12 April 2010
Five years ago, Congress enacted the Class Action Fairness Act of 2005 (CAFA) in reaction to widespread "abuses of the class action device" in state courts. Congress heard evidence that many nationwide class actions were being filed in state courts with reputations for hostility to business defendants (especially those from out of state) or for rubber-stamping coupon settlements under which the class counsel — not the class members — received the lion's share of the benefit. Concluding that these abuses were operating as a drag on the nation's economy, Congress enacted CAFA to expand federal diversity jurisdiction to encompass substantial interstate class actions. Congress's belief was that in federal court these abuses would be diminished. See S. Rep. No. 109-14, at 10-27 (2005).
How has CAFA fared? Looking back at the past five years, CAFA's reforms have had mixed success. As intended by Congress, class actions increasingly proceed in federal court. Since CAFA took effect, the number of class actions originally filed in federal court has nearly tripled. See Emery G. Lee III & Thomas E. Willging, Federal Judicial Center, The Impact of the Class Action Fairness Act of 2005 on the Federal Courts 1 (April 2008). Diversity removals also spiked after CAFA's enactment, although they have trended downward in the years since, probably because so many class actions are now initially filed in federal court. But CAFA is not an unqualified success: Many observers have concluded that new tactics by the plaintiffs' bar — and several judicial decisions — have undermined CAFA's goal of stopping class action abuses. They are discussed below.
- The new forum-shopping. That CAFA has shifted many cases from state to federal court does not mean that forum-shopping has ceased. With removal of major class actions to federal court becoming inevitable, plaintiffs' attorneys have adapted by choosing to file suit in particular federal courts — such as those within the U.S. Court of Appeals for the 9th Circuit — where the law is particularly favorable to class certification. Original filings in diversity cases have skyrocketed in such jurisdictions since CAFA's enactment. See Howard M. Erichson, "Fairness to Whom? Perspectives on the Class Action Fairness Act of 2005," 156 U. Pa. L. Rev. 1593, 1612-14 (2008). For example, federal district courts in California have seen an explosion in consumer class actions. In 2004 (the year before CAFA's enactment), California federal courts issued about one-third more decisions in such cases than any other state. By 2007, however, California's share had increased to well more than three times that of any other state. See Searle Civil Justice Institute, State Consumer Protection Acts: An Empirical Investigation of Private Litigation Preliminary Report, at 21 (December 2009).
In these hand-selected federal courts, plaintiffs increasingly are asking the court to apply the law of a single state to an entire nationwide class in order to prevent the differing application of 50 states' laws from making certification of a nationwide class unmanageable. For example, the 9th Circuit recently held that California law applies to all DirecTV customers nationwide — even though their contracts include choice-of-law clauses selecting the laws of their respective home states — chiefly because The DirecTV Group Inc. is headquartered in California. See Masters v. DirecTV, No. 08-55825, 2009 WL 4885132 (9th Cir. Nov. 19, 2009) (unpublished). Such rulings threaten to roll back the clock to when some state courts routinely certified nationwide classes alleging the violation of a single state's substantive law.
- Meeting CAFA's amount-in-controversy requirement. If a plaintiff brings a class action in state court, often the hardest part of removing it to federal court is satisfying CAFA's amount-in-controversy requirement. CAFA confers federal jurisdiction over covered class actions only if, after aggregating the claims of the putative class, "the matter in controversy exceeds the sum or value of $5 million." 28 U.S.C. 1332(d)(2). Courts have generally found that, when a plaintiff does not allege a specific sum in damages, the removing defendant must prove the amount in controversy by a preponderance of the evidence. See, e.g., Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41 (1st Cir. 2009). That burden alone sometimes dissuades defendants from seeking removal because they do not want to signal that $5 million or more is potentially at stake in the litigation.
Even worse for defendants, when a plaintiff has expressly alleged damages of less than CAFA's $5 million threshold, some courts require the removing defendant to prove "to a legal certainty that the amount in controversy exceeds the statutory minimum." Lowdermilk v. U.S. Bank. Nat'l Ass'n, 479 F.3d 994, 999 (9th Cir. 2007); see also Morgan v. Gay, 471 F.3d 469, 473 (3d Cir. 2006) (same); but see Bell v. Hershey, 557 F.3d 953, 957 (8th Cir. 2009) (adhering to preponderance of the evidence standard); Amoche, 556 F.3d at 49 n.2 (noting in dicta that it would do the same). Unsurprisingly, virtually no defendant is willing to meet that standard, for that requires proving one's opponent's case at the outset of the litigation. Accordingly, a plaintiff who alleges damages of less than $5 million can effectively prevent removal in the 3d and 9th circuits.
Courts also disagree about which party's perspective should be used to measure the amount in controversy. Some courts look to the value to the plaintiffs of the rights or injuries at issue. See, e.g., Smith v. Nationwide Prop. & Cas. Ins. Co., 505 F.3d 401, 407 (6th Cir. 2007). By contrast, other courts have adopted a more flexible standard that permits reliance on either party's viewpoint. See, e.g., McMahon v. Advance Stores Co. Inc., No. 5:07-CV-123, 2008 WL 183715 (N.D. W.Va. Jan. 18, 2008).
Other recent conflicts concern the methods available to prove that CAFA's jurisdictional hurdle has been overcome. For example, courts are split on whether post-removal discovery is permissible to demonstrate an amount in controversy greater than $5 million. Compare Lowery v. Alabama Power Co., 483 F.3d 1184 (11th Cir. 2007) (notice of removal must itself contain the evidence) with Tompkins v. Basic Research LLC, No. CIV. S-08-244, 2008 WL 1808316, at *3 (E.D. Calif. April 22, 2008) (allowing limited jurisdictional discovery). Courts also disagree on whether defendants may produce their own declarations to demonstrate the amount in controversy. Compare Spivey v. Vertrue Inc., 528 F.3d 982 (7th Cir. 2008) (accepting defendant's declarations) with Thomas v. Bank of America Corp., 570 F.3d 1280 (11th Cir. 2009) (looking to the plaintiff's documents alone). This issue is one that will continue to be litigated heavily.
- Defeating removal with "fail-safe" classes. In some cases, plaintiffs have resorted to a new tactic for defeating removal under CAFA: pleading a so-called "fail-safe class." The term "fail-safe class" was coined to describe a class defined in terms of the underlying merits, such as "all customers defrauded by the defendant." Such classes are "fail-safe" for the plaintiff because, even if the defendant proves that it did not defraud anyone, by definition the class then has no members, and no one would be bound by the adverse judgment.
Although defendants ultimately have strong arguments against fail-safe classes at the certification stage, they can pose a significant obstacle to removal in the first place. To prove that CAFA's $5 million amount-in-controversy requirement is met, defendants first must estimate the number of putative class members as a baseline for calculating possible damages. But a fail-safe class definition potentially forces a defendant to concede that it committed the alleged wrongdoing in order to prove that the necessary number of individuals make up the putative class.
- The numerical loophole to removal of mass actions. In addition to allowing removal of class actions, CAFA's "mass action" provision extends federal jurisdiction to civil actions in which the "monetary relief claims of 100 or more persons are proposed to be tried jointly," as long as CAFA's jurisdictional prerequisites for class actions are also met. 28 U.S.C. 1332(d)(11)(B)(i). Somewhat predictably, plaintiffs' attorneys have sometimes resorted to dividing their clients into groups of 99 or fewer plaintiffs to avoid federal court. The 9th Circuit recently approved such a strategy, denying the defendants' requests to join seven separate mass actions that each involved 99 plaintiffs and remanding the cases to state court. Tanoh v. Dow Chem. Co., 561 F.3d 945 (9th Cir. 2009).
In sum, CAFA has succeeded in moving many large class actions from state to federal court, even though some decisions have made removal of particular cases much more difficult than Congress had intended. But CAFA has not eliminated forum-shopping behavior by plaintiffs. And although the U.S. Supreme Court has largely steered clear of CAFA to date, the growing divisions among the federal courts will likely require the high court's intervention soon.