CAFA Exceptions: Is There a Way to Stay Out of Federal Court?
Consumer Attorneys of California, Forum Magazine
Copyright CAOC, Forum, July/August 2007. Reprinted with permission.
By Robert J. Drexler, Jr. and Daniel A. Crawford
The Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d), is catching many class actions with minimally diverse parties in the widened net of federal courts’ jurisdiction, unless one of the two mandatory exceptions, or the “interests of justice” discretionary exception, apply. However, in each of those exceptions there are terms which are still practically undefined. For example, the Local Controversy exception (28 U.S.C. §1332(d)(4)(A)), requires at least one defendant whose conduct forms a “significant basis” of the class claims and from whom “significant relief” is sought. Also, the “principal injuries” must be incurred in the state where the case was filed. However, those terms are not defined in the statute, and in a close case it may not be clear whether they apply. Similarly, the Home State exception (28 U.S.C. § 1332(d)(4)(B)), requires that the “primary defendants” must be citizens of the original state, but does not explain whom the primary defendants are.
Legislative History of CAFA
The main piece of legislative history for CAFA is a detailed report by the Senate Judiciary Committee. S. Rep. 109-14 (2005). However, various courts have cautioned against relying too heavily on that report because it was only issued after CAFA’s enactment: “That report is of dubious value as an interpretative aid. It was issued ten days after the president signed the bill into law. There is thus no reason to think it played any role in legislators’ interpretation of the bill, their decisions about whether to support it, or the president’s conclusion that he should sign it.” Hangarter v. The Paul Revere Life Ins. Co., 2006 WL 213834, *2 (N.D. Cal. 2006) (not reported in F.Supp.2d); accord Lao v. Wickes Furniture Co., Inc., (2006) 455 F.Supp.2d 1045, 1051. Nevertheless, many courts have turned to the Senate report for guidance.
Primary Defendant
The Home State exception applies if at least two-thirds of the class members and the “primary defendants” are citizens of the original state. According to the Senate report, a “primary defendant” is a “real” defendant which is “a primary focus of the plaintiffs’ claims–not just a peripheral defendant. The defendant must be a target from whom significant relief is sought by the class (as opposed to just a subset of the class membership), as well as being a defendant whose alleged conduct forms a significant basis for the claims asserted by the class.” S. Rep. 109-14, 40 (2005). Primary defendants “would be expected to incur most of the loss if liability is found,” and the term “should include any person who has substantial exposure to significant portions of the proposed class in the action...” (Id. at 43.) For example, a local agent of an out-of-state insurance company would not be a primary defendant in a consumer fraud case against the insurer. (Id.)
In Hangarter, the court found that the California State Insurance Commissioner was a primary defendant when the plaintiffs were seeking mandatory injunctive relief from the Commissioner. Although no damages were sought from the State, the court found that the Commissioner had substantial exposure to the whole class due to the mandamus relief sought. (Id. at *3.)
Outside the context of CAFA, the term “primary defendant” has been defined differently in different areas of the law. Passa v. Derderian, 308 F.Supp.2d 43, 62-63 (D.R.I. 2004). Historically, the Supreme Court has defined primary defendants as those defendants allegedly having a “dominant relation to the subject matter of the controversy.” United States v. American Tobacco Co., 221 U.S. 143 (1911). In the context of securities fraud, the primary defendants are those who improperly purchased and sold securities, whereas defendants who have only a “legally cognizable” relationship with the plaintiffs (such as corporate insiders) are secondary. See Marrero v. Banco di Roma, (E.D. La. 1980) 487 F.Supp. 568, 572; Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94 (5th Cir. 1975). In RICO cases, courts have used the terms “primary defendants” and “secondary defendants” to divide defendants who actually participated in the racketeering activity from those who were only aiders and abettors. (See, e.g., Rolo v. City Investing Co. Liquidating Trust, (3d Cir. 1998) 155 F.3d 644, 650.) In tort actions, the primary defendants are generally those who are directly liable for the plaintiffs’ injuries, whereas secondary defendants are those who are only vicariously liable, or who are only joined for contribution or indemnity. (See, e.g., Halberstam v. Welch, (D.C. Cir. 1983) 705 F.2d 472, 476. The same distinction is applied in the context of the Multiparty, Multiform, Trial Jurisdiction Act of 2002 (“MMTJA”), 28 U.S.C. § 1369. Passa at 62-63.
Significant Relief / Significant Basis
The Local Controversy exception applies if: 1) at least two-thirds of the class members are citizens of the original forum state; 2) at least one defendant from whom “significant relief” is sought, and whose conduct forms a “significant basis” for the claims, is a citizen of that state; 3) the “principal injuries” occurred in the original state; and, 4) in the three-year period preceding the filing of the complaint, no other class action was filed asserting the same or similar factual allegations against any of the defendants.
One of the first cases to consider the terms “significant relief” and “significant basis” was Kearns v. Ford Motor Company, 2005 WL 3967998 (C.D. Cal., Nov. 21, 2005) (not reported in F.Supp.2d). In that case, the plaintiff alleged misrepresentations about the cars in Ford’s Certified Pre-Owned Program, which was run by Ford and implemented through the local dealerships. The issue was whether the class sought significant relief from the local dealerships, and whether their conduct was a significant basis of the claims.
First, the court noted the phrase “significant relief” is not used in any other statute. (Id. at *9.) The plaintiff contended any relief that was not inconsequential was significant. Based on the Senate report, the court held the relief sought from a particular defendant is only significant if it would largely satisfy the claims of the entire class. (Id. at *10.)
Regarding whether the local dealerships’ conduct formed a significant basis of the claims, the court discussed an example in the Senate report of a consumer fraud case against an out-of-state insurance company in which a local in-state agent was also a defendant. In that example, because the true target of the lawsuit was the insurance company, the agent’s conduct did not form a significant basis of the claims. (Id. at *11.) Based on that example, the Kearns court stated:
While [plaintiff] is likely correct that the conduct of dealers as a group forms a significant basis for the claims, this is not true of any single dealer like Claremont Ford. Its involvement is no different from that of the imagined insurance agent in the Committee Report, who presumably markets the program to clients, accepts and processes their applications, and handles billing. It is Ford, like the insurance company, that promulgates and oversees the overall alleged fraud. As such, if the Committee Report discounts the insurance agents’ conduct as not forming a “significant basis” for the claims of the class members, the definition of that term must similarly exclude the conduct of Claremont Ford and other dealers.
(Id. at *11. )
In Robinson v. Cheetah Transportation, 2006 WL 468820 (W.D. La., Feb. 27, 2006) (not reported in F.Supp.2d), a truck accident forced the closure of a bridge in Louisiana. The class in that case consisted of people who were unable to use the bridge while it was closed. The truck driver was the only defendant who was a Louisiana citizen, and the issue was whether the class sought significant relief from him.
After discussing the Senate report, that court stated: “whether a putative class seeks significant relief from an in-state defendant includes not only an assessment of how many members of the class were harmed by the defendant’s actions, but also a comparison of the relief sought between all defendants and each defendant’s ability to pay a potential judgment.” (Id. at *3.) Under that analysis, that court held that relief sought from the driver was not significant, so the Local Controversy exception could not apply. See, also, Evans v. Walter Industries, Inc., 449 F.3d 1159 (11th Cir. 2006) [adopting Robinson and Kearns definition of significant relief and significant basis].)
Two cases that highlight the ambiguities in CAFA’s terms came from the same court just eight days apart. In Caruso v. Allstate, 469 F. Supp.2d 364 (E.D. La., Jan. 8, 2007), the plaintiffs sued various insurers for underpaying property losses after Hurricanes Katrina and Rita. Of the six defendant insurers, only one, Louisiana Citizens Insurance (“Citizens”), was a citizen of Louisiana. Thus, the issue was whether Citizens’ conduct, and the relief sought from it, was significant. The evidence showed Citizens was the third largest insurer in Louisiana, but that it only accounted for 7.5% of the premiums written in the state.
That court combined the significant relief and conduct prongs to speak of a “significant defendant.” The court reasoned that a significant defendant must be less important than a “primary defendant” under the Home State exception, but must be “obviously one who is something more than ‘insignificant,’ which is defined as ‘having little or no importance’ or ‘trivial.’” (Id. at 369.) By that definition, the court held that Citizens was a significant defendant.
Eight days later, the same court (a different judge) reached the opposite conclusion about Citizens in Gauntt v. Louisiana Citizens Property Insurance Corp., (E.D. La., Jan. 16, 2007) 2007 WL 128801. In that case, the court considered evidence of Citizens’ share of the homeowners’ insurance market in Louisiana, which was only 0.8%. The plaintiffs asserted that Citizens was still a “significant” defendant because the allegations against each defendant were the same, the relief sought from each defendant was the same, and Citizens was financially able to pay the claims. The court rejected the plaintiffs’ position and followed Kearns and Robinson, holding the relief sought from Citizens must be compared to the total relief sought. Because the relief from Citizens was only a small portion of the total relief sought, the court found it was not “significant relief,” so the Local Controversy exception did not apply.
Principal Injuries
For the term “principal injuries,” the Senate report offers the unhelpful guidance: “By this criterion, the Committee means that all or almost all of the damage caused by defendants’ alleged conduct occurred in the state where the suit was brought.” S. Rep. at 40. But unless the principal injuries are simply a quantitative measure of damages, that definition suggests some non-principal injuries could occur outside the state where the class members reside.
In Kearns, the court considered “principal injuries” in dicta. In that case, although the class was limited to California residents, the court held the principal injuries from Ford’s program occurred nationwide. That court quoted the Senate report:
If the defendants engaged in conduct that could be alleged to have injured consumers throughout the country or broadly throughout several states, the case could not qualify for [the Local Controversy] exception, even if it were brought only as a single-state class action...In other words, this provision looks at where the principal injuries were suffered by everyone who was affected by the alleged conduct-not just where the proposed class members were injured.
(Kearns at *12.)
In Kitson v. Bank of Edwardsville, 2006 WL 3392752 (N.D. Ill., Nov. 22, 2006), the court interpreted “principal injuries” differently. That court was highly dubious of the Senate report, and stated: “the definition of ‘principal injuries’ [in the report] is not a meaning of the language of CAFA that can reasonably be inferred from the face of the statute.” (Id. at *12.) Instead, Kitson held that under the plain language of CAFA only the injuries to the class could be principal injuries.
Distinct Nexus
CAFA also has a discretionary exception which courts may apply “in the interests of justice” based on six listed factors. 28 U.S.C. § 1332(d)(3). One factor is whether there is a “distinct nexus” between the original forum state and the class, the harm, or the defendants. 28 U.S.C. § 1332(d)(3)(F). According to the Senate report, the purpose for a “distinct nexus” is to discourage class actions filed “in out-of-the-way ‘magnet’ state courts that have no real relationship to the controversy at hand...If the selected forum’s nexus to the controversy is shared by many other forums (e.g. some allegedly injured parties live in the locality, just as allegedly injured parties live in many other localities), the nexus is not distinct...” (Id at 37.)
In Preston v. Tenet Healthsystem Memorial Medical Center, Inc., (E.D. La. 2006) 463 F.Supp.2d 583, the court found a distinct nexus between Louisiana, the defendants, and the proposed class, but all of the defendants’ actions, and all injuries to the class members, occurred in a New Orleans hospital. Also, most of the claims would be resolved under Louisiana law, and all the defendants, and 97% of the patient class members, were Louisiana citizens. Thus, that case is not instructive about what may constitute a sufficient “distinct nexus” under closer facts.
The Final Twist: The Three-Year Rule
The Local Controversy and the discretionary exception both include a “three-year rule” requiring that no other case asserting “the same or similar” facts or claims has been filed in the preceding three years. See sections (d)(3)(F) and (d)(4)(A)(ii).
Although the language of the three-year rule is clear, it is ill-conceived in practice. According to the Senate report, the three-year rule should promote “efficiency and fairness” because similar cases will remain in federal courts where “the claims of all proposed classes could be handled efficiently on a coordinated basis pursuant to the feral courts’ multidistrict litigation process as established by 28 U.S.C. § 1407” and resolved by a single tribunal. S. Rep. at 37.
However, the three-year rule is not limited to cases filed in federal courts. Instead, it is triggered by any case raising similar issues regardless of where it is filed. Thus, a class action pending in state court against an in-state insurer (and not removable under CAFA) which alleges a particular bad-faith practice triggers the three-year rule for any case alleging the same practice against other insurers. Then, a second case alleging the same practice by a foreign insurer, which is removed to federal court under CAFA, cannot be remanded due to the three-year rule. Therefore, the three-year rule would prevent consolidation of similar cases, keeping them in different courts–exactly the opposite of the result anticipated in the Senate report.
Conclusion
As CAFA sweeps more class actions into federal courts, the ambiguities and problems with CAFA’s exceptions will become increasingly confounding. Many issues will be hammered out eventually by the courts, but perhaps the better solution, for litigants and the federal courts’ dockets, is for Congress to revisit CAFA’s exceptions now.
1. A passage in the Congressional Record purports to explain CAFA's provisions but that passage, like the Senate report, was apparently inserted after the law's enactment. (151 Cong. Rec. H729 (daily ed. Feb. 17, 2005).)
2. In the Ninth Circuit, the Criteria for determining a corporation's citizenship are set forth in Industrial Tectonics, Inc v. Aero Alloy (9th Cir. 1990) 912 F.2d1090.
Copyright CAOC, Forum, July/August 2007. Reprinted with permission.
