Class Action, SCOTUS, and Statutory Evasion

There are few problems of greater complexity than developing a set of legal rules that allows for the effective integration of state regulation with individual choice. That problem came to bear on Monday, January 7, 2013 in the oral argument before the United States Supreme Court on the question of how to read the $5 million threshold that is contained in the 2005 Class Action Fairness Act (CAFA), which allows a defendant to remove a case from state court into federal court if the class has more than 100 members and the total amount at stake in the controversy exceeds $5 million.

The point of this limitation was to make sure that defendants were not trapped in certain state court hellholes, which could claim jurisdiction over a national dispute because some small fraction of class members had contact with the state in question.  The competition among certain state districts to bring these actions provoked a huge national outcry that eventually resulted in the passage of a complete statute that did afford much relief to corporations that were so stranded in state court.

All statutes, however, count only as the opening move in a complex series of strategic maneuvers.  More concretely, the question before the Court in The Standard Fire Insurance Company v. Knowles, is whether the plaintiffs can seek by stipulation to limit the class claims to under $5 million in order to avoid the removal into the chillier environment of a federal district court.  That one maneuver raises at least two concerns. 

The first is that it could signal the willingness of the plaintiff’s attorney to cut back on the size of recovery to potential class members in order to secure a more favorable forum for the class, which could be interpreted as a departure from its fiduciary duty. But the response to that is: if the class members are better off with a larger shot at a smaller pie, it is not a breach of duty for a lawyer to maximize potential recovery by reducing the litigation risk.

The second difficulty is harder to deal with. The stipulation to limit damages could be part of a larger plan whereby similar class actions are filed in state court, each class with fewer members than a larger class. The separate actions could proceed along parallel tracks, and perhaps be consolidated for trial down the road. The question is whether this division should be disregarded so that the several class actions should be treated as one for the purpose of the Class Action Fairness Act, at which point removal is again proper for all the related cases.

In the course of oral argument, Justice Elena Kagan took the strong position that the plaintiff Knowles was the master of his suit, which he could fashion in whatever way he pleased.  It was not, on her view, the job of any court to second guess the plaintiff.  “He gets to decide which claims to bring. He gets to decide how many years’ worth to ask for. He gets to decide which defendants to sue.” Justice Breyer was not so sure, noting that the language of CAFA might support that result, but that the purpose of the statute seems to cut in the opposite direction.

On this one, the Breyer position is correct. It is always the case that any party can choose its own claim in a world without regulation. But the regulation opens the doors to strategic behavior, and that abusive behavior must be closed down. If there is a valid statute that says that workers who are employed for 30 hours per week are entitled to health care benefits, an employer cannot duck that statute by splitting the job into two 15 hour contracts so as to avoid the regulation. The law is rife with cases that make sure that these contracts are bona fide, and not clever ruses.

Closer at hand is the situation dealing with a plaintiff’s cause of action in situations where subrogation rights are at issue. Those subrogation rights state that if the plaintiff wins the lawsuit, it must pay, out of those proceeds, a health care provider a sum to compensate it for the medical expenses that it incurred. A plaintiff cannot evade that restriction by deciding to sue the defendant only for pain and suffering damages, and then pocket the full amount in settlement by claiming that none of the money represents medical expenses. The recharacterization of the damage element to the case cannot be used to defeat third party rights. If medical expenses come first generally, then they do so no matter how the plaintiff pleads.

In this instance, the key question is whether that kind of evasion is at stake. I see little harm in allowing the plaintiff to waive damages in one case, so long as that action is done in isolation. But if it turns out the plaintiff splits a larger class into smaller components, there is an evasion that should be blocked, just as it is done in countless cases where persons by unilateral action or voluntary contract seek to defeat the role of the statute. In this case, it appears as though that second element is very much in the wings. 

At one point, Chief Justice Roberts asked whether the plaintiffs could file two class actions, one for persons whose last names begin with A to K, and the other for parties who last names begin with L through Z. He hit the nail on the head. Clearly the loophole is too large to be ignored. Put otherwise, the plaintiff should be allowed to limit the scope of one class action so long as there is no parallel class action waiting in the wings. At that point, the plaintiff has to give up something of value, which is not done when the second suit is filed on the heels of the first.

Let’s hope that the Supreme Court sees it this way.

  1. genferei

    Just curious: why does the Act repeatedly say it is motivated by concerns about “interstate commerce” as well as “diversity jurisdiction” when Article III Section 2 of the Constitution seems to make Federal jurisdiction unarguable?

    The judicial power shall extend … to controversies … between citizens of different states….

    Is this just post-New Deal, pre-Obamacare cod jurisprudence that reference to “interstate commerce” makes everything constitutional, so why not add the magic words?

  2. SpinozaCarWash

    It is difficult to reconcile Justice Kagan’s position with the well-pleaded complaint rule from the case of Louisville & Nashville Railroad Company v. Mottley.

    The rule says that a plaintiff cannot base federal question jurisdiction on his anticipation that the defendant will raise a federal statute as a defense.  Instead, the Court read § 1331 to require the plaintiff to allege the defendant’s direct violation of the Constitution, laws, or treaties of the United States.  

    This seems quite similar to the type of evasion in Knowles, except that here the plaintiff wishes to avoid federal jurisdiction.  In both cases, the courts do not afford plaintiffs the generous deference that Justice Kagan’s remarks suggest.

  3. Keith

    Professor Epstein, thanks for posting these cases. You are the reason I joined Ricochet, to listen to your podcast.

    I’m just interested, but not a lawyer.

    Reading the statute, it puts an “and” after the 5 million amount in paragraph 2. doesn’t that mean 2 conditions have to be met. If Knowles limited the plaintiffs to citizens of the state, why would the amount matter?

    Also, Paragraph 4 indicates the district court “shall decline to exercise jurisdiction under paragraph 2 if certain conditions are met, including:

    “greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed”

    Is there a reason Knowles couldn’t petition to keep it in state, but have the amount over 5 million?

    Please pardon me if I missed something obvious.

  4. Keith

    Also, what’s it like to be a man who can just throw this out in the ether with such confidence:

    “On this one, the Breyer position is correct.”  (meaning of course that Justice Elena Kagan took the wrong (but strong :-) position?