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By Stephen A. Fogdall and Julie E. Randolph, Segal & Lewis LLP
Congress enacted the Class Action Fairness Act (CAFA) in 2005, dramatically expanding the scope of federal diversity jurisdiction over class actions and providing a mechanism for defendants to remove such actions to federal court where the amount in controversy exceeds $5 million, and certain other conditions are met. In the eight years since CAFA was enacted, the lower federal courts have had to address numerous efforts by plaintiffs to defeat removal by pleading under the $5 million amount-in-controversy threshold. In evaluating these efforts, courts have been pulled by competing considerations. On the one hand, the plaintiff is the “master” of his or her complaint and can “plead to avoid federal jurisdiction.”1 On the other hand, a defendant is supposed to have a “statutory right of removal” that should not be unduly “subject to the plaintiff's caprice.”2
Balancing these considerations, some courts have imposed a fairly heavy burden on a defendant seeking to remove a class action to federal court under CAFA where the plaintiff's complaint pleads an amount in controversy less than the $5 million threshold. These courts require the defendant to “prove with legal certainty that CAFA's jurisdictional amount is met” notwithstanding the plaintiff's assertion to the contrary in the complaint.3 Other courts have imposed a lower burden, requiring only that the defendant establish the amount in controversy by a preponderance of the evidence.4
In March of this year, the U.S. Supreme Court issued its decision in Standard Fire Insurance Co. v. Knowles,5 a ruling that, while not directly addressing the circuit split on the defendant's burden to establish the amount in controversy in CAFA removal cases, strongly supports the lower preponderance-of-the-evidence approach.
Nearly 80 years ago, the Supreme Court issued two seminal decisions—McNutt v. General Motors Acceptance Corp. in 1936,6 and St. Paul Mercury Indemnity Co. v. Red Cab Co.in 19387—which addressed the burden of establishing that the requirements of federal diversity jurisdiction (the amount in controversy and the citizenship of the parties) have been met. These decisions establish that, as a general rule, the party seeking to invoke jurisdiction has the burden of proof, and must “justify his allegations by a preponderance of the evidence.”8
An exception to this general rule applies to a plaintiff's allegation that damages exceed the amount-in-controversy threshold.9 Here, for cases brought in federal court, “the sum claimed by the plaintiff controls if the claim is apparently made in good faith.”10 Thus, a plaintiff bringing suit in federal court need not prove by a preponderance of the evidence that the amount-in-controversy threshold is satisfied to avoid dismissal. Rather, if the defendant challenges jurisdiction, then it has the burden to establish “to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal.”11
The Supreme Court did not directly address in these cases the applicable burden regarding the amount in controversy where it is the defendant, rather than the plaintiff, who seeks to invoke federal diversity jurisdiction by removing a state-court action to federal court.
Lower courts tried to eke some guidance on this issue out of St. Paul. There the Court considered whether a plaintiff, having pleaded damages in excess of the jurisdictional threshold in state court, could force a remand following removal by amending the claim to bring the amount in controversy below the threshold. The Court said that post-removal amendments could not prevent removal, else “the defendant's supposed statutory right of removal would be subject to the plaintiff's caprice.”12 But the Court stated that if the plaintiff sued “for less than the jurisdictional amount” at the outset, even “though he would be justly entitled to more,” the defendant could not remove.13
Lower courts went in conflicting directions in attempting to determine a removing defendant's burden to establish the amount in controversy. Some courts, such as the U.S. Court of Appeals for the Eighth Circuit, concluded that the amount in controversy is no different than any other jurisdictional element. As the party invoking jurisdiction, the defendant had the burden to “prove by a preponderance of the evidence that the amount in controversy exceeds” the jurisdictional threshold,14 just as it had to prove by a preponderance of the evidence its allegations regarding the citizenship of the parties.15
Courts taking this preponderance-of-the-evidence approach distanced themselves from St. Paul’s suggestion that a plaintiff could conclusively prevent removal by pleading in the complaint an amount of damages below the jurisdictional threshold. These courts observed that this suggestion “was premised on the notion that the plaintiff would not be able to recover more in state court than what was alleged in the state court complaint.”16 But the majority of states had since abandoned the view the amount specified in the ad damnum clause limited the ultimate damages award, and some states had even “enacted rules that strictly prohibit plaintiffs from pleading for specific amounts in cases of unliquidated damages.”17
Thus, these courts imposed the same evidentiary burden (preponderance of the evidence) regardless of whether “the complaint alleges no specific amount of damages or an amount under the jurisdictional minimum.”18Nevertheless, perhaps as a partial concession to St. Paul, these courts recognized one mechanism the plaintiff could employ to prevent removal, namely, by filing “a binding stipulation or affidavit” with the complaint disclaiming any recovery above the jurisdictional threshold.19
Other courts, such as the U.S. Court of Appeals for the Eleventh Circuit, took a very different approach.20 These courts reasoned that the plaintiff is “the master of his own claim,” so the plaintiff's own estimate of damages should have a “presumption of truth.”21 Thus, these courts took St. Paul’s statement that “the sum claimed by the plaintiff controls” unless the defendant can establish “to a legal certainty that the claim is really for less,”22which was meant to apply where the plaintiff has sued in federal court and the defendant seeks to defeat diversity jurisdiction, and extended it to cases in precisely the opposite posture, where the defendant seeks to invoke diversity jurisdiction by removing the action to federal court, and the plaintiff desires to defeat removal.23On this approach, the defendant was required to “prove to a legal certainty” that the plaintiff's claim was really for more than the amount alleged in order to remove the case to federal court.24
The legal certainty approach in the removal context was conceptually problematic for a number of reasons. First, as already noted, the standard was fashioned for cases where the plaintiff pleaded an amount of damages above the threshold, and the question was whether the action should properly be in federal court. The basis for applying the standard in the opposite posture was not clear. Nor was there a clear reason to impose a higher burden of proof with respect to the amount in controversy when the lower preponderance burden plainly applied to other jurisdictional elements.25 Second, St. Paul clearly contemplated that the plaintiff could conclusively prevent removal by “suing for less than the jurisdictional amount,” even though “he would be justly entitled to more.”26 Under that logic, there would be no rationale for imposing a higher “legal certainty” burden on the defendant. If the plaintiff truly were the “master” of the claim, and controlled the amount of any recovery, then the defendant presumably would be prevented from removing altogether, rather than subject to a higher burden of proof.
The split between the preponderance-of-the-evidence and legal-certainty standards in individual (non-class) actions was largely resolved by the Federal Courts Jurisdiction and Venue Clarification Act of 2011 (“JVCA”).27Under the JVCA, if a specific demand for damages in the complaint is not permitted by state law, or recovery in excess of the pleaded amount is allowed, the removing party must show “by the preponderance of the evidence, that the amount in controversy exceeds the amount specified in section 1332(a).”28
However, the JVCA, which applies to individual actions rather than class actions, does not resolve a similar circuit split regarding the defendant's burden to establish the amount in controversy when removing a class action under CAFA. It is to this issue that we now turn.
CAFA was enacted in 2005 in response to a growing perception of “abuses of the class action device” that “adversely affected interstate commerce” and “undermined public respect for” the federal judicial system.29These perceived abuses were aided, in part, by traditional restrictions on the exercise of diversity jurisdiction by U.S. district courts, which were felt to be “keeping cases of national importance out of Federal court.”30
Prior to CAFA, the traditional requirements of diversity jurisdiction that applied to individual actions also applied to class actions: the value of each plaintiff's claim, including the claims of unnamed class members, had to exceed the amount-in-controversy requirement.31 Moreover, each named plaintiff had to satisfy the “complete diversity” requirement, meaning that the state of citizenship of each named plaintiff had to be different from that of each defendant named in the action.32 These requirements were alleviated somewhat by the enactment in 1990 of Section 1367, the supplemental jurisdiction statute.33 Under Section 1367, if at least one named plaintiff satisfies the amount-in-controversy requirement, then the district court has supplemental jurisdiction over the claims of other class members, even those whose claims fall below the threshold.34 However, Section 1367 did not alleviate the requirement of complete diversity.35
CAFA solved these problems by significantly expanding federal diversity jurisdiction over class actions, giving federal district courts original jurisdiction over class actions in which (1) the amount in controversy exceeds $5 million, (2) there are at least 100 putative class members in the proposed class, and (3) “minimal diversity” is satisfied, meaning that there is at least one class member that is a citizen of a different state from at least one defendant.36 CAFA also states that “the claims of the individual class members shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $5,000,000,” thus allowing for jurisdiction even though each class member's individual claim might fall below the $75,000 threshold applicable in individual diversity actions.37 CAFA further provides that any class action meeting these requirements filed in state court may be removed by any defendant to federal court, even without the consent of other defendants.38
Given CAFA's purpose, in part, to bring more class action plaintiffs, sometimes unwillingly, into federal court, it is hardly surprising that some plaintiffs and their lawyers have attempted to evade removal by pleading in their complaints that the damages that would be recovered by the class are less than the $5 million minimum. Nor is it surprising, given the circuit split described above regarding a defendant's burden to establish the amount in controversy in individual actions, that a similar circuit split has developed regarding the defendant's burden when removing a class action under CAFA.
Some circuits have applied the heightened “legal certainty” standard where the plaintiff has pleaded an amount in controversy below $5 million. For example, the Ninth Circuit, in Lowdermilk, reasoned that it is the plaintiff's prerogative, as “master of the complaint,” to “forgo a potentially larger recovery to remain in state court.”39 Thus, “the party seeking removal must prove with legal certainty that CAFA's jurisdictional amount is met,” where the plaintiff has pleaded a smaller sum in the complaint.40
The Eighth Circuit reached a contrary conclusion in Bell v. Hershey Co. There the plaintiff urged the court to follow the Ninth Circuit's decision in Lowdermilk, but the court saw no reason to “utilize a different removal standard in CAFA cases than in others,” and thus applied the same preponderance-of-the-evidence standard it recognized for individual cases.41
However, the court did acknowledge one mechanism that, in its view, would override a defendant's evidence that the amount of the claim exceeded CAFA's threshold. Like a plaintiff in an individual case, the court reasoned, a plaintiff in a class action can “ensure” that any attempt to remove will be unsuccessful by including “a binding stipulation” with the complaint stating that the plaintiff will “not seek damages greater than the jurisdictional minimum.”42
It was this device for avoiding removal under CAFA—a named plaintiff's putatively binding stipulation not to seek damages above $5 million—that the Supreme Court scrutinized, and rejected, in Knowles.
In Knowles, the plaintiff filed a class action in state court in Arkansas, including with the complaint a stipulation stating that he would “not at any time during this case … seek damages for the class … in excess of $5,000,000 in the aggregate.”43 The defendant removed the action to federal court, and the plaintiff filed a motion for remand. Based on information submitted by the defendant, the district court found by a preponderance of the evidence that the value of class members' claims would exceed $5 million, in the absence of the plaintiff's stipulation.44 But the district court viewed the stipulation as expressly abandoning any claim above the $5 million threshold and was therefore dispositive. The district court ordered a remand.
After the Eighth Circuit declined to hear the defendant's appeal, the Supreme Court granted certiorari.45 The Court reversed, concluding that the named plaintiff “lacked the authority to concede the amount-in-controversy issue for the absent class members.”46 Thus, the plaintiff's stipulation not to seek damages greater than $5 million could not “overcome” the district court's “finding that the CAFA jurisdictional threshold had been met.”47
The question directly resolved in Knowles is whether a named plaintiff can bind absent class members to a stipulation purporting to limit their recovery to an amount less than $5 million (answer: no). As some courts have noted, Knowles “did not address the effect of a plaintiff's allegation—as opposed to a stipulation—that attempts to cap the amount.”48
Thus, some courts may find it unclear, after Knowles, “whether a removing party must prove that the amount in controversy is met by a preponderance of the evidence or to a legal certainty,” where the plaintiff has simply pleaded in the complaint (as opposed to asserting in a separate putatively binding stipulation) that the amount in controversy is less than CAFA's minimum.49 However, the reasoning in Knowles strongly supports the lower preponderance-of-the-evidence burden applied by courts like the Eighth Circuit.
First, Knowles accepted the district court's finding by a preponderance of the evidence that the class's potential recovery exceeded $5 million, and concluded that a non-binding stipulation could not overcome that finding. Thus, the Court held that jurisdiction under CAFA was established. This arguably is an endorsement of the lower preponderance-of-the-evidence burden.
Second, Knowles undermines the “master of the complaint” theory utilized in cases like Lowdermilk to support the “legal certainty” standard. If a named plaintiff cannot bind absent class members to a stipulation limiting their recovery, then a named plaintiff likewise should not have the “prerogative” to “forgo a potentially larger recovery” for the class by pleading in the complaint that the damages suffered by the class are less than $5 million.50
Third, Knowles does nothing to alleviate the conceptual weaknesses in the “legal certainty” standard that have already been discussed. If the “master of the complaint” theory had analytical force, then a plaintiff's allegation that the amount in controversy was less than CAFA's minimum presumably would be conclusive, thus foreclosing removal (as St. Paul implies), rather than merely triggering a heightened level of proof. Moreover, as noted above, the JVCA established a preponderance-of-the-evidence standard for the amount in controversy in non-CAFA cases. There is little basis for applying a different approach in CAFA cases, particularly given CAFA's purpose of bringing more class actions into federal court. Nor is there any compelling reason to impose a heightened burden of proof on the defendant as to the amount in controversy and a lower burden as to other jurisdictional elements.
Thus, continued application of the already questionable “legal certainty” approach under CAFA is all the more dubious in the wake of Knowles.
Stephen A. Fogdall is a partner in the Washington, D.C., office of Schnader Harrison Segal & Lewis LLP. He participates in numerous areas of the firm's commercial litigation practice, including financial services litigation, product liability litigation, and class action defense. Fogdall may be reached at firstname.lastname@example.org.
Julie E. Randolph is an associate in the Philadelphia office of Schnader Harrison Segal & Lewis. She focuses on product liability litigation, aviation litigation, and class action defense, and is available email@example.com.
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