Persistence (and a newly amended class) pays dividends for Liberty Mutual as the Seventh Circuit finds that federal jurisdiction under the Class Action Fairness Act is proper.

By McGlinchey Stafford on January 30, 2006

Knudsen v. Liberty Mutual Insurance Co., ___ F. 3d ___, No. 05-8037, 2006 WL 197133 (January 27, 2006).
Hanging tough finally paid off for Liberty Mutual Insurance Company. Twice shot down for trying to remove on the basis of claimed federal jurisdiction under the Class Action Fairness Act of 2005 during removal battles in federal district court, and shot down once before by the U. S. Court of Appeals for the Seventh Circuit in one of the earliest of the circuit courts of appeals’ decisions interpreting CAFA, Liberty Mutual has now persuaded the Seventh Circuit that the newly amended class action satisfied the requirements for federal jurisdiction under CAFA.

This influential new decision, penned by Judge Easterbrook, radically changes the course of this case, which began in Illinois state court in March of 2000. The plaintiffs asserted claims based on the methods Liberty Mutual allegedly used to calculate reimbursement of medical expenses. The plaintiffs sought to expand the class (post CAFA) on February 25, 2005, by including the insureds of Liberty Mutual Fire Insurance Company, which was not a named defendant. Contending that amending the class to include claims against a previously unnamed defendant commenced a new cause of action post-CAFA, Liberty Mutual petitioned for removal, but was initially unsuccessful in making the removal stick. The district court remanded, and the Seventh Circuit affirmed in June 2005, declaring that “Liberty Mutual Insurance Company cannot remove five years after this suit was commenced just because a non-party corporate sibling has been mentioned in plaintiffs’ latest papers.” (Editor’s Note: See CAFA Law Blog summary on Knudsen I posted on September 3, 2005.)

But the Seventh Circuit left the door open to removal in its first opinion – if new claims were asserted against Liberty Mutual that did not relate back to the original petition, a new cause of action could be “commenced” under CAFA and thus, removal under CAFA may be proper. Logically, if the plaintiffs asserted new claims not based on the same underlying acts as the original pre-CAFA complaint, a new cause of action would commence and removal could be successful. Liberty Mutual seized on its chance after the state court judge certified the most recent amendments to the class, which covered claims involving all affiliates and subsidiaries of Liberty Mutual — claims which were not based on the same underlying acts as the claims in the original complaint. Liberty Mutual again petitioned for removal, only to suffer yet another remand by the district court in December of 2005. (Editor’s Note: See CAFA Blog summary on Knudsen December district court opinion posted on January 5, 2006.)

Liberty Mutual immediately appealed the ruling to the Seventh Circuit, undoubtedly hoping that this was just the scenario to which the court had alluded in Knudsen I. Since the class certification order was entered on September 29, 2005, “well after the Class Action Fairness Act’s effective date,” the only issue was whether the newly amended class claims related back to the original complaint. Since the original complaint did not provide Liberty Mutual with notice of claims based on acts performed by its newly named affiliates and subsidiaries, the Seventh Circuit concluded that the amended class did not relate back to the pre-CAFA complaint. Judge Easterbrook declared: “What causes the class definition of September 2005 to initiate new claims is the fact that Liberty Mutual does not adjust all demands for payment of all of its affiliates’ policies.” The original March, 2000 state court filing, Judge Easterbrook added, “did not even hint that Liberty Mutual might be accountable for underpayments” on claims for one affiliate adjusted under a different system some 15 years earlier.

Judge Easterbrook seemed to scold both the state court judge and the plaintiffs, while validating CAFA’s purpose: “The conduct of plaintiffs and the state court judge in this litigation, turning an arguable error in discovery into a sprawling proceeding in which Liberty Mutual will be required to pay on account of other insurers’ decisions taken long ago under different rules . . . illustrates why Congress enacted the Class Action Fairness Act.” For Liberty Mutual, what had doubtless become a tired tune ended on a sweet note — the court granted the petition for leave to appeal, and directed the district court to revoke the remand and decide the case on its merits.