In class actions involving more than one defendant and at least one local defendant, two exceptions to jurisdiction under the Class Action Fairness Act (CAFA) potentially come into play. The “home state” exception applies if two-thirds or more of the proposed class members and the “primary defendants” are citizens of the state where suit was filed. 28 U.S.C. § 1332(d)(4)(B). The “local controversy” exception applies if the same two-thirds threshold is satisfied, there is at least one local defendant “from whom significant relief is sought by members of the plaintiff class” and “whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class,” and during the previous three years, “no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.” Id. § 1332(d)(4).  The terms “primary defendants,” “significant relief” and “significant basis” are not defined in the statute, and thus whether a particular defendant constitutes a “primary defendant” or satisfies the “significant basis” requirement have been the subject of extensive litigation.

The First Circuit recently addressed these issues, reviewing the law nationwide. It held that the “home state” exception did not apply because a nonlocal defendant was a “primary” defendant. However, the “local controversy” exception applied because the local defendant satisfied the “significant basis” requirement where essentially the same claims were alleged against all defendants. The court also held that the district court did not abuse its discretion in declining to sever the case against the nonlocal defendant, with one judge dissenting from that ruling.

In Kress-Stores of Puerto Rico, Inc. v. Wal-Mart of Puerto Rico, Inc., — F.4th –, 2024 WL  4750774 (1st Cir. Nov. 12, 2024), the plaintiffs were smaller merchants who sued several big-box retailers, alleging that they failed to comply with the executive orders of the governor of Puerto Rico during the COVID-19 pandemic. The big-box retailers were permitted to remain open for supermarket and pharmacy operations but allegedly sold other “non-essential” goods in violation of the orders. The case was removed to federal court by Costco, the only non-local defendant. The federal district court denied a motion to remand and later granted summary judgment for the defendants.

On appeal, the plaintiffs challenged federal jurisdiction under both the “home state” and “local controversy” exceptions to CAFA. Addressing the “home state” exception, the First Circuit explained that in interpreting the term “primary defendant,” some courts have focused on whether a defendant is alleged to be directly liable to the proposed class as opposed to vicariously or secondarily liable. Other courts have focused on which defendants have the largest exposure. The First Circuit appeared to agree with the Ninth Circuit’s approach, which considers both of those factors, along with others. The First Circuit rejected the plaintiffs’ argument that Costco was not a “primary” defendant because its potential liability was smaller than others — approximately $65 million, in comparison to Wal-Mart’s potential liability of over $265 million. Costco was a “primary” defendant because it “could face direct liability to class members on the order of tens of millions of dollars,” The “home state” exception was therefore inapplicable because one “primary” defendant was nonlocal.

Addressing the “local controversy” exception, the First Circuit explained that most circuits have adopted the Third Circuit’s test, under which a “significant” defendant is one whose alleged conduct is “an important ground for the asserted claims in view of the alleged conduct of all the Defendants.”  The First Circuit explained that courts have disagreed over how to apply this test where the complaint alleges that local and nonlocal defendants engaged in essentially the same conduct. The Ninth Circuit found that the local controversy exception applies in that circumstance, while the Fifth and Eighth Circuits have required what the First Circuit described as “some sort of plus-factor in the allegations of a local defendant’s conduct (as compared to non-local defendants’ conduct) to count the local defendant’s conduct as a ‘significant basis’ of the plaintiffs’ claims.” The First Circuit concluded that a “plus factor” was not required and agreed with the Ninth Circuit that a local defendant can be “significant” if the complaint’s allegations do not differentiate between defendants, but it noted that a “holistic evaluation” is required and that “[w]e remain sensitive to Congress’s suggestion that the local controversy exception is a ‘narrow’ one.” On the facts of this case, the First Circuit held that Wal-Mart Puerto Rico, Inc., a local defendant, satisfied the “significant basis” requirement because “all the claims run against Wal-Mart, and all the plaintiffs in the putative class have claims against Wal-Mart.” The “local controversy” exception therefore applied, defeating federal jurisdiction.

The First Circuit panel was split in reviewing the district court’s denial of Costco’s motion to sever. The majority concluded that the claims against the various defendants were properly joined under Rule 20(a) because they arose out of “the same transaction, occurrence, or series of transactions or occurrences.” The majority found it sufficient for joinder purposes that all the claims arose out of the COVID-19 pandemic and the governor’s orders. Judge Hamilton (of the Seventh Circuit, sitting by designation) dissented on this issue. Looking by analogy to intellectual property cases, he would have held that severance was warranted because the plaintiffs alleged that the defendants “acting independently and in competition with each other” engaged in similar conduct at the same time, but were not alleged to act in concert. Judge Hamilton would have found joinder improper, severed the claims against Costco and affirmed the district court’s summary judgment ruling in its favor.

This case is an example of how navigating the exceptions to CAFA jurisdiction can be complicated and requires a detailed case-by-case analysis along with the law of the applicable circuit. The “home state” exception is a tougher climb for plaintiffs. The “local controversy” exception is construed more broadly in some circuits than others. If plaintiffs can avoid CAFA merely by alleging that multiple defendants engaged in the same conduct and one of them is local, that has the potential to create a significant gap in federal jurisdiction. In such cases, severance might be a strategy worth pursuing by nonlocal defendants if Judge Hamilton’s dissenting opinion gains traction in his home circuit or others.