Wednesday, February 3, 2010

CAFA and the Home State Exception

(Cross posted at Prawfsblawg).

Even if you're not a civ pro buff you've probably heard of the Class Action Fairness Act (CAFA).  Enacted in 2005, CAFA allows some class actions based in state law to proceed in federal court, even if they don't meet the normal 1332 diversity requirements.  CAFA's proponents touted the statute as a national remedy for class action “abuses” in state courts in which state law procedural devices were blamed for empowering litigants to bring “nationwide” class actions in states with plaintiff-friendly law. 

But what of genuinely local class actions? To protect such lawsuits, CAFA's drafters crafted some exceptions for local actions, one for actions where two thirds of the class are citizens of the state where the action was filed , and one for local controversies.   CAFA's home state exception has the power to change class action practice, and this might not be a bad thing.   A Seventh Circuit decision from last week, In re Sprint Nextel Corp., illustrates a few of the new issues.

The plaintiffs, Sprint and Nextel customers from Kansas, accuse Sprint of conspiring with other wireless companies to artificially inflate text messaging rates.  There was nothing special here about Kansas, and this is the sort of action that pre-CAFA might have been brought as a nationwide consumer class action.  Here, however, the lawsuit has been confined to residents of a single state, clearly with the hope that the action would remain in Kansas state court. 

This looks like a new trend in class action practice -- filing smaller state-wide class actions to avoid the CAFA net.  At first blush this might look like a new breed of forum shopping to the tune of 50 separate class actions.  How could that be efficient?  This, however, assumes that the nationwide class action was an efficient method of litigation to begin with.  The Supreme Court has already noted that nationwide class actions present serious choice of law issues, or manageability and predomination issues if the laws of many different states must be applied.  The CAFA home state exception might be forcing some of the smaller, more local class actions that the plaintiff bar initially resisted in the Phillips Petroleum v. Shutts context.

While some plaintiffs' attorneys have retooled to bring nationwide class actions on a state by state basis, the defense bar has started to look to the nationwide nature of the class for their salvation.  In Sprint Nextel, the defendants argued that the denominator in the two thirds number should be all possible plaintiffs in a nationwide class, rather than all members of the class in Kansas (remember, not Kansas subscribers are Kansas citizens).  The Seventh Circuit rejected this argument, but the reversal of state and national focus among plaintiffs and defendants is interesting to watch.

The Seventh Circuit remanded the case to the district court to allow the plaintiff class a chance to prove the Kansas citizenship of two thirds of the class.  But prove their citizenship the plaintiffs must -- guesswork flowing from the class definition won't cut it. 

This illustrates a final observation about the CAFA home state exception:  more exceptions equal more litigation.  And like other threshold matters in class action practice, determining the citizenship of the class requires discovery and findings of fact.  In this new breed of local/nationwide class actions CAFA's minimum diversity requirement turns out to demand more work of the courts, and not less.


Class Actions, Federal Courts, Subject Matter Jurisdiction | Permalink

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