In 2005, Congress passed the Class Action Fairness Act (“CAFA”) “to facilitate adjudication of certain class actions in federal court.” Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547, 554 (2014). CAFA relaxed the strictures of diversity jurisdiction to allow more plaintiffs to file class actions in federal court, and it provided separate removal authority that made it easier for class-action defendants to insist upon a federal forum. But, as the Seventh Circuit’s recent decision in Tri-State Water Treatment, Inc. v. Bauer, No. 16-3938 (7th Cir. Jan. 5, 2017), illustrates, courts have not interpreted CAFA to be as much of a break with general jurisdictional rules as Congress envisioned.

Federal jurisdiction, class actions, and CAFA

Federal courts have limited jurisdiction. They adjudicate cases that involve questions of federal law (federal question jurisdiction) or arise between citizens of different states (diversity jurisdiction). As a general matter, federal diversity jurisdiction reaches any case in which no plaintiff is a citizen of the same state as any defendant and there is at least $75,000 at stake. 28 U.S.C. §1332. When a plaintiff chooses state court as the forum to litigate a suit that meets the criteria for federal diversity jurisdiction, the defendant(s) can remove—that is, transfer—the case to federal court. 28 U.S.C. §1441.

Class actions are a particular kind of lawsuit that seek to aggregate the claims of large groups of plaintiffs for resolution in a single proceeding. In some circumstances, class actions are essential, because each plaintiff’s individual harm is real, yet too slight to justify litigation on its own. Consider, for example, a scenario where several companies that produce a popular consumer product allegedly conspired to fix prices at an inflated level. If every consumer who bought the product in the past few years overpaid by $2 per unit purchased, even those consumers who used the product most heavily suffered losses of only a few hundred dollars—nowhere near enough to offset the costs of litigating a large antitrust action. But if millions of consumers bought the product, their total losses could be enough to make litigation, on a class-wide basis, feasible.

The class-action mechanism is ripe for abuse, however, because the threat of a massive judgment—even a small judgment per plaintiff adds up when awarded to a class with hundreds of thousands of members—can threaten a defendant’s viability. Plaintiffs and their lawyers can use that threat as leverage to extract settlements that shield defendants from the risk of outsized judgments and highly compensate the plaintiffs’ lawyers, while providing nominal (or even no) benefits to most members of the plaintiff class.

Such leverage is particularly effective—and therefore the potential for abuse is especially acute—in some state courts, where the procedural rules are more favorable to class-action plaintiffs than they are in federal court. CAFA sought to ameliorate this concern by bringing more class actions into federal court, rather than state court. It allowed plaintiffs to file in federal court, even if some members of the plaintiff class hailed from the same states as one or more defendants, so long as the plaintiff class included at least 100 people and there was at least $5 million at stake. 28 U.S.C. §1332(d)(2).

CAFA also made it easier for class-action defendants to remove litigation to federal court. It created specific authorization for the removal of class actions from state court to federal court. 28 U.S.C. §1453(b). It also excepted class-actions from several restrictions that generally apply to removal, including that removal must be sought within one year of the suit’s beginning, that removal is prohibited if a defendant is a citizen of the state in which the suit was brought, and that all defendants must unanimously seek removal. Id. And CAFA authorized an immediate appeal to settle disputes over the proper forum, see id. §1453(c), whereas issues of removal and remand typically cannot be appealed until after final judgment.

Courts have not acted upon the full breadth of CAFA’s removal provisions. As I argued in an amicus brief to the U.S. Supreme Court, the plain text of CAFA authorizes removal by a defendant in any class action, without regard to whether there are at least 100 plaintiffs and $5 million at stake. Notwithstanding the text of CAFA’s removal provision, which does not reference the requirements to file a class action in federal court, courts have routinely held that removal is available to class-action defendants only if the suit involves at least 100 plaintiffs and $5 million. See, e.g., Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 617 (7th Cir. 2012); Hart v. FedEx Ground Package Sys. Inc., 457 F.3d 675, 679 (7th Cir. 2006).

The Seventh Circuit’s decision in Bauer rejects an attempted removal of a class action on different grounds. The Bauer holding is not directly contrary to CAFA’s text, but it exposes a fascinating tension between CAFA’s purpose and its integration into the larger federal jurisdictional scheme.

Bauer holds that not all class-action suits can be removed from state court

Bauer began as a collection action in small claims court in Illinois. Tri-State Water Treatment, Inc. installed a water treatment system at the home of Stacey and Michael Bauer. When the Bauers did not pay Tri-State’s bill, Tri-State filed suit. In response, the Bauers filed a counterclaim, alleging—on behalf of a putative class of buyers across several states—that Tri-State used fraudulent sales tactics. Several months later, the Bauers amended their counterclaim to add two additional counterclaim defendants, including Home Depot U.S.A., Inc. The Bauers allege the counterclaim defendants offered free in-home water tests and used the results to mislead consumers into purchasing unneeded water treatment systems.

Home Depot responded by invoking CAFA’s removal provision to transfer the suit from state to federal court. At the Bauers’ request, the federal court sent the case back to state court. The remand order reasoned that CAFA did not authorize Home Depot to remove the case. Home Depot then invoked CAFA’s provision allowing petitions for interlocutory appeal and asked the Seventh Circuit to decide where the case should proceed. The Seventh Circuit agreed to hear the appeal and affirmed the district court’s conclusion that Home Depot cannot remove this case from state court.

The Seventh Circuit’s decision turned on its conclusion that CAFA “does not support treating an original counterclaim-defendant different from a new one.” Bauer, slip op. at 2. This proposition grows out of an earlier decision, First Bank v. DJL Properties, LLC, 598 F.3d 915 (7th Cir. 2010). These decisions, individually and together, undermine CAFA’s purpose and its efficacy.

First Bank held that a plaintiff who chose to litigate in state court could not then seek removal to federal court solely because the original defendant filed a class-action counterclaim. Id. at 916-17. There is an intuitive logic to this. It is not obvious the original plaintiff should get to reconsider its strategic decision to litigate in state court just because the defendant raises a class-action counterclaim. There is a legal logic to it as well. The Seventh Circuit explained that CAFA authorizes removal by a “defendant,” which term has been long understood in other removal statutes to exclude a litigant who files an action as a plaintiff in state court and then, after the original defendant files a counterclaim, “wears two hats, one as plaintiff and one as defendant.” Id. at 916 (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941)).

However, the First Bank court gave short shrift to counterarguments. While the court placed significant import on the original plaintiff’s choice of forum, it did not consider that often, including in the underlying claims giving rise to the First Bank case, the plaintiff has no choice between filing in state or federal court because there is not enough money at stake to trigger federal diversity jurisdiction. And, though the Seventh Circuit asserted that CAFA “did not say anything similar to: ‘Courts may allow removal whenever the case involves a large, multi-state class action,’” id. at 918, that is essentially the correct reading of CAFA and accords with Congress’s goals in passing the statute.

Bauer compounds these errors. It acknowledges that a party, like Home Depot, added to litigation for the first time as an additional class-action counterclaim defendant “is not one who voluntarily chose state court.” Slip op. at 8. It nonetheless falls back on the notion that such a party falls outside the meaning of “defendant” as developed in longstanding removal case law and summarized in First Bank. The Bauer decision considers three options—(1) allowing removal of the entire case, (2) splitting the class-action counterclaim so that the new defendant can remove and the original plaintiff cannot, and (3) denying any right of removal—before concluding that “the one that does the least damage to both the jurisdictional statutes providing for removal and litigation efficiency is the third.” Id. at 9. But in weighing these options, the decision pays insufficient attention to CAFA itself, and how CAFA differs from other jurisdictional statute providing for removal.

Bauer most clearly reveals its shortcomings when it addresses CAFA most directly. In the court’s words:

CAFA only selectively increased federal jurisdiction over multi-state class actions. It did not roll out the welcome mat for all multi-state class actions. Instead, it established restrictions on what class actions the federal courts could and could not entertain. These restrictions include amount-in-controversy and numerosity requirements…

Id. at 12 (emphasis in original). This oversimplifies CAFA—and sells the statute short. CAFA expressly did invite removal of all multi-state class actions. There is no basis in CAFA for applying the referenced restrictions to class actions removed from state court. Bauer is perhaps the most jarring of several decisions in which the Seventh Circuit has imposed constraints on the expanded federal jurisdiction Congress passed CAFA to provide.

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