Jurisdictional Tug of War and the Class Action Fairness Act: How Plaintiffs Attempt to Avoid Federal Court and How Courts Let Them

Mark Natale
Wednesday, October 10, 2012

On February 18, 2005, President Bush signed the Class Action Fairness Act (“CAFA”) into law.[2]  He described the legislation as “a critical step toward ending the lawsuit culture in our country” and lauded that the law will “ease the needless burden of litigation on every American worker, business, and family..”[3]  Congressional findings on the law describe its intention in similar fashion, stating that over the previous ten years, there were “abuses of the class action device that have harmed class members with legitimate claims and defendants that have acted responsibly, adversely affected interstate commerce, and undermined public respect for our judicial system.”[4]  Since its passage, attorneys have attempted to keep their claims out of CAFA’s jurisdiction, namely by breaking up claims into smaller actions.  These attempts have spawned debate among federal circuit courts on when to allow actions to remain within state jurisdiction, and when to aggregate claims for federal jurisdiction.

U.S.C.A. §1332 controls diversity jurisdiction for class actions. The statute defines a class as “all of the class members in a class action,” and class action as “any civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar state statute.”[5]  The statute also claims under §1332 (d) (2) that federal courts will have original jurisdiction of “any civil action in which the matter in controversy exceeds the sum or value of $5,000,000 exclusive of interest and costs, and is a class action in which: (A) any member of a class of plaintiffs is a citizen of a State different from any defendant; (B), any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State;  or (C) any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state.
 
The legislation worked to expand federal courts’ diversity jurisdiction on class action cases, and in many respects has been successful to that end.  A congressional study analyzing U.S. district courts in 2007 compared to 2001 found that there had been a dramatic increase in the number of diversity class actions filed as original proceeds in the federal courts post CAFA.[6]  This increase was widespread, and diversity class action original proceedings increased overall in districts for eleven of the twelve circuits nationwide.[7]  There was also an increase in the amount of diversity removals post CAFA, with increases in seven of the twelve circuits.[8] These increases are explained in the numbers of contracts, consumer protection/fraud, and torts-property damages class actions filed in or removed to federal court in the post CAFA period.[9]
 
Naturally, plaintiffs attorneys were not happy with these results.  To respond to the new legislation, the plaintiff’s bar began to devise increasingly creative yet arbitrary ways to split up their claims, hoping to avoid the federal jurisdiction that CAFA expanded.  In 2008, the Sixth circuit made the standard clear: regardless of how creative a pleading is, if claims are split arbitrarily, they will be aggregated.[10]
 
The Freeman Standard                   
           
In Freeman, plaintiffs brought a class action claim for nuisance against a paper mill for water pollution.[11] To stay in state court, the plaintiffs divided their claim into five separate suits covering distinct six-month time periods, and limited each individual claim to under CAFA’s $5 million threshold.12 Despite this division, each of the individual suits had identical parties and claims, with the assigned six-month periods being the only unique characteristic between the suits.13
           
On appeal, the circuit court held that the $5 million CAFA threshold was met, because the separate lawsuits should be aggregated.14 The court’s logic for aggregation was that there was “no colorable reason” for breaking up the lawsuits, outside of avoiding federal jurisdiction.15 According to the court, this purely strategic decision, without any additional rationale, went against Congress’s intent in passing CAFA.16
 
To support this decision, the court quoted CAFA in arguing that one of the prior abuses in class actions was that “state and local courts are keeping cases of national importance out of federal court.”17 According to the Senate Report on CAFA, prior law allowed lawyers to manipulate the procedural rules and keep nationwide or multi-state class actions in state courts, which are more likely to certify the class and settle the case without concern for other class members’ interests.18  The legislative history dictated the court’s interpretation of congressional intent, and the court ruled that breaking up the claims to avoid federal jurisdiction was not acceptable.  The court did, however, limit its holding to when there is no colorable basis for dividing up the sought for retrospective relief into separate time periods.19
 
Treatment of Freeman and Lessons for Future Plaintiffs
           
The most difficult aspect of the Freeman decision was applying the “colorable” basis test.  Several circuit courts have attempted to apply this test, with the majority of courts interpreting Freeman to be a very narrow and limited holding.
           
Courts have ruled that it is acceptable to splinter a claim for relief purposes, such as separating a claim in order to go after real property.20  Courts have also ruled that claims have a colorable basis to be separated when there are different sets of plaintiffs in each claim.21 Similar plaintiffs can also avoid CAFA jurisdiction by separating their claims to mirror defendants’ previous lawsuits.22 Freeman has also been limited to class actions, with courts ruling that the case did not apply when parties were joined in a “mass action” instead.23 As stated in the Freeman opinion, courts have also allowed plaintiffs to avoid CAFA jurisdiction by pleading below the $5,000,000 requirement, even if their claim is potentially worth more.24
 
References

[1] Mark Natale is a 2013 J.D. Candidate and the Symposium Editor of the Rutgers Journal of Law & Public Policy
[2] Nan S. Ellis, The Class Action Fairness Act of 2005: The Story Behind the Statute, 35 J. Legis. 76, 97 (2009).
[3] Id.
[4] Class Action Fairness Act of 2005, 119 Stat. 4, 109th Cong. § 2(a) (2005).
[5] 28 U.S.C.A. § 1332 (West 2012).
[6] Emery G. Lee III & Thomas E. Willging, Impact of CAFA on the Federal Courts: Fourth Interim Report,  1-2 (2008) .Overall, the study found a 72 percent increase in class action activity in the eighty-eight district courts studied. While much of this was in federal question cases, there was still an increase in diversity cases as well. Pre-CAFA, the amount of diversity class actions filed as original proceedings per month was 11.9. Post-CAFA, that number has risen to 34.5.
[7] Id. at 2.
[8] Id.
[9] Id.
[10] Freeman v. Blue Ridge Paper Products, Inc., 551 F.3d 405, 407 (6th Cir. 2008). (plaintiffs were three hundred land owners from Tennessee, down river from the Blue Ridge Paper mill in Canton, North Carolina).
[11] Id.
12 Id. See also U.S.C. § 1332 (d) (2).
13 Freeman, 551 F.3d 407. .
14 Id. at 407.
 
16 Id.
17 Id. at 408.
18 Freeman,  551 F.3d at 408.
19 Id. at 409. The court also leaves open the possibly of simply pleading down to a lesser amount as a legitimate way to keep a claim out of federal court.  The key difference, the court said, is that when you splinter the claims you “expand” recovery, rather than limiting it by pleading down under the $5 amount.
20 Site Mgmt. Solutions, Inc. v. TMO CA/NV, LLCNo. CV 10-08679 MMM (JEMx), 2011 U.S. Dist. LEXIS 52493, at *12 n.3 (D. Cal. May 4, 2011).
21 Mora v. Dole Food Co.No. CV 09-195-CAS(VBKx), 2009 U.S. Dist. LEXIS 24680, at *12 (C.D. Cal. Mar. 9, 2009); see also Royalty Alliance,Inc. v. Tarsadia Hotel, No. 10CV1231 DMS (CAB), 2010 U.S. Dist. LEXIS 87208, at *7 n.3 (S.D. Cal. Aug. 23, 2010).
22 Marple v. T-Mobile Cent. L.L.C., 639 F.3d 1109, 1111 (8th Cir. 2011).
23 Dublin v. Monsanto Co., No. 4:11 CV 1659 (CEJ) (W.D. Mo. Nov. 7, 2011).
24 See Freeman, supra note 10; see also McClendon v. Challenge Financial Investors Corp., No. 1:08CV1189 (N.D. Ohio March 9, 2009).