Lack of Confidence Not An Answer to CAFA Removal

Readers are used to litigants using favorable law to their benefit; this case involves a plaintiff trying to use unfavorable law to his benefit.  The court concluded that a proposed class of joint pain supplement purchasers could not escape the reach of the Class Action Fairness Act by asserting their case could never be certified in federal court. See Hoffman v. Nutraceutical Corp., No. 13-3482 (3rd Cir. unpublished decision 4/10/14).

Hoffman filed suit against Nutraceutical in the Superior Court of New Jersey, Bergen County. The action concerned a Nutraceutical supplement, which was marketed to help to stem the progression of osteoarthritis and reduce related joint pain. Hoffman, who bought a $20 bottle of the supplement, alleges that Nutraceutical falsely represented that the supplement was "of the highest quality," when in fact the "product was polluted and contaminated by significant concentrations of lead." Hoffman proposed a class consisting of all nationwide purchasers for the six year period preceding the filing of this suit. 

The Complaint asserted violations of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-2, as well as claims for common-law fraud, breach of contract, and common-law breach of warranty.   Neutraceutical removed the case to federal court under CAFA. The District of New Jersey denied Hoffman's motion for remand, and Hoffman appealed.

 

With certain exceptions not relevant here, CAFA grants federal courts original jurisdiction over actions in which: (1) the matter constitutes a "class action"; (2) "the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs"; (3) CAFA's minimal diversity requirements are met; and (4) there are at least 100 members of the putative class. 28 U.S.C. § 1332(d)(2), (d)(5)(B). Hoffman's challenge to the District Court's jurisdiction was premised entirely on the proposition that the amount in controversy of his suit  could not exceed $5 million.

 

Where, as here, the plaintiff does not specifically aver that the amount in controversy falls below CAFA's $5 million threshold, the case must be remanded to state court if it is "a legal certainty" that CAFA's amount in controversy requirement cannot be met. Frederico v. Home Depot, 507 F.3d 188, 197 (3d Cir. 2007). Hoffman argued, as both the sole class representative and the sole attorney for the class, that the purported class could not possibly be certified under established Third Circuit law. Thus, he reasoned, the amount in controversy of the action — as least while the case remained in federal court — was equivalent to the value of Hoffman's individual claim, rather than the aggregate value of the class members' claims, which would easily exceed $5 million. In other words, because it was supposedly a "legal certainty" that the class would not be certified, it follows that it was a "legal certainty" that the amount in controversy requirement cannot be met.

But CAFA mandates that federal courts calculate the amount in controversy of a putative class action before determining whether the class may be certified under Rule 23. A putative class action satisfies CAFA's amount in controversy requirement where (1) the action was filed under Rule 23 or a similar state statute or rule and (2) the aggregated claims of the proposed class members amount to more than $5 million. See Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345, 1348 (2013).  Thus, a putative class action's prospects for certification are irrelevant to whether federal courts have subject matter jurisdiction over that action in the first instance.

Hoffman could not demonstrate to a legal certainty that the claims of the purported class — i.e., the "nationwide purchasers" of the supplement "for the six year period preceding the filing of this suit," — were worth $5 million or less. Accordingly, this action satisfied CAFA's amount in controversy requirement, and the District Court properly concluded that it had subject matter jurisdiction over Hoffman's suit.
 

CAFA Removal Appeal to Watch

Here's one to watch.  The Supreme Court agreed earlier this week to consider whether defendants seeking removal of a proposed class suit to federal court under the Class Action Fairness Act must provide additional evidence supporting jurisdiction or just a short and plain statement of the grounds for removal. See Dart Cherokee Basin Operating Co., LLC v. Owens,  No. 13-719 (U.S., cert. granted 4/7/14).

The case came to the Court in an unusual posture. The Tenth Circuit denied defendant's petition for panel review, and the appeals court divided 4-4 on whether to hear the case en banc. Judge Hartz wrote a dissent, see 730 F.3d 1234 (10th Cir. 2013).

A defendant seeking removal of a case to federal court must file a notice of removal containing “a short and plain statement of the grounds for removal” and attach only the state court filings served on such defendant. 28 U.S.C. § 1446(a). Consistent with that statutory pleading requirement, the First, Fourth, Fifth, Seventh, Eighth, Ninth, and Eleventh Circuits require only that a notice of removal contain allegations of the jurisdictional facts supporting removal; those courts do not require the defendant to attach evidence supporting federal jurisdiction to the notice of removal. District courts in those Circuits may consider evidence supporting removal if it comes later in response to a motion to remand.

Here, the Tenth Circuit let stand an order remanding a class action to state court based upon the district court’s refusal to consider evidence establishing federal jurisdiction under CAFA because
that evidence was not attached to the original notice of removal. 

This case presents an important question of federal removal procedure and federal jurisdiction that potentially affects all litigants and district courts involved in a removal proceeding. More than 30,000 cases are removed to federal court each year.

Ninth Circuit to Rehear CAFA Mass Action Removal

The Ninth Circuit en banc has agreed to rehear a panel's split decision on mass action removal under the Class Action Fairness Act that created a circuit split on the removal issue.  See Romo v. Teva Pharm. USA Inc. (9th Cir., en banc, 2/10/14).

This case presents the issue of whether removal was proper under the “mass action” provision of CAFA when plaintiffs moved for coordination pursuant to California Code of Civil Procedure section 404. CAFA authorizes federal removal for mass actions when “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. . . .” 28 U.S.C. § 1332(d)(11)(B)(i). The panel originally concluded that this CAFA jurisdictional requirement was not met under the totality of the circumstances in this case, and affirmed the district court’s remand order.

More than forty actions have been filed in California state courts regarding products containing
propoxyphene. Some of the parties filed a petition asking the California Judicial Council to establish a coordinated proceeding for all California propoxyphene actions pursuant to California Code of Civil Procedure section 404. The defendant then removed the cases. The district court found that there was no federal jurisdiction under CAFA because plaintiffs’ petition for coordination did not constitute an explicit proposal to try the cases jointly, and remanded the case back to state court. The appeals court panel agreed, rejecting defendant's argument which emphasized that plaintiffs had sought coordination to avoid “inconsistent judgments,”and “conflicting determinations of liability” -- which certainly sound like trial issues.

The decision created a split with cases like  In re Abbott Labs., Inc., 698 F.3d 568 (7th Cir. 2012).

En banc oral argument is set for the week of June 16, 2014.


 

Supreme Court Hears Argument in CAFA Case

The U.S. Supreme Court heard argument in a case raising the issue whether a parens patriae group action by a state attorney general -- a class-like litigation without the procedural protections of a class action -- is removable as a mass action under CAFA.  See Mississippi ex rel. Hood v. AU Optronics Corp.,  No. 12-1036 (U.S., oral argument 11/6/13).

The Fifth Circuit, 701 F.3d 796 (5th Cir. 2012), had announced a claim-by-claim analysis to determine the real party in interest for purposes of CAFA jurisdiction in such parens patriae actions; the Fourth, Seventh and Ninth Circuits have taken a different, more “whole case” approach, considering the entire complaint to determine the real party in interest.  See AU Optronics Corp. v. South Carolina, 699 F.3d 385 (4th Cir. 2012); LG Display Co. v. Madigan, 665 F.3d 768 (7th Cir. 2011); Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012).

CAFA allows removal of certain mass actions, even if not styled as class actions, but contains an exception that a suit is not a mass action if all of the claims in the action 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; but when specific individual consumers, in addition to the state, are the real parties in interest, there is no way that all of the claims are asserted on behalf of the general public.

Mississippi, of course, argued for "state sovereign prerogatives.”  And Mississippi focused on the statutory language about a mass action seeking a joint trial, and contended that the parens patriae action did not propose a joint trial for 100 or more plaintiffs' claims. On the other hand, defendants noted that the use of the word “persons” in CAFA's mass action provision clearly required the court to engage in a fact specific claim-by-claim analysis, rather than take a whole-claim approach. CAFA could have, but did not focus on “named plaintiffs.”  It was clear that the Mississippi consumers allegedly harmed by defendants' prices were the real parties in interest.  Regarding the federalism concerns, defendants noted that this was only a question of forum, and federal courts can faithfully enforce state law.

The Washington Legal Foundation, in one of multiple amicus filings, argued that CAFA was enacted to enhance the ability of defendants to remove interstate mass actions to federal court.  The Chief Justice raised the most compelling issue, asking “So the answer is, that there is nothing to prevent 50 attorneys general, from saying, every time there is a successful class action as to which somebody in my State purchased one of the items, we are going to file a parens patriae action, the complaint is going to look an awful lot like the class action complaint, and we want our money” -- in state court, out of the reach of CAFA?

 

CAFA Local Exception Rejected

 A federal court in Georgia ruled last week that a proposed class action alleging injury from chemical exposures was properly removed under the Class Action Fairness Act of 2005.  See Anderson v. King America Finishing Inc., No. 1:11-cv-2258-JEC (N.D. Ga., 3/25/13).


Plaintiffs alleged that defendant King America Finishing released a toxic chemical into the Ogeechee River from its manufacturing plant in Dover, Georgia. According to plaintiffs, the toxic chemical release caused damage to surrounding land downstream from the Dover plant. In addition, plaintiffs claimed that certain individuals who swam in the Ogeechee River suffered from physical injuries due to the release. Plaintiffs filed a class action complaint in Fulton County Superior Court. They purported to represent a property damage class defined to include “[a]ll possessors of property affected, directly or indirectly, by [the May, 2011] release of chemicals into
the waters of the Ogeechee River.” One named plaintiff also purported to represent a personal injury class defined to include “[a]ll persons who have been exposed, directly or indirectly, with the waters of the Ogeechee River that had been contaminated by the Release.”


Defendants removed the case to federal court pursuant to the Class Action Fairness Act (“CAFA”), 28 U.S.C. §§ 1332(d) and 1453. CAFA generally provides for the removal of any class action in which there is: (1) minimal diversity, (2) at least 100 putative class members and (3) $5 million in alleged damages. 28 U.S.C. §§ 1332(d)(2) and 1453. It was undisputed that these requirements were met in this case. Plaintiffs conceded that all of the named plaintiffs were diverse from defendant, that the putative class exceeded 100 members, and that the claims exceeded $5 million in damages.

Nevertheless, plaintiffs filed a motion to remand the case to state court, based on the “local controversy” exception to CAFA jurisdiction, which provides for the remand of a class action that “uniquely affects a particular locality to the exclusion of all others.” Evans v. Walter Indus., Inc., 449 F.3d 1159, 1164 (11th Cir. 2006). Specifically, a “local controversy” is defined by CAFA as a class action in which: (1) greater than two-thirds of the class members are citizens of the state in which the action was originally filed, (2) at least one “significant” defendant is a citizen of the state in which the action was filed and (3) the principal injuries alleged in the action were incurred in the state in which the action was filed. 28 U.S.C. § 1332(d)(4)(A).

Defendants did not dispute elements 2 and 3. The argument among the parties centered on the two-thirds requirement.  Under CAFA, plaintiffs bear the burden of proving that the exception applies. In order to meet their burden on the two-thirds requirement, plaintiffs had to present evidence from which a court could credibly adduce that more than two-thirds of the purported class members were Georgia citizens. Plaintiffs used tax and voter registration records,  reference to the Secretary of State’s Corporation website, and interviews of personal injury class members who were determined by interview to be Georgia citizens, to just get over the threshold.

The court rejected their calculations, finding no sound evidentiary basis for including several of these groups in the calculation. For example, with regard to the legal entities, the Secretary of State’s website merely lists a Georgia office address for each entity. The website does not indicate that any of these entities have their “principal place of business” in Georgia. In addition to the evidentiary issues with the numerator in plaintiffs’ equation, there were serious questions about the denominator as well. Both the property and the personal injury classes were defined broadly in the complaint to include all land and persons directly or indirectly allegedly impacted by the May, 2011 release. Given that broad definition, the property class likely included many more members than the 900 or so landowners in the particular geographical area chosen by plaintiffs’ attorneys for their showing. Likewise, there could be many more individuals who were “indirectly” injured by the release than the 20 potential class members interviewed by plaintiffs.  The court could not simply speculate about the citizenship of these unaccounted for class members.
Accordingly, the court denied the plaintiffs' motion for remand.

Court of Appeals Applies CAFA Mass Action Provision

The Seventh Circuit has resolved a conflict between district court decisions about whether a motion to consolidate and transfer related state court cases to one circuit court constitutes a proposal to try the cases jointly triggers the “mass action” provision of the Class Action Fairness Act (“CAFA”).  The court held that plaintiffs’ motion to consolidate did propose a joint trial, and thus removal was proper. See In re Abbott Laboratories Inc., No. 12-8020 (7th Cir. 10/16/12).
 

Between August 2010 and November 2011, several hundred plaintiffs filed ten lawsuits in three different Illinois state courts for personal injuries they alleged were caused by Depakote, a prescription medication.  Later, plaintiffs moved the Supreme Court of Illinois to consolidate and
transfer their cases to one venue, St. Clair County. In the memorandum in support of their motion, plaintiffs indicated they were requesting consolidation of the cases through trial and not solely for pretrial proceedings. Defendant removed each of the cases to federal court (in two districts) asserting that the motion to consolidate brought the cases under CAFA’s “mass action” provision, which allows the removal of any case where 100 or more people propose to try their claims jointly. Plaintiffs moved to remand in both courts.

The Southern District granted the motion to remand, concluding that the language in the motion to consolidate did not propose a joint trial. The Northern District court denied plaintiffs’ motion to
remand, noting that the motion to consolidate clearly sought to consolidate the 10 complaints for all purposes, including for purposes of conducting a trial.  Plaintiffs argued on appeal that they did not specifically propose a joint trial because their motion to consolidate did not address how the trials of the various claims in the cases would be conducted, other than proposing that they all take
place in St. Clair County. In plaintiffs’ view, for the mass action provision to apply, they would have needed to take the further step of requesting a joint trial or an exemplar trial that would affect the remaining cases.

The court of appeals noted that plaintiffs argued that they never specifically asked for a joint trial, but a proposal for a joint trial can be implicit. See Bullard v. Burlington Northern Santa Fe Railway
Co., 535 F.3d 759 (7th Cir. 2008).  A joint trial does not have to encompass joint relief. For example, a trial on liability could be limited to a few plaintiffs, after which a separate trial on damages could be held. Similarly, a trial that involved exemplary plaintiffs, followed by application of issue or claim preclusion to more plaintiffs without another trial, would be one in which the claims of 100 or more persons are being tried jointly. In short, said the court of appeals, a joint trial can take different forms as long as the plaintiffs’ claims are being determined jointly.

Here, plaintiffs may not have explicitly asked that their claims be tried jointly, but the language in their motion came close. Plaintiffs requested consolidation of their cases “through trial” and “not solely for pretrial proceedings.” They further asserted that consolidation through trial “would also facilitate the efficient disposition of a number of universal and fundamental substantive questions applicable to all or most Plaintiffs’ cases without the risk of inconsistent adjudication
in those issues between various courts...”  It is difficult to see how a trial court could consolidate the cases as requested by plaintiffs and plaintiffs’ claims would somehow not be tried jointly. Although the transferee court will decide how their cases proceed to trial, it does not matter whether a trial covering 100 or more plaintiffs actually ensues; the statutory question is whether one has been proposed.

The court thus reversed the Southern District's grant of the plaintiff's motion to remand and affirmed the Northern District's ruling. 

Supreme Court Grants Cert in CAFA Case

Here is one to watch, especially for our readers with a class action practice. The U.S. Supreme Court granted certiorari last week in a case raising the issue whether class plaintiffs may stipulate to a damages amount below the jurisdictional threshold of the Class Action Fairness Act to avoid removal of the case to federal court. See Standard Fire Insurance Co. v. Knowles, No. 11-1450, U.S., certiorari granted 8/31/12).

Since the Act was passed in 2005, as surely as one end of a balloon expands when you squeeze the other end, litigants have reacted to the Congressional effort to expand federal jurisdiction over class actions by seeking exceptions and loopholes to keep the cases in state court.  This case will be the first time the Supreme Court considers a case arising under CAFA, and one of those creative efforts to avoid its reach.

Readers will recall that CAFA allows for removal of class actions in which just minimal diversity exists and the amount in controversy exceeds $5 million. A number of class plaintiffs have attempted to defeat the defendant's removal under the Class Action Fairness Act by filing a stipulation that purports to limit the damages sought to less than the $5 million threshold for federal jurisdiction.  A key question is whether that stipulation can be binding on absent class members, and thus possibly impact federal jurisdiction, when the Court recently reaffirmed that in a putative class action "the mere proposal of a class ... could not bind persons who were not parties." Smith v. Bayer Corp., 131 S. Ct. 2368, 2382 (2011).  In light of that holding, the question presented in this case is:

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a "stipulation" that attempts to limit the damages he "seeks" for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the "stipulation," exceeds $5 million, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?


The facts of the case involve a putative class action in Arkansas state court alleging that defendant Standard Fire Insurance Co. breached homeowners insurance policies by failing to fully  reimburse losses.  Standard Fire attempted to remove the case under CAFA but the federal district court remanded the case pursuant to the stipulation that plaintiffs would not seek damages above $5 million.   The Eighth Circuit denied Standard Fire's petition to appeal the remand order. Defendant then petitioned the Supreme Court for certiorari.  The U.S. Chamber of Commerce weighed in with an amicus brief in favor of the petition.


The petition argued that putative class members are not bound by such actions taken by the named plaintiffs before class certification. Such a limitation, if effective at the time suit is filed, would violate the due process rights of the proposed class members.  The Chamber echoed that district courts must conduct a meaningful analysis to determine with legal certainty whether the stipulation will truly limit the ability of absent class members to recover no more than the stipulated amount, and whether the stipulation is consistent with due process. If allowed to stand, the lower court's decision could result in an enormous CAFA loophole allowing plaintiffs to drag businesses into class action-friendly state court systems.  Plaintiff argued that the petition was premature because the issue could be considered at the class certification stage within the adequacy of representation prong. 

Definitely one to watch.

New Law Takes Effect Regarding Venue, Removal

For all the litigators out there, a reminder that The Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63. took effect last week.  The act amends the federal jurisdictional statutes regarding diversity jurisdiction (28 U.S.C. § 1332), venue (28 U.S.C. §§ 1390-92, 1404), and removal (28 U.S.C. §§ 1441, 1446, 1454).  Legislative history here.

Among its provision, the new act states that, with respect to diversity, the district courts shall not have original jurisdiction of any civil action between citizens of a state, and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same state.

It modifies the citizenship rules to treat corporations as citizens of any foreign state: (1) by which it has been incorporated, and (2) where it has its principal place of business. It treats insurers as citizens of any foreign state: (1) of which the insured is a citizen, (2) by which the insurer has been incorporated, and (3) where the insurer has its principal place of business.

The law now dictates that, upon removal of any civil action with both removable and non-removable claims, the district court shall sever from the action all non-removable claims and remand them to the state court from which the action was removed.  So no discretion to hold on to such claims.

The law prescribes revised requirements for filing notices of removal, including allowing statements in the notice of the amount in controversy, when it exceeds the necessary amount, if the initial pleading seeks: (1) non-monetary relief; or (2) a money judgment, but where the relevant state practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded. Removal of the action is proper on the basis of an amount in controversy asserted this way,  if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds the amount required.

Importantly, the law now allows removal of a case based on diversity of citizenship more than one year after commencement of the action if the district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action.  This deals with a common plaintiff tactic in mass torts, such as the inclusion of a treater simply to defeat diversity. In 1988, Congress amended the statute to prohibit the removal of diversity cases more than one year after their commencement. This change was intended to encourage prompt determination of issues of removal in diversity proceedings, and it sought to avoid the disruption of state court proceedings that might occur when changes in the case made it subject to removal. The change, however, led some plaintiffs to adopt removal-defeating strategies designed to keep the case in state court until after the 1-year deadline passed. In those situations, some courts have viewed the 1-year time limit as `jurisdictional' and therefore an absolute limit on the district court's jurisdiction.

The new venue provision requires the issue of proper venue of any civil action brought in a U.S. district court to be determined without regard to whether the action is local or transitory in nature. It repeals the "local action" rule that any civil action, of a local nature, involving property located in different districts in the same state, may be brought in any of such districts.  It also allows a district court to transfer a civil action to any district or division to which all parties have consented.

Significantly, the act resolves a circuit split regarding the time each defendant in a multi-defendant case has to file a notice of removal. Traditionally, the defendant had 30 days from receipt of the plaintiff’s complaint to file a notice of removal.  But in multi-defendant cases, some courts have adopted the “first-served” rule, under which each defendant in a case had 30 days from the date on which the first defendant was served, while others adopted the “later-served” rule, which gives each defendant a 30-day period to file a notice of removal after that defendant is served.  The new law adopts the latter view (but keeps the unanimity rule.)

Court Permits Plaintiffs to Evade CAFA Mass Action Reach

Readers know that one of the effects of the Class Action Fairness Act has been to encourage plaintiff counsel to get creative in ways to defeat federal jurisdiction and keep mass torts and class actions in state courts.  Last week, a federal court remanded several cases brought by individuals who claimed that they developed non-Hodgkins lymphoma as a result of exposure to PCBs, despite the “mass action” provisions of CAFA.  Nunn v. Monsanto Co., No, 4:11-CV-1657(CEJ) (E.D. Mo. 11/7/11).

Under CAFA, federal courts have jurisdiction over class actions in which the amount in controversy exceeds $5,000,000 in the aggregate; there is minimal diversity among the parties; and there are at least 100 members in the class. 28 U.S.C. §1332(d). CAFA also provides federal jurisdiction over a “mass action,” which is defined 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 . . .” 28 U.S.C. § 1332(d)(11)(B)(i).

The district court stated that for it to have jurisdiction under the mass action provisions, defendants must demonstrate that there really are 100 plaintiffs. Defendants made a clever and powerful argument, pointing out that in addition to the cases and these plaintiffs subject to the remand motion,  plaintiffs’ counsel filed two separate, largely identical, cases in the state court (St. Louis City Circuit Court), one with 95 plaintiffs and one with 96 plaintiffs. This clearly evidenced plaintiffs’ counsel purposeful efforts to “splinter” a single mass tort case for the purpose of evading federal jurisdiction. That kind of rigging was rejected in cases like Freeman v. Blue Ridge Paper Prods., Inc., 551 F.3d 405 (6th Cir. 2008), and Westerfeld v. Independent Processing, LLC, 621 F.3d 819 (8th Cir. 2010), argued defendants.

The court felt obligated to disregard such manipulations, however.  Defendants’ contention that plaintiffs had deliberately divided their cases in order to avoid the mass action threshold was somehow "irrelevant."  Reference to the other identical cases was, the court thought, akin to defendant "consolidating" the cases; by excluding cases in which the claims were consolidated on
a defendant’s motion, 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. Citing Anderson v. Bayer Corp., 610 F.3d 390, 393 (7th Cir. 2010); see also Tanoh v. Dow Chem. Co., 561 F.3d 945 (9th Cir. 2009). 
 

So, another example of the numerical loophole to removal of mass actions, evading the Congressional intent. Plaintiffs' attorneys continue to resort to dividing their clients into groups of 99 or fewer plaintiffs to try to avoid federal court.


 

Supreme Court Clarifies Definition of "Principal Place of Business"

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.

7th Circuit Weighs In on CAFA Issue

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).

 

 

Rule 15 Amendments May Impact Removal Prospects

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.”

CAFA Mass Tort Removal in Drug Case

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.

Court Allows Plaintiffs to Structure Suits To Avoid CAFA

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.”
 

Denial of Class Certification Does Not Alter CAFA Jurisdiction

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.
 

Seventh Circuit Rejects Remand of CAFA Mass Action

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.