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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

“The Significant Defendant” Element Is A Narrow Exception Carefully Drafted To Ensure That It Does Not Become A Jurisdictional Loophole

Posted in Case Summaries

Atwood v. Peterson, No. 4:15-cv-00305 (E.D. Ark. Sept. 10, 2015).

The plaintiff brought a putative class action against Walgreen Co. (“Walgreens”) and two of its district managers (“DMs”) in state court alleging violation of Ark. Code Ann. § 4-75-501(a)(2) which makes it unlawful to willfully refuse purchasers all rebates and discounts which are granted to other purchasers, for cash, of like quantities of such manufactured products.

Beginning in September 2012, Walgreens began offering discounts to its customers who enroll in, and use, its Balance Rewards Card program. Customers who do not enroll in, or use, the Balance Rewards program are not eligible for the same discounts. The plaintiff alleged that this practice is contrary to § 4-75-501(a)(2). While Walgreens was incorporated in Illinois, its DMs are citizens of Arkansas. The plaintiff asserted that along with Walgreens, the DMs were personally liable for violation of the statute because they were “persons” engaged in the sale of a manufactured product, “had primary responsibility” for the discharge of the duties to comply with the statute, and recklessly performed or omitted to perform those duties.

Walgreens removed the action to the federal court pursuant to CAFA, and the plaintiff sought remand arguing that the Complaint contained all four elements of the mandatory local controversy exception to CAFA jurisdiction. Walgreens, however, disputed that “the significant defendant” element was met because the DMs were not significant parties and that the DMs were fraudulently joined by the plaintiff in order to defeat federal diversity jurisdiction. The District Court agreed with Walgreens and denied the plaintiff’s motion to remand.

At the outset, the District Court noted that “the significant defendant” element is a narrow exception that was carefully drafted to ensure that it does not become a jurisdictional loophole. Thus, in assessing whether each of these criteria is satisfied by a particular case, a federal court should bear in mind that the purpose of each of these criteria is to identify a truly local controversy–a controversy that uniquely affects a particular locality to the exclusion of all others. The District Court noted that CAFA itself does not describe the type or character of conduct that would form a significant basis of plaintiffs’ claims or define the term ‘significant relief’. However, the significance of the asserted basis and relief asserted against the local defendant must be analyzed in relation to the basis and relief asserted against all of the defendants.

28 U.S.C. § 1332(d)(A)(i)(II)(bb) does not require that the local defendant’s alleged conduct form a basis of each claim asserted; it requires the alleged conduct to form a significant basis of all the claims asserted.

In support of its contentions, Walgreens filed affidavits of the DMs to prove that the DMs were not only insignificant actors in the alleged illegal scheme but in fact had no control, authority, ability to implement or ability to discontinue the Balance Reward Card scheme in their stores. Although the plaintiff argued that the Court should not consider evidence outside the Complaint, the Court disagreed with the plaintiffs.

The District Court noted that although the Eighth Circuit has not decided whether extrinsic evidence may be considered when analyzing the local controversy exception to CAFA, the District Court found some guidance on the issue in Westerfeld v. Indep. Processing LLC, 621 F.3d 819 (8th Cir., 2010), in which the Eighth Circuit, while vacating the district court’s order, did not find that the district court should have excluded the extrinsic evidence or should exclude the extrinsic evidence on remand. (Editors’ Note:  See the CAFA Law Blog analysis of Westerfeld posted on September 13, 2010).  Thus, the District Court decided to consider DMs declarations in this case.

While evaluating the DMs declarations, the District Court found that the declarations directly contradicted the plaintiff’s allegations against the DMs in the Complaint that DMs were in charge of and directly responsible for controlling their stores’ practices and procedures affecting sales, pricing, discounting and rebating of the products. Further, the plaintiff had not provided any evidence to support his burden of proof that the DMs were ‘significant’ enough to satisfy the local controversy exception. Accordingly, the District Court concluded that the conduct of the DMs did not form a significant basis for the plaintiff’s claims and the DMs did not provide a significant source of relief to the plaintiff.

Moreover, the District Court found that the plaintiff fraudulently joined the DMs to defeat federal jurisdiction because there existed no reasonable basis in fact and law to support a claim against it.

Accordingly, the District Court concluded that the plaintiff had failed to prove that the local controversy exception deprived the Court of jurisdiction, and denied the plaintiff’s motion to remand.

-Melissa M. Grand