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Are Quasi-Class Action Suits By State AGs Removable Under CAFA (Or, For Securities Fraud Cases, Barred By SLUSA)?

Posted in Antitrust, Class Action Trends, Securities

A number of courts recently have weighed in on a question we’ve blogged before—whether lawsuits by state attorneys general seeking restitution on behalf of private citizens are subject to removal under the Class Action Fairness Act of 2005 (pdf) (“CAFA”). These rulings have broad implications for the litigation of these quasi-class actions.  They also are of substantial importance to determining whether securities fraud actions filed by state attorneys general are precluded by the federal Securities Litigation Uniform Standards Act of 1998 (pdf) (“SLUSA”).

CAFA allows defendants to remove certain significant “class actions” and “mass actions” from state court to federal court. Usually, actions filed by a state acting for itself aren’t removable under CAFA for lack of diversity of citizenship; the state isn’t “a citizen of a state different from any defendant.” 28 U.S.C. § 1332(d)(2)(a). But what if the state is suing to vindicate the financial interests of its private citizens in an action for restitution—a case that looks like a class action, walks like a class action, and quacks like a class action? Is the state still the real-party-in-interest for diversity purposes—or should federal courts consider the private citizens themselves—who actually stand to recover—to be the real-parties-in-interest? According to most courts that have ruled on the issue, the answer depends on whether a single “sovereign” claim in a complaint is enough to exempt the action from removal under CAFA or whether the complaint instead should be analyzed claim by claim to determine removability.

In one recent case—AU Optronics Corp. v. South Carolina (pdf), 699 F.3d 385 (4th Cir. 2012)—the Fourth Circuit held that South Carolina’s suit seeking restitution on behalf of private citizens from manufacturers of liquid crystal display panels for an alleged price-fixing conspiracy does not trigger federal court jurisdiction under CAFA. Although the Fourth Circuit acknowledged that the state sought restitution on behalf of private citizens, it noted that the state was pursuing other, purely sovereign remedies as well, such as forfeiture and penalties. In affirming the district court’s remand to the state court, the Fourth Circuit rejected a “claim-by-claim” approach. Instead, choosing to follow the Ninth and Seventh Circuits’ “whole-case” approach, the Fourth Circuit concluded that the state was the “real party in interest in the lawsuit.” This ruling precludes the removal of what effectively amount to class- and mass-actions when the private plaintiffs (or, often in practice, plaintiffs’ counsel) are able to lobby their state governments to file “quasi-sovereign” enforcement actions seeking restitution.

In contrast, the Fifth Circuit has concluded that although a state’s suit seeking restitution for similar alleged antitrust violations was not a “class action” under CAFA, it was a “mass action” because it sought “monetary relief” for “100 persons or more.” Mississippi ex rel. Hood v. AU Optronics Corp. (pdf), 701 F.3d 796 (5th Cir. 2012). Observing that prior Fifth Circuit precedent “instructs [the courts] to pierce the pleadings and look at the real nature of a state’s claims” on a “claim-by-claim” basis,” the court concluded that “[t]he real parties in interest in Mississippi’s suit are those more than 100 persons . . . who will ultimately benefit from the recovery.” The court thus reversed the district court’s order remanding the case to state court.

For its part, the Second Circuit recently noted the conflict among the circuits in Purdue Pharma L.P. v. Kentucky (pdf), 2013 WL 85918 (2d Cir. Jan. 9, 2013). The Second Circuit declined to weigh in on the issue, however, because—in light of a procedural technicality—the appellant there argued that the suit qualified only as a “class action,” and “not . . . as a ‘mass action’ under CAFA” Id. at *4 n.5. Because the suit there had not been brought under an analogue to Federal Rule 23, the court held that CAFA did not apply, regardless of which approach it might ultimately adopt.

These decisions have implications beyond CAFA. SLUSA prohibits certain state-court securities fraud class actions. 15 U.S.C. § 78bb(f). But similar to CAFA, the statute applies only to suits “by any private party” and in addition includes a savings clause that permits states “to investigate and bring enforcement actions.” Id. In March of this year, the New York Court of Appeals will consider, in People v. Greenberg (pdf) (Index No. 401720/05), whether an action by the state’s attorney general seeking both penalties and restitution on behalf of private citizens is a sovereign “enforcement action” or instead a class action “by [a] private party” within the meaning of SLUSA. In earlier proceedings in the case, the Appellate Division concluded that the action was a permitted sovereign “enforcement action”—thus rejecting the same “claim-by-claim” approach under SLUSA that has divided federal courts in the CAFA context.