©2008 Sutherland Gail L. Westover, Partner Lewis S. Wiener, Partner G. Brendan Ballard, Associate...

©2008 Sutherland

Gail L. Westover, PartnerLewis S. Wiener, PartnerG. Brendan Ballard, Associate

November 6, 2009

Motions to Compel Individual Arbitration and ContinuingCAFA Jurisdiction: Be Careful What You Wish For, You May Get It

1

This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation.

©2009 Sutherland Asbill & Brennan LLP2

Purposes of Class Action Fairness Act

Address scenario where class counsel obtain large fee awards while plaintiffs obtain little in settlements.

Halt forum shopping for notorious state court jurisdictions.

Facilitate adjudication of nationally important cases in federal court.


CAFA Removal: Standard v. CAFA Diversity Jurisdiction

Standard 28 U.S.C. §1332(a)

Class Action Fairness Act (CAFA) 28 U.S.C. §1332(d)

Number of Class Members

No requirement for removal ≥ 100

CitizenshipComplete Diversity

(all named plaintiffs, all defendants)

Minimal Diversity

(one putative class member, one defendant)

Amount in Controversy

$75,000

(at least one named plaintiff, no aggregation)

$5,000,000

(aggregated)

Time Limit for Removal

One year after commencement of the action

No absolute limit; 30 days after receipt of complaint or later paper from which removability may be

ascertained

Appeal of Remand Order

NoneBy application to Court of Appeals within 7 days of

entry of remand order

Consent of all Defendants

Required Not Required


Exceptions/Exclusions to CAFA Jurisdiction

The Home State Exception 28 U.S.C. §1332(d)(3)

The Local Controversy Exception 28 U.S.C. §1332(d)(4)

The Securities Litigation Uniform Standards Act (SLUSA) Exclusion 28 U.S.C. §1332 (d)(9)

Sovereign Immunity Exclusion 28 U.S.C. §1332(d)(5)


The Home State Exception 28 U.S.C. §1332(d)(3)

If 2/3 or more of putative class members, and primary defendant(s), are citizens of the state in which the action was filed, a district court shall decline to exercise jurisdiction.

If more than 1/3 but less than 2/3 of putative class members, and primary defendant(s), are citizens of the state in which the action was filed, the district court may decline to exercise jurisdiction based on considerations of:

The role of the forum state’s law;

The presence of national/interstate issues;

The nexus between the forum and the class, the defendants, and the alleged harm;

The dispersion of class members among other states; and

The existence during the past three years of actions involving the same or similar claims.


The Local Controversy Exception 28 U.S.C. §1332(d)(4)

A district court shall decline to exercise jurisdiction if:

Greater than 2/3 of putative class members are citizens of the state in which the action was filed;

At least one defendant from whom significant relief is sought is a citizen of the state in which the action was filed;

The principal injuries allegedly caused by the defendants’ conduct occurred in the state in which the action was filed; and

There has been no class action asserting the same or similar factual allegations against any of the defendants during the three years preceding filing of the action.


CAFA Exceptions: Burden of Persuasion

The burden of establishing federal jurisdiction is on the removing party.

The burden of establishing that a CAFA exception applies is on the party seeking remand.


Remand Under CAFA 28 U.S.C. §1447(c)

If at any time before final judgment, it appears that the district court lacks subject matter jurisdiction under CAFA, the case must be remanded to state court.


Remand Under CAFA and Arbitration

The most effective strategy for many payday lenders facing class actions in state court has generally been to:

1) Remove the case to federal court based on the Class Action Fairness Act.

2) Move to compel individual arbitration based on the binding arbitration provision and

enforce the class action waiver included in the customer loan agreement.


State v. Federal Court Enforcement of Class Action Waivers

State courts trend toward striking arbitration provisions with class action waivers as unconscionable.

Federal courts more uniformly enforce arbitration provisions with class action waivers based on the Federal Arbitration Act.


Unforeseen Risks of Compelling Arbitration After CAFA Removal

If the only basis for removal is a class allegation under CAFA, after the court compels individual arbitration based on an arbitration provision with a class action waiver, plaintiffs may move to remand to state court on the basis that the grounds for removal under CAFA no longer exist.


Case Study: Trejo v. Advance America (N.D. Ill. 2009)

Plaintiff brought putative class action against Advance America in Illinois state court alleging violations of payday lending laws.

Advance America timely removed the case to the United States District Court for the Northern District of Illinois, pursuant to CAFA.

Plaintiff did not seek remand. Advance America next moved to compel individual arbitration

based on the binding arbitration provision and class action waiver in the parties’ loan agreement.

Plaintiff argued that the arbitration provision was unconscionable and thereby unenforceable.

The federal court granted Advance America’s motion to compel individual arbitration.

Plaintiff then moved to remand the case to state court on the ground that the court’s subject-matter jurisdiction ceased upon its holding that the case could not proceed as a class action.


Case Study: Trejo v. Advance America (N.D. Ill. 2009)

The Northern District of Illinois granted plaintiff’smotion to remand holding:

“In granting the motion to compel arbitration, the Court made the legal determination that no class action could exist in this case. CAFA was the sole basis for this Court’s subject matter jurisdiction upon removal from state court. Federal Rule of Civil Procedure 12(h)(3) provides: ‘If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.’ Thus, as a matter of law, CAFA jurisdiction never existed in this case, and the Court lacks subject-matter jurisdiction.”


Split in Authority on CAFA Jurisdiction After Class Claims Dismissed

On one side of the split are courts holding that jurisdiction under CAFA continues after the court has denied the plaintiff’s motion for class certification or otherwise dismissed class claims on the grounds that:

1) Jurisdiction is determined at the time the complaint is filed or at the time of removal.

2) The denial of class certification is a change in a jurisdictional fact, which does not affect

continued jurisdiction.


District Courts Holding CAFA Jurisdiction Continues Without Class Claims

Allen-Wright v. Allstate Ins. Co., 2009 WL 1285522 (E.D. Pa. May 5, 2009)

In re HP Inkjet Printer Litig., 2009 WL 282051 (N.D. Cal. Feb. 5, 2009) Brinston v. Koppers Indus., Inc., 538 F. Supp. 2d 969 (W.D. Tex. 2008) Colomar v. Mercy Hosp., Inc., 2007 WL 2083562 (S.D. Fla. Jul. 20,

2007) Genenbacher v. Centurytel Fiber Co. II, LLC, 500 F. Supp. 2d 1014

(C.D. Ill. 2007) Garcia v. Boyar & Miller, P.C., 2007 WL 155691 (N.D. Tex. May 30,

2007); In re Welding Fume Prods. Liab. Litig., 245 F.R.D. 279 (N.D. Ohio 2007) Davis v. Homecomings Fin., 2007 WL 905939 (W.D. Wash. Mar. 22,

2007) Levitt v. Fax.com, 2007 WL 3169078 (D. Md. May 25, 2007) Kitts v. Citgo Petroleum Corp., 2009 WL 192550 (W.D. La. Jan. 23,

2009) Gonzalez v. Pepsico, Inc., 2007 WL 1100204 (D. Kan. Apr. 11, 2007)


Allen-Wright v. Allstate Ins. Co. (E.D. Pa. May 5, 2009)

After the federal court denied the plaintiff’s motion for class certification, the plaintiff asked the federal court to remand the action to state court for lack of CAFA jurisdiction.

The court determined that the statutory language of CAFA was consistent with established law regarding removal, which weighed in favor of retaining CAFA jurisdiction: CAFA defines a “class action” as “any civil action filed under rule 23

of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action.”

Looking at the plain language, an action in which class certification is later denied would still be defined as a “class action” because it was filed as such.

Well-settled law regarding removal is that the nature of the plaintiff's claim and propriety of remand must be evaluated on the basis of the record as it stands at the time the petition for removal is filed.


Allen-Wright v. Allstate Ins. Co. (E.D. Pa. May 5, 2009)

The court also noted that policy considerations weighed in favor of retaining CAFA jurisdiction: If a federal court’s jurisdiction could be ousted by events occurring

after a case was removed, plaintiffs who believed the tide was turning against them could simply amend their complaint months (or even years) into the litigation to require remand to state court. Therefore, a defendant could prevail on the merits, only to have the federal court conclude that it lacks jurisdiction to enter judgment.

Because the denial of class certification is an interlocutory order that may only be appealed once a final judgment has been entered, the potential procedural hurdles of appealing a certification upon a final judgment while in state court weigh in favor of retaining jurisdiction.


Eleventh Circuit Dicta

“We note that the plaintiff's failure to make a showing of numerosity with respect to the Florida-only class, which gives rise to the possibility that there are fewer than 100 members of the newly-narrowed Florida-only class, does not divest the federal courts of subject matter jurisdiction under the CAFA. See 28 U.S.C. § 1332(d)(5)(B). Even if it were later found that the narrowed, Florida-only class numbers fewer than 100, the § 1332(d)(5)(B) limitation applies only to ‘proposed’ plaintiff classes (as opposed to classes actually certified or that go to trial); jurisdictional facts are assessed at the time of removal; and post-removal events (including non-certification, de-certification, or severance) do not deprive federal courts of subject matter jurisdiction.”

Vega v. T-Mobile USA, Inc., 2009 WL 910411, at *25-26 n.12 (11th Cir. Apr. 7, 2009)


Split in Authority on CAFA Jurisdiction After Class Claims Dismissed

On the other side of the split are courts holding that:

1) The denial of class certification is not a post-filing or post-removal change in a jurisdictional fact, but is a legal determination that the plaintiff’s claims did not constitute an actual or potential class action.

2) Therefore, dismissal of class claims is effectively a determination that there is not and never was CAFA jurisdiction.


District Courts Holding CAFA Jurisdiction Ceases After Dismissal of Class Claims

Avritt v Reliastar Life Ins. Co., 2009 WL 1703224 (D. Minn. June 18, 2009) Atkinson v. Wal-Mart Stores, Inc., 2009 WL 1458020 (M.D. Fla. May 26,

2009) Muehlbauer v. Gen. Motors Corp., 2009 WL 874511(N.D. Ill. Mar. 31, 2009) Salazar v. Avis Budget Group, Inc., 2008 WL 5054108 (S.D. Cal. Nov. 20,

2008) Jones v. Jeld-Wen, Inc., 2008 WL 4541016 (S.D. Fla. Oct. 2, 2008) Clausnitzer v. Fed. Express Corp., 2008 WL 4194837 (S.D. Fla. June 18,

2008) Arabian v. Sony Elecs. Inc., 2007 WL 2701340 (S.D. Cal. Sept. 13, 2007) Jin v. Ben Bridge-Jeweler, Inc., 2009 WL 981600 (E.D. Cal. Apr. 9, 2009) Ronat v. Martha Stewart Living Omnimedia, Inc., 2008 WL 4963214 (S.D. Ill.

Nov. 12, 2008) Falcon v. Philips Elecs. N.A. Corp., 489 F.Supp.2d 367 (S.D.N.Y. 2007) McGaughey v. Treistman, 2007 WL 24935 (S.D.N.Y. Jan. 4, 2007) Hoffer v. Cooper Wiring Devices, Inc., 2007 WL 2891401 (N.D. Ohio Sept.

28, 2007) Giovanniello v. New York Law Publ’g Co., 2007 WL 2244321 (S.D.N.Y. Aug.

6, 2007)


Avritt v Reliastar Life Ins. Co., (D. Minn. June 18, 2009)

After the federal court denied the plaintiff’s motion for class certification, the plaintiff asked the federal court to remand the action to state court for lack of CAFA jurisdiction.

The court concluded that jurisdiction under CAFA no longer existed and remanded the action to state court: Denial of class certification is effectively a determination that there is

not and never was CAFA jurisdiction.

The ruling on class certification was final, and there was no reasonably foreseeable possibility that class certification might be reconsidered in the future.

CAFA jurisdiction applies “to any class action before or after the entry of a class certification order by the court with respect to that action,” therefore, without a class certification order, the court was divested of jurisdiction.


Second Circuit Dicta

“Without considering whether the County needed to exhaust administrative processes to sustain jurisdiction, we remand for consideration of a different jurisdictional concern, which we raised nostra sponte at oral argument: whether the complaint meets the requirements for class certification under Fed. R. Civ. P. 23, without which both we and the District Court would lack jurisdiction over the suit as presently constituted.”

County of Nassau, New York v. Hotels.Com, LP, 577 F.3d 89, 90 (2d Cir. 2009)


First Circuit Dicta

“[D]enial [of class certification] would . . . defeat [CAFA] jurisdiction.”

In re TJX Cos. Retail Sec. Breach Litig., 564 F.3d 489, 492 (1st Cir. 2009)

“There is an open question as to whether a later denial of class certification will divest the district court of CAFA jurisdiction. . . . We express no opinion on this question.”

College of Dental Surgeons of Puerto Rico v. Connecticut Gen. Life Ins.Co. & Metro. Life Ins. Co., 2009 WL 3384804, at *7 (1st Cir. Oct. 22, 2009)


Trejo Court Followed Second Line of Cases

In holding that “CAFA jurisdiction . . . never existed,” the Trejo court effectively applied the second line of cases—holding that after class certification is denied, the court loses CAFA jurisdiction—to the context in which a court has enforced an arbitration agreement with a class action waiver.


Third (Discretionary) Approach

At least one court has held that the decision to exercise jurisdiction once a class action has been voluntarily dismissed or a class certification has been denied is discretionary.

In Gianini v. Schering-Plough Corp., 2007 WL 1839780 (N.D. Cal. Jun. 26, 2007), the court set forth a two-part test to determine whether it was appropriate to exercise its discretion to remand: Whether the case fell under the enumerated elements of 28

U.S.C. §1367(c)

Whether the values of economy, convenience, fairness, and comity would be served by exercising jurisdiction


Potential Consequences of Trejo Logic

All cases involving mandatory arbitration provisions and class action waivers—that are properly removed to federal court under CAFA—may be remanded to state court in the event the federal court upholds the underlying arbitration provision and class action waiver.

State court is responsible for enforcing the federal court’s orders compelling arbitration, thereby giving the state appellate court the authority to review, interpret, and even reverse the federal court’s decision in any particular case.


Practice Tips: Removal

Always plead alternative basis for removal if

possible. Federal question jurisdiction Mass action provision of CAFA


Practice Tips: Compelling Arbitration

Always move to compel arbitration and stay proceedings, instead of moving to compel arbitration and dismiss.

Strengthens the argument that the federal court should maintain jurisdiction over the case after it compels arbitration.


Practice Tips: Motions for Remand

Set forth general propositions that: jurisdiction decided at time of removal; and post-removal determinations that a plaintiff will be unable to prove the jurisdictional facts alleged in the complaint, such as class allegations, do not affect the court’s continued jurisdiction.

Distinguish case law holding that CAFA jurisdiction does not

continue upon the denial of class certification. CAFA jurisdiction applies “to any class action before or after the entry of a

class certification order by the court with respect to that action.”

Where a case has been removed to federal court pursuant to CAFA and then compelled to arbitration pursuant to an arbitration provision with a class action waiver, the court has not yet ruled on a class certification motion, so the procedural posture of the case remains “before . . . the entry of a class certification order.”


Practice Tips: Post Remand

Argue that the federal court’s order enforcing the arbitration provision has collateral estoppel effect and is binding on the state court.

Appeal remand to Court of Appeals under 28 U.S.C. § 1453


Practice Tips: Future Cases

Because most payday lending contracts include the availability of a small claims tribunal for adjudication of disputes as a way to ensure mutuality and equality of bargaining power between the parties, payday lenders should not necessarily resist a plaintiff’s attempt to seek adjudication in a small claims tribunal after arbitration has been ordered.

If a plaintiff requests remand to seek adjudication in a small claims tribunal, payday lenders should ask that the federal court stay the action pending adjudication in a small claims tribunal, but not insist on arbitration at all costs.

Do not want future plaintiffs to argue that the arbitration provision is unconscionable because plaintiffs do not have access to a small claims tribunal in practice.

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