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Supreme Court Holds that CAFA Doesn’t Let Defendants Remove State AG Actions to Federal Court

Posted in CAFA, Class Action Trends, U.S. Supreme Court

When state attorneys general file suits to seek monetary recoveries based on claimed injuries to private citizens, those lawsuits look like, walk like, and quack like class actions. In fact, in most of these so-called “parens patriae” cases, the same private plaintiffs’ lawyers that bring private class actions are retained to represent states in exchange for the potential to garner substantial attorneys’ fees. While most class actions and mass actions of significance can be removed to federal court under the Class Action Fairness Act of 2005 (“CAFA”), the Supreme Court held today in Mississippi ex rel. Hood v. AU Optronics Corp. (pdf), that lawsuits in which the state is the sole named plaintiff do not as a technical matter fall within CAFA’s coverage of “mass actions,” and therefore that such lawsuits may proceed in state courts. The likely impact of the decision is that businesses will face more class-action-style cases in state-court forums.

CAFA allows defendants to remove, among other things, “mass actions” from state to federal court. Under the statute, a mass action is “any civil action … in which monetary relief claims of 100 or more persons are proposed to be tried jointly.” 28 U.S.C. § 1332(d)(11)(B)(i). The question facing the Court in Hood was whether a parens patriae suit filed by a State as the sole plaintiff constitutes a mass action when the suit includes claims for restitution based on injuries suffered by the State’s citizens.

The case arose out of a lawsuit filed in state court by the State of Mississippi alleging that manufacturers of liquid crystal displays (“LCDs”) had formed a cartel to restrict competition and raise prices. The State sought, among other forms of relief, restitution for its own purchases of LCD products and for the purchases of its citizens. The manufacturers removed the case to federal court, arguing that it qualified as a mass action. The district court found that the case was a mass action, but remanded under CAFA’s “general public exception.” On appeal, the Fifth Circuit reversed, agreeing with the district court that the case qualified as a mass action but finding that no exception to federal jurisdiction under CAFA existed. The Fifth Circuit’s decision conflicted with rulings in the Fourth, Seventh and Ninth Circuits, which had all held that similar lawsuits were not “mass actions” under CAFA.

The Supreme Court granted review to resolve the circuit split. Today, in a unanimous opinion by Justice Sotomayor, the Court reversed the Fifth Circuit’s decision, holding that such parens patriae actions do not qualify as mass actions under CAFA. The Court held that the “100 or more persons” language in CAFA’s mass action provision refers to named plaintiffs only, and does not encompass unnamed persons who are real parties in interest. Slip op. 5-10. Citing CAFA’s numerosity requirement (28 U.S.C. § 1332(d)(5)(B)), the Court noted that Congress knew how to include unnamed persons in a definition, but chose not to do so with respect to mass actions. Id. at 6. Further, the Court determined that the “100 or more persons” were later specified as the “plaintiffs” in the same provision and that the term “plaintiffs” could not include unnamed parties. Id. at 6-8. The Court concluded that construing “plaintiffs” to include unnamed real parties in interest would stretch the meaning of “plaintiff” beyond its common understanding as a party who brings a civil suit. Id. at 8-9.

In addition, the Court noted CAFA’s requirement that a removed case shall not be transferred to another court “unless a majority of the plaintiffs in the action request transfer.” Id. at 10. If “plaintiffs” included unnamed parties, the Court found, it would be difficult for a court to poll all of the real parties in interest to decide whether the case could be transferred. Id. In addition, the Court found that the mass action provision functions largely as a “backstop” to ensure that plaintiffs cannot evade federal jurisdiction under CAFA by naming a host of plaintiffs rather than using the class device. Id. at 11. According to the Court, if Congress wanted CAFA to authorize removal of representative actions brought by a state, it would have provided for the removal under the class action mechanism, not the mass action provision. Id.

Finally, the Court found that it was not proper in the mass action context to apply a background principle requiring courts to look behind the pleadings to ensure that parties are not improperly creating or destroying diversity jurisdiction. Id. at 11-13. According to the Court, this background principle had not previously been applied to count up unnamed parties but was typically applied to determine which parties’ citizenship should be considered in determining diversity. Id. at 12. In addition, by prohibiting defendants from joining unnamed individuals to turn a case into a mass action, see 28 U.S.C. 1332(d)(11)(B)(ii)(II), Congress indicated that it did not want courts to look behind the pleadings to attempt to find the real parties in interest. Id. at 13.

Today’s decision is highly significant for businesses. State attorneys general already have been filing enforcement actions in increasing numbers. And, as we have discussed before, some members of the plaintiffs’ bar have been lobbying states to deputize them as acting attorneys general so that they may file lawsuits as parens patriae actions in order to avoid federal jurisdiction and instead proceed in state court, which they perceive as a more hospitable forum. The Court’s decision today will likely encourage the private plaintiffs’ bar to redouble those efforts.