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Supreme Court May Clarify Procedures For Removal Under CAFA—If It Decides To Answer The Question Presented in Dart Cherokee Basin Operating Co. v. Owens

Posted in Motions Practice, U.S. Supreme Court

This morning I attended oral arguments at the Supreme Court in Dart Cherokee Basin Operating Co. v. Owens.  The issue presented in Dart Cherokee is whether a defendant who wishes to remove a case to federal court under the Class Action Fairness Act (CAFA) is required to submit evidence supporting federal jurisdiction along with the notice of removal.    Here’s my key takeaway from the argument:  The answer will be “no”—defendants need not attach evidence to a notice of removal—but only if the Court concludes that it has the power to reach the merits.

In most circuits, when a defendant seeks to remove a class action to federal court under CAFA, all the defendant has to do is file a notice of removal alleging that CAFA’s jurisdictional requirements have been satisfied—most significantly, that the amount in controversy exceeds $5 million.  More often than not, plaintiffs—who, as Justice Ginsburg put it memorably at the argument today, are “looking for big bucks”—do not contest that showing.  Of course, sometimes plaintiffs resist removal by moving for a remand to state court. In such situations, the defendant (who bears the burden of proving that federal jurisdiction exists) can come forward with evidence in opposing removal, and plaintiffs can contest that showing (including by responding with their own evidence.

But the prevailing rule in the Tenth Circuit is different.  There, district courts—applying Tenth Circuit precedent—routinely hold that a defendant must attach evidence supporting removal to the notice of removal itself.  That can be challenging for defendants, who typically are required to file a removal notice within 30 days of being served with a complaint—and the 30-day deadline is (usually, although not always) mandatory and jurisdictional.

In Dart Cherokee, the defendant did not do so; instead, it removed the case and alleged in its notice of removal that the amount in controversy exceeded $8.2 million (that is, greater than CAFA’s $5 million threshold).  After the plaintiff moved to remand, the defendant submitted uncontested evidence in opposition to the remand motion to shore up the allegation that the amount in controversy had been met.  The district court remanded the case to state court, concluding that the evidence defendant had submitted was too late to be considered.  The defendant sought leave to appeal under 28 U.S.C. § 1453(c), which provides that, for removals under CAFA, “a court of appeals may accept an appeal from an order of a district court granting or denying a motion to remand a class action to the State court from which it was removed.”  A divided panel of the Tenth Circuit denied leave to appeal, and rehearing en banc was denied by a divided 4-4 vote, over a vigorous dissent by Judge Hartz.

The Supreme Court granted certiorari, presumably to resolve the (lopsided) split among the circuits.  Today’s oral argument—transcript available here (pdf)—revealed two things.  First, if the Supreme Court reaches the merits of the issue presented, Dart Cherokee will almost certainly win.  Not one Justice asked questions reflecting any sympathy for the Tenth Circuit’s rule.   To the contrary, the Justices who spoke about the issue seemed to find it an easy one.  The statute governing notices of removal, 28 U.S.C. § 1446, provides that “[a] defendant . . . desiring to remove any civil action from a State court shall file in the district court of the United States . . . a notice of removal . . . containing a short and plain statement of the grounds for removal…” As Justice Ginsburg pointed out at oral argument, that language tracks Federal Rule of Civil Procedure 8(a), which governs pleadings; under Rule 8, it is clear that a complaint must have sufficient factual allegations but need not be—and rarely is—accompanied by evidence.

That said, it is possible that the Supreme Court may not answer the question at all.  Why not?  The potential wrinkle—one that received the most air time during today’s argument—has to do with whether the underlying merits have properly been  presented to the Supreme Court at all.  And the credit (or blame) for this wrinkle belongs to Public Citizen, whose amicus brief (pdf)  in support of the respondent first raised this question.

In that amicus brief, Public Citizen first argues that the Supreme Court lacks any jurisdiction to consider the case at all.   Under 28 U.S.C. § 1254, the Supreme Court has jurisdiction to review only “[c]ases in the court of appeals”; Public Citizen contends that because the Tenth Circuit denied leave to appeal, the case was never “in” the court of appeals.  At the argument, the Justices showed little sympathy for this position, but many Justices seemed intrigued by Public Citizen’s backup position, which is that all that was “in” the Tenth Circuit was whether leave to appeal should be granted, and that issue is one that is reviewed for an abuse of discretion.  In assessing that more limited question—whether the Tenth Circuit abused its discretion in denying review—the Justices seemed conflicted.  On the one hand, if the Tenth Circuit had agreed with the district court on the merits, then (assuming that Dart Cherokee is right about the merits) the Tenth Circuit’s refusal to review the district court’s order rested on an error of law—which always amounts to abuse of discretion.  On the other hand, if the denial rested on other factors (for example, docket congestion, factual issues, lack of interest, etc.) then it seems less likely that an abuse of discretion could be found.

So will the Court reach the underlying merits in Dart Cherokee?  My own take is that it’s a toss-up.  For most practitioners, it would be a bizarre result indeed if the oral argument revealed that there is an easy answer to the question presented but, for far more complicated reasons, the Court cannot deliver that answer.  As Justice Kagan put it to Dart Cherokee’s counsel after grilling him on jurisdictional issues:  “I sympathize with you. Because the next half hour”—in which counsel for respondents would argue—“is going to reveal that, actually, most of us agree with you on the merits,” or, at minimum, that “I agree with you on the merits.”

Furthermore, the Supreme Court’s past practice suggests that whether or not the court of appeals grants leave to appeal should not be an obstacle to the Supreme Court’s plenary review of the merits.  After all, just last term, a unanimous Supreme Court held in Standard Fire Insurance Co. v. Knowles that an order remanding the case to state court violated CAFA in a case where the Eighth Circuit—just like the Tenth Circuit here—denied the defendant leave to appeal the district court’s remand order.  Moreover, if Public Citizen is right that a court of appeals can insulate questions arising under CAFA from Supreme Court review by denying leave to appeal, that will create perverse incentives for the lower courts and may hamper the development of uniform rules governing CAFA removals—a result that seems at odds with CAFA’s purpose of ensuring that cases of national importance are easily removed to federal court.  Indeed, it is telling that Public Citizen’s brief focuses entirely on the jurisdictional issue, avoiding any effort to defend the judgment on the merits.

Will the Court answer the issue presented?  We’ll have to wait and see.

Despite Wal-Mart Stores v. Dukes, Ninth Circuit approves statistical sampling to prove that an “unofficial” common policy exists

Posted in Class Certification, Commonality, Employment

There seem to be two prevailing conceptions of class actions.  In one view, a class action is a way of determining many similar claims at once by evaluating common evidence that reliably establishes liability (and lays a ground work for efficiently calculating damages) for each class member.  That is, the class device produces the same results as individual actions would, but more efficiently.  In the other view—one we consider misguided—a “class” of plaintiffs complaining about similar conduct can have their claims determined through statistical sampling even if no common evidence will provide a common answer to common factual or legal questions. Instead, this theory holds, the results of mini-trials can simply be extrapolated to the entire class, even if individual results would vary widely.

Last week, the Ninth Circuit took a step deeper into the second camp in Jimenez v. Allstate Insurance Co. (pdf), delivering a ringing endorsement of statistical sampling as a way to establish liability as well as damages.

Fourth Circuit puts teeth into ascertainability, commonality, and predominance requirements for class certification

Posted in Ascertainability, Class Certification, Commonality, Predominance

Sometimes it’s hard to know who’s in a class without substantial individualized inquiries.  Can a court certify a class of persons with allegedly similar injuries by pigeonholing the question of class membership as a question of damages to be determined later?  Not so fast, the Fourth Circuit held in EQT Production Co. v. Adair (pdf).  A class that is not ascertainable ex ante is not a class at all.

And the Fourth Circuit also decided another question that has led to different answers from different courts.  When the rule of law proposed by plaintiffs would permit a controlling question to be answered in common for the class, but the competing rule proposed by defendants would require individualized inquiries, can the trial court treat the dispute of law as itself a common question supporting class certification?  On this point, the Fourth Circuit held that the court must first determine the correct rule and then decide whether it is susceptible to a common answer.  In a recent post, we described a California Court of Appeal decision taking the contrary view; the California Supreme Court has since denied review. (We submitted an amicus letter (pdf) on behalf of the U.S. Chamber of Commerce supporting the petition.)

Finally, the Fourth Circuit outlined a qualitative rather than a quantitative, issue-counting approach to predominance.  Under this approach, it is not how many circumstances are common among class members, but whether the common circumstances or other, individualized ones will be more significant in determining class members’ entitlement to relief.

EQT arises from a series of disputes about who was entitled to royalties for coal-based methane, a coal byproduct that is an energy source in its own right; wells are drilled to extract methane gas. The owners of surface rights to real property often sever coal mining rights (the “coal estate”) from subsurface gas rights (the “gas estate”). The disputes in EQT focus on who owns the rights to coal-based methane when the owner of the gas estate and the owner of the coal estate for a particular tract differ.  The plaintiffs are gas estate owners who assert that they are entitled to royalties for coal-based methane.

The district court certified five classes.  Four consist of current and former gas estate owners who were never paid coal-based methane royalties; the members of the fifth class assert that they were underpaid.  The Fourth Circuit reversed all five certifications.

First, the court of appeals held that you can’t certify a class if you can’t tell who is in it.  The Fourth Circuit held that the district court had not properly considered whether identifying class members “would render class proceedings too onerous” in light of a variety of “heirship, intestacy, and title-defect issues” affecting many potential class members’ claims. The Fourth Circuit understood ascertainability to require a way to “readily identify the class members in reference to objective criteria”—which means something less individualized than tract-by-tract ownership analyses.

Plaintiffs often like to recharacterize the deficiencies in a class definition as pertaining only to damages calculations—and that’s what the EQT plaintiffs did to get around their inability to determine who was in the class and who was out.  Plaintiffs contended that it would not be necessary to resolve the individualized ownership issues until the damages phase, but the court of appeals disagreed:  “The fact that verifying ownership will be necessary for the class members to receive royalties does not mean it is not also a prerequisite to identifying the class.”

Second, the court held that a dispute over the dispositive rule of law is not automatically a common issue if one competing rule could be resolved only upon individualized inquiries.  In certifying the four classes who had never been paid royalties, the district court found that the overriding common issue was a dispute over whether Virginia law entitled the owners of the gas estate to coal-bed methane royalties.  One legal rule would entitle all gas-estate owners to those royalties; the other would make the answer hinge on particular deed language.  The Fourth Circuit held that the district court should have resolved the question, and went ahead to hold that deed language was paramount.  The court of appeals left open the possibility of subclasses organized around deeds for which the relevant language was materially similar.

Finally, the Fourth Circuit rejected the finding of predominance for the class of owners claiming underpayment. On that issue, the district court had pointed to a large number of uniform practices by the defendants that were relevant to the royalty calculation.  The Fourth Circuit rejected this quantitative approach because the dispositive questions again hinged on the specific contract language, again recognizing that subclasses perhaps could be constructed around materially similar terms.

EQT provides some welcome structure and discipline to class certification analysis. Let’s hope that other courts of appeals will provide similar guidance.

Getting to “yes”: Ninth Circuit provides guidance on formation of “browsewrap” arbitration agreements

Posted in Arbitration

In the three years since AT&T Mobility LLC v. Concepcion, courts have largely been rejecting substantive attacks on arbitration agreements that waive class actions.  By contrast, in some cases plaintiffs have succeeded in avoiding arbitration by arguing that they never agreed to it in the first place.

The latest case to address such questions of contract formation comes from the Ninth Circuit, which held last week in Nguyen v. Barnes & Noble, Inc. that  plaintiff Kevin Nguyen had not agreed to arbitration because he and similarly situated consumers lacked sufficient notice of the company’s online “browsewrap” terms of use.  Because the Ninth Circuit applied New York law governing contract formation—and because the court indicated that it would have come to the same conclusion under California law—the decision is an important one for all businesses that engage in online commerce in the United States.

In the opinion, the Ninth Circuit distinguished between the familiar “clickwrap” process—in which a user affirmatively accepts terms by, for example, clicking “I agree” after receiving notice of the terms—and “browsewrap,” in which a company makes the relevant terms available to users on the web site (usually by providing a hyperlink), but does not require a customer to record his or her assent to the terms.

In Nguyen, each page on Barnes and Noble’s web site included a link to the applicable terms of use. If followed, the link would direct a user to the terms, which provided that a user accepts the terms by “visiting any area in the Barnes & Noble.com Site, creating an account, [or] making a purchase.” The terms, among other things, provided that parties would resolve their disputes by arbitration on an individual basis.

In determining whether Nguyen had agreed to those terms, the court of appeals focused on whether he had received “reasonable notice” of them.  The court pointed out that Nguyen was not “required to affirmatively acknowledge the Terms of Use before completing his online purchase” —the “clickwrap” model.  Nor was there “any evidence in the record that Nguyen had actual notice of the Terms of Use.”  The court said, however, that if there had been “actual notice”—presumably meaning proof that the plaintiff had in fact read (or at minimum was aware of) the terms—“the outcome of this case might be different,” because “courts have consistently enforced browsewrap agreements where the user had actual notice of the agreement.”

But in the absence of “actual notice,” the Ninth Circuit  held, “the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.” The answer to that question depends on website “design and content,” including the “conspicuousness and placement of the ‘Terms of Use’ hyperlink” and other design characteristics. Browsewrap agreements will not be enforceable, according to the court of appeals, when the hyperlink is “buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it.” In the court’s view, “consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.”

Certainly not every court would agree with the Ninth Circuit’s approach to “browsewrap” agreements.  As the court itself admitted, Barnes & Noble’s web site provided a “conspicuous hyperlink” to the terms of use “on every page of the website”—and in some places, the “link appears either directly below the relevant button a user must click on to proceed in the checkout process or just a few inches away.”  While the Ninth Circuit held that even this degree of notice is insufficient under California and New York law, the decisions of other courts suggest that they would take a different approach.

Nonetheless, Nguyen is likely to have a significant impact on the enforceability of online contracts, both in the Ninth Circuit and elsewhere.   Accordingly, businesses may wish to consider reviewing their online contracting processes; in many cases, it may be relatively straightforward to adopt changes that satisfy the Nguyen court’s concerns.

ABA Journal Accepting Nominations for Blawg 100

Posted in Uncategorized

The ABA Journal is putting together its annual list of the 100 best legal blogs.  There are many great legal blogs out there; if you think this is one of them, we’d be grateful if you would consider nominating us for the list.

To put in a good word for us, please use this form on the ABA Journal’s website.  The deadline for nominations is August 8, 2014.

Many thanks in advance for your support!

Third Circuit to Consider FTC’s Authority Over Data Security Standards in FTC v. Wyndham

Posted in Class Action Trends

We have written previously about the FTC’s action arising out of the data breach suffered by the Wyndham hotel group, and the company’s petition for permission to pursue an interlocutory appeal regarding the FTC’s use of its “unfairness” jurisdiction to police data security standards. On Tuesday, the Third Circuit granted Wyndham’s petition. Even the FTC had agreed that the “the legal issues presented are ‘controlling question[s] of law,’ and they are undoubtedly important.”  Yesterday’s ruling promises that these questions soon will be considered by the Third Circuit.

Class Action Fairness Act Roundup

Posted in Motions Practice

Nine years after the Class Action Fairness Act of 2005 (“CAFA”) was enacted, parties continue to fight over when federal jurisdiction over significant class and mass actions is proper.

In this post, we provide a rundown of some of the most important recent cases involving CAFA.

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Upcoming Class Action Seminar in Washington, DC

Posted in Class Action Trends

Later this week, DRI—an important professional organization that serves as a leading voice for the defense bar and in-house counsel—will once again hold its annual seminar on class actions in Washington, D.C.  I will be one of the speakers, and will be discussing recent developments affecting arbitration and class actions.  I plan to preview some of the issues that I’ll be discussing on the blog in the weeks to come.   More information about the seminar is available here.  I look forward to seeing readers of our blog and other friends and colleagues.

Wyndham Seeks Immediate Appeal Over Whether FTC Has Authority To Regulate Data Security

Posted in Class Action Trends

We have written previously about FTC v. Wyndham Worldwide Corp., currently pending in federal district court in New Jersey, and its potential significance for data security class actions. A recent opinion in that case has brought it back into the news—and made clear that the stakes are as high as ever.

Over the FTC’s opposition, the district court certified an interlocutory appeal to the Third Circuit regarding its earlier denial of Wyndham’s motion to dismiss. Specifically, the district court certified two questions of law for appellate review: (1) whether the FTC has the authority under Section 5 of the FTC Act to pursue an unfairness claim involving data security; and (2) whether the FTC must formally promulgate regulations before bringing such an unfairness claim. Here is a copy of Wyndham’s petition to the Third Circuit to accept the certified appeal.

ERISA Stock-Drop Class Actions: As One Door Opens for Plaintiffs, Another Closes

Posted in Employment, Securities, U.S. Supreme Court

In ERISA stock-drop class actions, plaintiffs routinely allege that their employers breached a duty of prudence by permitting employees to invest their retirement assets in their company’s stock.  Until today, defendants typically defended against such claims by invoking a judicially crafted presumption that offering company stock was prudent.  Today, in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (pdf), the Supreme Court rejected that presumption.

But all hope is not lost for stock-drop defendants.  Much of the work previously done by the presumption of prudence will now be done by the substantive requirements of the duty of prudence.  The Court offered guidance as to what plaintiffs must demonstrate to survive a motion to dismiss—and the standards suggested by the Court will not be easy to satisfy.

As a starting point, fiduciaries who administer retirement plans governed by the Employee Retirement Income Security Act (ERISA) owe a duty of prudence to plan participants.  See 29 U.S.C. § 1104(a).  To comport with that duty, fiduciaries are generally required to “diversify[] the investments of the plan so as to minimize large losses, unless under the circumstances it is clearly prudent not to do so.”  Id. § 1104(a)(1)(C).  But because Congress wanted to encourage employees to invest in their own companies, it waived the duty of prudence “to the extent it requires diversification” for fiduciaries of an “employee stock ownership plan” (ESOP).  Id. § 1104(a)(2).

Several federal courts of appeals had inferred from this exemption that an ESOP fiduciary’s decision to hold or buy employer stock should be presumed prudent, and that the fiduciary could not be held liable unless the company was in such dire financial straits that its viability as a going concern was in doubt.  In today’s unanimous opinion by Justice Breyer, the Court held that ERISA’s text provides no presumption—in particular, although Section 1104(a)(2) expressly exempts ESOP fiduciaries from the duty of prudence, to the extent that duty requires diversification, it makes no reference to any special presumption.

Having resolved the question presented, the Court proceeded to “consider more fully one important mechanism for weeding out meritless claims, the motion to dismiss for failure to state a claim,” and explained how, in light of the substance of the duty of prudence, motions to dismiss should be assessed.

The Court effectively ruled out stock-drop claims based on publicly available information, invoking its two-day-old decision in Halliburton Co. v. Erica P. John Fund, Inc. (pdf) (previously discussed on the blog), in which the Court opined that investors may reasonably rely on the market to incorporate public information into a stock’s price.  For circumstances in which fiduciaries are alleged to possess nonpublic information that suggests it was imprudent to hold company stock, the Court held that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”  The Court emphasized that ERISA fiduciaries cannot be required to trade on insider information in violation of the securities laws.  And the Court cast doubt on other theories sometimes offered by ERISA stock-drop plaintiffs—that fiduciaries should have ceased making new investments in company stock or disclosed the previously nonpublic information.  The Court noted that ERISA’s requirements must be in harmony with “the complex insider trading and corporate disclosure requirements imposed by the federal securities laws” and the objectives of those laws, and indicated that ERISA’s fiduciary breach requirements do not require plan fiduciaries to take actions that “would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

The Court’s decision fundamentally reconfigures the landscape for ERISA stock-drop class actions.  Although the rejection of the presumption of prudence is likely to result in more suits against retirement plan fiduciaries, the Court’s substantive guidance arms class-action defendants with potent defenses that can be invoked at the motion-to-dismiss stage.  The main issue left open by the Court—when, if at all, fiduciaries must act on nonpublic information—will be litigated extensively in the lower courts, and may ultimately percolate back up to the Supreme Court again.