On February 14, 2017, in Herklotz v. Parkinson, the US Court of Appeals for the Ninth Circuit held that after a party severed his state law crossclaim against non-diverse parties, the district court lacked subject matter jurisdiction. The court lacked original jurisdiction over the crossclaim, and the severance created a new, independent case which could no longer proceed in federal court based on supplemental jurisdiction. ( (9th Cir. Feb. 14, 2017)).

In 2000, WRS, Inc. sued Plaza Entertainment and its directors, John Herklotz, Eric Parkinson, and Charles von Bernuth, in the US District Court for the Western District of Pennsylvania. Although the suit asserted only state law claims, the federal district court had diversity jurisdiction because WRS was a Pennsylvania company, while the defendants were all California citizens.

Herklotz brought a crossclaim against Plaza, Parkinson, and von Bernuth, raising claims for indemnification, breach of fiduciary duty, and misrepresentation. The district court subsequently entered a judgment of $2.5 million in favor of WRS, for which Parkinson, von Bernuth, and Herklotz were jointly and severally liable.

Herklotz moved to sever his crossclaim under Federal Rule of Civil Procedure (FRCP) 21, and to transfer the severed crossclaim to the US District Court for the Central District of California. The Pennsylvania district court granted the unopposed motion. After Herklotz severed his crossclaim, only state law claims against non-diverse parties remained.

Herklotz then filed an amended crossclaim, which added state law claims against Thomas Gehring, a California citizen who was Herklotz's former attorney and a Plaza shareholder. Gehring and von Bernuth moved to dismiss for failure to state a claim under FRCP 12(b)(6), and the California district court granted their motion. Herklotz appealed.

Meanwhile, Herklotz filed a parallel action in California state court asserting similar claims against Plaza, Parkinson, Von Bernuth, and Gehring. Von Bernuth and Gehring demurred, arguing that res judicata principles barred the state court action in light of the district court's dismissal of the federal proceeding on the merits.

On appeal, the Ninth Circuit vacated the California district court judgment dismissing the claims on the merits and remanded with instructions to dismiss for lack of subject matter jurisdiction. The Ninth Circuit emphasized that federal courts are courts of limited jurisdiction, and parties may not expand that jurisdiction by waiver or consent. Even if the parties do not dispute jurisdiction, the appellate court has an independent obligation to assess both its jurisdiction and the district court's jurisdiction.

Herklotz and Gehring argued that the Pennsylvania district court retained supplemental jurisdiction over Herklotz's state law crossclaims under 28 U.S.C. § 1367(c), which provides the district court discretion to retain pendant state law claims even if the original claim providing federal jurisdiction has been dismissed or resolved. However, the Ninth Circuit explained that 28 U.S.C. § 1367(c) does not apply to severed claims, because:

Herklotz and Gehring also argued that ruling against district court jurisdiction would undermine the district court's authority to transfer venue and the parties' ability to consent to venue transfer. The Ninth Circuit explained that while a district court has the authority to transfer a case, in this case the Pennsylvania district court lost jurisdiction when Herklotz severed the crossclaim, and so it did not have the authority to transfer venue after that point. Therefore, the lower court erred in not scrutinizing the Herklotz's motion to sever more closely. The appropriate course of action would have been to either deny the motion to sever and retain jurisdiction over the supplemental state law claim, or to decline to exercise supplemental jurisdiction under 18 U.S.C. § 1367(c)(3).