Cafa: Recent Developments on the Jurisdictional and Settlement Fronts
| Publication year | 2014 |
| Author | By Michael L. Mallow |
By Michael L. Mallow1
Since Congress enacted the Class Action Fairness Act (CAFA) in 2005, the nation's class action litigation has increasingly migrated to the federal stage, with plaintiffs bringing more class actions directly to federal court and corporate defendants exercising the right of removal. Although the Supreme Court's class action jurisprudence has been relatively thin for many years, a handful of recent decisions have addressed class actions, including jurisdictional issues specific to CAFA. While these decisions—particularly in the arbitration realm—may be regarded as favoring defendants,2 there have also been several unanimous decisions directed at achieving consistency in the federal courts' application of CAFA and preventing "artful pleading" by class plaintiffs to avoid CAFA jurisdiction.
A legislative response to a number of perceived problems and abuses in class action litigation, CAFA transformed the class action landscape in two important ways: expanding the diversity jurisdiction of federal courts over class actions, and providing a "Class Action Bill of Rights" that requires courts to engage in more exacting scrutiny of proposed settlements. While the Supreme Court's CAFA decisions have, so far, focused primarily on jurisdictional and class certification issues, there has been ample judicial activity at the settlement review stage, with district and circuit courts inspecting coupon settlements, cy pres allocations, and attorneys' fees through CAFA's remedial lens. This article examines developments at both ends of the class action "life-cycle." The first section discusses the Supreme Court's recent jurisdictional decisions—and some of the open issues that still surround removal and remand under CAFA. The second section looks at recent decisions considering the post-CAFA viability of coupon settlements and cy pres distributions, even in class actions outside of CAFA's jurisdictional reach.
CAFA's jurisdictional provisions lower the barriers to federal court jurisdiction over class actions by providing relief from conventional diversity jurisdiction rules governing class actions. CAFA also amended the traditional requirement that all class members must meet the amount-in-controversy requirement ($75,000). Under the statute, federal diversity jurisdiction exists as long as there is a putative class that includes at least 100 members, minimal diversity — at least one class member is from a different state than at least one defendant — and the total amount in controversy exceeds $5 million (exclusive of interest and costs).3 CAFA also affords defendants more opportunities for removal of actions filed in state court. Any defendant in a class action that meets CAFA's jurisdictional thresholds can move for removal, including defendants from the state where the state court action is filed, can seek removal without the consent of other defendants. Of course, CAFA does not alter the availability of federal court jurisdiction over claims arising under federal law (federal question jurisdiction), which remains available to defendants as a basis for removal.
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CAFA does include several important exceptions. One, the so-called "Delaware carve out," exempts from CAFA cases that concern covered securities, as defined by certain federal laws, or that relate to corporate governance issues arising under the state laws of a company's state of incorporation, or that concern fiduciary duties created by securities laws.4 CAFA also creates two mandatory exceptions (the federal court must decline jurisdiction) over "local controversy" and "home state" actions. The exceptions apply to class actions in which more than two thirds of the class members are from the forum state and either one of two conditions are met: (1) the primary defendant is from the forum state or (2) a significant defendant is from that state, the principal injuries occurred in the forum state, and no other class action on the issue has been filed in the preceding three years.5
The statute also provides a permissive exception (the court, in its discretion, may refuse jurisdiction over the case) that covers cases in which the primary defendants and between one third and two thirds of the class members are from the forum state.6 In those situations, the court will look at six factors, the overall thrust of which is geared toward assessing whether the forum state has a particular interest in, and nexus with, the class and the claims being asserted.7 Finally, federal courts must decline jurisdiction in cases implicating the sovereign immunity of states, state officials, or other entities against which the court may be foreclosed from ordering relief.8
Even with these exceptions, CAFA marks a clear expansion of the federal courts' jurisdiction over diversity-based class actions. While CAFA was expected to result in an increase of removals by class action defendants, less expected was the increase in class actions filed directly in federal court. And as CAFA has reduced the barriers to federal court jurisdiction over class actions, it also has resulted in federal courts grappling with significant questions including evidentiary issues related to removal and remand, as well as post-jurisdictional issues related to Rule 23 certification and settlements.
While plaintiffs increasingly have filed suit directly in federal courts, many plaintiffs (and their counsel) continue to regard state courts as more attractive and amenable forums for large class action claims, leaving the work of removing cases to federal court to defendants. While CAFA has eased the requirements for the removal of state court cases to federal court, the practical application of the statute has also generated a number of removal-related questions, including the appropriate evidentiary standards and burdens of proof for removal and remand of CAFA cases. Over the years, courts have split as to the appropriate evidentiary standard, with the majority of circuit courts now taking the position that defendants seeking removal under CAFA must demonstrate diversity and aggregate amount-in-controversy by a preponderance of the evidence, while the party resisting removal or seeking is left to demonstrate that one of CAFA's exceptions applies.9
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While the Supreme Court has not yet squarely decided the issue, its 2013 decision in Standard Fire Insurance Co. v. Knowles10 supports a "preponderance of the evidence" approach (generally applicable outside the context of CAFA actions), while also making it clear that plaintiffs may not escape removal by stipulating to damages under the $5 million CAFA threshold. In Standard Fire, the class representative attempted to avoid removal by entering a stipulation that the class would seek less than $5 million in damages. The district court had found, by a preponderance of the evidence, that the damages would exceed that threshold, but for the stipulation, yet ultimately honored the terms of the stipulation and declined removal. The Eighth Circuit declined to hear an appeal, but the Supreme Court took the case and reversed.
In an 8-0 decision, the Court took aim at plaintiffs' counsel filing multiple, near-identical suits, each framed as falling slightly under the $5 million amount-in-controversy threshold for CAFA, and held the stipulation unenforceable, finding that the class representatives could not strategically evade removal through stipulation. The decision did not squarely address the burden on the removing party and may be read narrowly, framed in terms of whether class representatives possess the authority to bind class members prior to class certification. While it is often noted that a plaintiff is the "master...
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