You receive a call from the general counsel of a longtime client, which is a large nationwide vitamin manufacturer. The client has been sued in California state court on claims that the packaging of one particular vitamin misrepresents the benefits of the vitamin in a way that induced a class of California consumers to purchase it. The company’s sales of the vitamin total $4 million in California. Two weeks later, you learn that the same plaintiffs’ firm has filed a nearly identical lawsuit in New York state court by a class of New York consumers. A week later, a third class action is filed in Florida state court. The general counsel asks you about the possibility of litigating the cases in federal court, which could allow for greater coordination through the multidistrict litigation process.
In this hypothetical, the Class Action Fairness Act (CAFA) likely presents the best and perhaps only opportunity to get into federal court. In 2005, Congress passed CAFA in response to the growing recognition that the then-current requirements for diversity jurisdiction illogically operated to deprive federal courts of jurisdiction over large, complex class actions. CAFA “intended to expand substantially federal court jurisdiction over class actions” in order to prevent a number of inequitable results and abusive tactics. S. Rep. No. 109-14 (2005), reprinted in 2005 U.S.C.C.A.N. 3, 11–27, 41. For example, plaintiffs’ attorneys often evaded federal jurisdiction and flooded state courts perceived to be plaintiff-friendly. Id. at 11–14. It was alleged that some state courts certified almost any alleged class, while others allowed plaintiffs’ counsel to receive a disproportionate share of settlement payments. Id. at 13–15. As a result, defendants often were forced either (1) to settle questionable claims due to the uncertain and potentially devastating outcome of a nationwide class action litigated in state court or (2) to defend against copy-cat cases in multiple jurisdictions. Id.
CAFA added a new form of diversity jurisdiction aimed to address these abuses by allowing federal courts to exercise jurisdiction over more class actions. Federal courts can now exercise jurisdiction over class actions with at least 100 putative class members, so long as there is “minimal” diversity (at least one member of the putative plaintiff class is a citizen of a state different than at least one defendant) and if, aggregating the putative class’s claims, more than $5 million is in controversy.
From a class action defendant’s perspective, federal court may also provide several perceived benefits, such as access to the federal bench, the requirement that any verdict be unanimous, more limited discovery, or procedural devices in certain federal district courts aimed at an early determination on class certification.
Obstacles to Federal Jurisdiction Persist even under CAFA
Although it expanded federal jurisdiction to many class actions, CAFA has not been a panacea for forum-shopping. As in the above hypothetical, a nationwide class can be divided into several state-specific classes with each state class’s current claims totaling less than $5 million. Defending duplicative claims—and responding to duplicative discovery—in multiple forums can provide plaintiffs’ counsel tremendous leverage in settlement negotiations, especially if plaintiffs claim state-specific consumer protection laws present distinct legal issues requiring unique discovery in each case, misuse protective orders, or tailor discovery requests by state.
The U.S. Supreme Court recently eliminated one tactic of plaintiffs to avoid federal jurisdiction. In Standard Fire Insurance Co. v. Knowles, 133 S. Ct. 1345 (2013), the Supreme Court found that a pre-certification stipulation in a complaint that asserted that the putative class will not seek damages exceeding $5 million does not take a case outside CAFA’s scope, because the stipulation can bind only the named plaintiff and not the entire proposed class at the pre-certification stage. Id. at 1348–50. Thus, named class members cannot avoid removal simply by artificially capping the proposed class’s claimed damages. Even if the pleading claims to seek less than $5 million, courts will “look beyond the four corners of the complaint” to determine whether the amount in controversy is actually over $5 million. Rodriguez v. AT&T Mobility Servs. LLC, 728 F.3d 975, 980 (9th Cir. 2013).
Despite Knowles, a defendant may still face some tricky circumstances with respect to removal. For example, what happens if the aggregated amount in controversy was not $5 million when the complaint was filed but likely will hit that threshold at some point during the course of the litigation because damages continue to accrue? In such situations, the defendant faces a dilemma. If the defendant does not remove, then the ability to remove may lapse if a court later determines that the 30-day deadline to remove had already been triggered. See 28 U.S.C. § 1446; Roth v. CHA Hollywood Med. Ctr., L.P., 720 F.3d 1121 (9th Cir. 2013). On the other hand, if a defendant does remove to federal court immediately, then how should a court evaluate “future damages”?
Federal Courts and “Future Damages”: Amount in Controversy for Purposes of CAFA?
In the hypothetical at the start of this article, the $5 million threshold in the California class action has not been met, as sales of the challenged vitamin amount only to $4 million. But if the alleged misrepresentations remain on the vitamin’s packaging, then the number of putative class members and alleged restitution sought by the complaint will continuously increase as the client sells more products. Can the defendant remove to federal court immediately given the likelihood that the $5 million threshold will be reached during the pendency of the case, or must the defendant wait until $5 million in alleged damages have actually accrued?
Although the law in CAFA cases is not well developed on this subject, several district courts have allowed for such future damages to be considered in determining the amount in controversy for purposes of CAFA. For example, in Faltaous v. Johnson & Johnson, 2007 WL 3256833, at *9 (D.N.J. Nov. 5, 2007), a New Jersey district court found that limiting plaintiff’s damages for purposes of CAFA jurisdiction to the two-year liability period prior to the filing of the complaint was “too restrictive.” Instead, “[w]hile the amount in controversy is determined through consideration of the good faith allegations of the complaint at the time it was filed . . . , damages accruing in the future are properly counted against the jurisdictional amount ‘if the right to future payments . . . will be adjudged in the present suit.’” Id.
The consideration of future damages in a jurisdictional evaluation is not unique to CAFA cases. Several courts considering traditional diversity jurisdiction have found that future damages should be evaluated in an inquiry to determine whether the $75,000 threshold applicable to that form of jurisdiction has been met. For example, in Broglie v. MacKay-Smith, 541 F.2d 453, 455 (4th Cir. 1976), the Fourth Circuit found that where the complaint alleged continuing damage that will accrue in the future and be adjudged in the action, such continuing damage should be “counted against the jurisdictional amount.” The court found that “plaintiffs here may rely upon costs to be incurred subsequent to the filing of the complaint but prior to trial in meeting the jurisdictional amount requirement.” Id.
However, other courts have drawn a distinction where the future damages are contingent or within the discretion of the defendant. For example, in Indianer v. Franklin Life Insurance Co., 113 F.R.D. 595, 599–600 (S.D. Fla. 1986), a Florida district court found that future damages that were conditional and discretionary could not be used in the computation of the amount in controversy. The plaintiff in Indianer had purchased a life insurance policy from the defendant that allowed him to take out loans against the policy and paid him a dividend each year. Id. at 597. The insurance contract stated that the dividend share was to be “determined and apportioned by the company.” Id. at 600. The defendant changed its dividend policy in a way that negatively affected those policyholders who borrowed against their insurance policies, such as the plaintiff. The plaintiff argued that the amount in controversy must include the future reductions in his dividend payment through his life expectancy. The court rejected this argument, finding that the plaintiff had “no legal or contractual right to any future benefits because future dividend payments lie wholly in [the defendant’s] discretion.” Id. at 599–600. Thus, the “alleged future damages” were “altogether speculative.” Id.
Even though some district courts allow for inclusion of future damages in the calculation of the amount in controversy in CAFA cases, the law is uncertain because the courts of appeals have not weighed in. The ability to include future damages in the calculation of the jurisdictional amount likely depends on the nature of the future damages and the degree of certainty with which they will occur. This standard is consistent with the notion that jurisdiction cannot be based on speculation.
Of course, future damages could be considered within the defendant’s control in many cases. For example, the client in the hypothetical could simply stop selling the challenged vitamin or incur the expense of changing the labeling. That argument makes the unreasonable assumption that a defendant will immediately and voluntarily cease the allegedly wrongful conduct. A defendant should not be deprived of access to the federal courts simply because it continues to engage in the same conduct whose legality is the subject of the lawsuit without yet having allegedly caused $5 million in injuries. If encompassed by the class definition, future damages accrued after the filing of a complaint will be adjudicated in the CAFA action and should be factored into the amount in controversy. It would be nonsensical to require the filing of another class action to adjudicate the damages that accrue during the pendency of the original action.
If future damages are included in the amount in controversy, the question becomes what yardstick a court should utilize to determine the time period during which future damages will accrue. A defendant may argue that the “time-to-trial” benchmark should be used. The Federal Judiciary website provides median times within which civil actions in each district have gone from filing to trial. Such statistics can be, and have been, used by courts to estimate a reasonable time to trial where no trial date has been set. See, e.g., Faltaous, 2007 WL 3256833, at *10. Moreover, a “time-to-trial” estimate arguably aligns with the procedure for measuring what the complaint, through its allegations, puts in controversy, with an assumption that there is a verdict for the plaintiff on all claims alleged in the complaint. Finally, such a view is consistent with the legislative history’s instruction that courts err in favor of exercising jurisdiction.
On the other hand, the judge likely knows that very few class actions go to trial. A judge may be unwilling to accept estimated damages that extend a year or more into the future as anything other than speculative. Therefore, the court could estimate future damages with the understanding that the case likely will be settled or resolved much sooner than trial. The Federal Judiciary also keeps statistics on the median “time to disposition” in each district. More detailed statistics concerning the average time to disposition and the average or median time to disposition once a case survives the pleading stage would allow for courts to make a more tailored estimate of future damages in each case. Of course, both district courts and litigants would be served by guidance from the appellate courts on the correct standard to employ when estimating future damages in a jurisdictional inquiry.
Discovery Can Be Used to Bolster CAFA Jurisdiction
A removing defendant must be able to provide reasonable and reliable estimates of future damages, which almost always will require an internal investigation that involves digging into its accounting records, policies, or practices. See, e.g., Roth, 720 F.3d at 1125. After filing the removal papers, the defendant should continue inquiring into jurisdictional issues, especially if it anticipates or suspects a motion to remand will be filed. The defendant should seek to obtain additional information from the plaintiff in discovery that may be helpful in supporting CAFA jurisdiction.
For example, written discovery devices such as requests for admission or interrogatories may force the plaintiff to flesh out the amount or type of damages sought in the case or to provide clarity as to the scope of the class definition. That information may bolster the grounds for CAFA jurisdiction or supplement jurisdictional evidence gathered from an internal investigation. If a motion to remand is filed, then the court can consider evidence presented by the removing party in opposition to that motion even if the evidence was not available or not presented in the removal papers. See, e.g., Janis v. Health Net, Inc. of Cal., 472 F. App’x 533, 534–35 (9th Cir. 2012).
Filing a Second Notice of Removal May Be Appropriate
Class actions are unique in that a defendant can remove the case to federal court at any time during the litigation, even on the eve of trial. See 28 U.S.C. § 1453(b); Roth, 720 F.3d at 1126. The one-year deadline to remove non-class actions under traditional diversity jurisdiction does not apply to class actions. 28 U.S.C. § 1453(b). Further, nothing prevents a previously unsuccessful defendant from filing a second removal petition. See, e.g., Benson v. SI Handling Sys., Inc., 188 F.3d 780, 782–83 (7th Cir. 1999) (“Nothing in § 1446 forecloses multiple petitions for removal.”).
Thus, if a federal court remands the case back to state court, the defendant should remain vigilant about issues affecting the removability of the case. The case may become removable, and the 30-day removal deadline may be triggered, if the plaintiff later reveals that CAFA jurisdiction exists.
The ability of a defendant to file a second removal petition shows the importance of an appropriate estimation by the district court of future damages. If future damages are not appropriately considered at the outset, then the case may bounce back and forth between state and federal court as damages continue to accrue and future damages are converted into actual, past damages, thereby leaving little doubt as to the satisfaction of the $5 million jurisdictional threshold. That outcome does not benefit the parties or courts; it only results in delay and uncertainty. When a case bounces between state and federal courts, it cannot be litigated in an effective manner, as hearings are taken off the calendar and deadlines are vacated.
Therefore, district courts should take a pragmatic approach when faced with jurisdictional issues in CAFA matters and should resist the urge to summarily dismiss any consideration of future damages. Courts should accept all reasonable estimates of future damages that will accrue prior to likely disposition but remain open to argument as to why a longer estimate may be required in a particular case, especially where a discovery dispute or anticipated motion practice suggests that disposition is unlikely to occur in the near future. A too-restrictive view of such considerations can operate to frustrate CAFA’s objectives, delay the disposition of cases, and create uncertainty for the courts and parties about the court in which the case ultimately will be decided.
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