Daily Archives: February 25, 2011

Seeking CAFA Clarity: A Summary of Recent Case Law Addressing Challenges to Jurisdiction Under the Class Action Fairness Act

I.          The Class Action Fairness Act (“CAFA”)

In 2005, CAFA was enacted to assure fair and prompt recoveries for class members with legitimate claims, restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction, and benefit society by encouraging innovation and lowering consumer prices.  Pub. L. No. 109-2, 119 Stat. 4 (2005), LEXSEE 109 PL 2.

To achieve these stated purposes, 28 U.S.C. §1332 was amended to expand diversity jurisdiction in class action litigation.  Subsection (d)(2) of §1332 provides that in class action cases involving 100 or more class members:

  (2)        The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $ 5,000,000, exclusive of interest and costs, and is a class action in which–

(A)        any member of a class of plaintiffs is a citizen of a State different from any defendant;

(B)        any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or

(C)       any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.

CAFA eliminates some of the traditional procedural impediments to removal by no longer placing a 1 year limit on removal, allowing removal even if the defendant is a citizen of the state where the suit was initiated, and no longer requiring the removing defendant to obtain consent to removal from the co-defendants.  28 U.S.C. §1453(b).

Pursuant to 28 U.S.C. §1332(d)(11), mass actions also may be removed to federal court.  A mass action is a 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.  Jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the $75,000 jurisdictional amount found in of §1332(a), and if the other requirements of CAFA removal are met, including minimal diversity and an aggregate amount in controversy in excess of $5 million.

Even thought CAFA expands diversity jurisdiction, the removing party still has the burden to establish the court’s jurisdiction by demonstrating that the requisite number of plaintiffs exist, that there is minimal diversity, and that the amount in controversy is sufficient to meet the statutory requirements.

II.        Exceptions to CAFA Jurisdiction

Certain class actions are specifically excluded from CAFA’s reach.  The exceptions to CAFA jurisdiction are fertile territory for plaintiffs trying to keep their class actions cases in state court.  CAFA’s exceptions are found in 28 U.S.C. §1332(d)(3) through (5) and include the following:

 

·       the discretionary/interests of justice exception,

·       the local controversy exception,

·       the home state exception, and

·       the state action exception.

A.  Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

The discretionary/interests of justice exception allows a district court to decline jurisdiction in the interests of justice and looking a the totality of the circumstances if greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed.  In exercising this discretion the court must consider: whether the claims asserted involve matters of national or interstate interest; whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

B.         Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

Under the local controversy exception, a district court shall decline to exercise jurisdiction over a class action which meets the following three criteria.  First, greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed.  Second at least one defendant is a defendant from whom significant relief is sought by members of the plaintiff class; whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and who is a citizen of the State in which the action was originally filed; and principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed.  Third, during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.

C.  Home State Exception – 28 U.S.C. §1332(d)(4)(B)

The home state exception applies when two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.

 D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

If the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief then the case falls within the state action exception to CAFA jurisdiction.

  III.  Arguments raised to defeat CAFA jurisdiction

 A. Is this case a class action?

CAFA applies to class actions and  a class action is defined in 28 U.S.C. §1332 (d)(1) (B) as an civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing action to be brought by 1 or more representative persons as a class action.  But does CAFA apply if the complaint does not specifically define a proposed class?

In College of Dental Surgeons of Puerto Rico v. Connecticut Gen. Life Ins. Co., 585 F. 3d 33 (1st Cir. 2009) the First Circuit grappled with this issue.  The plaintiff, the College of Dental Surgeons of Puerto Rico, brought suit on behalf of its members, consisting of licensed dentists in Puerto Rico, against multiple defendants claiming that the defendants’ claims handling practices were questionable, fraudulent and economically detrimental to the members.  Two defendants removed the case to federal court pursuant to CAFA.  The district court remanded the case on the basis that the complaint did not sufficiently define the plaintiff class.  On appeal, the remand order was vacated.  The First Circuit noted that the complaint plausibly alleged claims for class-wide relief and consistently alleged harm to the members as a professional group.  The appellate court rejected the argument that remand was appropriate because the case could never be certified since an association cannot be a member of a certifiable class.  The Court found that the association met the standing requirements to sue on behalf of its members because the members had standing to sue in their own right, the interests the association sought to protect were germane to its purposes; and neither the claim asserted nor the declaratory relief requested required the participation of individual members in the suit.  More importantly, the Court stated that class composition was not the issue at the inception of a class action.  Review of the complaint alone typically is insufficient for determining if the class can be certified, so the district court’s ruling on the inadequacy of the class definition was premature.

 B.  Is this case a mass action under 28 U.S.C. §1332(d)(11)?

In a series of cases brought in California, the plaintiffs were able to avoid CAFA jurisdiction by pleading around both the jurisdictional amount and the number of persons necessary to satisfy a mass action under §1332(d)(11).

In Tanoh v. Dow Chemical, Co, 561 F.3d 945 (9th Cir. 2009), cert. denied, 130 S. Ct. 187, 175 L. Ed. 2d 236 (2009) the defendant removed seven state court actions involving over 600 foreign nationals who claimed that they had been injured by exposure to the chemical DBCP while working on banana and pineapple plantations in the Ivory Coast.  In each case of the seven cases there were fewer than 100 plaintiffs.  The cases were removed to federal court on the basis of diversity jurisdiction and the mass action provisions of CAFA.  Dow Chemical argued that the seven actions, taken together, constituted a mass action and that the cases had been filed separately just to frustrate the purposes of CAFA jurisdiction.

The district court disagreed and remanded the actions.  Specifically, the court looked at the language in 28 U.S.C. §1332(d)(11) which specifically states that a mass action shall not include claims that are joined upon the motion of a defendant.  It found that Dow Chemical’s attempt to aggregate the actions for purposes of CAFA, was tantamount to doing an end-run around this limitation in the statute.  On appeal, the Ninth Circuit upheld remand of the actions to state court.  It rejected Dow Chemical’s argument that the plaintiffs should not be allowed to structure the complaints in order to defeat CAFA jurisdiction.  The appellate court did not consider cases decided under provisions other than CAFA’s mass action provision to be persuasive.    See also, Venegas v. Dole Food Co., Inc., 2009 U.S. Dist. LEXIS 22885 (C.D. Cal. Mar. 9, 2009), where approximately 2500 plaintiffs, banana plantation workers, filed multiple lawsuits against the same defendants alleging damages from exposure to a chemical used in banana farming operations in Costa Rica, Panama, Honduras and Guatemala. The plaintiffs were divided into groups alphabetically and by country so that each case had less than 100 plaintiffs. Defendants removed the cases to federal court on CAFA jurisdictional grounds asserting that all the actions should be considered one action because the plaintiffs divided their claims solely for purposes of avoiding federal court jurisdiction.  The motion for remand was granted.  Remand was granted, in part, because nothing in CAFA suggests that the plaintiffs, as the masters of their own complaint, may not file multiple actions each with fewer than 100 plaintiffs.  The court also held that the defendant had not met its burden of demonstrating that amount in controversy exceeded $75,000 individually or $5 million in the aggregate.

C.  Is there minimal diversity?

1.  For purposes of federal diversity jurisdiction, a corporation is considered a citizen of the state where it is incorporated and of the state where it has its principal place of business. 28 U.S.C. §1332(c)(1).  But what constitutes a corporation’s principal place of business?  

In Hertz Corp. v. Friend, 130 S. Ct. 1181, 175 L. Ed. 2d 1029 (2010), the U.S. Supreme Court addressed the meaning of principal place of business (“PPB”) for diversity jurisdiction purposes.  Plaintiffs, California citizens sued their employer, Hertz, in state court alleging California wage and hour law violations.  They brought the suit on behalf of themselves and a class of California citizens suffering similar harms.  Hertz removed the case to federal court on the basis of diversity jurisdiction, asserting that its PPB was in New Jersey.  The plaintiffs moved for remand alleging that Hertz’s PPB was in California.  Hertz submitted a declaration to establish that its PPB was in New Jersey.  In the declaration, Hertz stated that it had facilities in 44 states, that its corporate headquarters was in New Jersey, and that its core executive and administrative functions were carried out in New Jersey.  With respect to the state of California, Hertz stated that it had 273 of its 1606 car rental locations there, that about 2300 of its 11,230 full time employees were in California and that its business in California amounted to about $811 million of its $4.371 billion in annual revenue.  Based on these facts, the district court found that Hertz’s PPB was in California under the Ninth’s Circuit’s test which required the court to examine Hertz’s business on a state-by-state basis.  If the amount of activity in one state is significantly larger or substantially predominates, then that is the company’s PPB, but if there is no such state, then the PPB is the corporation’s nerve center, i.e., the place where the majority of its executive and administrative functions are performed.  After examining the plurality of Hertz’s business activity in various states, the district court found that its activity in California was significant and so Hertz’s PPB was in California.  The Ninth Circuit affirmed the remand order and Hertz appealed.

The United States Supreme Court reversed.  Noting that there were many different ways in which the various circuit courts over the years had determined what constitutes a company’s PPB, the Supreme Court thought it necessary to find a single, more uniform interpretation of this statutory phrase. The Court adopted the nerve center test, holding that PPB is best read as referring to the place where a corporation’s officers direct control, and coordinate the corporation’s activities.  In practice this 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.

2. What if the plaintiffs sue a limited liability company instead of a corporation.  What is the citizenship of an LLC under CAFA?

In Ferrell v. Express Check Advance of SC LLC, 591 F. 3d 698, (4th Cir. 2010), the plaintiffs filed a class action on behalf of South Carolina citizens against a payday lender for alleged violations of South Carolina law. The lender removed the case under CAFA.  Following a long line of case law holding that the citizenship of an unincorporated association is determined based upon the citizenship of each of the association’s members, the lender argued that there was diversity based on the citizenship of its sole member, a Missouri corporation with its PPB in Kansas.

Alternatively, the lender argued that if it was deemed an unincorporated association within the meaning of 28 U.S.C. §1332(d)(10), it was a citizen of Tennessee, under whose laws it was organized, and of Kansas where it had its PPB.

The plaintiff moved to remand, arguing that the defendant’s PPB really was South Carolina, the place where it made all its loans and where all of its employees, but for its top four officers were located. The district court held that the defendant, a limited liability company, was an unincorporated association under 28 U.S.C. §1332(d)(10).  Consequently, it was a citizen of the state under whose laws it is organized and of the state where it has its PPB.  The district court found that the lender’s PPB was in South Carolina, not Kansas, and therefore the case should be remanded.

On appeal, the Fourth Circuit affirmed.  It examined the citizenship language in 28 U.S.C. §1332.  Section 1332 (c)(1) provides that a corporation is a citizen of the state of its incorporation and the state of it PPB.  Section 1332(d)(10) provides that the citizenship of an unincorporated association is determined by the state under whose laws it is organized and the state where it has it PPB.  However, the court observed that the because the provisions relating to the citizenship of corporations and of unincorporated associations are found in different sections of the statute, the provision relating to unincorporated associations in §1332(d)(10) applies only to class actions covered by CAFA.  The court concluded that the term “unincorporated association” found in §1332(d)(10) refers to all non-corporate business entities.  The appellate court agreed with the district court’s analysis that the defendant’s PPB was in South Carolina so the case was remanded.

D.   Is the amount in controversy greater than $5 million?

1.    Has the plaintiff alleged any amount in controversy?

When a plaintiff does not allege an amount in controversy in the complaint, the defendant must prove by a preponderance of the evidence that CAFA’s in excess of $5 million amount in controversy has been met.  As the following cases demonstrate, this is not always an easy task.

 Berniard v. Dow Chemical Co., 2010 U.S. App. LEXIS 16515 (5th Cir. 2010), involved the remand of seven class actions stemming from a single incident, the sudden accidental release of ethyl acrylate, a potentially noxious chemical.  The release resulted in the evacuation of residents and businesses with a 2 mile area east of the facility where the release had occurred.  On the day of the release, two class actions were filed in state court.  Eventually, three more state court class actions were filed and two class actions were filed in federal court.

The district court examined the allegations in the pleadings to determine if it had jurisdiction under CAFA.  It examined the geographical reach of the chemicals, the number of persons affected, the seriousness and extent of the injuries suffered, and the potential monetary value of the damages, including punitive damages.  Upon removal, defendants had a choice to either sustain removal by: (1) adducing summary judgment evidence of the amount in controversy; or (2) demonstrating that it is facially apparent from the pleadings alone that the amount in controversy has been met.  The defendants chose the latter approach.

To meet the amount in controversy requirement, the defendants offered census data of the geographical areas at issue, and compared the quantum recovery in previously reported cases involving similar incidents and injuries. This was held to be insufficient. The court noted that the defendants had improperly equated the geographic areas in which potential plaintiffs might reside with the population of the class itself.  The comparison to damage recoveries in similar cases was found to be speculative.  It did not matter that the plaintiffs were claiming compensatory damages, pain and suffering, psychological and long term future damages, and even punitive or exemplary damages.

In Pretka v. Kolter City Plaza II, Inc., 608 F. 3d 744, (11th Cir. 2010), the court addressed what types of evidence the defendant could present to establish the jurisdictional amount in controversy.  The seven plaintiffs brought a putative class action on behalf of themselves and all other similarly situated depositors who had placed deposits on the purchase of luxury condominiums in the defendant’s development in West Palm Beach, Florida.  The complaint alleged breach of contract and violation of Florida’s Condominium Act, and sought rescission of the purchase contracts and return of the deposits, but did not state an amount in controversy.  Attached to the complaint were the plaintiffs purchase contracts showing an average deposit amount of roughly $105,000. The complaint stated that the class was believed to consist of over 300 members.

The defendant removed the case under CAFA.  In support of the removal, defendant attached a declaration of the CFO of its parent company indicating that the company had collected over $5 million in deposits from more than 100 prospective purchasers.  The plaintiffs moved for remand arguing that the court could not consider the CFO’s declaration because it was not a paper received from the plaintiffs. In its opposition brief, the defendant attached another declaration from its parent company’s closing manager who had reviewed the closing contracts.  She stated that those contracts showed that the defendant possessed purchase deposits totaling over $41 million.

The district court, relying on the 11th Circuit’s decision in a prior case, Lowery, held that it could not consider either the declaration evidence in support of the amount in controversy, or the contracts of other putative class members because such documents had not been supplied by the plaintiffs.  The district court also found that the first declaration impermissibly speculated as to the potential damage claim of all putative class members and the second declaration could not be considered because it had not been submitted with the notice of removal.  The district court remanded the case.

The defendant appealed, and the 11th Circuit held that district court had erred in rejecting the defendant’s evidence of the amount in controversy.  In reaching this conclusion, it distinguished its holding in Lowery, and disavowed any statements in the dicta of Lowery that could be considered contradictory to its holding in Pretka.  The Circuit Court held that when a case is removed under the first paragraph of 28 U.S.C. §1446(b), i.e., within 30 days of receipt of an initial pleading setting forth a claim for relief, that statutory language does not restrict the type of evidence that a defendant may use to satisfy the jurisdictional requirements for removal.  This is in contrast, however, to removal under the second paragraph of 28 U.S.C. §1446(b) i.e., within 30 days of receipt of an amended pleading, motion or other paper, upon which it may first be ascertained that the case is removable. In the latter instance, the evidence to be considered is limited to reliance on receipt of an “other paper” due to a voluntary act of the plaintiff.

Contrary to the district court’s ruling, the appellate court recognized that documents generated by a defendant do not necessarily involve impermissible speculation.  In the instant case, the CFO’s declaration contained non-speculative knowledge of the amount of every putative class member’s claim which could be considered, since the claims of the individual class members could be aggregated to determine the amount in controversy.  The court stated that evidence added post-removal also could be considered by the court.  Consequently, upon consideration of all of the defendant’s amount in controversy evidence, the remand order was rescinded.

In McGee v. Sentinel Offender Services LLC, 2010 U.S. Dist. LEXIS 126842 (S.D. Ga. Nov. 30, 2010), the plaintiff challenged the defendant’s CAFA removal on several grounds, including whether the amount in controversy requirement had been met. The Plaintiff filed a putative class action on behalf of all individuals previously convicted of a misdemeanor or ordinance violation in Georgia who were under probation supervised by Sentinel, a private probation company.  The plaintiff sued for alleged violation of Georgia’s RICO statute and sought reimbursement in an amount equal to times the amount paid to Sentinel for supervision of the class members in private probation.

Sentinel supported its CAFA removal with a declaration from its COO and Vice President, who stated that there were 35,753 individuals convicted of misdemeanors or ordinance violations in the State of Georgia under probation supervised by Sentinel, and that Sentinel had collected $5,675,639.20 from these individuals in supervision fees.  Plaintiff challenged the declaration because it did not specify when the fees were collected, whether they were collected within the statute of limitations period, or if they had been paid by persons who were class members.  The court rejected this challenge and retained jurisdiction.  The court noted that the declaration set forth an amount reflective of the damages sought by the plaintiff in the complaint.  The RICO claim sought the divestiture of any interest in the enterprise or personal property, including all fees collected by Sentinel. As for plaintiff’s statute of limitations argument, the court noted that when determining the amount in controversy for jurisdictional purposes, it could not look past the complaint to the merits of a defense that had not yet been established.

2. Has the plaintiff alleged an amount in controversy less than $5 million?

While some plaintiffs may allege no amount in controversy in the complaint, other plaintiffs may disavow an amount that meets the jurisdictional requisite.  For instance, in Freeman v. Blue Ridge Paper Products, Inc., 551 F. 3d 405 (6th Cir. 2008), the plaintiffs made every effort to avoid CAFA jurisdiction.

The claims involved 300 landowners who sued a paper mill for nuisance created by water pollution.  In their first class action suit filed in 2005 in Tennessee state court, the plaintiffs asserted claims covering a 6-year period from 6/1/99 to 8/17/05.  At trial in that case, they recovered an aggregate award of $2 million.

Thereafter, plaintiffs filed an additional class action lawsuit in state court, in which they sought damages accruing after 8/17/05 until the date of trial.  The name plaintiff disavowed individual damages above $74,000 or aggregate damages above $4.9 million.  The defendant removed the suit to federal court, but it was remanded for failure to satisfy the jurisdictional amount.

After remand, the plaintiffs amended the complaint to seek damages from 8/17/05 to 2/17/06.  The state court orally granted the motion to amend in December of 2007, but the written order was not entered until February of 2008.  In the interim, the plaintiffs filed four more lawsuits in state court , each suit covering a different six month time period.  Each complaint was essentially identical and pled the same damage limitations as the initial complaint. On February 4, 2008, the defendant removed all five cases to federal court where they were consolidated and subsequently remanded.  Defendant appealed.

On appeal, the Sixth Circuit found that the CAFA threshold had been met because the $4.9 million sought in each complaint had to be aggregated.  In so holding, the court noted that the complaints were identical, except for the artificially broken up time periods, and the plaintiffs offered no colorable reason for breaking up the lawsuits other than to avoid CAFA jurisdiction.  The court limited its holding to the situation where no colorable basis exists for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate the purposes of CAFA. The Sixth Circuit recognized that generally a plaintiff could avoid CAFA jurisdiction by seeking amounts less than the threshold, “but where recovery is expanded, rather than limited, by virtue of splintering of lawsuits for no colorable reason, the total of such identical splintered lawsuits may be aggregated.”  Id. at 409.

E.  Arguments for exceptions to CAFA jurisdiction

While the party removing a case has the burden to establish that the federal court has jurisdiction under CAFA, once that burden has been met, the burden then shifts to the party seeking to remand the case to establish that a CAFA exception applies.

1.  The Home State Exception.

In Jackson v. Sprint Nextel Corp., 2011 U.S. Dist. LEXIS 7005, (N.D. Ill. Jan. 21, 2011) the plaintiffs sued Sprint, a Kansas Corporation alleging that Sprint conspired with other cell phone providers to impose artificially high prices for text messaging.  The action was brought on behalf of a putative class of all individuals who purchased texting from Sprint or an alleged co-conspirator from 1/1/05 to the present, had a Kansas cell phone number, received their cell phone bill at a Kansas mailing address, and paid a Kansas USF fee.  Sprint removed based on CAFA jurisdiction and the plaintiffs sought remand on the basis of the home state exception.

The lower court granted remand, finding that the plaintiffs had met their burden of establishing the existence of the home state exception because Sprint was a resident of Kansas and at least two thirds of the members of the proposed class were citizens of Kansas since the class only included members with Kansas billing addresses and cell phone numbers.  Sprint appealed.

On appeal the Seventh Circuit reversed, finding that the lower court could not draw conclusions about the citizenship of the class members based on information like the class members cell phone numbers and mailing addresses.  Instead, the district court could have relied on evidence of citizenship obtained through affidavits or survey responses in which putative class members revealed whether they intended to remain in Kansas or were a Kansas business. Using statistical principles, the plaintiffs could then establish the two thirds number required under the home state exception. Alternatively, the court noted that the plaintiffs could have defined their class as “all Kansas citizens who purchased text messaging from Sprint Nextel or an alleged co-conspirator. The case was remanded for further proceedings.

On remand, the parties conducted jurisdictional discovery.  Following the evidentiary roadmap set forth in the Seventh Circuit’s opinion, the plaintiffs obtained updated customer information from Sprint and its alleged co-conspirators.  The plaintiffs conducted a telephone survey of a random sample of putative class members.  They searched voter registration, driver license and secretary of state records and collected Internet information to determine the citizenship of those individuals and businesses who had not answered the survey. Using this new data, the Plaintiffs renewed their motion for remand.  While Sprint challenged the survey results on various grounds, in the end the court found that the plaintiffs had met their burden of establishing the elements of the home state exception. Hence the case was remanded.

 2.  The Local Controversy Exception. 

Under the local controversy exception, plaintiffs may name a local defendant from whom significant relief is sought and whose alleged conduct forms a significant basis for the claims asserted by the class, and who has not been sued in a class action in the previous three years.

Case in point, LaFalier v. State Farm Fire & Cas. Co., 2010 U.S. App. LEXIS 17588 (10th Cir. 2010), where the plaintiffs owned properties located in an environmentally contaminated town in Oklahoma.  The state established a Trust to purchase the properties and assist the homeowners in relocating.  During the purchase/relocation process, many homes were damaged by a tornado.  The Trust then offset any amounts the plaintiffs might receive from insurance against the amounts the plaintiffs would receive under the Trust.  The plaintiffs eventually brought suit against two individuals responsible for administering the Trust, and two appraisal companies, alleging that the defendants deliberately used appraisals that undervalued the properties, and conducted secret proceedings concerning the appraisals. The plaintiffs also sued ten insurance companies, three from Oklahoma and ten from out of state, alleging that the insurers paid only cash value for the tornado damage because they knew the properties would not be repaired or replaced, failed to reveal all coverage available, and improperly leveraged Trust offsets to urge the insureds to accept lower payments.

State Farm removed the case pursuant to CAFA.  The plaintiffs moved for remand under the local controversy exception and the case was remanded.  The insurers appealed, but remand was upheld.  The insurers argued that the claims against the Trust defendants had been misjoined with the claims against the insurers, consequently, the Trust defendant claims should have been ignored for purposes of analyzing the local controversy exception.  The district court disagreed.  Every plaintiff had a claim against the Trust defendants, but not every plaintiff had a claim against each named defendant insurer.  The Trust defendants were local defendants from whom significant relief was sought and whose conduct formed a significant basis for the claims asserted.  The doctrine of procedural misjoinder had not been adopted in the Tenth Circuit, and even if it had, it was not clear that the severed claims against the insurers would meet CAFA’s jurisdictional requirements of over 100 class members and in excess of $5,000,0000.

The lower court also rejected the insurers’ contention that an earlier lawsuit filed by these plaintiffs against the Trust itself, and not against the current named Trust defendants, meant that the plaintiffs could not satisfy the last prong of the local controversy exception.  On appeal the Tenth Circuit agreed with the district court, noting that the plain language of 28 U.S.C. §1332(d)(4)(A(ii) says there must be a prior action “against any of the defendants” and not “against any of the defendants or parties in privity with them” as the insurers would have had the court interpret the statute.  The Tenth Circuit also noted that State Farm had admitted that not every plaintiff had a claim against an insurer, and there was nothing before the court to demonstrate that at least 100 plaintiffs had claims against the insurers.

3.  The Discretionary/Interests of Justice exception

If greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed the discretionary exception may apply.  One of the difficulties in addressing this exception is that the term “primary defendant” is not defined in CAFA.  The definition is important because the statute requires that “all” of the primary defendants be residents of the state where the suit was filed.

In Powell v. Tosh, 40 Envtl. L. Rep. 20251, 2009 U.S. Dist. LEXIS 98564 (W.D. Ky. Oct. 21, 2009), the plaintiffs sought to remand their case to state court based, in part, on CAFA’s discretionary exception.  The plaintiffs, 28 Kentucky landowners, brought a class action nuisance lawsuit against nine defendants alleging that noxious fumes from the defendants’ hog farm operations were negatively impacting the value of the plaintiffs’ property and causing personal injuries.  Among the defendants were the local operators of the hog farms as well as some diverse defendants who were the owners of the hogs on those farms.

While it was undisputed that the CAFA’s jurisdictional requirements had been met, the plaintiffs argued that the case should be remanded pursuant to two of CAFA’s mandatory exceptions, the local controversy exception and the discretionary exception.  With respect to the discretionary exception, the plaintiffs argued that greater than one third but less than two-thirds of the members of the proposed class were citizens of Kentucky and the court agreed.  Next, the plaintiffs argued that the primary defendants were citizens of Kentucky.  The court disagreed.

The court looked at the language of the exception and determined that the requirement that the primary defendants be citizens of the state where the suit was filed, meant “all” of the primary defendants.  Next, the court examined the complaint and noted that all members of the plaintiff class had claims against the diverse defendants.  Accordingly, those defendants appeared to be the real targets of the class action.  Also indicative of their status as primary defendants was the fact that the diverse defendants had been sued directly and were the subject of a significant portion of the claims asserted by the plaintiffs.

 4.  The State Action Exception

One of the least argued exceptions to CAFA jurisdiction is the state action exception which applies if the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief.  Like the discretionary exception, the state action exception also contains the language “primary defendants” which has been interpreted to mean “all” the primary defendants must be state actors.

The question then turns on whether the defendants can be considered States, State officials or other governmental entities against whom the district court may be foreclosed from ordering relief.  The purpose behind the enactment of 28 U.S.C. §1332(d)(5)(A) was to prevent states, state officials or governmental entities from removing a case to federal court, and then arguing that due to immunity the federal court would be prohibited from ordering the relief requested by the plaintiff.

The issue was addressed in Frazier v. Pioneer Americas LLC, 455 F.3d 542 (5th Cir. 2006) where the plaintiffs brought a class action against the operator of hydrogen processing equipment and the Louisiana Department of Environmental Quality (“DEQ”) for damages allegedly caused by seeping mercury.  Pioneer removed the case pursuant to CAFA.  The plaintiffs moved for remand on multiple grounds including that CAFA’s state action exception applied.  The district court denied remand and the plaintiffs appealed.  On appeal, the plaintiffs argued that the DEQ was both a primary defendant and a state entity so remand was appropriate.  The Fifth Circuit disagreed because the statute requires “all” primary defendants to be States, State Officials or other governmental entities and Pioneer also was a primary defendant. The court rejected the plaintiffs’ argument that such a result violated the 11th Amendment and the principles of state sovereign immunity. The appellate court noted that unless the state joins in the removal, which it is not required to do so under CAFA, it does not waive its right to assert sovereign immunity.  Furthermore, the court may ignore sovereign immunity until the state asserts it.  The fact that absent waiver of the immunity, the court may not be able to order relief against the state, does not mean the court cannot assume jurisdiction over a case involving a state.

CONCLUSION

In the six years since CAFA’s enactment, the courts have seen many arguments against CAFA jurisdiction.  Several of these arguments could not have been foreseen by the drafters of the legislation.  In the coming year, we should expect to see more arguments relating to calculation of the amount in controversy, interpretation of the “mass action” provisions, and interpretation of CAFA exceptions containing undefined phrases such as “primary defendant” and “significant relief.”

Indirect Purchaser Plavix Class Actions Tossed for Lack of Antitrust Standing

On January 31, 2011, the District Court for Southern District of Ohio granted defendants’ Rule 12(b)(6) motion, dismissing indirect purchaser class actions that challenged proposed reverse payment agreements as anticompetitive under Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2. Plaintiffs alleged those agreements prevented the defendants from entering into an alternative competitive agreement that would have permitted the cheaper generic version of Plavix to enter the market sooner. In re Plavix Indirect Purchaser Antitrust Litig. (“Plavix“), Slip Op., No. 1:06-cv-226, 2011 WL 335034 (S.D. Ohio Jan. 31, 2011).

Background – Kroger Co. v. Sanofi-Avantis, 701 F.Supp.2d 938 (S.D. Ohio 2010) 

In an earlier opinion, which was incorporated by reference into the January 31 decision, the court dismissed the direct purchaser actions based on the same allegations. Accordingly, a brief description of the background of the case and the court’s prior decision is helpful in understanding the context of the court’s ruling dismissing the indirect purchaser claims.

The defendants in both sets of actions were Sanofi Aventis and Sanofi-Synthelabo, Inc., Bristol-Myers Squibb Company and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership (collectively “Sanofi”) and Apotex Corporation (“Apotex”). Sanofi manufactures a patented clopidogrel bisulfate drug, known as Plavix, which is used to treat patients with a risk of heart attacks and strokes. Apotex was the first generic applicant to seek FDA approval to market a generic version of Plavix in the United States, alleging that Sanofi’s patent was invalid (called a Paragraph IV certification). Sanofi then initiated a patent infringement suit against Apotex. Kroger, 701 F.Supp.2d at 942.

The FDA grants the first generic applicant to file a Paragraph IV certification with a six-month exclusivity period during which the generic drug manufacturer may sell the drug free of competition from any other generic manufacturer. However, the filing of a patent infringement suit stays the FDA approval process for the generic drug for up to 30 months. 21 U.S.C. § 355(j)(5)(B)(iii); Kroger, 701 F.Supp.2d at 942.

The automatic 30-month stay that was triggered by Sanofi’s infringement suit pursuant to section 355(j)(5)(B)(iii) expired in May 2005, and the trial of the infringement action was scheduled for April 2006. Apotex received FDA approval in January 2006, which started the 6-month exclusivity period running before the patent issues were resolved. Apotex was, therefore, faced with either losing the lucrative 6-month exclusivity rights or launching its generic drug “at risk,” thus exposing itself to infringement damages if Sanofi’s patent was upheld. Apotex began preparing for an at risk launch based on a belief that it had a strong invalidity case. Meanwhile, Aventis had obtained independent professional advice that called into question the validity of the patent at issue. Kroger, 701 F.Supp.2d at 944.

Given the risks on both sides, negotiations ensued resulting in two sets of proposed settlement agreements, both of which required government approval to take effect. The first called for a series of “reverse payments” by Sanofi to Apotex, also guaranteeing that neither Apotex nor Sanofi would launch a generic during Apotex’s exclusivity period. When this agreement failed to gain government approval, the parties entered into a second proposed agreement that capped Apotex’s damages if the patent litigation was resolved in Sanofi’s favor and under which Sanofi would not be prohibited from launching its own generic during Apotex’s exclusivity period. Moreover, the effective date of the agreement was moved forward to June 1, 2011 from September 17, 2011. However, this agreement also failed to gain the required government approval. A later government investigation into the proposed settlement resulted in criminal charges against, and a guilty plea by, Bristol Meyers for making false statements to government officials in connection with the proposed settlement.Kroger, 701 F.Supp.2d at 945-46.

In August 2006, while the patent litigation was ongoing, Apotex launched its generic version of Plavix at risk and sold it a few weeks before Sanofi obtained an injunction against Apotex and halted the sale of the generic drug. Id. at 946. The infringement action was later resolved against Apotex and the patent was held valid and infringed. Apotex litigated the issue through the Federal Circuit which upheld the findings below. Id. at 962-63.
Plaintiffs, both direct and indirect purchasers, alleged that, but for the two proposed settlement agreements, defendants would have entered into another, procompetitive agreement either (1) licensing Apotex to market its generic brand, or (2) shortening the life of Sanofi’s patent rights in return for Apotex’s delayed entry into the generic market. They claimed that such alternative hypothetical agreement would have avoided the unsuccessful patent trial and would have resulted in plaintiffs receiving the benefits of lower-priced generic competition sooner. Id. at 946. They also raised a Section 2 claim premised on a Walker Process theory of monopolization through enforcement of a fraudulently-obtained patent based on misrepresentations made to the Patent and Trademark Office (“PTO”). Id. at 949.

The district court dismissed the direct purchasers’ Section 1 claims for lack of antitrust injury. The court concluded, “Plaintiffs’ allegations, taken as true and construed in their favor, preclude the possibility that their injury flowed from the anticompetitive effects of the [proposed] agreements ‘which make [D]efendants’ acts unlawful.’” Id. at 954 (internal citation omitted). The court distinguished the case from In re Cardizem CD Antitrust Litig., 332 F.3d 896, 906 (6th Cir. 2003) which similarly involved a reverse payment agreement, noting that the agreement involved in that case in fact kept the generic drug from entering the market.

In contrast, Apotex launched the generic drug at risk and sold it on the market for a few weeks before its sales were halted by valid injunctions. Accordingly, the injunctions, not the proposed agreements, caused plaintiffs’ alleged injury and were “impenetrable legal impediments to the sale of generic” Plavix. The court held, such “alleged injury, although related to an antitrust violation, nevertheless will not qualify as ‘antitrust injury.’” Kroger, 701 F.Supp.2d at 954. (internal quotation marks and citation omitted).

The court also rejected direct purchaser plaintiffs’ Section 2 Walker Process theory of monopolization. The court noted that such claims are typically brought as counterclaims in patent infringement suits, and that outside this context, “a patent’s validity can be challenged only by a party (1) producing or preparing to produce the patented product, and (2) being threatened or reasonably likely to be threatened with an infringement suit.” Id. at 960. Because the direct purchasers did not fall into either category, they could not directly challenge the validity of Sanofi’s patents. However, the court found that whether purchasers could nonetheless assert a Walker Process claim like plaintiffs’ was not a settled question.

Relying on In re DDAVP Direct Purchaser Antitrust Litigation, 585 F.3d 677 (2d Cir. 2009), the court opted for a narrow application of such a claim. InDDAVP, the Second Circuit held “that purchaser plaintiffs have standing to raise Walker Process claims for patents that are already unenforceable due to inequitable conduct.” 585 F.3d at 691-92 (emphasis added); Kroger, 701 F.Supp.2d at 961-62.

The court found DDAVP inapplicable, however, because Apotex litigated the validity of the patent at issue through the Federal Circuit and lost, thereby failing to establish “by clear and convincing evidence that Sanofi engaged in inequitable conduct” before the PTO. Kroger, 701 F.Supp.2d at 963. Accordingly, the court dismissed the direct purchasers’ claims.

The Indirect Purchaser Actions 

At the outset, and with the foregoing rulings in mind, the court noted that “a complaint’s ‘[f]actual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all of the complaint’s allegations are true.’” Plavix, 2011 WL 335034, at *2 (quotingBell Atl. Corop. v. Twombly, 550 U.S. 544, 555-56 (2007)). The court also stressed that “something beyond the mere possibility of [relief] must be alleged, lest a plaintiff with a largely groundless claim be allowed to take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value.” Id.(internal quotation marks and citation omitted).

The court first turned to indirect purchaser plaintiffs’ injunctive relief claim under Section 16 the Clayton Act, 15 U.S.C. § 26. The court noted that plaintiffs sought to enjoin not just any future reverse payment agreements related to Plavix, but went “so far as to request to enjoin Defendants from the possibility of entering into a yet-to-be-determined reverse payment agreement on some yet unidentified drug.” Plavix, 2011 WL 335034, at *4 (emphasis added). In other words, indirect purchasers sought “an injunction preventing the practice of entering into reverse payment agreements.” Id. at *3 (emphasis in original). The court rejected the claim as “too speculative a basis for injunctive relief,” as plaintiffs “provide[d] no factual basis for their claims that there is any kind of threatened violation on the part of Defendants” and “merely speculate[d] that Defendants’ previous behavior and their status as the ‘world’s leading’ pharmaceutical or generic drug makers leads to the assumption that Defendants will engage in future collusive agreements.” Id. at *4.

The court next turned to the indirect purchasers’ claims under various states’ antitrust and consumer protection laws and rejected those claims based on the absence of antitrust injury as found in Kroger. See id. at *5 (indirect purchaser plaintiffs’ “alleged injury – paying ‘artificially inflated prices for Plavix’ – derives from the lack of access to a generic substitute caused by the court-ordered injunctions” and “is not of the type the antitrust laws were intended to prevent”). In reaching the same result as in Kroger, the court noted that indirect purchaser plaintiffs conceded that state courts are guided by federal decisions in interpreting similar state antitrust and consumer protection statutes. Id. The court also relied on a number of cases dismissing state law claims when similar federal claims based on the same allegations were dismissed. See, e.g., id. (citing and quoting, among others, Asahi Glass Co., Ltd. v. Pentech Pharms., Inc., 289 F.Supp.2d 986, 996 (N.D.III.2003) for proposition that “the state antitrust charge falls for the same reasons as the federal, since there is no difference material to this case between the state and federal statutes”).

Finally, the court also dismissed indirect purchasers’ unjust enrichment and restitution claims. Noting that an unjust enrichment claim “hinges on, inter alia, a benefit conferred by a plaintiff upon a defendant,” the court held that “[a]ny payment by Indirect Purchasers for Plavix was not a ‘benefit conferred’ but instead consideration for the patented drug.” Id. at *6.

Federal Court Refuses To Toss Out EEOC Claim That Chrysler Retaliated Against Employees

Hostile Warnings of Discipline and Termination After Complaint of Sex Discrimination Are Enough for Case to Go Forward, Judge Says

MILWAUKEE – Automobile giant Chrysler Group, LLC’s effort to have an U.S. Equal Employment Opportunity Commission (EEOC) claim of unlawful retaliation thrown out of court has failed, the agency announced today. The EEOC has received a February 17, 2011 Decision and Order from District Judge William F. Callahan, Jr., denying Chrysler’s motion for summary judgment. The judge held that the EEOC’s claims of retaliation on behalf of two women employed in the company’s national parts distribution center in Milwaukee should go forward. (EEOC v. Chrysler Group, LLC, E.D.Wis. No. 08-C-1067, Decision & Order, 2/17/2011, D.J. Callahan.)

The claims were brought by the EEOC under Title VII of the Civil Rights Act of 1964 in a lawsuit filed in December 2009. According to the EEOC, one of the women was taken off what the court described as a “coveted position” driving a power sweeper and assigned to more physically demanding work “picking” parts to satisfy a “hot order” in the “back order area” of the warehouse. The EEOC said that when the woman and a coworker complained that a male employee with less seniority should have been assigned to that job, they were accused of “disrupting the workforce” subjected to verbal harassment and threatened with discipline up to and including termination.

Chrysler urged the court to summarily reject EEOC’s claims because the women were neither discharged nor suffered any other tangible loss such as a loss of pay, benefits, or position. According to Chrysler, “the alleged verbal harassment and intimidation is simply not the kind of actionable harm which Title VII contemplates.”

The court rejected that line of reasoning. “An adverse employment action [necessary to sustain a claim for retaliation] need not be tangible,” Judge Callahan wrote. The court then reviewed the circumstances surrounding the statements to the women, finding that “the manner in which [the manager] delivered his message to each woman matters. If he were screaming and pounding his fists on the table while threatening termination, as [the women] testified, this scenario paints a much more hostile and intimidating atmosphere than if [the manager] delivered his message in a normal tone of voice, as he contends he did.”

Because of this controversy, the court concluded, the trial should go forward to determine whether Chrysler’s behavior “would have dissuaded a reasonable worker from making a charge of discrimination.”

The EEOC’s regional attorney in Chicago, John Hendrickson, said, “This is an important decision. It is a firm reminder that the concept of retaliation under the federal employment discrimination laws is a common-sense one. The Supreme Court has said that if an employer responds to a discrimination complaint in a way which would dissuade a reasonable worker from filing a charge, that’s retaliation. The EEOC will move swiftly to stem such actions.”

In addition to Hendrickson, the case is being litigated by Supervisory Trial Attorney Gregory Gochanour and Trial Attorneys Bradley Fiorito and Grayson Walker, all of EEOC’s Chicago District Office. The EEOC’s Chicago District Office is responsible for processing charges of discrimination, administrative enforcement, and the conduct of agency litigation in Illinois, Wisconsin, Minnesota, Iowa, and North and South Dakota, with Area Offices in Milwaukee and Minneapolis.

EPA Issues Final Boiler MACT Rules

On February 23, 2011, following ten years of litigation, the U.S. Environmental Protection Agency (“EPA”) released scaled-back air emission rules for industrial boilers and solid waste incinerators. EPA received over 4,800 public comments after it released proposed boiler and incinerator rules in April 2010, and EPA estimates that the cost to industry to implement the scaled-back rules will be approximately $1.8 billion – half the estimated $3.6 billion cost of complying with the originally proposed rules.

The recently released final rules address hazardous air pollutant (“HAP”) emission standards for industrial, commercial and institutional boilers and process heaters (the Boiler Maximum Achievable Control Techcnology or “Boiler MACT” rule) and commercial and industrial solid waste incineration units (the “CISWI” rule). Industrial boilers and process heaters burn fuels such as natural gas, biomass, coal and oil to produce heat or electricity; CISWIs burn solid waste.

EPA issued the final rules after a federal district court last month denied EPA’s request to further postpone their issuance for an additional fifteen months, and instead extended the court-imposed deadline (originally set at December 15, 2007 and subsequently extended multiple times) for one month – to February 21, 2011. The final Boiler MACT rule affects numerous industries, including paper mills, refineries, and chemical and manufacturing plants.

The Boiler MACT rules create emission limits for mercury, particulate matter and carbon monoxide for all new coal-fired boilers with heat input greater than 10 million Btu per hour and particulate matter emission limits for new biomass and oil-fired boilers. New boilers with heat input below 10 million Btu per hour will be required to undergo a boiler tune-up every two years. For existing boilers, the new rules create emission limits for mercury and carbon monoxide only for coal-fired boilers with input greater than 10 million Btu per hour. EPA did not establish emission limits for other existing boilers. Instead, those boilers must undergo a tune-up every two years.

Industrial boilers at major sources (those facilities that emit ten or more tons per year of a single air toxic or twenty-five or more tons per year of any combination of air toxics) are subject to emission limits for five different HAPs: mercury, dioxin, particulate matter, hydrogen chloride and carbon monoxide. The only exceptions for major source boilers are for natural gas and other “clean fuel” burning boilers and those boilers with heat input capacity below 10 million Btu per hour.

The new CISWI rule sets New Source Performance Standards and emission guidelines for 88 specific commercial and industrial solid waste incineration units. The CISWI rule establishes emission limits for mercury, lead, cadmium, hydrogen chloride, particulate matter, carbon monoxide, dioxin/furans, nitrogen oxides and sulfur dioxide. The affected incinerator units must come into compliance with the new limits by February 2016, at the latest.

The fate of this latest final rule package is uncertain, considering EPA expressed doubt that itcould issue defensible boiler and incinerator rules when it sought an additional fifteen month extension from the federal district court. However, EPA announced that it intends to begin the formal process of reconsidering these final rules, with additional details of the reconsideration process to be released in the near future.