Challenging Adequacy of Amount in Controversy After Removal Under CAFA

December 4, 2020

by: Colin E. Flora

Once again, our discussion takes us outside of Indiana as we look to a recent opinion from the Ninth Circuit that sheds some important light into how to challenge removal of class actions to federal court under the Class Action Fairness Act (“CAFA”). Before we dive into Harris v. KM Industries, Inc., we first need to take a look at the basics of CAFA jurisdiction in class actions and the Supreme Court’s opinion in Dart Cherokee Basin Operating Co., LLC v. Owens.

Turning first to a brief overview, let us crib from one of our prior discussions on CAFA, for the following:

CAFA, like many federal laws, did not smoothly slide into the U.S. Code. It altered numerous existing sections. One of those sections is 28 U.S.C. § 1332, the section most well-known for permitting diversity jurisdiction. Section 1332(d)(2) sets the amount in controversy to exceed $5 million. This means simply that the stakes of the case for the defendant is at least $5 million — well, technically a penny more than $5 million, for at $5 million even, the amount in controversy does not “exceed” $5M.

The reason CAFA matters in this context is because if its requirements are satisfied, then a case properly filed in state court may be removed to federal court. That is, CAFA expands the jurisdiction of federal courts in the setting of class actions.

In 2014, the Supreme Court was confronted with the question of what obligations befall a defendant who is facing a state-court class action and seeks to remove the case from state court and invoke the jurisdiction of a federal court. The result was the majority decision in Dart Cherokee. Prior to that decision, there was a split between the federal circuits as to whether a defendant seeking to remove the case need only plausibly allege that the threshold amount in controversy was met or needed to attach evidence to demonstrate that it was. As we previously discussed, the Court concluded that no evidence need be attached to the notice of removal.

Note, however, that just because no evidence need be attached to the notice of removal does not mean that there is no mechanism for challenging a lack of sufficiency in the amount in controversy. The Dart Cherokee majority opinion instructs:

If the plaintiff contests the defendant’s allegation, §1446(c)(2)(B) instructs: “[R]emoval . . . is proper on the basis of an amount in controversy asserted” by the defendant “if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds”  the jurisdictional threshold. 1Link to the text of the note This provision, added to §1446 as part of the Federal Courts Jurisdiction and Venue Clarification Act of 2011 (JVCA), clarifies the procedure in order when a defendant’s assertion of the amount in controversy is challenged. In such a case, both sides submit proof and the court decides, by a preponderance of the evidence, whether the amount-in-controversy requirement has been satisfied.

Put succinctly, after removal has occurred, the plaintiff may call the defendant to task and have the court decide whether the amount in controversy really does exceed the $5 million threshold. That is precisely what played out in Harris v. KM Industries.

The Ninth Circuit majority—it was a split (2-1) decision—began the substantive portions of its analysis by observing that a challenge may arise either as a facial attack on removal or a factual attack. Distinguishing the two avenues, the court summarized, “A ‘facial’ attack accepts the truth of the [defendant’s] allegations but asserts that they ‘are insufficient on their face to invoke federal jurisdiction.’ A factual attack ‘contests the truth of the . . . allegations’ themselves.” If the challenge is factual, then the defendant, as the proponent for federal jurisdiction, bears the burden “to show, by a preponderance of the evidence, that the amount in controversy exceeds the $5 million jurisdictional threshold.” Evidence from beyond the pleadings may be submitted, but it is not necessarily required.

In Harris, there was a dispute over whether the challenge was facial or factual. The plaintiff did not assert evidence from outside the pleadings, which would typically signify a mere facial attack. Nevertheless, the plaintiff did challenge the truth of the defendant’s allegations underlying its methodology for calculating an amount in controversy greater than $5 million. Accordingly, the majority found it was a factual challenge, requiring the defendant to carry its burden to establish by a preponderance of the evidence that the amount exceeds $5 million. In order to do so, the defendant had to support “its ‘jurisdictional allegations with competent proof.’” Because the assumptions used in the defendant’s calculations were unreasonable, the Ninth Circuit affirmed the district court’s remand order.

An important extra detail from Harris is that the defendant would not be afforded a second bite at the apple to produce more evidence to support its position: “Finally, because both parties were afforded the opportunity to place evidence on the record supporting their respective positions as to the amount in controversy . . .  remand to the district court for further factfinding is not required.”

While there was a spirited dissent, it merits only minimal discussion for our purposes because it turns primarily on circumstances unique to the Harris case. The one important take away from Judge Collins’ dissent is that the reasonableness of a defendant’s methodology for calculating the amount in controversy and attending assumptions cannot be assessed in a vacuum, but must be considered in light of the specific allegations of the complaint along with the attending scope and breadth of the circumstances alleged and the relief sought.

Join us again next time for further discussion of developments in the law.

Sources

*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.

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