Mass Tort Defense : Mass Tort Defense Lawyer & Attorney : Sean P. Wajert : Dechert Law Firm : Products Liability, Class Actions, Pharmaceutical Litigation

Our readers know a crucial early decision for defendants in cases brought in state court is whether to seek to remove the case to federal court.   In a decision that will impact when corporations can remove litigation to federal court based on diversity, the Supreme Court this week adopted a new test of corporate citizenship. Hertz Corp. v. Melinda Friend, et al., No. 08-1107 (S.Ct. 2/23/10).

Plaintiffs, California citizens, sued Hertz Corporation in a California state court.  Hertz sought removal to the federal district court, claiming that because it and plaintiffs were citizens of different states, the federal court had diversity jurisdiction. Plaintiffs, however, claimed that Hertz was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking under §1332(c)(1), which provides that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

To show that its “principal place of business” was in New Jersey, not California, Hertz submitted a declaration stating, among other things, that it operated facilities in 44 States, that California accounted for only a portion of its business activity, that its leadership is at its corporate headquarters in New Jersey, and that its core executive and administrative functions are primarily carried out there. The district court concluded that it lacked diversity jurisdiction because Hertz was a California citizen under Ninth Circuit precedent, which asked, instead, whether the amount of the corporation’s business activity is “significantly larger” or “substantially predominates” in one state.

The Supreme Court acknowledged that the phrase “principal place of business” has proven difficult to apply.  Lower courts were at times uncertain as to where to look to determine a corporation’s “principal place of business” for diversity purposes. If a corporation’s headquarters and executive offices were in the same state in which it did most of its business, the test seemed straightforward. But if those corporate headquarters, including executive offices, were in one state, while the corporation’s plants or other centers of business activity were located in other states, the answer was less obvious. In particular, courts have had difficulty when a corporation’s operations are not far-flung but rather limited to only a few states. When faced with this question, various federal courts have focused more heavily on where a corporation’s actual business activities are located, adopting divergent and increasingly complex tests to interpret the statute.

In an effort to find a single, more uniform interpretation of the statutory phrase, the Supreme Court returned to the “nerve center” approach under which a “principal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice it should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.

Among the considerations that convinced the Court that the “nerve center” approach, while admittedly imperfect, was superior to other possibilities:  first was the statutory language which uses the word “place” in the singular, not plural, and refers to a place within a state, not the state itself.  This rules out those lower court tests that look not at a particular place within a state, but incorrectly at the state itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are significantly larger than in the next-ranking state.

Second, administrative simplicity is a major virtue in a jurisdictional statute. A “nerve center” approach is simple to apply, comparatively speaking. MassTortDefense agrees that a clear rule -- predictability -- is something the business community has been looking for.  Greater predictability may assist businesses in making investment and other financial decisions.  The new rule may also reduce the need for extensive and expensive jurisdictional discovery.

The Court admitted that while there may be no perfect test that satisfies all administrative and policy criteria, this test is relatively easier to apply. The Court warned that if the record reveals attempts at jurisdictional manipulation -- for example, that the alleged “nerve center” is nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat -- the courts should instead take as the “nerve center” the place of actual direction, control, and coordination, in the absence of such manipulation.

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The Seventh Circuit recently issued a decision clarifying an issue under the Class Action Fairness Act:  when the federal court denies class certification in a case in federal court because of CAFA, does that divest the court of jurisdiction?  The court of appeals reversed an Illinois district court ruling that a failed class action lost jurisdiction, ruling that the lower court misinterpreted CAFA. Cunningham Charter Corp., et al. v. LearJet Inc., No 09-8042 (7th Cir., Jan. 22, 2010).

Cunningham sued Learjet in an Illinois state court asserting claims for breach of warranty and products liability on behalf of itself and all other buyers of Learjets who had received the same warranty from the manufacturer that Cunningham had received. The defendant removed the
case to federal district court under CAFA. Eventually, the district judge denied the motion on the ground that neither proposed class satisfied the criteria for certification set forth in Rule 23 of the Federal Rules of Civil Procedure. The judge then ruled that the denial of class certification
eliminated subject-matter jurisdiction under the Act, and so he remanded the case to the state court.

The 7th Circuit, per Judge Posner, disagreed.  the court offered some context, a textual explanation, and policy reasons. The general principle that jurisdiction once properly invoked is not lost by developments after a suit is filed, such as a change in the state of which a party is a citizen that destroys diversity. E.g., St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 293-95 (1938). That general principle was applicable to this case because no one suggests that a class action must be certified before it can be removed to federal court under the Act.  Cases should not be shunted between court systems; "itigation is not ping-pong."

Text: The Act defines class action as “any civil action filed under rule 23 of the Federal Rules of Civil
Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action.” § 1332(d)(1)(B). No requirement of certification.

Policy: If a state happened to have different criteria for certifying a class from those of Rule 23, the result of a remand because of the federal court’s refusal to certify the class could be that the case would continue as a class action in state court. That result would be contrary to the Act’s purpose of relaxing the requirement of complete diversity of citizenship so that class actions involving
incomplete diversity can be litigated in federal court.

In finding that federal jurisdiction under the Class Action Fairness Act does not depend on certification, the court joined Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1268 n. 12 (11th Cir. 2009).

Judge Posner concluded, that  is the better interpretation." See Richardson, “Class Dismissed, Now What? Exploring the Exercise of CAFA Jurisdiction After the Denial of Class Certification,” 39
New Mex. L. Rev. 121, 135 (2009); Clermont, “Jurisdictional Fact,” 91 Cornell L. Rev. 973, 1015-17
(2006).

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Readers of MassTortDefense know how important the choice of forum can be for significant product liability and mass tort matters.  The differences between federal and state court -- perhaps right down the street from each other -- can be huge, with differing juror pools, differing procedural rules, differing views on class actions, different methods of selecting the judiciary, etc.

Thus, it is worth making sure a subtle amendment to Rule 15 of the Federal Rules of Civil Procedure, which took effect Dec. 1, 2009, does not miss your attention, because of the potential impact it has on removal to federal court.

Prior to the amendments to Rule 15 — which governs amended and supplemental pleadings —  a plaintiff could amend the complaint once as a matter of course before any responsive pleading was filed.  Responsive pleading came to mean the defendant’s answer, and not a motion to dismiss.  E.g., Foster v. DeLuca, 545 F.3d 582 (7th Cir. 2008).  Thus, a defendant could eliminate the plaintiff’s right to amend as a matter of course by serving an answer.  That is, under the old version of Rule 15, a defendant could prevent amendments designed to eliminate the basis for removal by serving an answer just prior to or along with the filing of the notice of removal. When a plaintiff wanted to amend after the defendant had removed and answered, the plaintiff had to obtain consent or leave of court. So what about the removal, then? Any proposed amendment to the complaint affecting the court’s jurisdiction would trigger a heightened scrutiny of the amendment.  E.g., Hensgens v. Deere & Co., 833 F.2d 1179 (5th Cir. 1987). Defendants could argue that the  proposed amendment should be rejected on this basis. 

The new Rule 15 permits a plaintiff to amend “as a matter of course” even after the defendant has served “a responsive pleading.”  A party may file an amended pleading without leave of court within 21 days after service of a responsive pleading or 21 days after service of a Rule 12 motion, whichever is earlier. After that, a party may file an amended pleading only with leave of court. 

That raises the issue for your consideration whether the new ability of the plaintiff to amend “as a matter of course,” even after the defendant has served an answer, permits the plaintiff to make one of those jurisdiction-destroying amendments.  One possibility is that courts will look at "matter of course" amendments under the new rule the same way they were analyzed by many courts under the old rule.  That is, courts were guided by 28 U.S.C. § 1447(e), which states that if after removal the plaintiff seeks to join additional defendants whose joinder would destroy subject matter jurisdiction, the court may deny joinder, or permit joinder and remand the action to the state court. Schur v. L.A. Weight Loss Centers, Inc., 577 F.3d 752, 759 (7th Cir. 2009); Whitworth v. TNT Bestway Transp. Inc., 914 F.Supp. 1434 (E.D.Tex.,1996).  Courts, in the motion for leave context and sometimes in the "as of course" context as well, to decide between those two choices, would scrutinize the amendments closely, and due consideration is given to the original defendant’s interest in the choice of forum. Courts examine whether the purpose of the amendment is to defeat federal jurisdiction; how timely/prompt the plaintiff has been in seeking the amendment; whether the plaintiff will be prejudiced if amendment is not allowed; and any other equities. Bailey v. Bayer CropScience L.P., 563 F.3d 302 (8th Cir. 2009).

If this heightened scrutiny is applied to "matter of course" amendments made under the new version of Rule 15, removals may be in less jeopardy when when a plaintiff attempts to amend the complaint post-removal, post-answer  “as a matter of course.”

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A federal court in Illinois recently denied remand of approximately 100 cases involving Trasylol, an anti-bleeding drug, citing the Class Action Fairness Act. Gilmore v. Bayer Corp., 2009 WL 4789406(N.D. Ill., 12/10/09). (Federal Trasylol litigation was consolidated in 2008 in the Southern District of Florida. In re Trasylol Prods. Liab. Litig., No. 08-MD-1928 (S.D. Fla.). The plaintiffs typically assert that the product causes heart and kidney complications, and that the defendants allegedly failed to warn of the risks.)

The suit was originally filed in state court. The defendants removed the case, but Judge G. Patrick Murphy remanded it for lack of federal jurisdiction. Additional plaintiffs were added in October, followed by a second removal motion. The defendants asserted diversity of citizenship under CAFA. The plaintiffs again sought remand.

The Southern District of Illinois ruled that the removing defendants asserted correctly that this case was a removable “mass action” within the meaning of CAFA. Among the actions covered by CAFA is a “mass action,” defined by the statute as “any civil action ... in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs' claims involve common questions of law or fact,” and in which there is minimal diversity of citizenship (at least one plaintiff is not a citizen of the same state as at least one defendant) and the plaintiffs each seek a recovery exceeding $75,000, exclusive of interest and costs. 28 U.S .C. § 1332(d)(11)(B)(i).

The court concluded that an independent review “discloses plainly that the removal of this case is proper under the CAFA.”  The operative complaint asserted claims on behalf of one hundred persons, the minimum number of plaintiffs required for the exercise of jurisdiction pursuant to CAFA's “mass action” provisions.  Further, this case obviously presented questions of law and fact common to the claims of all one hundred plaintiffs, said the court. Common questions of fact and law included, for example, what information Bayer, Bayer LLC, and Bayer Healthcare possessed concerning the alleged harmful effects of Trasylol, what information they elected to disclose to physicians and patients about those harmful effects, and what information they were required by law to disclose about those effects, according to the court.

With respect to the requirement of minimal diversity of citizenship, this jurisdictional prerequisite was satisfied in this case as plaintiff Thomas Gilmore is a citizen of Washington and Bayer is incorporated under Indiana law and has its principal place of business in Pennsylvania.

Finally, with respect to the jurisdictional amount in controversy under the CAFA's “mass action” provisions, the Court noted that in other cases involving allegations of personal injuries allegedly caused by the drug similar to the allegations contained in the operative complaint in this case that the plaintiffs' claims individually exceeded $75,000.

Our readers know that Congress enacted CAFA to allow more interstate class actions to be heard in federal court, and to address class action abuse.  "Mass actions" were recognized as class actions in disguise, and included in CAFA the provision to prevent the statute's objectives from being undermined by these "close substitutes that escape the statute's application." The courts increasingly offer a common sense reading of CAFA  that thwarts any attempt by plaintiffs' counsel to avoid federal court through the class-action substitute.

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Two thousand Central American banana farm workers suing over their alleged exposure to a pesticide were permitted split up their suits to avoid federal court jurisdiction under the Class Action Fairness Act.  See Vanegas v. Dole Food Co., 2009 WL 690198 (C.D. Cal. 3/9/09).  The opinion allowed the plaintiffs to craft their suits against the Dole Food Co., Dow Chemical Co., and other defendants, so that they each have no more than 100 plaintiffs and avoid CAFA's mass action reach.

Plaintiffs allege that they were injured by exposure to 1, 2-Dibromo-3-chloropropane (“DBCP”), a toxic chemical sold under the brand names “Nemagon” and “Fumazone.” Plaintiffs allege that defendants manufactured, marketed, and distributed DBCP. Plaintiffs further allege that they were exposed to DBCP as a consequence of working on banana plantations in Costa Rica, Panama, Honduras, and Guatemala, owned or operated by defendants.

Plaintiffs were divided, alphabetically and by country, into 30 cookie cutter cases such that each case has less than 100 plaintiffs; they alleged claims for (1) products liability-negligence; (2) strict products liability; (3) products liability-defect in design, manufacture, and chemical composition; (4) products liability-breach of warranty; (5) fraudulent management; (6) intentional misrepresentation; (7) fraud by concealment; (8) general negligence; and (9) conspiracy.

Defendants removed, and plaintiffs sought remand. Plaintiffs argued that this case is not a “mass action” pursuant to the Class Action Fairness Act of 2005, 28 U.S .C. §§ 1332(d) and 1453, because their complaint s each contain less than 100 plaintiffs. Defendant responded that plaintiffs may not “gerry-mander their lawsuit to circumvent CAFA,” citing Freeman v. Blue Ridge Paper Products, Inc., 551 F.3d 405, 2008 WL 5396249, at *1 (6th Cir. Dec.29, 2008); Proffitt v. Abbott Laboratories, 2008 WL 4401367, at *5 (E.D.Tenn. Sept.23, 2008)). Defendants argued that plaintiffs cannot artificially splinter their actions to avoid jurisdictional thresholds.

The district court remanded, holding that the removal statute is to be “strictly construed against removal jurisdiction and any doubt must be resolved in favor of remand,” citing Hofler v. Aetna U.S. Healthcare of California, Inc., 296 F.3d 764, 767 (9th Cir.2002). These actions do not constitute “mass actions” under CAFA, said the court, because each of these actions has been brought by less than 100 plaintiffs. Tanoh v. AMVAC Chemical Corp., 2008 WL 4691004, at *5 (C.D.Cal. Oct.21, 2008). Nothing in CAFA suggests that plaintiffs, as masters of their complaint, may not “file multiple actions, each with fewer than 100 plaintiffs, to work within the confines of CAFA to keep their state-law claims in state court.” Tanoh, 2008 WL 4691004 at *5.

The court distinguished Freeman, saying the Sixth Circuit limited its ruling to one type of claim splitting. “In Freeman, the plaintiffs divided their suit into five separate suits with identical parties and claims, each covering distinct, sequential six-month time periods,” the court said. “By contrast, each of the cases at issue here involves distinct plaintiffs. Moreover, the Sixth Circuit explicitly noted that its holding is limited to the situation where there is “no colorable basis for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate CAFA.”
 

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A federal court has issued an opinion on an important aspect of the Class Action Fairness Act, namely whether the denial of class action status deprives a federal court of jurisdiction under the Act. In Kitts v. Citgo Petroleum Corp., 2009 WL 192550 (W.D. La., 1/23/09), the district court declined to remand to state court a personal injury action stemming from an oil spill. Although some district courts have held that post-removal events such as class certification denial can render the court without subject matter jurisdiction under CAFA, the Western District of Louisiana held that the better approach is to retain jurisdiction.

On June 15, 2007, plaintiffs filed a putative class action suit in state court in Louisiana, claiming damages resulting from a 2006 oil spill alleged to have occurred from a facility owned and operated by defendant. Plaintiffs' complaint alleged they suffered injuries from this spill, respiratory problems and illnesses, sinus damage, difficulty breathing, and burning of the throat and nasal passages. Defendant removed, based on CAFA. The federal district court later denied class certification. Plaintiffs then filed a Motion to Remand alleging that remand to state court was appropriate because the refusal to certify this matter as a class action divested the court of subject matter jurisdiction.

The court, however, found compelling the reasoning of those cases finding jurisdiction continues to exist even after denial of the class action. Particularly appropriate was the conclusion reached by the Southern District of Florida in Colomar v. Mercy Hospital, Inc., 2007 WL 2083562, *3 (S.D.Fla.07/20/2007). In support of its denial of a Motion to Remand filed in a case properly removed under CAFA, but after the minimally diverse defendant was dismissed and class certification was denied, the Florida district court stated that the courts considering the issue of whether a federal court retains jurisdiction after class certification is denied have concluded that case developments subsequent to removal do not alter the courts' CAFA jurisdiction, if jurisdiction was proper at the time of removal.

The court quoted from the CAFA legislative history, the Senate Report stating that “once a complaint is properly removed to federal court, the federal court's jurisdiction cannot be ousted by later events.... If a federal court's jurisdiction could be ousted by events occurring after a case was removed, plaintiffs who believed the tide was turning against them could simply always amend their complaint months (or even years) into the litigation to require remand to state court.... [I]f subsequent events could unravel a federal court's jurisdiction, a defendant could prevail on the merits, only to have the federal court conclude that it lacks jurisdiction to enter judgment."  S. Rep. 109-14, 109th Cong., 1st Sess.2005, reprinted in 2005 U.S.C.CA.N. 3, *70-71, *66-67.

Here, the court said that to litigate the case up to the eve of trial, and then to seek remand after adverse rulings have issued and summary judgment is briefed, equates to a forum shopping. Plaintiffs admitted that this matter was properly removed under CAFA. Plaintiffs' efforts to unravel jurisdiction on the eve of trial was forum shopping which the traditional rules of removal and remand are designed to preclude.
 

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The Seventh Circuit Court of Appeals has affirmed a trial court’s ruling that a case involving plaintiffs alleging damages from chemicals escaping from a wood-processing facility is a “mass action” that belongs in federal court. See Bullard, et al. v. Burlington Northern Sante Fe Railway, et al., 2008 WL 2941359 (7th Cir. 2008).

A state court complaint by 144 plaintiffs sought damages from four corporations that had designed, manufactured, transported, or used chemicals that allegedly escaped from a Texas wood-processing plant and purportedly injured people living nearby. Among the plaintiffs’ claims are negligence, trespass, willful and wanton conduct, and fraudulent concealment, asserting that chemicals associated with creosote used to preserve wood were released into the environment through soil, ground water, and/or air mechanisms.

Defendants removed the suit, relying on the Class Action Fairness Act of 2005. CAFA expanded federal jurisdiction over various types of class actions. CAFA’s expanded jurisdiction was not limited to pure class actions, however. It also reaches a category of cases – “mass actions” – in which monetary claims of 100 or more persons are proposed to be tried jointly on the grounds that the plaintiffs’ claims allegedly involve common questions of law or fact. See 28 U.S.C. ¶1332(d)(11)(B)(i).

Plaintiffs moved to remand. They denied that the suit was a “mass action,” noting their complaint never proposed a trial. Thus, according to plaintiffs, defendants may remove a “mass action” only when a final pretrial order or equivalent document identifies the number of parties to the trial, which is to be “joint.” The district judge denied the motion for remand, and plaintiffs obtained interlocutory review “because the legal issue is novel.”

On appeal, plaintiffs argued they are entitled to litigate in state court because the Class Action Fairness Act has a loophole. Section 1332(d)(11)(B)(i) refers to “claims of 100 or more persons ... proposed to be tried jointly.” Complaints do not propose trials, plaintiffs insisted; they'd be happy to win by summary judgment or get a settlement. The case may never get to a trial. Cross that bridge when you come to it.

The Court rejected this reading. Plaintiffs' lawyers who want to avoid federal court, the Court said, have simply designed a class-action substitute. Their complaint alleges that several questions of law and fact are common to all 144 plaintiffs; it provides no more information about each individual plaintiff than an avowed class complaint would do. No one supposes that all 144 plaintiffs will be active; a few of them will take the lead, just as in a class action, and as a practical matter counsel will dominate, just as in a class action.

If the plaintiffs’ proposed strict reading were right, then, actually, §1332(d)(11) would be defunct, because it defines a class action to include a mass action. Taken to its logical end, in plaintiffs' view, no “mass action” could ever be a “class action”, for a suit cannot be officially identified as a “mass action” until the trial is finalized, not on the date of filing which, plaintiffs say, is the operative date. But “courts do not read statutes to make entire subsections vanish into the night,” said the Court.

A second reading would be to reject the date of filing as the only operative date and find that a case could become a “mass action” at any time. That could be long after filing, once plaintiffs are formally and explicitly proposed to be tried jointly. The prospect of this situation is why §1332(d)(11) allows the definition to be applied after the suits' filing date. But nothing in the statute says that the eve of trial is the only time when a “mass action” can be detected.

When plaintiffs take advantage of procedural rules that permit the joinder of multiple plaintiffs in a single suit where the claims arise out of “the same transaction or series of transactions” and “common questions of law or fact” are allegedly present, that's “exactly when a single trial is appropriate.” It does not matter whether a trial covering 100 or more plaintiffs actually ensues; the statutory question is whether one has been “proposed.” This complaint, which describes circumstances common to all plaintiffs, proposes one proceeding and thus, for statutory purposes, sufficiently alleges one trial.

And the Seventh Circuit went on to anticipate and reject plaintiffs' next likely reaction: A proposal to hold multiple trials in a single suit, or just one trial with 10 plaintiffs and the use of preclusion to cover everyone else, does not take the suit outside the language applying to any “civil action ... in which monetary relief claims of 100 or more persons are proposed to be tried jointly.” The question is not whether 100 or more plaintiffs answer a roll call in court, but whether the “claims” advanced by 100 or more persons are proposed to be tried jointly. A trial of 10 exemplary plaintiffs, followed by application of issue or claim preclusion to 134 more plaintiffs without another trial, is one in which the claims of 100 or more persons are being tried jointly, and this would bring the suit within federal jurisdiction.

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