The Supreme Court held today that a named class plaintiff’s pre-certification stipulation that the class will seek less than $5 million in damages does not defeat federal diversity jurisdiction under CAFA.
In Standard Fire Insurance Co. v. Knowles, a unanimous Court reversed the order of a federal district court in Arkansas remanding a class action to state court based on the named plaintiff’s affidavit, filed with the complaint, stating that the plaintiff would not seek damages “in excess of $5,000,000 in the aggregate.” The district court, applying Eighth Circuit precedent, held that the affidavit was sufficient to establish the required “legal certainty” that the amount in controversy fell below $5 million. The Eighth Circuit denied Standard Fire’s permission to appeal.
Standard Fire then petitioned for rehearing en banc. While the petition was pending, the Eighth Circuit, in a separate case, affirmed an order of remand based on a stipulation similar to the affidavit submitted in Knowles. The Eighth Circuit subsequently denied rehearing en banc in Knowles.
In an opinion written by Justice Breyer, the Court stated that its reason for holding that the stipulation could not defeat jurisdiction “is a simple one: Stipulations must be binding.” Because a plaintiff who files a proposed class action cannot legally bind members of the proposed class until the class is certified, a stipulation filed with the complaint cannot reduce the value of the unnamed class members’ claims.
The Court further characterized the stipulation as “contingent” on future events and therefore impermissible as a juridicitional basis. For example, the Court noted, the state court, on remand, might order the stipulation excised as a condition of class certification, or find the named plaintiff an inadequate class representative based on his proposed recovery cap. Or another class member might intervene with an amended complaint and no stipulation, and the action might proceed with a new representative. Refusing to exercise federal jurisdiction based on the stipulation would require an unwarranted assumption that these scenarios are “farfetched.”
Justice Breyer described the plaintiff’s strongest argument as his contention that any such modification would effectively create a different case than the one filed, and that CAFA permits the district court to consider only the complaint that the plaintiff has filed. He responded, however, that the Court “do[es] not agree that CAFA forbids the federal courts to consider, for purposes of determining the amount in controversy, the very real possibility that a non-binding, amount-limiting separation may not survive the class certification process.” Such an outcome, Justice Breyer wrote, would not “result in the creation of a new case,” and to hold otherwise would “treat a nonbinding stipulation as if it were binding” and “exalt form over substance.”
The Court’s decision is a resounding victory for class action defendants seeking to ensure federal court jurisdiction. Standard Fire had argued that the plaintiff’s counsel in Knowles had filed numerous class actions in Arkansas state court, most of them in the same county, and had obtained orders deferring briefing on all dispositive motions until after discovery is complete and class certification was decided. The state court, according to Standard Fire, would then typically “force” settlement in the cases by permitting “staggeringly expensive discovery,” compliance with which was ordered “prior to briefing on certification in order to force massive nationwide settlements in cases in which the federal courts would never have certified a class.” Today’s opinion removes the damages stipulation as a means of circumventing CAFA jurisdiction.
The 2012-13 Supreme Court term has been a hotbed of class action activity, with the justices set to decide at least half a dozen cases that will directly affect class action litigation. Although none of this term’s decisions is likely to have the impact of the Court’s recent decisions in Wal-Mart Stores v. Dukes or AT&T Mobility v. Concepcion, the sheer number of opinions expected this spring promises significant clarifications of some murky areas. These include:
• Whether a plaintiff may defeat removal under CAFA by stipulating that he or she will not seek more than the $5 million jurisdictional threshold on behalf of the class. In Standard Fire Insurance v. Knowles, the Eighth Circuit denied permission to appeal a district court’s determination that such a stipulation was sufficient, after affirming the validity of a jurisdictional stipulation in a similar case. Is the Eighth Circuit correct, or does such a stipulation improperly bind members of a class that the named plaintiff does not yet represent?
• The extent to which the Supreme Court’s 2011 decision in Wal-Mart requires courts to delve into the merits of a lawsuit when considering class certification motions. In Comcast v. Behrend, the Third Circuit affirmed the grant of class certification in an antitrust action, despite the district court’s decision not to resolve disputes about the relevant market and the existence of classwide impact at the class certification stage. Instead, the Third Circuit held that it was sufficient for the court to determine that the class could establish the relevant market through common proof, that the element of antitrust impact was capable of proof through evidence common to the class, and that the plaintiffs had presented a common methodology to determine damages on a classwide basis. Does Wal-Mart, which included a footnote implying that merits inquiries are appropriate in applying Rule 23(b), require more?
• The extent to which the plaintiff in a securities fraud class action must establish that the alleged misrepresentation was material in order to obtain class certification based on a “fraud on the market” presumption. In Amgen v. Connecticut Retirement Plans and Trust Funds, the Ninth Circuit held that a plaintiff need only plausibly allege materiality at the class certification stage. Did the Ninth Circuit get it right, or does failure to establish materiality at the class certification stage preclude a finding that classwide issues predominate?
• Whether a defendant renders a class action moot by offering full relief to the named plaintiff prior to class certification. In Genesis HealthCare v. Symczyk, the Third Circuit held that in a collective action brought under the Fair Labor Standards Act—which, unlike a Rule 23 class action, requires “class” members to affirmatively consent to participation in the class—an offer of judgment to the named plaintiff, though made before any other plaintiffs had “opted in,” did not moot the lawsuit as to the “class.” Can a defendant thwart a class action pre-certification by settling with the putative class representative, or must the Article III “case or controversy” requirement be read more broadly in class actions? And is the answer different for FLSA actions than for Rule 23 class actions?
• Whether a class arbitration waiver can be held invalid if it prevents plaintiffs from enforcing their federal statutory rights. In In re American Express Merchants’ Litigation, the Second Circuit struck down a class arbitration waiver on the ground that the waiver had the practical effect of precluding potential class members from enforcing their Sherman Act claims. Does the Supreme Court’s 2011 opinion in AT&T Mobility, which held that the Federal Arbitration Act’s general protection of arbitration clauses preempted a state common law unconscionability doctrine, apply more broadly, or is there an exception where the waiver might interfere with enforcement of another federal statute?
• How specific an arbitration clause must be in order to support a finding that the parties consented to class arbitration. In Oxford Health Plans v. Sutter, the Third Circuit affirmed an arbitrator’s finding that the parties had agreed to class arbitration based on a contractual provision mandating simply that “all” disputes be submitted to arbitration. Is such language sufficient for an arbitrator to find consent, or must an arbitrator infer that the parties did not contemplate class proceedings absent an explicit reference to class arbitration?
With all of these cases pending before the Court, as well as several controversial issues percolating in the lower federal courts, the first half of 2013 could be a high-water mark for class action developments. Stay tuned.
Four years ago, the Fifth Circuit became one of the first courts to consider the application of CAFA’s “mass action” provision to a suit filed by a state attorney general on behalf of a subset of injured citizens. The court’s approach has since been rejected in other circuits. Now, a recent case in which the Fifth Circuit awkwardly applied its own precedent has created a confusing set of circumstances and led at least one Fifth Circuit judge to opine that the other courts probably have it right after all.
CAFA provides that removal of a case to federal court is proper if the suit is either a “class action”—defined with reference to Rule 23 and parallel state law provisions—or a “mass action.” A case is a “mass action” under CAFA if it proposes the joint trial, based on common questions of law or fact, of monetary relief claims of at least 100 persons with an amount in controversy of at least $75,000.
In 2008, the Fifth Circuit held in Louisiana ex rel. Caldwell v. Allstate Insurance Company that where removal of a state attorney general’s lawsuit is sought on “mass action” grounds, a court should “pierce the pleadings” to determine whether the “real party in interest” is the state or the injured citizens. In Caldwell, the Louisiana attorney general brought a parens patriae action on behalf of injured policyholders alleging that insurance companies conspired in violation of the state antitrust laws. The court held that the policyholders, not the state, were the real parties in interest, and therefore the lawsuit was removable as a mass action.
Courts that addressed the same issue after Caldwell took the opposite approach. In 2011, the Seventh Circuit affirmed the remand of a lawsuit brought by Illinois on behalf of injured purchasers of allegedly price-fixed LCD products, holding that whether a state is the real party in interest “is a question to be determined from the essential nature and effect of the proceeding.” In March 2012, the Ninth Circuit sided with the Seventh Circuit, requiring the remand of an action filed by the Nevada attorney general alleging that Bank of America misled Nevada consumers about the terms and operation of its home mortgage modification and foreclosure processes. The Ninth Circuit noted “the devastating effect of the foreclosure crisis on Nevada” and “Nevada’s sovereign interest in protecting its citizens and economy from deceptive mortgage practices” in determining that Nevada was the real party in interest.
The issue returned to the Fifth Circuit in Mississippi v. AU Optronics Corporation, another antitrust and consumer protection case brought against LCD manufacturers on behalf of purchasers. The Fifth Circuit noted that its approach had been rejected by other courts, but nonetheless applied Caldwell and held that the Mississippi attorney general must litigate his “mass action” in federal court.
The awkwardness of the Fifth Circuit’s adherence to Caldwell, however, was illustrated in a concurring opinion by Judge Jennifer Walker Elrod. Judge Elrod supported the denial of remand on the ground that the panel had accurately applied Caldwell, but then proceeded to explain why the Fifth Circuit might be wise to free itself of Caldwell’s constraints:
1. CAFA provides no textual support for piercing the complaint “to determine whether [the] plaintiff is the sole beneficiary of each basis for relief.”
2. The Supreme Court has repeatedly warned that removal statutes should be strictly construed, with ambiguities resolved in favor of remand.
3. Principles of comity and federalism dictate that this rule should apply “with particular force” where the plaintiff is a state suing in its own courts.
4. The Caldwell approach negates the “general public” exception to CAFA, which provides that a “mass action” does not include a civil action in which all of the claims “are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to a State statute specifically authorizing such action.” Because Caldwell, as well as the majority in AU Optronics, hold the injured citizens on behalf of whom the state has sued are the real parties in interest, these cases also hold that the claims are not “asserted on behalf of the general public” for purposes of the exception. The result is that “a case cannot satisfy the criteria of both the mass action provision and the general public exception,” thereby vitiating the general public exception.
Based on this own critique from a concurring judge, it would seem unlikely that future circuits to consider the matter on first impression would follow the Fifth Circuit’s approach. The question is whether the Fifth Circuit, at its next opportunity, will accept Judge Elrod’s suggestion and reconsider, or whether the Fifth Circuit will stand as the only circuit in which a state’s parens patriae lawsuit is removable under CAFA.
The Class Action Fairness Act of 2005 creates federal diversity jurisdiction over class actions in which the amount in controversy exceeds $5 million. Suppose a defendant removes a putative class action to federal court, making a showing that the $5 million threshold is met, and the plaintiff signs a stipulation that he or she will not seek more than $5 million on behalf of the class. May the case be remanded on the basis of such a stipulation?
That question will be decided by the Supreme Court this term in Standard Fire Insurance Co. v. Knowles. In Knowles, the complaint was filed in an Arkansas state court and accompanied by the plaintiff’s signed affidavit, which stated that the plaintiff “will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).” Standard Fire removed to federal court, and the plaintiff moved to remand.
The district court, applying Eighth Circuit precedent, held that Standard Fire had satisfied its burden of establishing, by a preponderance of the evidence, that the $5 million threshold was satisfied, shifting the burden to the plaintiff to prove to a “legal certainty” that the amount in controversy fell below $5 million. The district court further held, however, that the plaintiff’s affidavit was sufficient to establish that “legal certainty.” Standard Fire sought permission to appeal to the Eighth Circuit, which was denied.
Standard Fire then petitioned for rehearing en banc. While the petition was pending, the Eighth Circuit decided Rolwing v. Nestle Holdings, Inc., affirming an order of remand based on a stipulation similar to the affidavit submitted in Knowles. The Eighth Circuit subsequently denied rehearing en banc in Knowles.
The case raises important issues about due process and the proper role of a named plaintiff in a putative class action case. Standard Fire argues that a named plaintiff, prior to class certification, has no authority to “stipulate” away damages for, or otherwise bind, a class that he or she does not yet represent. Permitting such a stipulation, Standard Fire contends, violates the due process rights of absent class members. It also allows one party to effectively waive a jurisdictional requirement.
Standard Fire also claims that the underlying lawsuit illustrates precisely the type of abuses CAFA was intended to prevent. According to Standard Fire, the plaintiffs’ counsel in Knowles has filed numerous class actions in Arkansas state court, most of them in the same county, and has obtained orders deferring briefing on all dispositive motions until after discovery is complete and class certification is decided. The state court, according to Standard Fire, then typically “forces” settlement in the cases by permitting “staggeringly expensive discovery,” compliance with which is ordered “prior to briefing on certification in order to force massive nationwide settlements in cases in which the federal courts would never have certified a class.”
The plaintiff, in turn, contends that the stipulation is just one of a number of lawful methods in which class action plaintiffs structure their complaints to remain under the removal threshold—such as narrowly defining the class or otherwise limiting the scope of the claims asserted. No absent class member is required to “bound” by the stipulation, because any class member who objects to the $5 million limitation is free to opt out of the class.
The Supreme Court’s unusual decision to grant certiorari in a case that was not even heard or decided at the Eighth Circuit level may be a sign that some on the Court are sufficiently troubled by the “stipulation” tactic that they see an immediate need to dispense with it. On its face, the notion that a plaintiff can purport to bind absent members of an uncertified class seems inconsistent with the most fundamental principles of class actions, including the Court’s own recent decisions. If the “stipulation” approach is upheld, the Court may give class action plaintiffs a new path around CAFA.
This blog has previously discussed the importance of the amount-in-controversy requirement for jurisdictional purposes. Plaintiffs wishing to remain in state court need to provide a clear and definitive allegation that the amount in controversy falls below CAFA’s $5 million jurisdictional threshold. For some plaintiffs, this requirement can pose a dilemma. On the one hand, most plaintiffs would like to maximize the amount of recovery for any particular case, even if the amount of that recovery exceeds $5 million. On the other hand, definitively admitting that the amount in controversy exceeds $5 million increases the likelihood that the case will be removed to federal court if all other requirements for removal are satisfied.
A recent case from the Ninth Circuit illuminates the catch-22 associated with the $5 million amount-in-controversy requirement in class action cases. In Campbell v. Vitran Express, Inc., former employees alleged that the defendant trucking company violated California Labor Code provisions. The plaintiffs properly pled in their complaint that the amount in controversy was less than $5 million, forcing the defendant to prove “by a legal certainty” that the amount in controversy exceeded $5 million. In its removal petition, the defendant offered two separate damages calculations showing the amount in controversy to be greater than $5 million. The plaintiffs did not dispute either of the defendant’s damages calculations.
More compelling to the court than the defendant’s damages calculations, however, was the plaintiffs’ steadfast refusal to stipulate at oral argument that they would seek less than $5 million in damages. To the court, this refusal equaled a tacit admission that plaintiffs would in fact seek more than $5 million at trial. The court admonished, “[W]e see nothing in [precedent] that supports the proposition that a party may avoid federal court by pleading that he is seeking less than $5 million in the complaint, but refusing to support that pleading with any sort of judicially binding admission—which tells us he is actually seeking more than $5 million.” Because the plaintiffs were “unwilling” to stipulate to damages less than $5 million and because the defendants had produced undisputed damages calculations, the court held that the defendant had established “to a legal certainty” that the amount in controversy exceeded $5 million. All of the other jurisdictional requirements in CAFA being met, the Ninth Circuit reversed the district court’s order to remand the case to state court.
Campbell not only illustrates the importance of clearly pleading the amount in controversy in the complaint, but it also demonstrates the vulnerability of plaintiffs who are forced to choose between staying under the jurisdictional threshold and maximizing their potential for recovery. Campbell offers defendants a potential avenue to force plaintiffs to make this choice early in the litigation.
Two recent decisions from the Ninth Circuit demonstrate how knowledgeable pleading by plaintiffs regarding the amount-in-controversy requirement of CAFA can determine whether a class action will be litigated in federal or state court.
For the district court to retain original jurisdiction over a civil action under CAFA, the amount in controversy must exceed $5 million, the aggregate number of proposed plaintiffs must total 100 or more, and any member of the plaintiff class must be diverse from any defendant. The latter two requirements are usually met without any dispute. Thus, more often than not, once a plaintiff files an action in state court, the burden shifts to the removing defendant to prove that the amount in controversy exceeds $5 million.
The precise extent of that burden, however, may depend on how well the plaintiffs have pleaded the amount in controversy. The removing defendant need only satisfy a “preponderance of the evidence” standard to show that the amount in controversy has been met “where it is unclear or ambiguous from the face of a state-court complaint whether the requisite amount in controversy is pled.” But “when a state-court complaint affirmatively alleges that the amount in controversy is less than the jurisdictional threshold,” a removing defendant must prove to a “legal certainty” that CAFA’s jurisdictional amount is satisfied.
Two recent Ninth Circuit decisions illustrate the duality of this legal framework. In Morey v. Louis Vuitton N. Am., Inc., the court determined that the defendants met their burden to show by a preponderance of the evidence that the amount in controversy exceeded $5 million. In that case, a plaintiff brought a class action against the high-end clothing company, alleging that the company violated California’s credit card act. The credit card act imposed penalties of up to $250 for the first violation and up to $1,000 for each subsequent violation, regardless of whether the subsequent violation aggrieved the same victim. The complaint sought the maximum penalties of “up to . . . $1,000 per violation.” Because the complaint was “unclear or ambiguous” regarding the amount in controversy, the Ninth Circuit determined that Louis Vuitton only had to show by a preponderance of the evidence that the $5 million amount had been met. The clothing company easily met its burden. The amount in controversy could be $1,000 for each violation (after the first), and there were more than 5,000 credit card transactions. With this information, Louis Vuitton successfully removed the class action to federal court under CAFA.
The defendants in Montalvo v. Swift Transp. Corp. did not fare as well. In that case, the Southern District of California remanded the suit, finding that the defendant failed to establish CAFA’s amount-in-controversy requirement. In this wages-and-hours class action, the plaintiffs affirmatively alleged that “the aggregate claims, including attorneys’ fees and all other requested relief, are under the five million dollar ($5,000,000.00) threshold of the Class Action Fairness Act of 2005.” Faced with the plaintiffs’ unambiguous declaration of the amount in controversy, the district court found that the “legal certainty” standard applied. Legal certainty refers to “something less than absolute certainty and more stringent than a preponderance of the evidence.” The court determined that the defendants estimated a class size that was too expansive and unsupported by facts and that defendants failed to show that every member of the class was entitled to penalties; indeed, the court seemed to agree with the plaintiffs’ argument that “[d]efendant’s calculations are based on conjecture, speculation, and assumptions,” falling far short of the legal certainty requirements. The district court, quoting the Ninth Circuit, explained the legal certainty rule: “CAFA’s removal provision and the ‘legal certainty’ rule strike a balance, leaving plaintiff as master of her case, but giving defendant an option of a federal forum at the point when they can prove its jurisdiction.”
One can argue, of course, that the reason for the differing results in Morey and Montalvo had less to do with pleading standards than with the facts of the cases themselves. In Morey, it was readily demonstrable that the number of transactions was sufficient, given the $1,000 penalty, to trigger federal jurisdiction; quite likely, Louis Vuitton would have been able to satisfy even a “legal certainty” standard. Presumably this is why the plaintiffs could not make an affirmative, unambiguous allegation, compliant with Rule 11, that their claims did not exceed $5 million. Conversely, in Montalvo, the defendants’ speculative calculations may well have failed even the lighter “preponderance of the evidence” burden.
Nevertheless, the contrasting approaches taken in Morey and Montalvo provide clear lessons to counsel on both sides of a state court class action complaint. Plaintiffs’ counsel who wish to remain in state court will do well to make a “below the threshold” allegation in as clear and definitive a manner as the facts will allow. Defendants’ counsel, meanwhile, can maximize their chances of successful removal by exploiting even the smallest equivocation in jurisdictional allegations.
Earlier this year, the Fourth Circuit rejected a bid by a group of pharmacies to refashion an action brought by the West Virginia attorney general as a “disguised class action” filed on behalf of West Virginia citizens. A recent decision dealt a similar blow to the seller of the prescription pain medication OxyContin in a lawsuit brought by the Kentucky attorney general, though for different reasons.
In In re Oxycontin Antitrust Litigation, the Commonwealth of Kentucky brought a variety of state law claims alleging that Purdue—the company that designs, sells, and distributes OxyContin—misled and deceived consumers, medical providers, and government officials regarding the drug, particularly with respect to risks of addiction. The Commonwealth sought damages on its own behalf, in the form of restitution for Medicaid reimbursements it made to Kentucky residents for prescriptions the Commonwealth claims would never have been written but for Purdue’s deceptive marketing campaign. The Commonwealth also sought equitable and injunctive relief in its parens patriae capacity, i.e., to vindicate a “quasi-sovereign” interest on behalf of its citizens.
Purdue removed the case to federal court, in part on the ground that because Kentucky sought relief on behalf of consumers who purchased the drug, the purchasers were the real parties in interest, and the lawsuit was a class action subject to CAFA. The United States Judicial Panel on Multidistrict Litigation transferred the action to the Southern District of New York for inclusion in an existing MDL antitrust proceeding involving OxyContin. Kentucky then moved the federal court in New York to remand the case to Kentucky state court.
In granting the Commonwealth’s motion, the court described three capacities in which a state may bring a suit. First, a state may bring a suit in which it alleges a direct, tangible injury to the state itself. Second, a state may bring a parens patriae suit to protect the health and well-being of its residents generally. Third, the state may bring a claim to vindicate the interests of a distinct group of private parties. The court ruled that only in this final type of case is the state merely a nominal party and not the real party in interest.
In this case, Kentucky’s claim for equitable and injunctive relief was a parens patriae claim. Furthermore, the Commonwealth’s damages claim, the court held, was for direct, tangible injury it suffered in connection with Medicaid payouts. Therefore, the Commonwealth, with respect to both claims, was the real party in interest.
Purdue argued that only a distinct group of citizens, and not Kentucky itself, had standing to bring some of the claims involved. That fact, they argued, showed that those citizens were the real parties in interest. The court rejected this argument, however, saying that the Commonwealth’s standing was a separate issue from determining the real party in interest. While some of the Commonwealth’s actions might ultimately be dismissed for lack of standing, this possibility did not entitle Purdue to transform those claims into a class action.
In making its ruling, the court assumed, without deciding, that CAFA applies to suits brought by a state and that a real party in interest analysis is appropriate in such suits. The OxyContin decision, together with the Fourth Circuit pharmacy case, suggest that defendants seeking to use CAFA to bring such cases into federal court will face an uphill battle.
Contributing author: Brian Kint
When is a state’s parens patriae action really a class action in disguise, and therefore removable under CAFA? Almost never, according to a recent opinion by a divided Fourth Circuit panel.
In State of West Virginia v. CVS Pharmacy, the West Virginia attorney general sued six pharmacies in West Virginia state court, alleging that the pharmacies violated West Virginia law by selling generic drugs to West Virginia consumers without passing along to the consumers the cost savings of generic drugs over brand name equivalents. The attorney general alleged that the pharmacies’ practices violated two state statutes, one regulating the practice of pharmacy and the other prohibiting unfair or deceptive trade practices.
The pharmacies removed the action to federal court under CAFA, arguing that the lawsuit was a “disguised class action.” The pharmacies contended that the action met the Rule 23 and CAFA requirements for a removable class action: i.e., that the number of West Virginia consumers and prescriptions filled for them met CAFA’s numerosity and amount-in-controversy requirements; that minimal diversity was satisfied because the pharmacies are not West Virginia citizens; and that the action was a representational proceeding because the attorney general sought refunds on behalf of affected West Virginia purchasers of generic drugs. The attorney general moved to remand, and the federal district court granted the motion.
On appeal, the Fourth Circuit panel affirmed the remand order, concluding that the suit is not a “class action” as defined by CAFA. CAFA authorizes removal of actions that are brought under Rule 23 or a “similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action.” The court observed that the lawsuit had been brought under neither Rule 23 nor West Virginia’s corresponding state court rule, but under substantive statutes that include no provisions for a “typical class action.” While the pharmacies claimed that the state statutes are nonetheless “similar” to Rule 23, because they allow the attorney general to bring a single action representing multiple consumers who all suffer a similar injury, the court disagreed, noting that the state statutes lack the Rule 23 requirements of numerosity, commonality, typicality, and adequacy of representation. Moreover, the court held, the representational action permitted under the state statutes is also different from a class action in that the attorney general is not a member of the “class,” as would be required under Rule 23.
Finally, the court held that permitting the pharmacies to remove the action to federal court would violated “deeply-rooted principles of federalism,” to which CAFA “is also sensitive.” Noting that the case was brought by the state of West Virginia to enforce West Virginia laws on behalf of West Virginia citizens, the court was unwilling “to mandate that the State was not entitled to pursue its action in its own courts . . . and inappropriately transform what is essentially a West Virginia matter into a federal case.”
The dissenting opinion noted that “some of the same private attorneys representing the Attorney General here are simultaneously representing individuals who have filed essentially identical claims against the same defendants in Michigan and Minnesota.” The dissent noted that those claims were filed as class actions, and “[i]f one were to close one’s eyes as to who the named plaintiff is in the three lawsuits, there is no way to detect a material difference” between the two class actions and the West Virginia suit.
Nevertheless, at least in the Fourth Circuit, defendants seeking to remove a parens patriae action will not be permitted to rely on the action’s resemblance to a class action. Unless the action is brought pursuant to the state’s equivalent of Rule 23, it will not be removable under CAFA.
A recent federal court decision in Texas offers interesting insights as to the inferences a court may reach in calculating the amount in controversy for removal purposes—and as to the extent to which some of those inferences may be within the defendant’s control.
In Laffin v. National Football League, several holders of tickets to Super Bowl XLV in Dallas brought a putative class action in Texas state court against the NFL, the Dallas Cowboys, and various associated entities. The lawsuit seeks relief on behalf of ticketholders who allegedly were denied or delayed seating or relocated to different seats, and it alleges counts including fraud and breach of contract.
The defendants removed the action to the Northern District of Texas, specifically alleging that the amount in controversy exceeds $5 million. When the plaintiffs moved to remand, the NFL submitted a declaration showing the face values of the tickets at issue and, for each value, the number of ticketholders affected. Based on these figures, the face value of the tickets of the putative class members totaled slightly more than $2.5 million
Yet the court found that the NFL had established, by a preponderance of the evidence, that the amount in controversy was more than $5 million. To find the remaining $2.5 million, the court relied on a number of assumptions and inferences. First, the court reasoned that the $2.5 million was a “conservative” estimate of consequential damages, given the likelihood that some class members paid more than face value for their tickets and the plaintiffs’ likely ability to recover travel, hotel, and restaurant expenses should they prevail. The court then noted that because the plaintiffs had alleged fraud and were therefore entitled to punitive damages, and because Texas law allows for punitive damages up to twice the economic damages plus a capped amount for noneconomic damages, punitive damages could equal at least an additional $2.5 million. Finally, the court made an estimate of “reasonable, and conservative” attorney fees at 20 percent, or $1 million.
The plaintiffs’ primary counterargument was that many of the putative class members had already settled with the NFL, and that the amount in controversy must be reduced by the settlements. The court noted, however, that the jurisdictional facts supporting removal must be judged “at the time of removal.” The defendants filed their removal notice only two days after sending settlement offers, rendering it “unlikely that a significant number, if any, of putative class members” had settled at the time of removal. Significantly, the defendants, rather than wait the permitted 30 days before removing, filed their removal notice only nine days after the complaint was filed—a decision that may have significantly impacted the court’s reluctance to allow for the possibility of settlements.
It is also worth noting that the court, while giving the defendants the benefit of several doubts, passed on the opportunity to make any of a number of inferences in the plaintiffs’ favor. For example, although the NFL’s figures showed more than 3,200 affected ticketholders, only 475 of those were displaced completely. The vast majority were instead relocated or delayed seating. Yet the court assumed that the consequential damages for each ticketholder would be “at least” the face value of the ticket, not merely a diminution in value based on the severity of the relocation or the portion of the game missed as a result of any delay. The court also made assumptions about the recoverability of ticket payments made in excess of face value, and about the number of out-of-town spectators, that may be accurate but do not appear to have been supported by evidence.
The imbalance of assumptions, however, does not necessarily mean the court exhibited a bias toward the NFL. Rather, it arguably reflects the removal standard itself. As the court noted, when a defendant shows by a preponderance of the evidence that the amount of controversy exceeds the jurisdictional minimum, the plaintiff must show that it is a “legal certainty” that he will not be able to recover the jurisdictional amount. Thus, a court is essentially required to resolve all doubts regarding the amount in controversy in favor of the defendant, and in favor of retaining jurisdiction.
Class action defendants frequently have the advantage of having the relevant jurisdictional facts in their possession—the number of individuals who purchased their product or otherwise did business with them, as well as the dates of the transaction, payment amounts, and often even the states of residence of the various putative class members—as well as the ability to control contact with class members until such time as the plaintiff learns their identities. The NFL’s removal of the case while its settlement offers were still in the mail is an example of how a defendant can exploit this advantage.
The burden on class action defendants seeking removal to federal court under the Class Action Fairness Act (“CAFA”) is not a steep one. But a recent remand order in Wisconsin instructs that when removal is contested, the defendant must come forward with facts that will plausibly support federal jurisdiction.
In Zhang v. United Healthcare Insurance Co., a college student claims he was wrongfully denied medical benefits because he refused to sign a subrogation agreement that, the student alleges, is contrary to Wisconsin state law. He filed his complaint in state court, on behalf of himself and a class of college students in Wisconsin who purchased a certain policy from United Healthcare and were asked to sign the subrogation agreement. The plaintiff alleges that the class size is “at least in the thousands” and that his claim is typical of the claims in the class.
United Healthcare filed a notice of removal, and the plaintiff moved to remand. At issue was whether the amount in controversy exceeds $5 million, as required by CAFA. As a threshold matter, the plaintiff argued that United Healthcare failed to produce evidence of the amount in controversy at the time of removal. The court rejected this argument, saying that “there is no legal basis for the assertion that the notice of removal itself has to contain evidence of the jurisdictional amount in controversy.” (Emphasis in original.)
The court added, however, that once the allegation of the amount in controversy is challenged—such as through a motion to remand—the proponent of federal jurisdiction must support its assertion with competent proof. This proof need only establish the amount in controversy, not the amount the plaintiff is likely to win, and may take the form of a plausible, good-faith estimate if supported by the evidence.
United Healthcare, the court held, failed to meet even this minimal burden. United Healthcare relied on an affidavit stating that the named plaintiff’s claim amounts to approximately $6,950, and apparently contended that this figure, coupled with the allegation that the class size is “in the thousands,” formed a basis for a conclusion that the amount in controversy exceeds $5 million. The court, however, said that it “cannot simply multiply what the plaintiff’s denied claims are by a thousand, as such as sum would not be reliable.” (Internal quotations omitted.)
The court said United Healthcare had not shown that others in the class “had even the slightest potential to sustain similar damages.” The court noted that in order to receive similar damages, other potential class members would have to have been denied benefit claims “because those plaintiffs all decided to ‘take a stand’ and refused to sign a subrogation agreement, a brave task for a college student facing thousands of dollars in medical bills.” (Emphasis in original.) In addition, there was no evidence that other class members would have similarly high medical bills, an unlikely scenario given a class consisting of “college students, a relatively healthy populace.” Thus, the court concluded that “it strains credulity to conclude that this case is a five million dollar case.”
Defendants seeking removal are frequently able to rely on the allegations in a class action complaint to establish the framework for CAFA removal. Defense counsel must first be certain, however, that the allegations in the complaint support the necessary inferences and do not require the court to make unwarranted assumptions about the size of the class or the range of individual damages. If those allegations are absent, defense counsel must be prepared to fill in the necessary gaps with evidence in response to a motion for remand.
Ninth Circuit: Third Parties Joined to Class Actions as Additional Counterclaim Defendants May Not Seek CAFA Removal
This week, the Ninth Circuit held that third parties joined to a class action as additional counterclaim defendants are not “true defendants” within the definition of 28 U.S.C. §§ 1446 or 1453(b) and may not remove the class action to federal court under the Class Action Fairness Act. The Ninth Circuit joins the Fourth and Seventh circuits in holding that CAFA did not amend the definition of “defendant” or “defendants” in the removal statute. Consequently, only traditional defendants, or those against whom the original plaintiff asserts claims, may seek removal under CAFA. The right of removal under CAFA does not extend to counterclaim defendants, third-party defendants, or additional counterclaim defendants.
The underlying lawsuit, Westwood Apex v. Contreras, began with the defendant’s alleged default of his student loan. When the college subsidiary that had extended the loan filed suit in state court to recover the unpaid loan balance, the former student responded with a vengeance. He not only answered the complaint, but brought a class action counterclaim (a “cross-claim,” in California parlance) alleging fraud and deceptive business practices. He also joined several new parties, including his former college and individuals affiliated with the college, as additional counterclaim defendants. The proposed class included all California residents who attended or are currently attending Westwood College.
The additional counterclaim defendants filed a removal notice under CAFA, but the notice was immediately questioned by the federal district court in a show cause order. The district court ordered briefing to explain why, in light of the Fourth Circuit's persuasive authority to the contrary, the additional counterclaim defendants were “defendants” authorized to remove the action to federal court. The district court ultimately concluded that additional counterclaim defendants were not “true defendants” (e.g., a defendant in the pleading that commences the action) and thus were not authorized by statute to file removal papers. The Ninth Circuit granted a petition to appeal from the order of remand, endorsed the logic of the Fourth and Seventh circuits, and affirmed the remand decision.
In retrospect, the Westwood Apex decision was foreshadowed by the Ninth Circuit’s earlier decision in Progressive West Ins. Co. v. Preciado. There, the Ninth Circuit held that a state court plaintiff who was also a counterclaim defendant lacked standing to remove a class action under CAFA. In that decision, the Ninth Circuit followed what has become known as the “true defendant” rule, a rule with roots extending back to the Supreme Court’s 1941 opinion in Shamrock Oil & Gas Corp. v. Sheets. Shamrock Oil interpreted the phrase “defendant or the defendants” in predecessor statutes as narrowing federal jurisdiction and excluding plaintiffs as parties with power to effect removal. Thus, only defendants in the traditional sense were authorized to seek removal from state court lawsuits. From that decision, the “true defendant” rule emerged and was applied to 28 U.S.C. § 1441. Since the terminology of “defendant” or “defendants” in § 1453(b) is identical to the terminology employed in § 1441, the courts apply the same logic. Consequently, the Fourth, Seventh, and Ninth circuits conclude that Congress intended that CAFA be given the same narrow interpretation afforded §§ 1441 and 1446 to prohibit removal by anyone other than a “true defendant.”
While these decisions make it exceedingly difficult for third parties to remove class actions, a glimmer of hope remains for them. As described by one federal district court in Sharp General Contractors, Inc. v. Mt. Hawley Ins. Co., 471 F. Supp. 2d 1304 (S.D. Fla. 2007), it may be possible for a non-traditional defendant to first sever the complaint from the counterclaim and then seek removal of the counterclaim. In Sharp, which did not involve a class action, the additional counterclaim defendant was sued for declaratory relief by an original defendant who itself had been sued in a subrogation matter. Because it was an additional counterclaim defendant, the insurer was not a “true defendant” and could not remove the action to federal court immediately upon service of the counterclaim. Instead, it filed a motion to sever the counterclaim from the underlying subrogation action. At the point of the order of severance, the action for declaratory relief became a separate action and the insurer became a “true defendant” rather than a third party defendant. The insurer then was able to file its removal petition. Thus, for third parties joined to a class action by counterclaim, severance may the only route by which they may seek removal of that class action counterclaim.
A divided Third Circuit panel recently held that federal courts may exercise diversity jurisdiction in class actions brought under the Telephone Consumer Protection Act, even though the statute deprives federal courts of federal question jurisdiction. In Landsman & Funk PC v. Skinder-Strauss Associates, the Third Circuit joins the Second, Fifth, and Tenth circuits in holding that diversity jurisdiction exists under the TCPA.
The TCPA provides a private right of action for recipients of unsolicited faxes, as well as statutory damages of $500 per violation—an amount that can be trebled for willful violations. The language creating the private right of action, however, provides that the recipient “may, if otherwise permitted by the laws or rules of court of a State, bring [an action] in an appropriate court of that State . . . .” (Emphasis added.) This provision contrasts with the section authorizing actions by state attorneys general, over which federal courts “shall have exclusive jurisdiction.”
In its 1998 opinion in ErieNet, Inc. v. Velocity Net, Inc., a case in which federal question jurisdiction was sought under the TCPA, the Third Circuit interpreted the private right of action section as authorizing such lawsuits only in state court. Judge Marjorie Rendell, however, writing for the majority in Landsman, said that although ErieNet “imprecisely” rejected all “federal court jurisdiction” for private TCPA suits, its “analysis and holding were limited to federal question jurisdiction.”
In essence, Judge Rendell’s rationale is that, while federal question jurisdiction is “substance-based” jurisdiction that must be conferred by Congress, diversity jurisdiction is conferred by 28 U.S.C. § 1332 and applies presumptively in all actions that meet its requirements, unless Congress intended to strip federal courts of diversity jurisdiction with respect to a specific cause of action. In Judge Rendell’s view, the TCPA evidences no such intent, and thus the diversity provisions of the Class Action Fairness Act—which were adopted after TCPA and which permit diversity jurisdiction over class actions where there is minimal diversity and an aggregate amount in controversy in excess of $5 million—apply to private TCPA actions.
Oddly, each of the three judges on the Third Circuit panel reached a different conclusion as to the existence of federal question and diversity jurisdiction under the TCPA. Chief Judge Theodore McKee, in a concurring opinion, wrote that he believed intervening Supreme Court decisions had invalidated ErieNet and would have held that both federal question and diversity jurisdiction existed. Judge Leonard Garth, in dissent, would have held that neither federal question nor diversity jurisdiction existed; he, like Judge Rendell, was on the ErieNet panel but took issue with Judge Rendell's limitation of ErieNet to federal question jurisdiction. Thus, Judge Rendell’s decision to split the difference carried the majority.
As a result, TCPA class actions are alive and well in the Third Circuit, provided a plaintiff can allege more than 10,000 non-willful violations (to meet the $5 million aggregation requirement) and establish minimal diversity.
South Carolina Court Allows Unnamed Class Members to Bring Direct Action Despite Failure to Opt Out of Prior Settlement
One critical component of class action litigation is the obligation of class counsel and the court to protect the rights of unnamed class members. A recent South Carolina federal district court decision should serve as a reminder that when class counsel shirk this obligation, the defendant can suffer the consequences.
In Hege v. Aegon USA, the court permitted unnamed class members in an Arkansas class action to proceed with their own direct claims in South Carolina, even though the Arkansas court had already approved a class settlement over the unnamed class members’ objections, and the unnamed class members did not opt out of the settlement. Although the South Carolina court ruled on several different legal theories, its opinions arose largely out of a similar underlying rationale. In essence, the court found that named plaintiffs and their counsel in the Arkansas litigation had negotiated a self-serving settlement that failed to protect unnamed class members. As a result, the Arkansas court’s ensuing order of dismissal was not entitled to full faith and credit in South Carolina, and the absence of an actual controversy between the named plaintiffs and the defendant deprived the Arkansas court of subject matter jurisdiction.
The two lawsuits are among several challenging Transamerica’s revised interpretation of the term “actual charges” in its supplemental cancer insurance policies. In April 2006, Transamerica stopped paying policyholders “actual charges,” equivalent to full initial fees billed by healthcare providers, and began re-interpreting “actual charges” to mean the payment healthcare providers would ultimately accept. After a federal court in Arkansas denied class certification in one of the lawsuits on the ground that proposed class representatives’ interests conflicted with those of policyholders, class counsel in these lawsuits negotiated a settlement with Transamerica. Class counsel then filed a new action in Arkansas state court, in which the same named plaintiffs from the other prior actions sought judicial approval of the settlement.
Under the settlement, Transamerica agreed to compensate each class member 40% of the difference between a healthcare provider’s initial bill and the amount finally accepted, capped at $15,000. Going forward, the settlement stated that Transamerica would define “actual charges” as “the amount legally owed to the provider.” Transamerica also consented to waive any potential claims against policyholders for overpayment of benefits. Finally, Transamerica agreed to pay $3,500,000 in attorneys’ fees to class counsel pursuant to a “clear sailing” clause.
The settlement notice sent to nationwide class members stated that the new definition of “actual charges” would enable Transamerica to reduce “the amount and frequency of future premium increases,” and that this definition was consistent with South Carolina law. The South Carolina plaintiffs objected to the $15,000 compensation limit, but did not opt out of the class, saying they feared that Transamerica would sue them if they opted out. However, after the expiration of the opt-out period, the plaintiffs and other objecting class members from South Carolina filed a motion in the Arkansas court to carve out a subclass for South Carolina class members. Their argument: after the opt-out deadline, they had learned that the South Carolina definition of “actual charges”—which, as the settlement notice stated, was consistent with the definition to be applied under the settlement—did not apply to policies issued before June 4, 2008. Therefore, for many South Carolina policyholders, the new Transamerica definition was not consistent with South Carolina law, and in fact would narrow the recovery otherwise available to them. The Arkansas court, however, denied all objections and motions to intervene, approved the settlement, awarded the $3,500,000 in attorneys’ fees, and dismissed all claims with prejudice.
When the plaintiffs subsequently filed the South Carolina action, Transamerica responded with a motion for summary judgment, arguing that their lawsuit was barred by the Arkansas settlement. The court disagreed. The court held that the Arkansas ruling was not entitled to full faith and credit because the South Carolina policyholders did not receive due process in Arkansas. First, the settlement notice was materially defective because it implied that South Carolina class members who opted out of the settlement would not be entitled to relief greater than that in the settlement agreement. Second, the South Carolina class members did not receive adequate representation by class counsel. In this regard, the South Carolina court characterized the relationship between class counsel and unnamed class members as “antagonistic,” finding that Transamerica’s $3,500,000 payment discouraged class counsel from engaging in the adversarial process. In particular, the court noted class counsel’s motions to stay proceedings in other courts pending settlement approval, their opposition to the settlement objections, and their failure to seek 100% compensation for the lower “actual charges” payments.
The court further held that the Arkansas court did not have subject matter jurisdiction, in part because the class representatives and Transamerica were not adverse, and no controversy existed between the plaintiffs and Transamerica. Class counsel acknowledged “that no litigation was ever intended to occur within that proceeding” and “independently confirmed the substantive settlement occurred before their filing of the complaint in state court.” According to the court, “the only discernable effort exerted by [class counsel] was to initiate the suit (which only they alone could do and which they did by virtue of their agreement with Transamerica), in exchange for the $3,500,000 attorney fee.”
Lastly, the court held that the Rooker-Feldman doctrine, which precludes a losing party in state court from subsequently challenging the state court judgment in federal court, was inapplicable here. The court found that the plaintiffs qualified as nonparties to the Arkansas action, because Arkansas law prohibits unnamed class members who have not intervened in trial court from directly appealing a settlement obtained by class representatives. As a result, the plaintiffs’ only means to challenge the settlement was through collateral attack.
Defense counsel negotiating class action settlements are routinely called upon to evaluate settlement proposals not only from the standpoint of their clients’ interest, but also with an eye toward the likelihood that the court will approve the settlement. Here, Transamerica cleared both of these hurdles and is left with substantial payouts under the settlement, but without having bought its peace. Hege reminds that if both parties focus only on compensating class representatives and counsel, and fail to consider the interests of the class as a whole, the consequence to defendants can be substantially greater than mere rejection of the settlement.
Removability of Mass Actions Under CAFA: Seventh Circuit Falls "Just Short" of Providing Clear Guidance
A recent Seventh Circuit decision, in addressing the extent to which a state court’s proposal to conduct a joint trial of related actions may create a removable “mass action” under the Class Action Fairness Act, has succeeded mainly in creating a blurry distinction between a proposal by the court and one by the plaintiffs.
In Koral v. Boeing, Boeing appealed the remand of 29 separate lawsuits arising out the 2009 crash of a Boeing-built airplane. Boeing argued that the separate lawsuits were in fact a mass action removable under CAFA. Under CAFA, a removable “mass action” is defined as any civil action in which there are (i) monetary relief claims of 100 or more persons; (ii) proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact; and (iii) sufficient claims in the mass action to satisfy the jurisdictional amount requirements. The Seventh Circuit’s affirmance of the remand, together with another recent denial of an attempt at CAFA removal, demonstrate that despite CAFA’s purpose of providing litigants broader access to federal courts, CAFA does, in fact, grant plaintiffs strong ammunition to defend their choice of forum against mass action removal by artfully structuring their claims and by steering clear of making proposals to try their claims jointly.
The Seventh Circuit first weighed in on CAFA’s mass action requirements for removal in Bullard v. Burlington Northern Santa Fe Railroad Co., a lawsuit in which 144 plaintiffs filed a single complaint. The plaintiffs’ motion for remand argued that removal was premature because the lawsuit could ultimately consist of fewer than 100 persons (some plaintiffs could settle). The court rejected this argument, ruling that the complaint, “which describes circumstances common to all plaintiffs, proposed one proceeding and thus one trial.” It was not relevant whether or not a trial covering 100 or more plaintiffs actually occurred; the proposal itself triggered CAFA removal.
But in Anderson v. Bayer Corp., the Seventh Circuit rebuffed Bayer’s attempt to invoke CAFA’s mass action provision to remove five separate but mostly identical state complaints. Although each lawsuit had fewer than 100 persons, Bayer argued that the plaintiffs artificially orchestrated their filings to avoid federal diversity jurisdiction. The court disagreed: “Congress appears to have contemplated that some cases which could have been brought as a mass action would, because of the way in which the plaintiffs chose to structure their claims, remain outside of CAFA’s grant of jurisdiction.” Against that backdrop, the Seventh Circuit summarily rejected Bayer’s attempt to deconstruct the pleadings to show that the five separate actions should have been treated as a single action: “The mass action provision gives plaintiffs the choice to file separate actions that do not qualify for CAFA jurisdiction.”
Confirming that plaintiffs are the “masters of the complaint,” Anderson posited: “So long as plaintiffs (or perhaps the state court) do not propose to try these cases jointly in state court, they do not constitute a mass action removable to federal court.” But in this throw-away comment, Anderson left litigants wondering whether the proposal to try claims jointly could be made by the state court.
Six months later, Koral has addressed the question left open by Anderson: “We assume … that the state court’s deciding on its own initiative to conduct a joint trial would not enable removal.” While Koral’s assumption makes sense in light of Anderson’s reasoning – it is the plaintiffs who determine whether or not their claims qualify for CAFA removal – the court’s dictum may not be sufficient to close the door to future removal attempts based on a state court’s proposal to conduct a joint trial.
In Koral, the “proposal” at issue was made by the plaintiffs, not the court. Boeing moved to dismiss for forum non conveniens, arguing its Washington-based witnesses would be greatly inconvenienced by testifying in multiple trials in Illinois. In their opposition, the plaintiffs claimed that Boeing overstated the purported inconvenience to its witnesses and played down the likelihood of multiple trials:
Practically speaking, Boeing’s suggestion … that its employees will have to come to Chicago, Illinois for ‘several’ trials is not true. As this Court is aware, in aviation disaster cases, several exemplar cases are routinely tried on one occasion at which time the issue of liability is determined for the remainder of the cases. Thus, to the extent there is a trial, Boeing’s witnesses will in all likelihood not have to travel to Chicago, Illinois several times. [Boeing’s affiant] agreed that if that were the case [i.e., one trial], it would not be as inconvenient for Boeing witnesses to come to Chicago.
Boeing seized upon this argument as a proposal by the plaintiffs to try their cases jointly. The district court was not impressed: “Boeing has attempted to circumvent the clear language of CAFA by interpreting a footnote in the plaintiffs’ response to Boeing’s forum non conveniens motion as the plaintiffs’ proposal that the Court treat these cases – consolidated for pretrial purposes only – as a ‘mass action.’ Plaintiffs’ footnote made no such unequivocal proposal.” On appeal, Boeing argued, correctly, that the district court improperly grafted an extra condition– that a proposal to try cases jointly be “unequivocal” – to CAFA removal.
The Seventh Circuit agreed with Boeing that a proposal to try individual cases jointly could be “implicit” for purposes of CAFA removal – as in cases, such as Bullard, where a single complaint joins more than 100 plaintiffs’ claims without proposing a joint trial – because “one complaint, one trial, is the norm.” In this case, however, the court held that “the plaintiff’s [sic] statement falls just short of a proposal, as it is rather a prediction of what might happen if the judge decided to hold a mass trial.” (Emphasis added). Koral affirmed the general rule that the plaintiffs’ chosen forum is entitled to deference: “It would be odd to think that plaintiffs could not make a telling response to a motion for dismissal of a suit on the ground forum non conveniens without thereby having forfeited their chosen forum; by arguing against dismissal, they would be arguing for it.”
The Seventh Circuit’s opinion thus hinged on a distinction between a “proposal” and a “prediction,” virtually issuing an open invitation to plaintiffs to style their trial suggestions accordingly. In affirming the remand orders, Koral’s “just short of a proposal” pronouncement leaves an analytical hole in the CAFA removal requirements large enough to fly a plane through.
Removal Burdens Under CAFA Where the Complaint Fails to Allege a Specific Amount of Monetary Damages
Class action plaintiffs may seek to thwart removal by filing a complaint that is silent or ambiguous about the dollar amount of damages sought. In such cases, the face of the complaint does not show that the amount in controversy satisfies the $5 million threshold for removal of class actions under 28 U.S.C. § 1332(d)(2). Though this makes removal more difficult, it does not automatically defeat removal.
Two recent cases in the Ninth and Eleventh Circuits hold important lessons for dealing with this familiar removal obstacle. In the Ninth Circuit, Lewis v. Verizon Communications addressed the burden of proof and the applicable legal standard that apply to removal where the class action complaint is strategically silent on the damages sought. In the Eleventh Circuit, Pretka v. Kolter City Plaza II, Inc. presented a similar question concerning the kind of evidence that a district court may consider in determining removal questions. In Lewis, the complaint was silent about the amount in controversy. In Pretka, the complaint alleged merely that damages were in excess of $15,000 exclusive of interests, costs and attorney’s fees, but later conceded that the amount in controversy was uncertain and indeterminate. In many circuits, removability is determined from the four corners of the initial pleadings. Hence, the removal clock does not start ticking when the plaintiff files a complaint that is indeterminate regarding removability, but that does not mean that a defendant must simply wait for something to happen.
In each of the recent cases, the defendants filed a removal petition accompanied by an affidavit from a corporate officer attempting to shed light on the damages sought by the class action. Since the complaint in Pretka sought the return of condominium purchase deposits for class members, the defendant’s declaration stated that it had sold more than 100 units and collected more than $5 million in purchase deposits. In Lewis, where the class complaint alleged improper billing for premium telephone services that were never authorized by the customer, the defendant’s declaration stated that its billing records showed subscribers were billed more than $5 million in subscriber fees. In each case, the district court found the defendant’s removal evidence insufficient and remanded the complaint to state court. In each case, the appellate court reversed.
These cases teach us that it is difficult to remove a class action complaint that is silent on the amount in controversy. Removal in Lewis and Pretka was realized only after an appeal of the district court’s remand order. Had the defendants been less tenacious, or their lawyers less creative, the plaintiffs’ tactical ambiguity might have won the day. Second, these cases demonstrate that the legal standards for removal vary depending upon (1) when the case is removed, and (2) what the complaint alleges.
In the Ninth and Eleventh Circuits, to establish the jurisdictional amount in controversy where the complaint is silent or ambiguous on damages, the defendant bears the burden of proving the amount in controversy by a preponderance of the evidence. Pretka concluded that there was no statutory restriction on the kind of evidence that could be used to establish the amount in controversy. Defendants may offer declarations, unsworn letters, or other summary judgment-type evidence. In the First, Second, and Seventh circuits, the standard is expressed slightly differently as a reasonable probability standard. Almost none of the cases from these circuits provide insight as to the difference between these standards, but the First Circuit has at least implied they are nearly identical. Regardless of how the standard is expressed, the defendant must present evidence of the amount in controversy because removal cannot rest upon mere conclusory allegations.
As with any good story, there is an unexpected twist. When a defendant seeks removal under the second paragraph of 28 U.S.C. § 1446(b) – e.g., when the initial pleading is not removable, but later becomes removable upon receipt of pleading, motion, order or other paper – that fact significantly alters the kind of evidence that can be offered to support a removal petition. When the defendant relies upon the second paragraph of Section 1446(b), the evidence showing the amount in controversy must come from the plaintiff, not the defendant. Some cases attribute this result to the Supreme Court's holding in Powers v. Chesapeake & O Ry, while others attribute it to its decision in Great Northern Ry. Co. v. Alexander. Still other cases point to the textual differences between the two paragraphs. The word “ascertained” appears in the second paragraph of Section 1446(b) while the phrase “setting forth” appears in the first. The different language, it is said, signals a higher level of certainty required to remove under the second paragraph of Section 1446(b). Regardless of its origin, the “voluntary-involuntary rule” remains firmly entrenched. Under this rule, a case that is non-removable when filed cannot later be converted into a removable case by the act of the defendant. The conversion can result only from a voluntary act of the plaintiff which brings about a change that renders the case removable.
While a defendant can present its own evidence to effect removal when the lawsuit is first commenced, the defendant may not offer its own evidence when removal is attempted under the second paragraph of Section 1446(b). Thus, the time when removal is attempted will determine the kind of evidence that can be used to support the removal petition.
A defendant’s removal burden also depends on the specific allegations of the class action complaint. In the Ninth Circuit, the “preponderance of evidence” standard applies only when the amount in controversy is uncertain. When the state court complaint alleges specific damages below CAFA’s jurisdictional amount, the party seeking removal must prove with “legal certainty” that CAFA’s jurisdictional amount is met. As the Ninth Circuit recognized in Lowdermilk v. U.S. Bank National Assoc., this standard sets a very high bar for removal and effectively requires the defendant to overcome a presumption against federal jurisdiction. Though Lowdermilk acknowledged that this standard might allow plaintiffs to plead damages below the federal jurisdictional threshold as a strategy despite knowledge that the cases were worth more, the only solace offered by the Ninth Circuit was that CAFA eliminated the one-year time limit for removal.
Removal of a state court complaint is not prevented solely because the class action complaint is silent or ambiguous regarding the amount in controversy. Class action defendants may still seek removal of these complaints, but must carefully tailor their removal papers to the applicable legal standard.