In a precedential opinion, the Court of Appeals for the Third Circuit last Friday made significant rulings on the "home state" and "local controversy" exceptions to federal subject matter jurisdiction under the Class Action Fairness Act (CAFA). 

Enacted in 2005, CAFA greatly expanded the types of class actions that defendants can remove from state to federal court based on diversity of citizenship jurisdiction. CAFA permits federal jurisdiction over class actions even when there is only "minimal diversity"—as opposed to "complete diversity"—as long as the amount in controversy and other CAFA requirements are met. Two important exceptions under CAFA are the “home state” and "local controversy" exceptions, under which a class action that otherwise meets CAFA’s requirements cannot be maintained in federal court because the controversy is uniquely connected to the state where the action was originally filed.

Invocation of the "home state" exception requires, among other things, that the "primary defendants" be citizens of the state where the action was brought. In last week’s decision in Vodenichar v. Halcon Energy Props., Inc., the Third Circuit rejected the district court’s conclusion that the out-of-state defendant in the case did not constitute a primary defendant simply because the defendant denied liability in its answer. Instead, the Third Circuit instructed, a district court ruling on whether a defendant is a primary defendant must determine whether the defendant is the "real target" of the plaintiffs' accusations. As part of this inquiry, the district court should consider if the defendant was sued based on its own actions, as opposed to the actions of others through theories such as vicarious liability.

In addition, district courts should ask whether the defendant has potential exposure to a significant portion of the class and would sustain a substantial loss compared to the other defendants, if found liable. The Third Circuit concluded that the out-of-state defendant in Vodenichar was a "primary defendant" under these criteria, and therefore the home state exception did not apply.

The Third Circuit then considered the "local controversy" exception, which requires, among other things, that "no other class action" has been filed in the prior three years asserting the same or similar allegations against any of the same defendants. Contrary to the district court's conclusion, the Third Circuit held that because the prior class action at issue in Vodenichar had been filed by the same plaintiffs and by the same counsel on behalf of the identically-defined putative class, that prior class action did not constitute an "other" class action under CAFA, "but rather is the same case."

The Court emphasized that the purpose of the "no other class action" requirement is to prevent a defendant from being subject to "copycat" class actions in multiple forums by different plaintiffs. Because all requirements of the local controversy exception were met, the Third Circuit held that federal jurisdiction under CAFA did not exist, and it remanded the case to state court.

Ballard Spahr's Consumer Class Action Litigation Group has substantial experience defending consumer class actions, including economic loss, consumer fraud, and warranty claims. For more information, contact Joel E. Tasca at 215.864.8188 or tasca@ballardspahr.com.

 


 

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