The Class Action Fairness Act: History, Uses, and Differences from Traditional Diversity Jurisdiction

In 2005, Congress passed the Class Action Fairness Act (“CAFA”) in order to grant class action litigants in diversity cases easier access to the federal courts. The re-formulated sections under 28 U.S.C. § 1332 created a lower threshold to gain access into the federal courts for both the plaintiff class members, and the perspective defendants wishing to remove to federal court. Congress passed these new provisions in order to “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.” In its deliberations over the bill, Congress specifically found that certain litigants used the previous jurisdictional regime to create many situations whereby certain cases with national importance did not qualify for federal jurisdiction based upon diversity. Additionally, Congress sought to address the age old concern of discrimination against out-of-state litigants.

Congress also mentions in its findings and purposes prelude to CAFA that over the previous decade (1995 – 2005), abusive practices of the class action device caused numerous harms, thus justifying this remake of the class action jurisdictional regime. But why in 2005? Perhaps because Congress wished to respond to the vast amount of litigation against insurers stemming from Hurricane Katrina, which made landfall in August of 2005. Perhaps because in 2005, Republicans held a majority in both the House and the Senate (and held the presidency), and as a general matter, the Republican Party, rightly or wrongly, is viewed as anti-plaintiff. In this view, Republicans wanted to allow insurance companies greater opportunities to remove to federal court (which is also seen, rightly or wrongly, as somewhat less pro-plaintiff than many state courts). Whatever the true reasoning, Congress did pass CAFA, and some of CAFA’s provisions are worth noting.

CAFA grants federal jurisdiction (through diversity) to class action cases where: (1) the amount in controversy, in the aggregate of all of the class members, exceeds $5,000,000 and (2) in a controversy in which ANY member of the class of plaintiffs is diverse from the defendant. CAFA then defines class members as those persons, named or unnamed, who fall within the definition of the proposed or certified class in a class action. Based on these threshold rules, a defendant could rather easily assert diversity from one of the unnamed or proposed class members. The removing party need not identify the diverse class member, but merely show by a preponderance of the evidence, using the face of the complaint or summary judgment type evidence, that it is reasonable to believe at least one class member maintains diversity from the defendant. Hardly a high hurdle to clear. However, several important subsections to CAFA help to qualify these basic underlying tenets, and may impose at least some further obstacles to navigate as a removing party.

First and foremost, CAFA allows the district courts to decline jurisdiction (under the auspices of, you guessed it, the interests of justice and the totality of the circumstances) when more than 1/3, but fewer than 2/3, of the proposed class members, and the primary defendants, are citizens of the state in which the action the class brought the action, using an assortment of factors to guide the district court’s decision. Additionally, the district court MUST decline jurisdiction when more than 2/3 of the class members are citizens of the state in which the class filed the action, and at least ONE defendant is also a citizen of that state. In so much as this rule at least facially helps CAFA maintain the edifice of diversity in a diversity suit, it does not end there. The single defendant must also be a defendant from whom significant relief is sought, whose alleged conduct forms a significant basis for the claims asserted by the class, and the principle injuries incurred by the plaintiffs resulted from the alleged misconduct of each of the defendants, and happened in the state in which the class filed the action.

These qualifications do allow judges to decline jurisdiction, and point to cases where they must decline jurisdiction, but in all instances, CAFA grants ample discretion to the district court in determining whether to allow removal in the first place (or to find jurisdiction if in fact the plaintiff class choose to file in federal court). As such, it appears that almost any class action may meet the jurisdictional requirements under CAFA necessary for litigating in federal court. However, as noted below, this is not always the case; sometimes a defendant must rely upon good, old-fashioned traditional diversity to establish federal jurisdiction.

A removing party does not need to rely upon traditional diversity to access the federal courts. It can now use the lower standard of CAFA, but CAFA and traditional diversity share certain similarities. As seen above, CAFA does follow certain conventions found within traditional diversity jurisdiction, namely, requiring the finding of a threshold amount in controversy, and requiring a finding of basic diversity among the plaintiff and defendant. However, certain differences help to differentiate the two in class action cases, and help the removing party to determine under which legal regime they will access the federal courts.

Under traditional diversity, the amount in controversy requirement remains at $75,000, but the defendant need only show by a preponderance of the evidence that any single plaintiff’s claim among the class will meet this threshold. The removing party may prove this from the face of the petition, or by using summary judgment type evidence (a demand letter from the plaintiff, averaging the amount alleged against the total number of class members, and so on). As noted previously, under CAFA the amount in controversy requirement is $5,000,000 in aggregate among all of the class members’ claims. From these figures, it appears CAFA may make it easier to access the federal court system than using traditional diversity, especially in large insurance claims (such as homeowners affected by Hurricane Katrina suing insurance companies for improper denial of claims, or insufficient or undervalued claims adjustments). While the majority of cases post-2005 do use CAFA to establish federal jurisdiction, a more important, and more subtle, distinction between traditional diversity and CAFA may in fact cause an insurance company, or any other defendant, to use traditional diversity jurisdiction to use the federal court system, as opposed to using CAFA.

Determining citizenship under traditional diversity jurisdiction of an unincorporated association (your garden variety LLC, LLP, general partnership or sole proprietor – shout out to Professor Williams and Business Associations) requires examining the citizenship of each partner or member of that unincorporated association. Conversely, CAFA alters this citizenship determination by defining an unincorporated association as a citizen of the state where it has its principal place of business and the state under whose laws it organized. So, as a defendant wishing to remove to federal court, one must examine the citizenship determination closely so as to justify federal jurisdiction properly.

For example, if an unincorporated insurance company composed of partners with citizenship in Michigan, Illinois, and Indiana, but whose principal place of business is in Wisconsin wishes to remove to federal court in Wisconsin for a cause of action arising out conduct occurring in Wisconsin, the company could not use CAFA if 2/3 of the class members were also citizens in Wisconsin. However, the company could still remove to federal court under traditional diversity jurisdiction, as the three partners’ citizenships differ from at least one class member from Wisconsin (assuming the company can show the amount in controversy requirement exceeds $75,000 for at least one of the plaintiffs in the class). So, even though the vast majority of class action cases are removed to federal court under CAFA, it is important to note this one possible exception, precipitated precisely because CAFA changes the citizenship test for unincorporated associations.

In conclusion, since a party needs only CAFA or traditional diversity, not both, to establish jurisdiction, and although CAFA substantially lowers the bar to establishing jurisdiction in the federal courts in a class action suit (for better or for worse), certain situations may still call for potential removing parties to use traditional diversity jurisdiction if they want their day in federal court.



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