Frederico v. Home Depot: the Third Circuit clarifies the removal burden for CAFA defendants, but is the burden still too high?

• Author: Davis, Dwight J.
• Position: Class Action Fairness Act of 2005

CONGRESS passed the Class Action Fairness Act of 2005 ("CAFA") with the express aim of making federal courts the preferred venue for large, multi-state class actions. (1) To effect that purpose, CAFA expanded federal diversity jurisdiction, allowing putative class action lawsuits to be litigated in federal court if (1) the parties are minimally dwerse; (2) (2) the putative class contains at least 100 members; (3) and (3) the aggregate amount in controversy exceeds $5 million. (4) Moreover, CAFA provided, for the first time, a procedure for interlocutory review of remand orders. (5) While CAFA's basic principles were both well-known and clearly described in the terms of the statute, certain courts have shown a surprising hostility to CAFA cases.

The initial battle to narrow the scope of CAFA involved whether CAFA altered traditional rules regarding which party had the burden of proof to establish federal jurisdiction after a case was removed. The Senate Judiciary Committee's Report, admittedly inserted into the record after CAFA's passage, specifically absolved removing defendants from submitting evidence demonstrating that the removal requirements were satisfied. (6) Relying on this legislative history, defense lawyers argued that they need not "prove" any of CAFA's jurisdictional facts (minimal diversity, one hundred class members, or amount in controversy exceeding $5 million) to support a CAFA removal, and that remand would be appropriate only if plaintiffs could prove, at least by a preponderance of the evidence, that these jurisdictional facts did not exist. Although some district courts initially accepted this argument, (7) every circuit court that confronted the issue ultimately rejected it because (1) the statute did not expressly reverse the well-established burden under existing law and (2) the committee report was inserted into the record after CAFA's passage and was, therefore, irrelevant. (8)

With that issue settled, courts began wrestling with the standard a removing party must meet to discharge its burden of proof. Most courts--including the Second, Sixth, Seventh, Ninth, and Eleventh Circuits--have concluded that a removing defendant must show CAFA's jurisdictional elements by a preponderance of the evidence. (9) To the contrary, until very recently, the Third Circuit stood alone in imposing on the removing defendant, in all cases, the substantially more stringent burden of showing the elements of CAFA jurisdiction to a "legal certainty." (10) In Morgan v. Gay, the court imposed this requirement on a defendant struggling to demonstrate at the earliest stages of the litigation that the amount in controversy exceeded $5 million. While the plaintiff in Morgan had expressly disclaimed damages in excess of CAFA's amount in controversy requirement, Morgan appeared to require that in all cases, regardless of whether a plaintiff makes such a disclaimer, removing defendants must establish to a legal certainty that CAFA's jurisdictional elements are satisfied at the time of removal.

In Frederico v. Home Depot, (11) the Third Circuit clarified the holding in Morgan and held that the stringent "legal certainty" test applied only in cases "where the plaintiff's complaint specifically (and not impliedly) and precisely (and not inferentially) states that the amount sought in a class action diversity complaint ... shall not exceed $5 million...."(12) In all other cases involving factual disputes as to the jurisdictional amount, the "preponderance of the evidence standard would be appropriate." (13) By limiting the application of Morgan's "legal certainty" test, the Third Circuit joined every other circuit which has addressed the issue and abandoned an evidentiary burden that is inconsistent with (1) the express intent of Congress to federalize multi-state class actions, (2) the removal standards applied by other appellate courts, and (3) the plain language of CAFA itself.

Unfortunately, in dicta, the Third Circuit in Frederico reaffirmed that the "legal certainty" standard will apply when a named plaintiff expressly states in the complaint, purportedly on behalf of the alleged class, that damages do not exceed $5 million. Yet, given Congress' expressed demand that large, multi-state class actions be in federal court, neither the Third Circuit nor any other court has yet expressed a logical reason why the stringent "legal certainty" standard should apply even if an express disclaimer is present in the complaint. At the time that the named plaintiff would make such a disclaimer, typically in the complaint before any discovery, the named plaintiff simply cannot have sufficient information about the alleged class to disclaim damages on behalf of that class. The fact that a named plaintiff attempts to disclaim damages on behalf of such a class without any discovery could indicate that the plaintiff is inadequate to represent the class or, in representing it, is deliberately seeking to avoid federal jurisdiction.

Further, if the parties conduct discovery on the amount in controversy and there is evidence that the $5 million threshold has been met, what public policy is furthered by requiring the defendant to meet the higher standard? In short, a class-wide disclaimer of damages at the initial stages of a lawsuit should not be sufficient to avoid federal court jurisdiction. The Third Circuit's reliance on such a disclaimer and its requirement that a defendant demonstrate to a legal certainty that such a disclaimer is incorrect is, arguably, inconsistent with United States Supreme Court precedent, (14) and is certainly inconsistent with Congress's express intent that large, multistate class actions be tried in federal court. Because the holding in Frederico clearly went beyond the issues raised in that case, perhaps this anomaly can be corrected in a future case.

In this article, we will trace the history of the burden of proof imposed on removing parties both before and after CAFA was enacted and suggest that, based on that history, the language of CAFA itself, and Congress's express intent in enacting it, courts should abandon the legal certainty standard altogether as a burden on removing parties; both, like the Frederico court, when a complaint is unclear regarding the amount in controversy and, contrary to the dicta in Frederico, when a named plaintiff expressly disclaims damages in excess of $5 million.

1. Morgan v. Gay

   1. Background

      In Morgan, the plaintiff, a New Jersey purchaser of skin cream, filed suit in New Jersey state court asserting violations of the New Jersey Consumer Fraud Act and a variety of common law claims arising from the defendant's allegedly false advertising. (15) In a clear attempt to avoid removal under CAFA, the plaintiff specified in her complaint that "the total amount of ... monetary relief for the class as a whole shall not exceed $5 million in sum or value." (16) Invoking CAFA, the defendants nonetheless removed the action to federal court. The defendants did not "offer any factual support" for their assertion that the damages sought by the plaintiff would "far exceed the $5 million mark." (17) The plaintiff then filed a motion to remand, arguing that the federal court lacked subject matter jurisdiction because the defendant had failed to prove the requisite amount in controversy. The district court granted the plaintiff's motion, and the defendant appealed to the Third Circuit. (18)

   2. The Third Circuit's Opinion

      On appeal, the defendant in Morgan first argued that CAFA did not require it to prove the elements of removal jurisdiction, but rather required the plaintiff to disprove those elements. (19) Like all other circuit courts to consider the issue, the court in Morgan concluded that CAFA did not alter the traditional rule that the party invoking federal court jurisdiction (here, the removing defendant) bore the burden of proof for jurisdictional elements. (20)

      The court then addressed what a removing defendant must show to discharge its burden under CAFA. The court began its analysis by stating that the Third Circuit's pre-CAFA rule was that "a defendant will be able to remove the case to federal court by 'show[ing] to a legal certainty that the amount in controversy exceeds the statutory minimum.'" (21) The court did not stop there, however, and next considered other appellate courts' decisions discussing the standard borne by a removing defendant under CAFA, implicitly recognizing that CAFA's purpose of easing the way for defendants to remove class actions to federal court could suggest a departure from prior precedent. (22)

      The court closely analyzed--to the point of deconstruction--the Seventh Circuit's decision in Brill and the Ninth Circuit's decision in Abrego. (23) In both Brill and Abrego, the courts concluded that CAFA had not altered the burden of proof and that a removing defendant under CAFA had to show CAFA's jurisdictional elements by a preponderance of the evidence. (24) Nevertheless, the Third Circuit in Morgan, while purporting to rely on Brill, concluded that removing defendants must prove to a "legal certainty" that the aggregate amount in controversy exceeds $5 million. (25) Because the evidence regarding the amount in controversy in Morgan was inconclusive, the court held that the defendants had failed to discharge their burden and affirmed the district court's remand decision. (26)

2. Analytical Flaws in Morgan

   In attempting to create a bright-line rule (one which arguably is impossible to meet), the Morgan decision was far too ambitious. Had the Third Circuit reached the same result on narrower legal or factual grounds, its decision would still be inconsistent with the express purpose of CAFA but would be at least analytically sound. The plaintiff in Morgan expressly pied that the aggregate amount in controversy was less than $5 million. As the...