Seventh Circuit Clarifies CAFA Removal Standard
Last Friday the Seventh Circuit, in an opinion authored by Chief Judge Frank Easterbrook, clarified the standard to be used by courts in evaluating a defendant's estimation of the amount in controversy. See Back Doctors Ltd. v. Metropolitan Property & Cas. Ins. Co., 2011 WL 1206184 (7th Cir. Apr. 1, 2011).
In Back Doctors, the plaintiffs alleged that the insurer used a computer program that caused it to pay medical providers less than it was required to pay them under the policies. The plaintiffs alleged that use of this computer program was not only a breach of contract, but also violated Illinois's Consumer Fraud Act. The case had been filed as a class action in state court.
The defendant removed, citing CAFA, arguing that the amount in controversy exceeded $5 million. No one disputed that so-called "actual" damages exceed $2.9 million. But plaintiffs argued that because they had not actually pled a punitive damages claim and had not included a prayer for punitive damages in their complaint, it was wrong of the defendant to include in its estimated amount in controversy more than $2.1 million in punitive damages.
The trial court found for the plaintiffs and remanded the case to state court; but the Seventh Circuit granted the appeal to clarify the applicable standards.
As Chief Judge Easterbrook explained, Seventh Circuit jurisprudence used to refer to a "reasonable probability" standard, which was intended to mean that although the proponent of federal jurisdiction was entitled to have his allegations about the amount-in-controversy accepted unless it was impossible for the plaintiff to recover the jurisdictional minimum, jurisdictional facts "must be alleged and proved by a preponderance of the evidence," and the phrase "reasonable probability" was used to illustrate that point. 2011 WL 1206184 at *1 (citations omitted).
But "many judges misunderstood the phrase as requiring the proponent of federal jurisdiction to establish that it was likely that the plaintiff would obtain a judgment exceeding the amount-in-controversy requirement." Id.
Subsequently, the court issued decisions trying to clarify and then dump the "reasonable likelihood" requirement, and it issued Back Doctors to make it clear exactly what the standard is:
The legal standard was established by the Supreme Court in St. Paul Mercury: unless recovery of an amount exceeding the jurisdictional minimum is legally impossible, the case belongs in federal court. Only jurisdictional facts, such as which state issued a party's certificate of incorporation, or where a corporation's headquarters are located, need be established by a preponderance of the evidence.
There is no presumption against federal jurisdiction in general, or removal in particular. The Class Action Fairness Act must be implemented according to its terms, rather than in a manner that disfavors the removal of large-stakes, multi-state class actions. When removing a suit, the defendant as proponent of federal jurisdiction is entitled to present its own estimate of the stakes; it is not bound by the plaintiff's estimate. Once this has been done, and supported by proof of any contested jurisdictional facts, the presumption is the one stated in St. Paul Mercury: the estimate of the dispute's stakes advanced by the proponent of federal jurisdiction controls unless a recovery that large is legally impossible. So the question here is not whether the class is more likely than not to recover punitive damages, but whether Illinois law disallows such a recovery.
Id. at *2 (citations omitted).
The court went on to analyze the availability of punitive damages under the plaintiffs' complaint. It noted that the plaintiffs had not, in their complaint, disclaimed any amount above the jurisdictional minimum. And it observed that Illinois law would allow plaintiffs to amend their complaint up until the time of trial to include punitive damages -- particularly where fraud already had been pled and was part of the case. The court also refused to credit a post-motion declaration from plaintiffs, observing that removal is judged at the time of removal, and subsequent facts should not be considered. And the court noted that the named plaintiffs here had a fiduciary duty to the class, and thus could not just throw away a claim that might bring a large recovery to the class members.
The court ultimately held that removal was proper, reiterating: "When a plaintiff does not tie its own hands, the defendant is entitled to a good-faith estimate of the stakes. If that estimate exceeds the jurisdictional minimum, it controls and allows removal unless recovery exceeding the jurisdictional minimum would be legally impossible." Id. at *3.
