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Pretrial Practice and Discovery

Supreme Court's CAFA Decision Changes Law in Fifth Circuit

By Paul Thibodeaux and Danny Dysart – June 18, 2014

On January 14, 2014, the U.S. Supreme Court held, in Mississippi ex rel. Hood v. AU Optronics Corp., that because Mississippi is the sole named plaintiff in a parens patriae suit, the case does not constitute a removable “mass action” under the Class Action Fairness Act (CAFA) despite the fact that the state’s suit includes claims for “restitution based on injuries suffered by the state’s citizens.” 134 S. Ct. 736, 739 (2014). This is a marked deviation from prior precedent by the U.S. Fifth Circuit Court of Appeals that a state parens patriae action seeking damages on behalf of the state, its local subdivisions, and its citizens is removable as a mass action under CAFA where the “real parties in interest” include non-party citizens. Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418, 428–30 (5th Cir. 2008). In rejecting the Fifth Circuit’s Caldwell analysis, the Supreme Court issued a bright-line rule that courts should look solely to the named plaintiffs in determining whether the suit is a “mass action” and therefore subject to CAFA removal. While the practical result of Hood is that state parens patriae actions are likely no longer subject to CAFA mass-action removal, a broader question is whether Hood will encourage the filing of parens patriae actions in place of traditional Rule 23 class actions, which have been increasingly difficult to certify.

CAFA Removal of “Mass Actions”
Enacted to address prejudicial state-court treatment of class actions and end abusive forum-shopping practices, CAFA expanded federal diversity jurisdiction for statutorily defined “class actions” or “mass actions.” See Lowery v. Ala. Power Co., 483 F.3d 1184, 1193 (11th Cir. 2007). CAFA amends the federal diversity jurisdiction statute, 28 U.S.C. § 1332, by inserting a new subsection that creates and defines a “mass action” as “any civil action . . . in which monetary relief” is sought that satisfies a numerosity requirement of “100 or more persons . . . proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” CAFA § 1332(d)(11)(B)(i). Subject to certain exceptions, these actions may be removed to federal court by defendants if (1) the action is a mass action as defined under CAFA, (2) minimal diversity exists between the parties with an aggregate amount in controversy that exceeds $5,000,000, and (3) the mass-action claims individually satisfy the $75,000 jurisdictional requirement. CAFA § 1332(d)(11)(A)–(B).

Since the introduction of CAFA, defendants in courts within the Fifth Circuit have removed parens patriae actions under the theory that they are CAFA mass actions. See, e.g., Hood v. JPMorgan Chase & Co., No. 3:12-cv-565, 2013 WL 3946002 (S.D. Miss. July 31, 2013); Caldwell v. Bristol Myers Squibb Sanofi Pharm. Holding P’ship, No. 6:12-cv-00443, 2012 WL 3862454 (W.D. La. June 12, 2012); Mississippi ex rel. Hood v. Entergy Miss., Inc., No. 3:08-cv-780, 2012 WL 3704935 (S.D. Miss. Aug. 25, 2012); Bd. of Comm. of the SE La. Flood Protection Auth.-East v. Tenn. Gas Pipeline Co., No. 13-cv-5410 (E.D. La. filed July 24, 2013).

The Fifth Circuit’s “Claim-by-Claim” Approach to CAFA Mass-Action Removal
The first significant decision determining whether a parens patriae suit constituted a mass action under CAFA was decided in 2008 in Louisiana ex rel. Caldwell v. Allstate Insurance Co., 536 F.3d 418 (5th Cir. 2008). In that case, Louisiana filed a state-court suit alleging that insurance companies conspired to suppress competition in the insurance industry. Louisiana sought injunctive and monetary relief, including treble damages under the Louisiana Monopolies Act (LMA) because the defendants allegedly rigged and manipulated policyholder premiums. The defendants removed the action alleging, in part, that it constituted a mass action under CAFA, and Louisiana sought remand. The district court denied the motion to remand because it found that non-party policyholders, totaling thousands of individuals, were the “real parties in interest” and satisfied CAFA’s mass-action numerosity requirement of 100 or more persons.

On appeal, the Fifth Circuit affirmed, explaining that courts should look beyond the pleadings to determine the real parties in interest on a “claim-by-claim” basis. Under the LMA, the Fifth Circuit found that the real parties in interest for treble damages were the non-party policyholders. Thus, the Fifth Circuit agreed that the action was properly removed as a CAFA mass action because it involved “claims of more than 100 Louisiana citizens who were minimally diverse from [the] defendant.”

Circuit Split: The “Whole-Case” Approach to CAFA Mass-Action Removal
Following the Caldwell decision, other U.S. courts of appeals faced with the same parens patriae issues rejected theFifth Circuit’s claim-by-claim analysis and instead used a “whole-case” analysis to determine whether an action was removable as a CAFA mass action. For example, in LG Display Co., Ltd. v. Madigan, Illinois filed suit in state court against eight manufacturers of liquid crystal display (LCD) panels for violations of the Illinois Antitrust Act (IAA) and alleged that the defendants unlawfully inflated prices on LCD products sold to the state, its agencies, and its residents. 665 F.3d 768, 770 (7th Cir. 2011). Illinois sought injunctive relief, civil penalties, and treble statutory damages for the state and for individual purchasers through its parens patriae authority. The Seventh Circuit Court of Appeals rejected Caldwell’s claim-by-claim approach and affirmed the district court’s rationale that when viewing the complaint as a whole, the only plaintiff and real party in interest was Illinois. Following Madigan, the Ninth and Fourth Circuits also rejected Caldwell’s claim-by-claim approach. See Nevada v. Bank of Am. Corp., 672 F.3d 661 (9th Cir. 2012); see also AU Optronics Corp. v. S.C., 699 F.3d 385, 387–88 (4th Cir. 2012).

The Fifth Circuit Affirms the Caldwell Claim-By-Claim Approach
On March 25, 2011, Mississippi filed a state-court complaint on behalf of itself, its local subdivisions, and its individual citizens, alleging that manufacturers of LCDs engaged in price fixing in violation of state law. Mississippi ex rel. Hood v. AU Optronics Corp., 876 F. Supp. 2d 758, 761 (S.D. Miss. 2012). The defendants removed the suit as a CAFA mass action, and Mississippi sought remand. Consistent with the Caldwell claim-by-claim analysis, the district court found that the suit was a CAFA mass action subject to removal because it included “claims of 100 or more persons.” Id. at 771–72. The court held that in addition to Mississippi, the individual, non-party consumers that purchased the LCDs were also real parties in interest to the state’s restitution claim.

On appeal, the Fifth Circuit affirmed and explained that (1) the allegations demonstrated that the real parties in interest were the State of Mississippi and the individual consumers, (2) its decision was supported by the fact that state law did not give Mississippi the power to assert ownership over all individualized claims, and (3) Mississippi’s parens patriae authority did not permit it to stand in the place of and extinguish any citizen claims. Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796, 801–2 (5th Cir. 2012).

Supreme Court Rejects Caldwell and Issues a Bright-Line Rule
The Supreme Court granted certiorari to resolve the split in authority and framed the issue as “Whether a suit filed by a state as the sole plaintiff constitutes a ‘mass action’ under CAFA where it includes a claim for restitution based on injuries suffered by the state’s citizens.” Mississippi ex rel. Hood v. AU Optronics Corp., 134 S. Ct. 736, 739 (2014). A unanimous Supreme Court rejected the Fifth Circuit’s claim-by-claim approach and issued a bright-line rule that disregarded the real-party-in-interest analysis and focused strictly on the named plaintiffs in the suit.

First, the Court found that CAFA’s text clearly defined mass actions as involving “100 or more persons” and did not include “unnamed real parties in interest.” The Court noted that “[h]ad Congress intended the latter, it easily could have drafted language to that effect,” as it didfor CAFA’s class-action numerosity requirement, which requires 100 or more named or unnamed class members. Id.; see also 28 U.S.C. § 1332(d)(5)(B); (d)(1)(D).

Next, the Court found that “100 or more persons” should be interpreted to mean “plaintiffs” who are proposing to join their claims for a single trial. The Court reasoned that in CAFA, the terms “persons” and “plaintiffs” are used “just as they are used in Federal Rule of Civil Procedure 20” (party joinder)—i.e., both provisions refer to the ability of “persons” to join as “plaintiffs” in a single action.

Third, the Court found that CAFA’s legislative context confirmed that the term “plaintiffs” “refers to actual named parties,” not “unnamed real parties in interest,” because CAFA’s transfer provision provides that a case shall not be “transferred to any other court . . . unless a majority of the plaintiffs in the action request transfer.”

In addressing the argument that “plaintiffs” should be construed in CAFA to include named and unnamed real parties in interest, the Court held that such a reading would “stretch[] the meaning of ‘plaintiff’ beyond recognition” and would lead to administrative nightmares as lower courts would have to determine whether each unnamed real party in interest met the $75,000 amount in controversy requirement. The Court found that had Congress “wanted representative actions brought by states as sole plaintiffs to be removable under CAFA on the theory that they are in substance no different from class actions, [Congress] would have done so through the class action provision, not the one governing mass actions.”

Finally, the Court specifically rejected the Fifth Circuit’s rationale for using a claim-by-claim analysis. The Court noted that rather than rely on the text of CAFA, the Fifth Circuit developed its real-party-in-interest inquiry based on the premise that “federal courts look to the substance of the action and not only at the labels that the parties may attach.” Id. at 745 (citing Caldwell, 536 F.3d at 424). Although the Court had supported such inquiries in other contexts, it was error to use the approach to determine the appropriateness of CAFA jurisdiction. The Court explained that the real-party-in-interest inquiry had historically identified what parties’ citizenships should be considered in determining diversity. However, this is easily distinguishable from the inquiry in Caldwell, which was “to count up additional unnamed parties in order to satisfy the mass action provision’s numerosity requirement.” Even if the real-party-in-interest inquiry had previously been applied in a manner similar to Caldwell, “Congress provided express indications that it did not want the principle to apply to [CAFA’s] mass action provision.”

Thus, the Court rejected the Fifth Circuit’s approach and issued the following bright-line rule for determining whether a suit constitutes a CAFA mass action: “A ‘mass action’ must involve monetary claims brought by 100 or more persons who propose to try those claims jointly as named plaintiffs.” Based on this rule, the Court found that Mississippi was the only “plaintiff” or “person,” and removal under CAFA was improper.

Impact of the Supreme Court’s Decision in Hood on Future Mass Tort Litigation
Prior to the Supreme Court’s decision in Hood, the CAFA mass-action provision was a significant tool used to remove parens patriae suits. Following Hood, defendants will not be able to use the CAFA mass-action provision to remove parens patriae actions in which a state is the only named plaintiff. Courts must now look solely to the complaint’s named plaintiffs to determine whether the “100 or more persons” mass-action requirement is met. See California ex rel. Sherwin v. Office Depot, Inc., No. CV 12-9952, 2014 WL 320156, at *3–4 (C.D. Cal. Jan. 29, 2014). The impact of the Hood decision was felt immediately. For example, the defendants in Tennessee Gas Pipeline Co. withdrew their argument that removal of the action was proper as a CAFA mass action because there was only one named plaintiff in the case. Motion for Leave to File Notice of Issuance of Supreme Court Judgment, No. 13-cv-5410 (E.D. La. Feb. 19, 2014), ECF No. 328.

Moreover, Hood raises significant questions about the future of parens patriae actions. One significant question is whether states will be emboldened to file more aggressive parens patriae actions on behalf of thousands of non-party citizens who have real interests in the litigation. Hood’s limitation of the CAFA mass-action analysis to only named plaintiffs certainly appears to put states in a better position to artfully plead around CAFA jurisdiction and, at the same time, could broaden the scope of parens patriae claims filed on behalf of non-party citizens who have an interest in the action.

Keywords: litigation, pretrial practice, discovery, claim by claim, Caldwell, mass action, removal, Class Action Fairness Act

Paul Thibodeaux is a partner and Danny Dysart is an associate with Frilot L.L.C. in New Orleans, Louisiana.

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