[Note to subscribers: I’ve made a correction in this post to fix an error in Prof. Hellman’s name. If you’ve read it already, there are no substantive changes.]
The Federal Courts Jurisdiction and Venue Clarification Act of 2011 (Public Law 112-63) becomes effective today, January 6, 2012, with respect to new cases commenced in state or federal court from today forward. It makes a series of changes, some significant and others quite minor, to federal statutes governing jurisdiction, venue and removal. I will explain here what I see as the potential impact of this on class actions. For comprehensive summaries of the changes, I recommend Professor Arthur Hellman’s recent articles on Jurist summarizing the new law and describing its lengthy prior history and some missing pieces. Pepper Hamilton also has a detailed summary that is even more comprehensive than Prof. Hellman’s articles. House Report 112-10 provides Congress’s most comprehensive summary. But none of these sources discuss the potential class action impact, which I will focus on here:
The new law makes some changes that apply directly to removal of class actions on the basis that one of the named plaintiffs has an individual claim worth more than $75,000. These changes also raise some interesting questions about how these new provisions might impact Class Action Fairness Act removals. Here is the new language in 28 U.S.C. § 1446:
(c) Requirements; Removal Based on Diversity of Citizenship.—
(1) A case may not be removed under subsection (b)(3) on the basis of jurisdiction conferred by section 1332 more than 1 year after commencement of the action, unless the district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action.
(2) If removal of a civil action is sought on the basis of the jurisdiction conferred by section 1332(a), the sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy, except that—
(A) the notice of removal may assert the amount in controversy if the initial pleading seeks
(i) nonmonetary relief; or
(ii) a money judgment, but the State practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded; and
(B) removal of the action is proper on the basis of an amount in controversy asserted under subparagraph (A) if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds the amount specified in section 1332(a).
(3)(A) If the case stated by the initial pleading is not removable solely because the amount in controversy does not exceed the amount specified in section 1332(a), information relating to the amount in controversy in the record of the State proceeding, or in responses to discovery, shall be treated as an `other paper’ under subsection (b)(3). [Emphasis added.]
Class actions in which a named plaintiff has a claim for more than $75,000 are not that common, but when that is the case the federal court has supplemental jurisdiction over the putative class members’ claims under the Supreme Court’s decision in Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546 (2005). One tactic some plaintiffs’ lawyers have used to try to prevent removal of these cases is to state in the complaint that the named plaintiffs are each seeking less than $75,000. Sometimes affidavits under oath or formal stipulations to that effect are also attached to the complaint. Prof. Hellman describes in his article how Congress deleted provisions from the proposed bill that would have expressly authorized this kind of stipulation. Instead, as long as state law does not allow a demand for a specific amount in a complaint or allows recovery in excess of what the complaint demands, the defendant’s notice of removal will control the amount in controversy under the statute, as long as it meets the preponderance of the evidence test. This should help defendants successfully remove more of these types of cases to federal court. It is rare that state law prohibits a plaintiff from ever recovering more than they ask for in their initial complaint.
What I find particularly interesting is Congress’s failure to expressly address the impact of this on the Class Action Fairness Act (CAFA). One tactic plaintiffs’ lawyers have been using in class actions is to have the named plaintiff try to limit the amount of the putative class members’ claims in the aggregate to below the $5 million threshold for CAFA jurisdiction. No court of appeals has directly addressed this, although the Eighth Circuit is poised to do so, as I noted in a recent post. For defendants in class actions, this is a much bigger issue than in the $75,000 context because the vast majority of class actions seek relatively small amounts on behalf of each class member, and thus it is rare that a named plaintiff has at least $75,000 at stake.
The new Section 1446(c) applies only to Section 1332(a), which is the traditional $75,000 diversity jurisdiction section. It does not expressly apply to CAFA, which is Section 1332(d). I think there are at least two potential ways to interpret this. First, it may be that Congress expects that in a class action a named plaintiff cannot ask for a specific amount of damages on behalf of a putative class or limit the damages of the putative class to a specific sum because the named plaintiff has no authority to act on behalf of putative class members before certification. That would be consistent with the Supreme Court’s decision this year in Smith v. Bayer Corp., where the Court said that putative class members are not bound by what happens in a case before certification and notice. (It would also be consistent with what the Fifth, Sixth and Seventh Circuits have said on the stipulation issue. District courts have disagreed on the enforceability of stipulations and there is some dicta in other court of appeals decisions that plaintiffs’ lawyers and some district courts have relied on.) Second, it may be that Congress expects that what it has now enacted for traditional diversity jurisdiction would be applied by courts, at least by analogy, to CAFA removals. The federal courts in CAFA cases have generally applied other basic principles of removal jurisdiction to CAFA removals, on the assumption that Congress would presume those principles to apply, while making appropriate exceptions to those principles as necessary based on the purpose, intent and language of CAFA. The final House Report does not shed any light on what is intended with respect to CAFA but the lengthy prior legislative history (which I have not yet studied) might provide some guidance.
While this new law was not made expressly applicable to pending cases that were filed before today, it may demonstrate Congress’s intent behind pre-existing law where there were gaps in that law, and thus provide courts with some guidance in resolving pending cases.