Are Incentive Awards for Named Plaintiffs in Class Actions Allowed? Not According to the Eleventh Circuit

A recent decision by the Eleventh Circuit struck down a practice that is commonplace in class action settlements—providing a modest incentive award to a named plaintiff. In Johnson v. NPAS Solutions, LLC, No. 18-12344, 2020 WL 5553312 (11th Cir. Sept. 17, 2020), the district court, as part of the final approval of a class action settlement, approved a $6,000 incentive award for the named plaintiff. An objector to the settlement challenged the incentive award along with other objections, and the Eleventh Circuit held (with one judge dissenting) that the incentive award was improper. The court found that, although such awards are routine, no court had thoroughly evaluated the basis for its authority to approve them. The court relied on two 1880s decisions of the U.S. Supreme Court, which held, prior to invention of the modern class action, that plaintiffs who recovered on behalf of others (such as a trustee who sued on behalf of himself and other bondholders) could not recover an allowance for “personal expenditures” or “personal services” out of a common fund that was obtained. Id. at *8. The Eleventh Circuit majority concluded that, under these decisions, “[a] plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses,” and “the modern-day incentive award” was “roughly analogous to a salary” or “payment for ‘personal services.’” Id. at *9. The majority further concluded that the same result would be warranted if the incentive award were characterized as a “bounty.” According to the majority, such awards, although they have been routine, can be authorized only if the Supreme Court overrules its old precedent, Rule 23 is amended to authorize such awards, or Congress enacts a statute authorizing such awards. Id. at *9, 10-12.

Judge Martin dissented from this portion of the opinion, concluding that the majority’s decision was inconsistent with a 1983 decision of the Eleventh Circuit that had set forth a fairness test for such awards, similar to the approach taken by other circuits (albeit without thoroughly evaluating the authority to make such awards). Judge Martin wrote that: “By prohibiting named plaintiffs from receiving incentive awards, the majority opinion will have the practical effect of requiring named plaintiffs to incur costs well beyond any benefits they receive from their role in leading the class. As a result, I expect potential plaintiffs will be less willing to take on the role of class representative in the future.” Id. at *15 (Martin, J., dissenting).

It will be interesting to see whether this decision results in a decrease in class action filings in the Eleventh Circuit, or if plaintiffs’ attorneys are still able to recruit named plaintiffs without the possibility of an incentive award. It seems unlikely that this decision will make class actions more difficult to settle, although perhaps that could happen if named plaintiffs cannot obtain more than a small amount that absent class members are receiving. Given that the old Supreme Court decisions are focused on circumstances in which a “common fund” was created, perhaps the Eleventh Circuit would reach a different result if the settlement is on a claims-made basis, and provides for the incentive award to be paid by the defendant separately, not as part of a “common fund.” In those circumstances, the court is simply approving the parties’ agreement and not involved in the allocation of a “fund.”

The Eleventh Circuit also found that the district court erred in two other respects that demonstrate some good practice tips for class action lawyers. First, the court of appeals found that the district court improperly set the deadline for objections to the plaintiff’s attorneys’ fee award prior to the filing of the plaintiff’s attorneys’ motion for the fee award, which the court concluded was not in compliance with Fed. R. Civ. P. 23(h). The court concluded, however, that this was harmless error because the objector to the settlement had adequate opportunity to present its position in the district court after the fee motion was filed and on appeal. This problem can easily be avoided when the parties propose a schedule for the class action settlement process to the district court. Such a schedule can require the fee motion to be filed sufficiently in advance of the objection deadline. Second, the court of appeals concluded that the district court failed to make sufficient findings or conclusions to support its decision granting final approval of the settlement and the proposed fee award. Given that it is common practice in most federal courts for the parties to submit a proposed order to the district court, this problem also potentially can be avoided by presenting a thorough proposed order for the district court’s consideration.

Upcoming Webinar on COVID-19 Business Interruption Insurance Class Actions

Over the last several weeks, numerous putative class actions have been filed against insurers seeking coverage for business interruption claims arising from the COVID-19 pandemic. On May 21, 2020, I will be a panelist, along with Robert M. Cooper of Boies Schiller Flexner LLP and Mark P. Rapazzini of Heffler Claims Group, in a Perrin Conferences webinar entitled “Coronavirus Business Interruption Insurance Class Action Lawsuits: Coverage and Certification Issues.” The webinar will highlight the insurance coverage issues raised in these newly-filed cases and the class certification issues likely to arise. A small number of complimentary registrations are available for Robinson & Cole clients and friends on a first-come, first-served basis. If you are interested in one of those, please email me.

Does Bristol-Myers Squibb Apply to Class Actions? D.C. and Seventh Circuit Issue New Decisions

This week the D.C. Circuit and Seventh Circuit issued decisions addressing a question that has been hotly debated by class action lawyers on the plaintiffs’ and defense sides: whether the Supreme Court’s decision on personal jurisdiction in Bristol-Myers Squibb Co. v. Superior Court of California, 137 S. Ct. 1773 (2017) (blog post) applies to class actions, and if so, how. Bristol-Myers held that in a mass action, a California state court lacked personal jurisdiction (specific jurisdiction) over claims made by non-California residents that involved no harm in California and no harm to California residents. Following that decision, defendants have argued that trial courts lack jurisdiction over putative class members, or over claims alleged on their behalf, that lack sufficient connection to the forum jurisdiction. The first appellate decisions on these issues came down this week. Thus far, defendants have not prevailed, but I think the litigation of these issues is far from over.

In Molock v. Whole Foods Market Group, Inc., No. 18-7162, 2020 WL 1146733 (D.C. Cir. Mar. 10, 2020), the plaintiff employees sought to bring a nationwide class action for alleged lost wages. The district court denied the defendants’ motion to dismiss based on Bristol-Myers, and an interlocutory appeal was allowed. The D.C. Circuit, in a 2-1 decision, ruled that the question of whether and how Bristol-Myers applies to class actions is premature prior to a decision on class certification because, until a class is certified, putative class members are not parties. The majority relied on Smith v. Bayer Corp. and Standard Fire Ins. Co. v. Knowles, both of which recognized that putative class members cannot be bound by decisions made or actions taken in a putative class suit that has not yet been certified as a class action. The majority did not interpret Whole Foods’ position as asserting that there was a lack of jurisdiction over specific claims, and therefore did not address that question. I read Molock as potentially supporting an argument by defendants that, at class certification, the scope of any certified class should be limited to claims arising out of harm in jurisdictions where a named plaintiff was harmed. The line of argument would be that a class action must be litigated in a manner that ultimately leads to a binding outcome on the absent class members, which logically requires personal jurisdiction over the absent class members and the claims asserted on their behalf.

Judge Silberman of the D.C. Circuit dissented on various grounds, and would have ruled in favor of the defendant. He viewed Whole Foods’ argument as focusing not on whether there was personal jurisdiction over the absent putative class members, but rather seeking dismissal of those claims alleged by the named plaintiffs that related to injuries occurring outside the District of Columbia. He pointed out that courts have generally recognized and decided motions to dismiss or strike a portion of alleged class claims. Judge Silberman expressed a practical concern that, if adjudication of the scope of the class in this respect is postponed until class certification, a defendant can be subjected to unduly burdensome discovery (the majority opinion recognizes, however, that the district court could decide the Bristol-Myers issue in the context of a discovery dispute). Judge Silberman would have reached the merits of the Bristol-Myers issue and held that a named plaintiff cannot pursue claims of putative class members with no connection to the forum state. His reasoning included that: (1) personal jurisdiction must be analyzed on a claim-by-claim basis; (2) logically, a class action is a type of joinder and should not be treated differently than a mass action on this issue; (3) Rule 23 cannot alter jurisdictional requirements; and (4) Congress, in Rule 4(k)(1)(A), has limited federal district courts’ exercise of personal jurisdiction to that of a state court where the district court is located. Judge Silberman also would have concluded that absent class members are parties for purposes of personal jurisdiction over a defendant.

In Mussat v. IQVIA, Inc., No. 19-1204 (7th Cir. Mar. 11, 2020), the plaintiff filed a putative nationwide class action under the Telephone Consumer Protection Act. The district court granted the defendant’s motion to strike the class definition insofar as it alleged a nationwide class, based on Bristol-Myers. The Seventh Circuit agreed to hear an appeal from this ruling under Fed. R. Civ. P. 23(f), and held that Bristol-Myers did not apply to a nationwide class action in federal court under a federal statute. The Seventh Circuit wrote that “[o]nce certified, the class as a whole is the litigating entity, and its affiliation with a forum depends only on the named plaintiffs.” Slip op. at 5 (citation omitted). The Seventh Circuit did not address the issue raised by the D.C. Circuit about whether adjudication of this issue was premature where no class had been certified. The Seventh Circuit noted that the Supreme Court had repeatedly adjudicated nationwide class action cases without addressing the Bristol-Myers issue (although the issue does not appear to have been raised by parties in any of those cases), and that the Supreme Court stated in Bristol-Myers that it was applying “settled principles of personal jurisdiction.” Slip op. at 7. The Seventh Circuit also noted that absent class members are not treated as parties for ordinary diversity jurisdiction purposes, or in determining venue. The Seventh Circuit also analogized class actions to situations where an executor, administrator or trustee sues in a representative capacity, and courts analyze personal jurisdiction only with respect to the representative.

These are complicated issues and it will be interesting to see how the law develops as additional circuits are asked to weigh in. I expect the Supreme Court will take this up within the next few years. There are additional issues in play that were not raised or addressed by the D.C. Circuit or the Seventh Circuit. One of those that comes to mind is the fact that the Class Action Fairness Act (which is the basis for subject matter jurisdiction in many federal court class actions) requires consideration of the citizenship of putative class members for various purposes, including exceptions to jurisdiction. See 28 U.S.C. 1332(d)(3), (4). Putative class member claims are also aggregated for determining whether the amount in controversy requirement is satisfied. Id. § 1332(d)(6). These provisions seem to run counter to part of the Seventh Circuit’s reasoning that putative class members should be treated as irrelevant for jurisdictional purposes.

As highlighted by these decisions, there are strategic decisions defendants need to make in deciding how (and whether) to litigate this issue. One strategic decision is whether to present the question as an issue of personal jurisdiction over the absent class members themselves, or over a certain portion of the claims asserted by the named plaintiff against the defendant (i.e., the “out-of-state” claims), or both. Another strategic consideration is whether or how any positions taken might impact a class action settlement later in the litigation.

 

 

Supreme Court Decision on ERISA Statute of Limitations May Help Defendants Defeat Class Certification

Believe it or not, the Supreme Court of the United States just decided whether “to have ‘actual knowledge’ of a piece of information, one must in fact be aware of it.” The Court said “yes,” and it was unanimous. Most non-lawyers (and even some lawyers) would probably be surprised that this issue was even being debated. But it was a question that had divided the lower courts, with the Sixth Circuit ruling that “actual knowledge” did not require actually seeing or reading a document that was provided. The Supreme Court agreed with the six other circuits that had concluded that “actual knowledge” means what it says. The Court’s opinion potentially holds a silver lining for defendants though when it comes to class certification.

In Intel Corp. Investment Policy Committee v. Sulyma, No. 18-1116, the Court was asked to construe a statute of limitations for breach of fiduciary duty claims under the Employee Retirement Income Security Act  (ERISA), which requires that suit must be filed within three years of “the earliest date on which the plaintiff had actual knowledge of the breach or violation.” The plaintiff in this putative class action was a former Intel employee who claimed that retirement plans that he participated in had poor investment options with high fees and high risks. Various disclosures were made available to him on a website that he had access to, and in fact visited, but he did not remember reviewing the relevant disclosures, and claimed he was unaware that his money was being invested in hedge funds or private equity. He brought suit more than three years after receiving the disclosures.

Justice Alito wrote the opinion for a unanimous Court holding that “actual knowledge” under this statute means that you have to actually be aware of something. The opinion cited various dictionary definitions of “actual” and “knowledge” (even noting that the meaning of those words has not changed since ERISA was enacted in 1974), and explained how Congress in other parts of ERISA used a “should have known” type of standard instead of an “actual knowledge” standard, thereby choosing its words carefully.

What I found most interesting from a class certification perspective though is Part III. In that section, the Court explained how defendants could go about proving that plaintiffs had “actual knowledge”:

Nothing in this opinion forecloses any of the “usual ways” to prove actual knowledge at any stage in the litigation. [Citation omitted.] Plaintiffs who recall reading particular disclosures will of course be bound by oath to say so in their depositions. On top of that, actual knowledge can be proved through “inference from circumstantial evidence.” . . . Evidence of disclosure would no doubt be relevant, as would electronic records showing that a plaintiff viewed the relevant disclosures and evidence suggesting that the plaintiff took action in response to the information contained in them. . . . Today’s opinion also does not preclude defendants from contending that evidence of “willful blindness” supports a finding of “actual knowledge.”

In the context of a putative class action like this one, defendants will no doubt argue that they must be entitled to depose every putative class member regarding which disclosures or other relevant information he or she read, and to present at trial electronic records of every time a class member viewed the disclosures or other relevant information on a website or called to inquire about his or her account. Unless the proposed class is limited to the shortest possible three-year period, this would seem to be a potentially strong defense to class certification.

Tendering Full Relief to Moot a Class Action: It’s Still Possible in Illinois

When a business is sued in a proposed class action and there is only a small amount at stake on the named plaintiff’s claim, often one of the first thoughts that comes to mind is: can’t we just pay the full value of the named plaintiff’s claim and make the case go away? As you might imagine, this is a tactic that has been attempted for decades, since the advent of modern class actions. It’s largely been unsuccessful, but the Illinois Supreme Court clarified last week that defendants can defeat a class action in that state’s courts by “tendering” full relief. According to the Illinois Supreme Court, this requires paying the full amount potentially owed into the court’s registry, agreeing to pay whatever the court awards for reasonable attorney’s fees and costs (if applicable), and effectively admitting liability. And this only works if a motion for class certification has not been filed before the amount is tendered. If there is injunctive or other non-monetary relief sought, the defendant may have to agree to that relief unconditionally as well.

In Joiner v. SVM Management, LLC, Docket No. 124671, 2020 IL 124671 (Ill. Feb. 21, 2020), the Illinois Supreme Court revisited its prior precedent on this issue in light of the U.S. Supreme Court’s decision in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016) (blog post). The Illinois Supreme Court had previously found that a tender of full relief prior to a motion for class certification being filed would moot a putative class action. In Gomez, the U.S. Supreme Court held that an offer of judgment under Federal Rule of Civil Procedure 68 that was not accepted did not render a class action moot because an unaccepted offer was a nullity under basic principles of contract law. The Court suggested that depositing the funds into an account might lead to a different result, but federal courts of appeals addressing that tactic have thus far rejected that approach, as far as I’m aware.

The Illinois Supreme Court distinguished Gomez on the grounds that a tender is actually forking over the money, not just offering it, the Illinois Code of Civil Procedure expressly provides for such a tender, and such a tender admits liability and is unconditional. The court explained:

When a defendant tenders the relief sought by a named plaintiff prior to a motion for class certification, it does not force the plaintiff to accept a settlement against her will, as plaintiffs argue, but admits liability and satisfies plaintiff’s demand. A live controversy therefore no longer exists, and the court must dismiss the case if no other plaintiff steps into the named plaintiff’s shoes to represent the class.

In Joiner, the tender was made by the defendant’s attorney sending a cashier’s check to the plaintiff’s attorney, but the court explained that future tenders should be made by paying the funds to the court:

We hold that future tenders made to satisfy a demand if made after filing of suit, should be made to the court. If the tender fully satisfies the plaintiffs’ demand absent costs and attorney fees, the court could then hold a hearing on costs and, if applicable, attorney fees before dismissing the case contingent upon payment of costs and fees.

Will defendants decline to remove cases to federal court in Illinois where this strategy is available? Keep in mind that Plaintiffs still appear to be able to defeat this strategy under the Joiner decision by filing an appropriate motion for class certification simultaneously with the complaint. And defendants may need to consider whether there are any potential collateral consequences of admitting liability by making a tender.

The issue still remains open at the Supreme Court level in the federal system, so stay tuned.

Superiority and Mootness of Injunctive Relief Claim Addressed in Recent Denial of Class Certification

A recent decision by a Washington federal district court caught my eye because it involved a circumstance I often see—a new development in the law results in a class action lawsuit being filed before the defendant has an opportunity to change its practices in response to the change (or clarification) in the law. This decision highlights several arguments that defendants can make in defending against class certification in this type of case.

Morrison v. Esurance Ins. Co., 2020 WL 583824 (W.D. Wash. Feb. 6, 2020), arises from a Washington Supreme Court decision concluding that an insurer was not permitted to deny a claim for personal injury protection benefits under an automobile insurance policy solely based on a finding of maximum medical improvement. The court’s denial of class certification focused on two issues: the injunctive relief claim, and superiority under Rule 23(b)(3). First, the court found that a Rule 23(b)(2) class seeking injunctive relief was inappropriate for two reasons: (1) the claim for monetary relief was not incidental to the claim for injunctive or declaratory relief; and (2) the defendant had brought its procedures into compliance with the new decision, and thus “[a]ny request for injunctive relief is therefore moot” because “Plaintiff has failed to show any likelihood of the harm reoccurring.” Id. at *5. This is a key argument that defendants can make when a putative class action attempts to capitalize on a recent development in the law and the defendant has brought its procedures into compliance.

Second, the court found that certification of a damages class under Rule 23(b)(3) was not appropriate because superiority was not satisfied. The court first concluded that because individual suits could seek between $10,000 and $35,000 plus the possibility of treble damages and attorney’s fees, this “will provide substantial incentive for class members and their attorneys to prosecute claims individually.” Id. at *6. This can be a strong argument, particularly where the defendant can show that plaintiffs’ attorneys frequently file individual suits making claims similar to those alleged in the putative class action.

The court also concluded that the superiority requirement was not satisfied because determining who was in the class (which ultimately would have to be done in order to determine who is bound by any final judgment) would require mini-trials. This was because the insurer’s claim denial letters were not a sufficient basis to determine whether benefits were denied, or whether the denial was based on maximum medical improvement. The Ninth Circuit does not have a separate ascertainability requirement, but this is a good example of how a defendant can effectively make an argument about the class definition under the superiority criterion for class certification.

Ninth Circuit Reverses Class Action Settlement Based on Notice Concerns and Insufficient Scrutiny

Class action settlements are complicated. They often take months to negotiate. The last thing the lawyers or their clients on either side want to happen is for the trial court to deny approval or, even worse, for an appellate court to overturn a decision approving the settlement when an objector appeals. That happened earlier this week in the Ninth Circuit. Its decision provides some guidance on how counsel can help the trial court through the approval process.

The Ninth Circuit is a hotbed of class action litigation, and it seems to apply a higher level of scrutiny than other circuits in reviewing settlement approval decisions. In Roes v. SFBSC Management, LLC, No. 170079 (9th Cir. Dec. 11, 2019), objectors appealed from a Northern District of California decision approving a settlement of an employment class action alleging that exotic dancers were misclassified as independent contractors rather than employees. The Ninth Circuit found problems with both the notice to the class and the extent of the district court’s scrutiny of the settlement terms.

Notice to the Class: Approximately 12% of the notices mailed to class members (560 out of 4,681) were undeliverable, even after the administrator searched for new addresses. The Ninth Circuit concluded that there should have been additional means attempted to try to reach former employees, for whom the only means of notice was by mail. It suggested that some form of electronic notice to the former employees should have been used. The lesson here? If it turns out that notice has not reached more than 10% of the class (depending on the circumstances), consider a supplemental form of notice before final approval is sought.

The Ninth Circuit rejected an argument that the notice to the class should have informed class members about other pending putative class cases against defendants involving the same issues. It found that is simply not required by Rule 23.

Settlement Terms: The Ninth Circuit requires a “higher level of scrutiny” and “a more probing inquiry” by district courts when a settlement is reached before a ruling on class certification (although that is very common). The district court’s opinion, however, did not cite this precedent, and suggested that there was a presumption of fairness. (Slip op. at 26.) The lesson here: the parties should make sure that they are citing the correct standard under the most recent case law in the circuit, and helping the district court apply it.

The Ninth Circuit found that the district court had not adequately explained why $950,000 of attorneys’ fees were justified, where the total available settlement cash was $2 million and the valuation of a $1 million dance fee payment pool for class members was not sufficiently justified in the Ninth Circuit’s view. The court noted that the district court had not made any specific findings regarding that valuation, or regarding why the attorneys’ fees would be reasonable even if the value of that portion of the class relief were disregarded. This is another area where the parties potentially could aid the trial court by proposing such findings.

The Ninth Circuit also found problematic that the settlement provided for $20,000 payments to two named plaintiffs in exchange for a general release. The court expressed concerns about “draw[ing] such large amounts from the common fund to pay the named plaintiffs for what is essentially a side settlement,” further stating that “the handsome amounts of those incentive payments, relative to the size of the cash payments that can be claimed by class members, raise serious red flags . . . .” (Slip op. at 41, 43.) The lesson here: incentive payments should not be a minor afterthought in negotiations; they need to be carefully justified.

The Ninth Circuit also expressed concerns about reversionary aspects of the settlement, where funds would revert to the defendants rather than be distributed to the class in some other manner, or by cy pres relief. This is another area for parties to consider carefully in structuring their deal, and in their briefing to the district court.

The Ninth Circuit noted in an footnote that the Northern District of California has published procedural guidance on class action settlements, which recommends that the parties provide various pieces of information to the district court in seeking settlement approval. (Slip op. at 47 n.22.) Even if you are not in the Northern District of California, that is a useful checklist for what you might need or want to include in your preliminary and final approval papers.

Next time you have a class settlement, don’t just take your last brief in support of preliminary or final approval and reframe it for your newest settlement. Study the most recent authority in your circuit, think through potential objections, and help the trial court through the approval process. That can save you and your client some headaches down the road.

Sixth Circuit Reminds District Courts and Defendants That Notice Must Be Given Before Binding Class Members

A recent decision by the U.S. Court of Appeals for the Sixth Circuit provides an important reminder that if defendants want absent class members to be bound by a summary judgment ruling in their favor, generally they must insist that notice be given to the class before that ruling is made.

In Faber v. Ciox Health, LLC, No. 18-5896, 2019 WL 6596501 (6th Cir. Dec. 5, 2019), the plaintiffs sued a medical-records provider, alleging that it overcharged them for providing copies of their records. Because HIPAA does not provide a private right of action, the plaintiffs brought common-law claims under Tennessee law, and a claim under a Tennessee medical records statute. The plaintiffs moved for class certification and the parties cross-moved for summary judgment, with all three motions pending at the same time. The district court certified a class and then, before ordering notice to the class, granted summary judgment in favor of the defendant. The Sixth Circuit affirmed the district court’s summary judgment ruling, finding that none of the causes of action were viable under state law. But it also ruled that the class certification ruling in effect was a nullity due to the failure to give notice, and the judgment would apply only to the named plaintiffs. The Sixth Circuit rejected the defendant’s suggested approach of remanding so that post-judgment notice could be provided to the class because “post-judgment notice would present no meaningful opportunity for class members to make their case”; rather, it “would only invite parties to enter a fight that they already lost.”  Id. at *7. But what if the district court (or the Sixth Circuit) had vacated the summary judgment ruling too, and then let the class members make whatever additional arguments they wanted to make? It might be difficult to change the district judge’s mind, but the issue could still have gone either way on appeal at that point.

The practice pointer for defendants and their counsel here, in my view, is that if there is both a motion to certify a class and motions for summary judgment pending, you may need to provide a strong recommendation for the district court as to which order the motions should be decided in. If the plaintiff moves for summary judgment, the defendant often will want to invoke the rule against one-way intervention, so the ruling is not binding as to the class unless a class is certified first. With respect to a defendant’s motion for summary judgment, it’s a strategy call as to whether you want to push for class certification to be decided first. And if class certification is granted before your motion for summary judgment is decided, it might make sense to request that notice be given promptly, and your motion be held in abeyance, so it if it is granted you have a judgment against the whole class. But that might not be the best strategy if your argument on the merits is a longshot. And here the ruling in favor of the defendant might well have been perceived as a longshot, given that the Sixth Circuit departed from a Tennessee Court of Appeals decision on the state statutory claim, predicting that the Tennessee Supreme Court would not follow it. These are the kinds of tough calls that defendants in class actions must make in deciding whether to use the class action mechanism as a sword, or just fend it off.

Supreme Court Rules That Third-Party Counterclaim Defendants Cannot Remove Class Actions Under the Class Action Fairness Act (CAFA)

The U.S. Supreme Court held today that a third-party defendant could not remove a class action to federal court under the Class Action Fairness Act (CAFA) because the term “defendant” as used in CAFA refers only to the party or parties sued by the original plaintiff. The Court’s opinion also has implications beyond the class action context because it addresses the scope of removal jurisdiction under 28 U.S.C. § 1441(a). The key implication of this decision in class actions is that a company that regularly brings suit against consumers (typically in collections matters) may be forced to defend a class action counterclaim filed by the consumer in state court, without any opportunity to remove the case to federal court. Companies may be able to avoid this outcome if there is a governing arbitration provision or forum selection clause in the applicable consumer contract.

In Home Depot U.S.A., Inc. v. Jackson, No. 1701471, the lawsuit began as a collections suit by Citibank, N.A. against George Jackson, seeking to recover for an unpaid balance on a Home Depot credit card. Jackson counterclaimed against Citibank, and brought third-party class action claims against Home Depot and Carolina Water Systems, Inc. After Citibank dismissed its claims against Jackson, Home Depot removed the case to federal court. The district court remanded the case on the grounds that Home Depot as a third-party defendant had no right of removal. The Fourth Circuit affirmed, and the Supreme Court affirmed as well.

Justice Thomas wrote the majority opinion, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. The Court first addressed the scope of the right of removal under 28 U.S.C. § 1441(a), the removal statute enacted long before CAFA, which provides for removal of a civil action “by the defendant or the defendants . . . .” The Court noted that it was plausible that the term “defendant” referred to any person or entity sued in a civil case, but concluded that was not the best interpretation of the statute. Instead, the Court concluded that Section 1441(a) focuses on whether there is jurisdiction over the “civil action,” not particular claims or counterclaims made therein. The Court concluded that “Section 1441(a) thus does not permit removal based on counterclaims at all, as a counterclaim is irrelevant to whether the district court had ‘original jurisdiction’ over the civil action.” Slip op. at 6. The Court also reasoned that: (1) the Federal Rules of Civil Procedure distinguish between “defendants,” “third-party defendants,” and “counterclaim defendants”; (2) other removal statutes in the bankruptcy and patent/copyright context allow “any party” to remove; and (3) the Court held in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941) that a counterclaim defendant that was the original plaintiff had no right of removal under a predecessor statute to § 1441.

The Court then addressed the scope of the right of removal under 28 U.S.C. § 1453(b), part of CAFA, which provides for removal of a putative class action “without regard to whether any defendant is a citizen of the State in which the action is brought, except that such action may be removed by any defendant without the consent of all defendants.” The Court concluded that the use of the words “any defendant” in this statute were simply intended to clarify that the in-state defendant limitation and consent requirement do not apply to a removal under CAFA. The Court noted that, in other contexts, the word “any” is given an “expansive meaning,” but concluded that Congress did not intend an expansive meaning in this context. Slip op. at 10. The Court noted that “[o]f course, if Congress shares the dissent’s disapproval of certain litigation ‘tactics,’ it certainly has the authority to amend the statute. But we do not.” Id.at 11.

Justice Alito wrote a lengthy dissent, joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh. I won’t belabor the dissent here because it does not appear to provide guidance on the scope of the majority opinion that is now the governing law. In brief, the dissent’s key points included: (1) the purpose of CAFA was to expand defendants’ right of removal, contrary to the tactic employed by Jackson’s counsel here; (2) the ordinary meaning of the word “defendant,” i.e., a party being sued, includes a counterclaim defendant or third-party defendant; (3) the word “any” should be given an expansive meaning; and (4) the Court previously stated that there is no anti-removal presumption under CAFA.

This decision upholds prior rulings by some lower courts that counterclaim defendants have no right of removal. In the class action context, the decision is likely to have the most impact on companies that regularly bring suits against consumers that may result in a class action counterclaim, or get brought into such suits as third-party defendants. Other than lobbying Congress to amend CAFA, potential strategic options from the defense perspective may include the use of arbitration provisions in consumer contracts that the Supreme Court’s decisions have upheld, and potentially the use of forum selection clauses that could attempt to restrict the filing of CAFA-eligible class actions to federal courts.

Nutraceutical Corp. v. Lambert: Rule 23(f) Deadline Cannot Be Equitably Tolled

The Supreme Court ruled yesterday, in Nutraceutical Corp. v. Lambert, that the 14-day deadline under Federal Rule of Civil Procedure 23(f) for petitioning a court of appeals to hear a discretionary appeal from a class certification order cannot be equitably tolled. The district court had decertified the class. The plaintiff’s counsel expressed an intent to file a motion for reconsideration of that decision, and a deadline was set for filing that motion. The motion for reconsideration was filed in accordance with that deadline. The petition for permission to appeal was filed within 14 days after the motion for reconsideration was denied. The Ninth Circuit found the petition timely. But the Supreme Court said no.

Justice Sotomayor’s opinion for a unanimous Court explained that “[w]hether a rule precludes equitable tolling turns not on its jurisdictional character but rather on whether the text of the rule leaves room for such flexibility.” Slip op. at 4. “Where the pertinent rule or rules invoked show a clear intent to preclude tolling, courts are without authority to make exceptions merely because a litigant appears to have been diligent, reasonably mistaken, or otherwise deserving.” Id. The Court focused on Federal Rule of Appellate Procedure 26(b)(1), which provides that “the court may not extend the time to file: . . .a petition for permission to appeal . . . .” Id. at 5. The Court found no way around the “clear intent” of this rule.

This case is a good reminder for lawyers that not all deadlines can be extended, even if the trial court wants to grant an extension. The Supreme Court noted that some courts of appeals have concluded that a motion for reconsideration filed within the 14-day period extends the deadline for a petition for permission to appeal, on the theory that the class certification order is not “final.” But the Court did not address that issue, so the safest approach would be to file the petition within the 14 days. (And such petitions are limited to approximately 20 pages of large font text.) The Court also noted that a different result might be reached if the district court had misled the plaintiff’s lawyer, but that did not happen in this case.

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