CAFA Exception or Requirement? A Pane-ful Choice for Defendants

By Kyle Medin

In last fall’s television sensation Squid Game, unwilling participants in a gruesome game show compete in a series of deceptively simple challenges where one wrong move can have lethal consequences. The penultimate challenge is to cross a bridge made up of pairs of glass panes. In each pair, one pane is tempered glass, which will hold a person’s weight and allow him to proceed to the next pair. The other is normal glass, which will shatter under his weight, sending him plummeting to his doom in the chasm below. The panes look identical to the untrained eye, but the contestants must correctly decide where to jump if they hope to survive the game. For defendants, the 2005 Class Action Fairness Act (“CAFA”) hides a similar series of high-stakes decisions between nearly identical choices.

CAFA sought to increase the proportion of class actions that could proceed in the federal courts. The Senate Judiciary Committee’s Report on CAFA asserted that state courts applied the governing rules of class actions inconsistently, and too readily approved unwise settlements, which “offer[ed] little – if any – meaningful recovery to the class members and simply transfer[red] money from corporations to class counsel.” CAFA aimed to protect the rights of plaintiffs and defendants alike, but one aspect of it has left defendants feeling like they are crossing a bridge of glass panes: the decision of whether certain provisions of CAFA are “exceptions” or “requirements,” and therefore whether they are a plaintiff’s or defendant’s burden to argue and prove. Let’s jump in.

The Rules of the Game – CAFA

CAFA allows cases with at least $5,000,000 in controversy and where there is “minimal diversity” (i.e., where at least one defendant is a citizen of a different state than at least one plaintiff) to be brought in or removed to federal court. So, in the class action context, CAFA modifies the background rule on federal diversity jurisdiction, 28 U.S.C. § 1332, which normally requires only $75,000 in controversy but complete diversity between plaintiffs and defendants. Where a case qualifies for federal jurisdiction under CAFA, defendants will often benefit from removal to federal court on this modified diversity standard, for the reasons the Judiciary Committee asserted and more. To accomplish this, a defendant must file a notice of removal. Normally, a defendant needs the consent of all co-defendants to remove the case, but under CAFA, a sole defendant can remove the case without consent. 28 U.S.C. § 1453(b). Removal is still accomplished on the filing of the notice as usual; no permission by the state or federal court is required. Still, before filing, defendants must first decide which arguments to include in the notice.

That decision is more complex than it might seem at first glance. Section 1332, as modified by CAFA, contains a host of other provisions beyond minimal diversity and $5 million in controversy, presenting further limits on when CAFA jurisdiction can be invoked. The case law and Senate Report agree that some of these limits are “exceptions,” while others are “requirements.” The distinction is an important one, because it determines who has the burden of proof.  The Senate Report states, and the U.S. Supreme Court confirmed in Breuer v. Jim’s Concrete of Brevard, Inc., 538 U.S. 691, 698 (2003), that defendants have the burden to prove in a notice of removal that the requirements of federal jurisdiction are met, but they do not need to prove that the exceptions do not apply. Plaintiffs, on the other hand, carry the burden to prove that an exception applies in challenging the removal with a motion to remand.

This distinction is critical for defendants. If a defendant fails to argue that a certain requirement is met, thinking it was an exception, the issue may be waived on a remand challenge, and the defendant may find itself stuck in state court. If, on the flip side, a defendant makes an affirmative argument against an exception, thinking it was a requirement, the defendant, at best, unnecessarily expends valuable time and effort, and at worst, highlights a potential argument for the plaintiff that the plaintiff would not otherwise have raised.

The federal circuits and Senate Report have not been perfectly clear which parts of § 1332(d) are requirements and which are exceptions. Further complicating things, courts are not uniform in their use of the two terms. Because there is no clear rule dividing the provisions’ burdens between plaintiffs and defendants, a defendant working through the provisions of § 1332(d) may feel like it is leaping between glass panes. Fortunately, there are some places in case law and the Senate Report where we can look before we leap.

1332(d)(2) – The Threshold Requirements

This one is just a warm-up. The courts and Senate Report agree that the provisions of 1332(d)(2) –namely, the minimal diversity and $5 million amount in controversy provisions – are requirements rather than exceptions. This makes intuitive sense, too: in the pre-CAFA version of § 1332, all of the requirements related to the definition of diversity and the amount in controversy. Subsection (d)(2) is therefore crucial to address in a notice of removal.

1332(d)(3) – The Discretionary Exception

Safe on the first pane, we look ahead to subsection (d)(3) which allows the district court the discretion to “decline to exercise jurisdiction” over a class action in which between one and two thirds of the class are citizens of the state in which the action was originally filed, based on the court’s weighing of six discretionary factors. This is also a fairly easy choice: the courts are unanimous in treating subsection (d)(3) as an exception, placing the burden on the plaintiff to prove in a motion to remand that the exception applies. Bartels by & through Bartels v. Saber Healthcare Grp., LLC, 880 F.3d 668, 681 (4th Cir. 2018); Preston v. Tenet Healthsystem Mem’l Med. Ctr., Inc., 485 F.3d 804, 814 (5th Cir. 2007); Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1023 (9th Cir. 2007); Evans v. Walter Indus., Inc., 449 F.3d 1159, 1164–65 (11th Cir. 2006) (stating that the only requirements of CAFA are in (d)(2)). It poses little risk, therefore, to leave (d)(3) to the plaintiff on a motion to remand. Mind your footing, though: at least the Fifth Circuit has called (d)(3) a requirement, but held that it was the plaintiff’s burden to prove anyway (making it a de facto exception).

1332(d)(4) – Exceptions for Local and Home-State Controversies

The courts have also largely treated (d)(4) as an exception. Bartels, 880 F.3d at 681; Frazier v. Pioneer Americas LLC, 455 F.3d 542, 546 (5th Cir. 2006); Hart v. FedEx Ground Package Sys. Inc., 457 F.3d 675, 679 (7th Cir. 2006); Serrano, 478 F.3d at 1023; Evans, 449 F.3d at 1164–65. The language of (d)(4) is broken into subsections (A) and (B), commonly referred to as the “local controversy” and “home state” exceptions, respectively. These exceptions both act to keep in state courts those class actions that center on members of that state and/or injuries within that state. The Eleventh Circuit noted that the burden of proving the (d)(4) exceptions is particularly appropriate to put in the plaintiff’s hands (assuming the plaintiff seeks remand), since the plaintiff will be in a superior position to ascertain the citizenship of the various members of the class it proposes to represent. Evans, 449 F.3d at 1166. These, too, can be left to the plaintiff on a remand challenge. Still, we can’t rest on our laurels just yet.

1332(d)(5) – Leap(s) of Faith: State Action and Limited Scope Classes

The provisions of (d)(5) present the most uncertain leaps in the bridge. The language of (d)(5) is again broken into subsections (A) and (B), but these subsections are less similar to each other than the subsections of (d)(4) were. Subsection (d)(5)(A) excludes cases in which the primary defendants are “States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief.” Subsection (d)(5)(B) simply excludes cases in which there are fewer than 100 proposed class members. The courts are divided on whether they consider (d)(5) to contain exceptions or requirements. They have not even agreed whether to group (d)(5)(A) and (B) together, so (d)(5) actually presents defendants with two leaps. Where to leap for each subsection will depend on the forum hosting the game.

Subsection (A): The State Action . . . Exception?

Because subsection (A) is only clearly implicated in specific circumstances, fewer Circuits have considered it compared to its sister subsection. Of those to consider the issue, The Fifth, Tenth, and Eleventh Circuits consider (d)(5)(A) an exception. The Second and Fourth Circuits seem to agree, though they have only addressed subsection (A) in dicta. The Senate Report also calls subsection (A) the “State Action” exception. The Seventh and Ninth Circuits treat subsection (A) as a prerequisite of CAFA jurisdiction. The Third and Sixth Circuits have included subsection (B) but not (A) in a list of requirements, but have not explicitly held subsection (A) to be an exception. The First, Eighth, Federal, and D.C. Circuits have yet to weigh in.

Subsection (B): The Limited Scope . . . Requirement?

Subsection (B) is more widely relevant, perhaps explaining why the Circuits skew towards viewing it as a requirement. The Supreme Court has even hinted that it views subsection (B) as a requirement, listing it alongside the (d)(2) requirements in its 2013 opinion in Standard Fire Ins. Co. v. Knowles, 568 U.S. 588, 592 (2013). Even assuming that was simply dicta, there is a clear consensus among the Circuits. The Second, Third, Fourth, Sixth, Seventh, Ninth, and Tenth Circuits have treated it as a requirement for the defendant to meet. Est. of Pew v. Cardarelli, 527 F.3d 25, 29 n.1 (2d Cir. 2008); L. Offs. of K.C. Okoli, P.C. v. BNB Bank, N.A., 481 F. App’x 622, 625 (2d Cir. 2012); Kaufman v. Allstate New Jersey Ins. Co., 561 F.3d 144, 151 (3d Cir. 2009); Quicken Loans Inc. v. Alig, 737 F.3d 960, 964 (4th Cir. 2013); Salling v. Budget Rent-A-Car Sys., Inc., 672 F.3d 442, 443 (6th Cir. 2012). Hart, 457 F.3d at 679; Faltermeier v. FCA US LLC, 899 F.3d 617, 621 (8th Cir. 2018); Serrano, 478 F.3d at 1020 n.3; Nichols v. Chesapeake Operating, LLC, 718 F. App’x 736, 738 (10th Cir. 2018). Only the Fifth and Eleventh Circuits have held that it is an exception. Frazier, 455 F.3d at 546; Evans, 449 F.3d at 1164–65. The rest have yet to squarely consider the question. Despite this lopsided split between the Circuits, the Senate Report clearly views (d)(5)(B) as an exception, terming it the “Limited Scope” exception.

1332(d)(9) – The Securities Exception

We’ve mustered our courage and deftly leapt through (d)(5), and only one leap separates us from our goal. The next pane offers a breather. Subsection (d)(9) excludes cases in which the sole claim at issue relates to securities or the internal governance of a business enterprise. This subsection has been roundly considered an exception by every Circuit to hear the issue, including the Second, Fourth, Seventh, Eighth, Ninth, and Eleventh Circuits. Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23, 32 (2d Cir. 2010); Dominion Energy, Inc. v. City of Warren Police & Fire Ret. Sys., 928 F.3d 325, 330 (4th Cir. 2019); Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 619 (7th Cir. 2012); Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069, 1073 (8th Cir. 2012); Rainero v. Archon Corp., 844 F.3d 832, 839 (9th Cir. 2016); Lowery v. Alabama Power Co., 483 F.3d 1184, 1200 & n.39 (11th Cir. 2007). Some Circuits have only voiced this opinion in dicta, but their dicta offer a glimpse at potential future holdings. The Senate Report agrees that (d)(9) was intended as an exception as well. We may confidently make this final leap, leave (d)(9) to the plaintiff on a remand challenge, and return to terra firma.

A Final Twist

Now we know (or have some idea) whether the burden to prove the applicability of these provisions lies with the party seeking removal or the party seeking remand, and we have made it across the chasm in one piece. One last twist may delay our celebrations. We have so far assumed for simplicity’s sake that a defendant will be the one filing a notice of removal and a plaintiff will be the one filing a motion to remand. In most cases of removal that is true, but we must remember that CAFA slightly changed that background rule by allowing a single defendant to remove the case without the consent of its co-defendants. Therefore, a defendant may in fact find itself on either side of this analysis: it may be pushing for removal or pushing for remand after a co-defendant removed without its consent. Before we leap, we must confirm our starting position.

A Method to the Madness?

Is there any way to harmonize the trends in how the Circuits view the various provisions of § 1332(d)? One helpful trend is that (d)(3) and (d)(4), both safely considered exceptions, both detail situations in which a court may “decline to exercise jurisdiction” over a class action. Courts have noted that this makes linguistic sense: a court cannot decline to exercise jurisdiction it would not otherwise have, so these must be exceptions. However, this reading is difficult to square with the remaining provisions. For example, subsection (d)(5)(B) has been largely considered a requirement of CAFA, even by the Supreme Court. Its operative language is that when the provision is satisfied, the preceding paragraphs “shall not apply.” Still, (d)(5)(A) is considered by most Circuits to be an exception, and it contains the same operative language. To tie us in further knots, subsection (d)(9), universally considered an exception, also contains the “shall not apply” language. So, simply judging by the operative language of the provision will not get us through this deadly game of hopscotch unscathed.

A more helpful lens through which to view these provisions focuses on assignments of burden, with the acknowledgment that it is difficult to prove a negative. From that perspective, requirements would be those provisions where CAFA jurisdiction proceeds in the presence of a condition, and exceptions would be those provisions where jurisdiction will proceed in the absence of a condition. In other words, both the proponent and opponent of removal should only have to prove the presence of a condition.

Fortunately, the language of § 1332(d) often (but not always) lends itself to this approach. Subsection (d)(2) states that jurisdiction proceeds when the amount in controversy is greater than $5 million and one plaintiff and one defendant are of diverse state citizenship. That would be a requirement, which aligns with the case law and Senate Report. Subsections (d)(3), (d)(4) and (d)(5)(A) all state that jurisdiction proceeds in the absence of a condition: a certain state citizenship composition of the plaintiff class and defendants for (d)(3) and (d)(4), and a state entity that bars relief for (d)(5)(A). These would therefore be exceptions, which aligns with the case law and Senate Report. This approach also aligns with the consensus on subsection (d)(9). The only incongruous result is that (d)(5)(B) states that jurisdiction proceeds in the absence of a class with under 100 members. In that regard, it would be seen as an exception. This aligns with the Senate Report, but the case law is overwhelmingly at odds with this interpretation. A burden-focused lens helps shed some light, but will not completely remove all risk.

The View from the Other Side

In sum, 28 U.S.C. § 1332(d) presents a rather convoluted choice to defendants when deciding what must be included in a notice of removal under the Class Action Fairness Act. The question of which provisions contain exceptions and which contain requirements has not been definitively and completely answered – as we examine the subtle differences between the two panes of glass before us, the Circuits strain for telltale signs as well. The moral of the story is that a defendant, whether filing its own notice of removal or contesting a co-defendant’s notice of removal, should always look before it leaps.