Will My Business Case Be in State or Federal Court?

The short version

Federal courts are courts of limited jurisdiction. They can hear a case only if Congress has given them power over it. For a business dispute that means one of two doors: the case arises under federal law, or the parties are citizens of different states and enough money is at stake. If neither door is open, the case is in state court whether anyone likes it or not. If a door is open, the plaintiff chooses first and the defendant may be able to override that choice by removal.

Door one: a federal question

Under 28 U.S.C. § 1331, federal district courts hear civil actions arising under the Constitution, laws or treaties of the United States. Business claims that qualify include trademark infringement under the Lanham Act, trade secret misappropriation under the Defend Trade Secrets Act, copyright, patent, federal securities fraud and claims under federal employment statutes. A related state-law claim, such as breach of contract against the same defendant, can come along under supplemental jurisdiction (28 U.S.C. § 1367).

Many of these claims also have state-law twins. A trade secret case can be pleaded under the Texas Uniform Trade Secrets Act alone and stay in state court, or under the federal act and go to federal court. That choice is strategic and is made before filing. Where IP disputes get decided works through it for trademarks and trade secrets.

Door two: diversity of citizenship

Under 28 U.S.C. § 1332, federal courts hear disputes between citizens of different states where the matter in controversy exceeds $75,000, exclusive of interest and costs. Two details decide most business cases:

• Complete diversity. Every plaintiff must be a citizen of a different state from every defendant. One Texas defendant on either side with a Texas plaintiff closes the door.
• Entity citizenship. A corporation is a citizen of its state of incorporation and the state of its principal place of business. An LLC or partnership takes the citizenship of each of its members or partners, so an LLC with one Texas member is a Texas citizen regardless of where it is organized.

A Dallas company suing a Delaware corporation headquartered in Georgia on a six-figure contract can be in federal court. The same company suing a Fort Worth competitor cannot, unless a federal claim is pleaded.

Removal: the defendant's move

If a plaintiff files in state court a case that could have been filed in federal court, the defendant may remove it under 28 U.S.C. § 1441 by filing a notice of removal within 30 days after receiving the initial pleading (28 U.S.C. § 1446). All properly served defendants must join or consent. In a diversity case there are two more limits: a defendant who is a citizen of the forum state cannot remove on diversity alone, and a diversity removal is barred more than one year after the case was commenced unless the plaintiff acted in bad faith to prevent it.

If the case was not removable when filed but becomes so later, for example when a Texas defendant is dropped, a new 30-day window opens from the paper that first shows removability. A plaintiff who wants to stay in state court can defeat removal by pleading only state claims and, where possible, keeping a Texas defendant in the case. A plaintiff who improperly loses a federal forum can move to remand.

A defendant who has just been served should decide about removal in the same window in which the answer is due, which is why the first weeks after service matter so much.

What actually changes

Beyond the table, federal practice relies more on written motions and less on short oral hearings, and federal judges tend to hold parties to scheduling orders strictly. State court offers rule-based discovery limits that favor smaller cases and the expedited track for money claims of $250,000 or less. Neither is uniformly faster or cheaper; the honest comparison depends on the case.

A third option in Texas: the business court

Since September 2024 a large commercial dispute can also go to the Texas Business Court, a state court with appointed judges and written opinions that hears governance, fiduciary, securities and contract disputes above statutory thresholds, now $5 million for most categories. It does not replace federal jurisdiction; a qualifying case between diverse parties may still be removable to federal court. The Texas Business Court explains who qualifies.

Where Dallas cases are heard

State cases from Dallas County are filed in the civil district courts at the George L. Allen, Sr. Courts Building downtown. Federal cases from Dallas, Collin, Denton and nearby counties go to the Northern District of Texas, Dallas Division, also downtown. The First Division of the business court sits in Dallas and covers Collin, Dallas, Ellis, Fannin, Grayson, Kaufman and Rockwall Counties. The courthouses are a few blocks apart; the rules inside them are not.

Example

Suppose a Plano software company sues a former reseller based in Arizona for several hundred thousand dollars in unpaid license fees and for using the company's source code after termination. Pleaded as breach of contract and Texas trade secret misappropriation in a Collin County district court, the case is removable on diversity: the parties are citizens of different states and the amount exceeds $75,000. If the company instead adds a Defend Trade Secrets Act claim, the case is removable on federal question grounds too. If the reseller had an office and a Texas member in its LLC, diversity would fail, and only the federal claim could open the federal door. Counsel decides which claims to plead with that map in view.

Tina Wysk litigates business disputes in Dallas County district courts and the Northern District of Texas and advises clients on forum before the first pleading is filed.