by Cory Clements, a 2013 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.
In their ongoing quest to circumvent the Class Action Fairness Act (CAFA), plaintiffs’ lawyers have increasingly enlisted the aid of sympathetic state Attorney Generals (AG). In order to keep class action (or “mass action”) lawsuits in state court, plaintiffs’ lawyers pitch their ideas to state AGs who in turn bring suit on behalf of the state as parens patriae. This trick works because a suit brought only in the name of an AG on behalf of the state evades federal removal jurisdiction. Historically, because states are not considered “citizens” for purposes of diversity jurisdiction, when a state brings suit against an out-of-state corporation there can be no diversity, which will keep the suit in state court. But state court judges and juries often are biased against out-of-state interests. That works out well for the plaintiffs’ lawyers.
Late last year the U.S. Court of Appeals for the Fifth Circuit held in Mississippi v. AU Optronics Corp. that a suit brought by Mississippi AG Jim Hood (with an assist from a Minnesota plaintiffs’ firm) against a manufacturer of liquid crystal display (LCD) screens on behalf of Mississippi citizens was removable to federal court under CAFA’s mass action provision. Citing binding authority from a previous Fifth Circuit case, Louisiana ex rel. Caldwell v. Allstate Insurance Company, the court reasoned that “[i]t is well-established that in determining whether there is jurisdiction, federal courts look to the substance of the action and not only at the labels that the parties may attach.” Citing CAFA, Judge Stewart lauded application of this rule in order “to prevent jurisdictional gamesmanship.”
By holding parens patriae suits as “mass actions” under CAFA, the Fifth Circuit split from the Fourth, Seventh, and Ninth Circuits. Those circuits laid down a bright-line rule that even when the state pursues restitution for its citizens, that fact does not alter the nature of the overall action, which is a suit on behalf of the state as the “real party in interest.” In contrast, the Fifth Circuit held that such suits are removable so long as there is minimal diversity and the amount in controversy exceeds $5 million, and that such a determination should be made by examining the complaint on a claim by claim basis. Furthermore, courts should look to the real parties in interest and subjectively determine whether the state alone is the only real party in interest. In Mississippi v. AU Optronics Corp., the court determined that:
the real parties in interest are numerous — far in excess of 100. Contrary to the State’s assertions, Mississippi is thus not the sole party in interest. Instead, the State (as a purchaser of LCD products) and individual citizens who purchased the products within Mississippi possess ‘rights sought to be enforced.’
This May, the Supreme Court granted certiorari in AU Optronics Corp. to settle the split among the Circuits regarding the removal of parens patriae suits to federal court. Earlier last term, the high Court definitively rejected another popular plaintiffs’ lawyer CAFA circumvention tactic – stipulating that the class action wouldn’t seek more than $5 million is damages – in Standard Fire Insurance Co. v. Knowles. It would be unwise, however, to view Knowles as predictive of how the justices will rule this coming Term in AU Optronics Corp.