Motions to remand under the Class Action Fairness Act (CAFA) in insurance class actions often focus on whether the amount in controversy exceeds $5 million. This is because the “local controversy” and “home state” exceptions to CAFA jurisdiction are inapplicable if the defendant is not a citizen of the state where suit is filed. Thus, if the plaintiffs’ attorneys sue outside of the defendant’s state of incorporation and principal place of business, the only way they can avoid federal jurisdiction is if the amount in controversy is found to be below $5 million. Last week, in Frederick v. Hartford Underwriters Ins. Co., No. 12-1161, __ F.3d. __, 2012 WL 2443100 (10th Cir. June 28, 2012), the Tenth Circuit addressed several issues that are at the heart of these disputes, resolving all three issues in a manner favorable to defendants:
- Burden of Proof: The Tenth Circuit agreed with the majority of other circuits that a defendant must establish that the amount in controversy exceeds $5 million by a preponderance of the evidence. This standard (or a similar formulation) applies in the First, Second, Fourth, Sixth, Seventh, Eighth and Eleventh Circuits. But the Third and Ninth Circuits require a defendant to establish to a “legal certainty” that the amount in controversy exceeds $5 million. This is a well-developed circuit split (ten of the twelve circuits have weighed in) that the Supreme Court might be inclined to decide, if presented with an appropriate case.
- Allegation That Plaintiff Seeks Less Than $5 Million: In Frederick, the complaint alleged that the named plaintiff was seeking “a total award for compensatory and punitive damages [that] does not exceed $4,999,999.99.” Id. at *1. The district court held that this allegation, by itself, required a remand, but the Tenth Circuit reversed. The court of appeals explained that “a plaintiff’s attempt to limit damages in the complaint is not dispositive when determining the amount in controversy. Regardless of the plaintiff’s pleadings, federal jurisdiction is proper if a defendant proves jurisdictional facts by a ‘preponderance of the evidence’ such that the amount in controversy may exceed $5,000,000. Once a defendant meets this burden, remand is appropriate only if the plaintiff can establish that it is legally impossible to recover more than $5,000,000. Id. at *3. The district court erred when it “treated the plaintiff’s pleadings as dispositive” because “[a] court may not forgo an analysis of a defendant’s claims regarding the amount in controversy merely because a plaintiff pleads that he is seeking less than the jurisdictional minimum.” Id. at *4. The Tenth Circuit noted in footnote 3 of its opinion that the Jurisdiction and Venue Clarification Act of 2011 (“JVCA”), Pub. L. No. 112-63, was inapplicable because the JVCA did not become effective until after Frederick was filed. Regardless of that, the JVCA amendments appear to plainly apply only to diversity jurisdiction under § 1332(a), not CAFA jurisdiction under § 1332(d). See 28 U.S.C. § 1446(c)(2). (For more on the JVCA, see my January 6, 2012 blog post.) Frederick did not involve a purported binding stipulation by a named plaintiff as to the amount in controversy, but the district court treated the allegation as binding, so the court might treat a stipulation in the same fashion. For more on stipulations, see my February 7, 2012 blog post.
- Punitive Damages: The Tenth Circuit further held that, with respect to punitive damages, a defendant must show “merely that: (1) state law permits a punitive damages award for the claims in question; and (2) the total award, including compensatory and punitive damages, could exceed $5,000,000.” Frederick, 2012 WL 2443100, at *4 (emphasis added). The Tenth Circuit explained that this showing may be made based upon “facts alleged in the complaint, the nature of the claims, or evidence in the record to demonstrate that an award of punitive damages is possible.” Id. This does not appear to be an onerous standard for defendants to satisfy. If applicable state law on one or more causes of action permits an award of punitive damages and the maximum amount awardable under state law would bring the amount in controversy over $5 million, that would appear to satisfy the Tenth Circuit’s test.