A Brief History: The Four Ws
Who? President George W. Bush signed CAFA into law. Passed by the 109th Congress, the bill was sponsored by Republican Senators Charles Grassley and Orrin Hatch and Democratic Senator Herb Kohn. Its passage followed almost eight years of Senator Grassley’s introducing permutations of a Class Action Fairness Act to the Senate.
What? CAFA was enacted as Public Law 109-2. It added six new sections to Title 28 of the United States Code and made a significant revision to Section 1332 of that title.
“Consumer Class Action Bill of Rights and Improved Procedures for Interstate Class Actions”:
28 U.S.C. § 1711 – Definitions
28 U.S.C. § 1712 – Coupon Settlements
28 U.S.C. § 1713 – Protection against loss by class members
28 U.S.C. § 1714 – Protection against discrimination based on geographic location
28 U.S.C. § 1715 – Notifications to appropriate Federal and State officials
Federal District Court Jurisdiction for Interstate Class Actions:
28 U.S.C. § 1332(d)
Removal of Interstate Class Actions to Federal District Court:
28 U.S.C. § 1453
When? CAFA was enacted and took effect on February 18, 2005.
Why? The act followed, and sought to curb, perceived abuses of the class action device. The stated purposes are to:
(1) assure fair and prompt recoveries for class members with legitimate claims;
(2) restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction; and(3) benefit society by encouraging innovation and lowering consumer prices.
Pub. Law 109-2, § 2. A report from the 109th Congress provides additional context and analysis.
Expansion of Original (and Removal) Subject Matter Jurisdiction
In general, before CAFA’s enactment, a federal court had subject-matter jurisdiction over a class action only if the action met any of the “usual” requirements: “traditional” diversity jurisdiction under 28 U.S.C. § 1332 or federal question jurisdiction under 28 U.S.C. § 1331. “Traditional” diversity requires complete diversity—where no party on one side of the v is a citizen of a state that any party on the other side of the v is a citizen of—and a matter in controversy greater than (as of this writing) $75,000 (which could not be created by aggregating the claims of the plaintiffs or the putative plaintiff class).
CAFA changed the game on diversity jurisdiction for class actions, requiring only minimal diversity—a party (or a member of the proposed plaintiff class) on one side of the v needs to be a citizen of a different state than at least one party on the other side of the v. See 28 U.S.C. § 1332(d)(2). For CAFA purposes, a “class action” is an action filed under Rule 23 of the Federal Rules of Civil Procedure or a similar state statute or rule. See 28 U.S.C. § 1332(d)(1)(B). CAFA diversity jurisdiction requires the matter in controversy to exceed $5,000,000, exclusive of interests and costs—aggregating the putative class members’ claims (§ 1332(d)(6)).
To be sure, a class action still can be filed or removed on the ground of traditional diversity jurisdiction. See, e.g., Aldrich v. Univ. of Phoenix, Inc., No. 3:15-CV-00578-JHN (W.D. Ky. Oct. 9, 2015). But now there is an alternative. Further, the traditional $75,000 threshold does not apply to the named plaintiff’s claims when jurisdiction is asserted under CAFA diversity. See, e.g., Cappuccitti v. DirecTV, Inc., 623 F.3d 1118 (11th Cir. 2010).
Deciphering the jurisdictional exceptions and exclusions. CAFA unquestionably expanded federal jurisdiction over class actions—but there are limits. Here is the run-down on key exceptions and exclusions that spell out those circumstances in which the CAFA diversity jurisdiction set forth in 28 U.S.C. § 1332(d)(2) does not apply. Because these are exceptions, the party resisting the exercise of federal jurisdiction has the burden of proving their applicability. See, e.g., Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1024 (9th Cir. 2007) (holding that, once federal jurisdiction has been established under Section 1332(d)(2), “the objecting party bears the burden of proof as to the applicability of any express statutory exception” under Sections 1332(d)(4)(A) and (B)).
1. Exclusion as to state action (1332(d)(5)(A)). If the primary defendants are states, state officials, or other governmental entities against whom a district court cannot order relief, CAFA jurisdiction does not apply. See 28 U.S.C. § 1332(d)(5)(A).
2. Exclusion as to numerosity (1332(d)(5)(B)). CAFA diversity jurisdiction does not apply when the putative class(es) consist of less than 100 members. See 28 U.S.C. § 1332(d)(5)(B). In some circuits, this factor is viewed as a prerequisite, rather than as an exclusion, which thus must be proved by the party asserting CAFA jurisdiction. See, e.g., Serrano, 478 F.3d at 1021 (noting the defendant-employers “met their preliminary burden . . . to establish that the putative plaintiff class includes 100 or more persons”). However, “[t]he Fifth Circuit characterized § 1332(d)(5) as an ‘exception’ to CAFA jurisdiction conferred under § 1332(d)(2).” Id. (citing Frazier v. Pioneer Ams. LLC, 455 F.3d 542, 546 (5th Cir. 2006)).
3. Local controversy exception (1332(d)(4)(A)). Given the Act’s stated purpose of conferring federal jurisdiction over “interstate cases of national importance,” it makes sense that some cases are of local importance—and should be tried accordingly. Under the local-controversy exception, the district court shall decline jurisdiction over a class action when:
1. More than two-thirds of the proposed class plaintiffs are citizens of the state in which the action was originally filed
2. At least one defendant is
a. A defendant from who “significant” relief is sought by members of the class
b. Is a defendant whose alleged conduct forms a “significant” basis for claims asserted by the purported class
c. A citizen of the state in which the action was originally filed
3. The principal injuries resulting from the alleged conduct, or any related conduct of each defendant, were incurred in the state in which the action was originally filed.
The local-controversy exception applies only if, during the three-year period preceding the filing, 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.
4. Home-state exception (1332(d)(4)(B)). The home-state exception, like the local-controversy exception, targets cases that are uniquely local rather than of national importance. Under this exception, a federal court shall decline to exercise jurisdiction when two-thirds or more of the putative class members and the “primary defendants” are citizens of the State in which the action was originally filed. (In June 2013, the Class Actions and Derivative Suits Committee’s own Christopher E. Roberts provided us with a roadmap for navigating this exception.)
5. Permissive exception (1332(d)(3)). The permissive exception is related, but of course not identical, to the home-state exception. A federal district court may—but is not required to—decline jurisdiction when more than one-third but less than two-thirds of the proposed class members and the primary defendant are citizens of the original forum state. There is a list of six factors the court must consider in making its determination of whether or not to exercise jurisdiction.
6. Exclusions regarding specific claims (1332(d)(9)). Finally, excluded from CAFA’s jurisdictional reach are cases that “solely” involve certain types of claims:
Covered securities (1332(d)(9)(A)). CAFA jurisdiction does not apply to claims involving covered securities as defined by Section 16(f)(3) of the Securities Act of 1933 and Section 28(f)(5) of the Securities Exchange Act of 1934.
Corporate governance (1332(d)(9)(B)). Claims involving the internal affairs or governance of a corporation or other business enterprise arising under the laws of that entity’s home state are likewise excluded from CAFA jurisdiction. See, e.g., LaPlant v. Nw. Mut. Life Ins. Co., 701 F.3d 1137, 1139-40 (7th Cir. 2012).
Duties regarding securities (1332(d)(9)(C)). The final category of claims excluded from CAFA jurisdiction are those claims that “relate to rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security” as defined by Section 2(a)(1) of the Securities Act of 1933 and regulations promulgated thereunder. Note that such claims must be grounded in the terms of the securities themselves and do not include, for example, fraud claims. See, e.g., Lincoln Nat. Life Ins. Co. v. Bezich, 610 F.3d 448, 451 (7th Cir. 2010); see also BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assur. Corp., 673 F.3d 169, 173, 179 n.5 (2d Cir. 2012) (holding that CAFA’s securities exception applied to proceeding by trustee to confirm, inter alia, that settlement of claims involving mortgage-backed securities did not violate trustee’s duties; reversing trial court’s denial of remand; and recognizing that “these questions must be resolved on a case-by-case basis”).
Special expansion of removal power. Section 1441 of Title 28 grants the district courts jurisdiction over “any civil action brought in a State court” over which the district court has original jurisdiction. Section 1446 of that same title provides the procedures for removal.
CAFA added Section 1453, which specifically governs removal of class actions. Notably, it provides that the one-year limitation under Section 1446(c)(1) does not apply to class actions. Further, it provides that removal is “without regard to whether any defendant is a citizen of the State in which the action is brought” and that such action may be removed without the consent of all defendants.
Expedited federal appellate review of orders ruling on remand. In addition to carving out certain removal rules related solely to class actions, Section 1453 also created a new scheme under which an order granting or denying a motion for remand is immediately appealable. The appellate court maintains its discretion to accept the appeal, but Section 1453 imposes strict time periods for the appellate court to act—within 60 days unless an extension is granted. See generally 28 U.S.C. § 1453. Because of this exception to the general rule that appellate courts cannot review remand decisions, the U.S. Supreme Court has been able to help clarify both CAFA and the overall removal framework. See generally Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547 (2014); Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345, 1347 (2013).
Mass action versus class action. Section 1332(d)(11) defines mass actions—generally, actions involving claims of at least 100 persons to be tried jointly, with four types of claims excluded (see 1332(d)(11)(B)(ii))—and, with some exceptions, brings them within the scope of CAFA. However, unlike class actions, jurisdiction exists only over those plaintiffs whose claims satisfy the traditional amount-in-controversy requirement (currently, greater than $75,000).
Increased Scrutiny and Regulation of Coupon Settlements
Aside from jurisdiction, CAFA imposed new requirements for when parties reach a settlement of a class action. These can be found in Title 28 of the United States Code, Part V, Sections 1711 through 1715, titled the “Consumer Class Action Bill of Rights.”
Coupon settlements and attorney fees. Any attorneys’ fee award that is “attributable to the award of the coupons” must be based on the value of the coupons that are actually redeemed – as opposed to the value of the coupons issued. See 28 U.S.C. § 1712(a). Alternatively, if the fee award is not based on the recovery of the coupons, it shall be based on the amount of time reasonably expended working on the action. See 28 U.S.C. § 1712(b)(1).
“Judicial scrutiny,” fairness hearing. A coupon settlement may be approved only if the court conducts a hearing and makes written findings that the settlement is fair, reasonable, and adequate for class members. The court may also require the settlement agreement to provide for distribution of a portion of the value of unclaimed coupons to charitable or governmental organization(s) as agreed to by the parties (which redeemed proceeds may not be used to calculate attorneys’ fees). See 28 U.S.C. § 1712(c). The “fair, reasonable, and adequate” standard found in Section 1712(e) is also found in Rule 23(e)(2), and, consequently, some courts have viewed CAFA’s coupon-settlement standard to be a heightened requirement. See True v. Am. Honda Motor Co., 749 F. Supp. 2d 1052, 1069 (C.D. Cal. 2010) (citing, inter alia, Synfuel Techs., Inc. v. DHL Express (USA), Inc., 463 F.3d 646, 654 (7th Cir.2006)).
“Protection against loss”: Scrutiny of “net loss” awards. If a settlement would result in any class member being obligated to pay sums to class counsel that would result in a net loss to the class member, then such settlement may be approved only if the court makes a written finding that the nonmonetary benefits to that class member “substantially outweigh” the monetary loss. 28 U.S.C. § 1713.
“Protection against discrimination based on geographic location.” A settlement cannot give a larger award to certain class members solely because those class members are located in closer geographic proximity to the court. 28 U.S.C. § 1714.
Notification to government officials. Finally, this “Bill of Rights” spells out very detailed requirements for notifying federal and state officials of any class action settlement. The officials must be notified within ten days of filing the proposed settlement with the district court (§ 1715(b)), and an order giving final approval may not be issued earlier than 90 days after the latest date on which the officials were served with notice (§ 1715(d)). For more information on this requirement, please read “Notice of Class Action Settlement: Don’t Forget the Regulators” by Robert DeWitte.
For the practitioner new to class actions, knowing the ins and outs of CAFA is a must. But remember, CAFA cannot be fully understood or relied upon in isolation. Traditional jurisdictional, removal, and venue statutes remain in effect except to the extent CAFA specifically broadens or rejects certain of those requirements. And Rule 23 of the Federal Rules of Civil Procedure works in tandem with CAFA with respect to certification, class notice, appeals, fairness hearings, and court approval of settlements.
After ten years of CAFA, parties and litigators have learned to live with its new boundaries—restrictive in some regards, expansive in others—and CAFA has comfortably settled in to its role among the class action rules and regulations.
Keywords: litigation, class actions, derivative suits, Class Actions Fairness Act, Dart Cherokee, Eighth Circuit, removal practice