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Seventh Circuit Blocks Class Action from Returning to Kansas Court

By Anthony R. McClure, Litigation News Associate Editor – March 31, 2010

In a decision further shaping the landscape for class action jurisdictional issues, the U.S. Court of Appeals for the Seventh Circuit recently overruled a decision by the U.S. District Court for the Northern District of Illinois that would have sent a class action back to Kansas state court. In re Sprint Nextel Corp. [PDF].


The decision sheds light on how federal courts interpret the home-state exception to the Class Action Fairness Act of 2005 [PDF] (CAFA).


Background of In re Sprint Nextel Corp.
Plaintiffs in the case claim that Sprint conspired “with other cell phone providers to impose artificially high prices for text-message service.”


The plaintiffs defined the putative class as “all Kansas residents” who purchased text messaging from Sprint Nextel or one of its alleged coconspirators between January 2005 and October 2008. The plaintiffs further refined the class as limited to those who: (1) had a “Kansas cell phone number,” (2) received their cell phone bill at a “Kansas mailing address,” and (3) paid a Kansas “USF fee,” which is applied to all long-distance calls within Kansas.


Sprint Nextel removed the case to the U.S. District Court for the District of Kansas pursuant to CAFA, on grounds that more than $5 million was in controversy, the class contained more than 100 members, and at least one member of the putative class was not a Kansas citizen.


The panel on multidistrict litigation transferred the case—as well as more than a dozen other similar suits against cell phone companies—to the Northern District of Illinois.


District Court’s Decision
After receiving the case, the district court accepted the plaintiffs’ argument that the home-state exception required it be remanded. Under the home-state exception, if “two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed,” the district court should decline jurisdiction.


Sprint Nextel advanced two arguments in opposition to remand, both of which the district court rejected. First, Sprint Nextel argued that the plaintiffs failed to present evidence that two-thirds of the proposed class members were Kansas citizens. Second, Sprint Nextel argued that even if the plaintiffs presented such evidence, CAFA actually required Kansas citizenship of all members of proposed classes in all lawsuits alleging similar conduct—not just this lawsuit.


The district court first ruled that although the plaintiffs presented no evidence, they “have defined the putative class in such a way as to leave little doubt that at least two-thirds of the class members are Kansas citizens.”


Second, the court held that the home-state exception does not require consideration of other lawsuits.


Sprint Nextel appealed that decision to the Seventh Circuit, which observed that both arguments “present issues of first impression for this court.” Sprint Nextel also added a third argument—that “this is a national controversy, and just the sort of dispute that CAFA was designed to keep in federal court.”


Seventh Circuit Reverses
The Seventh Circuit reversed, but not before rejecting two of Sprint Nextel’s three arguments.


The Seventh Circuit addressed Sprint Nextel’s second argument first, and agreed with the district court’s analysis, joining the First Circuit in rejecting Sprint Nextel’s interpretation of CAFA. In re Hannaford Brothers Co. Customer Data Security Breach Litigation [PDF].


Sprint Nextel had argued that because Congress focused on “proposed plaintiff classes in the aggregate,” it meant to require courts to consider other cases. In rejecting this reading, both the First and Seventh Circuits agreed that “there can be more than one class in a single class action, and the plural language is meant to address that scenario.”


The Seventh Circuit then rejected Sprint Nextel’s argument that federal jurisdiction is proper simply because CAFA was enacted to ensure that national controversies are decided in federal court.


The court observed: “That may have been Congress’s general goal, but it also provided for exceptions, and plaintiffs are free to ‘circumscribe their class definitions’ so that they can fit within one of those exceptions and avoid federal jurisdiction.” Further, “the fact that this suit may be but a slice of a bigger controversy is irrelevant.”


Finally, the Seventh Circuit agreed with Sprint Nextel—and disagreed with the district court—on the evidentiary issue. “Once Sprint Nextel established that CAFA jurisdiction exists, the burden fell on the plaintiffs, who were seeking remand, to show that the home-state exception applies,” the court said.


The plaintiffs had to establish by a preponderance of the evidence that two-thirds of the proposed class members were Kansas citizens, the court ruled. The plaintiffs did not submit any evidence regarding citizenship. Nevertheless, the district court held that the class definition itself—focusing on Kansas cell phone numbers and mailing addresses—made it more likely than not that two-thirds of the class were Kansas citizens.


Although the Seventh Circuit admitted that the district court’s approach “has some appeal,” the court ultimately disagreed with that analysis, characterizing it as ‘[s]ensible guesswork, based on a sense of how the world works, but guesswork nonetheless.”


“We agree with the majority of district courts that a court may not draw conclusions about the citizenship of class members based on things like their phone numbers and mailing addresses,” the court said.


In remanding the case, the Seventh Circuit ordered the district court to “give the plaintiffs another opportunity to prove that the proposed class satisfies the requirements of the home-state exception.”


Useful Dicta
The Seventh Circuit shed some light on how a plaintiff class might successfully invoke the home-state exception, saying: “This would have been a much simpler case if the plaintiffs had followed either of two approaches.”


Under one approach, plaintiffs could have submitted evidence that two-thirds of the class members were indeed Kansas citizens. While “it would be infeasible to document each class member’s citizenship individually,” the court noted that plaintiffs could have submitted a representative sample. The evidence could have included affidavits or survey responses in which putative class members indicate whether they intend to remain in Kansas indefinitely.


“[T]he district court could then have used statistical principles to reach a conclusion as to the likelihood that two-thirds or more of the proposed class members are citizens of Kansas,” the court noted.


Under a second approach, the plaintiffs could have simply defined their class as “all Kansas citizens who purchased text messaging from Sprint Nextel or an alleged coconspirator.” This would have guaranteed that the suit would remain in state court.


However, the court observed that such an approach would have limited the pool of potential class members—“something that plaintiffs and their lawyers are apparently unwilling to do.”


Analysis
Reaction to the Seventh Circuit’s decision has varied. Brian J. Murray, Chicago, an ABA Section of Litigation’s Class Actions and Derivative Suits Committee member, says he believes the Seventh Circuit “absolutely” got it right.


“It’s amazing to me that it took so long for a court of appeals to weigh in on this,” says Murray.


Murray explains that when CAFA first took effect, to keep national class actions in state court, plaintiffs would divide the classes by state and simply plead that all class members were citizens of that particular state.


“But in recent years we’ve seen plaintiffs’ lawyers not be willing to commit to that; often times in certain cases the real money and the real claims are held by people outside the state,” Murray says.


Some cases will define the class “to make it look local (class members get paid in the state, they had a cell phone number in the state), but they don’t limit it to citizens of the state,” he notes.


“The Seventh Circuit’s decision is the first one we’ve seen clearly saying ‘no you can’t hedge like that. If you want to limit the class to citizens, that’s fine, but if you’re going to hedge, you need to come in with evidence,’” Murray says.


Others are not as supportive of the Seventh Circuit’s decision. Douglas L. McCoy, Mobile, AL, cochair of the Section’s Consumer & Civil Rights Litigation Committee, does not necessarily disagree with the Seventh Circuit’s decision, but is troubled by the burden that it places on the plaintiffs’ classes.


“While the Seventh Circuit’s allocation of the burden of proof to the plaintiffs was consistent with precedent and legislative history, the degree of burden imposed on the plaintiffs seems to be somewhat excessive,” McCoy says.


“At some point, common sense should have a role in resolving issues of this sort,” and courts should be permitted to use “sensible guesswork based on . . . how the world works,” he says.


McCoy also questions treating the “home-state” provision of CAFA “as an ‘exception to an exception’ related to the limitations of federal court jurisdiction.” In other words, he says, “the ‘home-state’ provision could really be viewed as a limitation on the exception that CAFA creates pertaining to the ‘regular’ standard for federal court jurisdiction.”


McCoy was ultimately satisfied with the Seventh Circuit’s opinion, however, when it proposed alternative class definitions for the plaintiffs in Sprint Nextel. Specifically with respect to the first alternative that would allow some statistical analysis, “given the Seventh Circuit’s opinion that statistical proof providing only 51 percent or greater certainty that two-thirds of the class members are citizens of the ‘home-state,’ the burden placed on the plaintiffs’ counsel by the decision seems relatively fair and reasonable.”


Murray, on the other hand, disagrees with the suggestion that the plaintiffs’ burden to establish the home-state exception is too high. “If you want to rely on your pleadings, then plead the elements of the statute,” he says.


“If you want to go beyond the elements of the statute to keep the class size big, then all the Seventh Circuit said was ‘well, you may still satisfy the statute but it becomes your burden to show us the evidence,’” Murray notes.


Keywords: In re Spring Nextel Corp., Seventh Circuit, District of Kansas, CAFA, class actions


 

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