing directly, which would not create diversity of citizenship, they form a new Limited Liability Company (LLC) in Delaware. They then transfer their claims to this Delaware LLC, which subsequently files the lawsuit against the California technology company in federal court.

  How this illustrates manufactured diversity: The actual parties in interest (the investors) and the defendant are all from California. The Delaware LLC was specifically created and used as the plaintiff to establish diversity of citizenship with the California defendant, allowing the case to be heard in federal court despite the underlying dispute being entirely between California parties.

• Example 3: Appointing an Out-of-State Guardian for a Minor

  A minor child in Pennsylvania is severely injured due to the negligence of a Pennsylvania resident. The child's parents, also Pennsylvania residents, wish to pursue a lawsuit in federal court. To create diversity, they petition a state court to appoint a distant relative living in New Jersey as the child's legal guardian *for the sole purpose of initiating and managing the litigation*. The New Jersey guardian then files the lawsuit against the Pennsylvania resident in federal court on behalf of the child.

  How this illustrates manufactured diversity: The injury occurred between two Pennsylvania residents. The appointment of an out-of-state guardian was a deliberate act to establish diversity of citizenship between the New Jersey guardian (representing the child) and the Pennsylvania defendant, thereby "manufacturing" the jurisdictional basis for a federal lawsuit.