Morrison v. YTB International, Inc., No. 10-2529, 2011 WL 3132398 (7th Cir. Ill. July 27, 2011).

In this case, the Seventh Circuit held that a plaintiff’s claim under his preferred legal theory fails has nothing to do with subject-matter jurisdiction, unless the claim is so feeble as to be ‘essentially fictitious.’ 

The plaintiffs brought a class action alleging that the “home-travel-agency program” of the defendant, YTB International, was a pyramid scheme, which violated the Illinois Consumer Fraud Act (the “Act”).

The Act forbids pyramid schemes, which it defines as any venture in which a participant’s profit is primarily based upon the inducement of additional persons to participate in the same plan or operation and is not primarily contingent on the volume or quantity of goods, services, or other property sold or distributed to consumers. 

YTB denied that its operation, in which its customers sell each other the right to act as travel agencies, as well as selling travel services to the public, came within this statutory ban.

The plaintiffs sought to represent a class of consumers across the US, who had participated in YTB’s home-travel-agency program. They filed their action in federal court and asserted jurisdiction under CAFA. 

The district court ruled that YTB’s transactions with residents of states other than Illinois did not occur predominantly in Illinois and so were outside the Act. Then the district court dismissed the claims of persons who lived in Illinois, concluding that the suit was an “intra-state controversy” that belonged in state court under an exception to CAFA jurisdiction, 28 U.S.C. §1332(d)(4).  

Upon appeal, the Seventh Circuit vacated the district court’s judgment. The Seventh Circuit remarked that §1332(d)(4) applies when at least two-thirds of the members of “the proposed class” reside in the same state as the principal defendant. The plaintiffs had never proposed a class limited to residents of Illinois. The class that the plaintiffs proposed was nationwide; that’s why they filed suit in federal court. Most members of the only ‘proposed class’ lived outside Illinois. 

The Seventh Circuit explained that subject-matter jurisdiction depends on the state of things when suit is filed; what happens later does not detract from jurisdiction already established. The Seventh Circuit had held in Johnson v. Wattenbarger, 361 F.3d 991 (7th Cir. 2004), that a district court may not dispose of some claims on the merits, then dismiss the suit for lack of jurisdiction because the remaining claims fall short of the minimum amount in controversy.

 And the Seventh Circuit applied this principle to CAFA in Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805 (7th Cir. 2010), which holds that §1332(d) supplies jurisdiction even if the district judge decides not to certify the proposed class.  (Editors’ Note:  See the CAFA Law Blog analysis of the Cunningham Charter case posted on February 3, 2011). What matters is the size of the proposed class, and the stakes, on the date a suit is filed (or removed under §1453, if it began in state court). Because the ‘proposed class’ in this suit was not centered in Illinois, the Seventh Circuit concluded that §1332(d)(4) did not govern.

YTB believed that the district court was entitled to apply §1332(d)(4) to the all-Illinois class that resulted from the dismissal of other plaintiffs for lack of standing. YTB contended that if the non-Illinois class members lacked standing, then the only claim that was ever within the district court’s jurisdiction was one by persons who live in Illinois — and, if that’s so, then §1332(d)(4) required the court to send the class to state court. 

The Seventh Circuit observed that although the district court wrote that the non-Illinois plaintiffs lacked ‘standing,’ the word was not an accurate description of what the court held. The district court dismissed non-Illinois plaintiffs based on application of choice-of-law principles because the Act does not apply to YTB’s customers outside Illinois. This application of choice-of-law principles had nothing to do with standing so far as subject-matter jurisdiction was concerned, the Seventh Circuit concluded.

The Seventh Circuit remarked that the district court’s language was imprecise. There’s no problem with standing because the plaintiffs would have standing if they have been injured by the pyramid scheme, the defendants caused that injury, and the injury can be redressed by a judicial decision. That a plaintiff’s claim under his preferred legal theory fails has nothing to do with subject matter jurisdiction, unless the claim is so feeble as to be “essentially fictitious.” YTB, however, did not contend that the claim by the non-Illinois residents was that weak.

The Seventh Circuit recognized that §1332(d)(4) does not itself diminish federal jurisdiction. It directs district courts to ‘decline to exercise’ jurisdiction otherwise present and thus is akin to abstention. But the language of §1332(d)(4) does not suggest that this principle applies to a subset of the plaintiffs; it takes the ‘proposed class’ as a given. If the suit as a whole is predominantly interstate, the district court must resolve the whole. 

Thus, the Seventh Circuit decided whether the district court was right to think that the non-Illinois plaintiffs lack a valid claim under the Act. Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill. 2d 100, 179-87 (2005) concluded that the Act applies to non-residents’ claims when the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois. The Seventh Circuit opined that Avery is a fuzzy standard because the overwhelming majority of the circumstances which relate to Avery’s claims proceedings — the disputed transactions in that case — occurred outside Illinois.

The plaintiffs maintained that their situation was like the plaintiff in Martin v. Heinold Commodities, Inc., 117 Ill. 2d 67 (1987). The complaint alleged that the plaintiffs dealt directly with YTB, which is headquartered in Illinois, payments were sent to YTB in Illinois, and that all of the travel-agency deals were executed in Illinois — or at least ‘accepted’ by YTB in Illinois after being placed over the Internet. YTB also required every plaintiff to sign a contract that provides for litigation in Illinois under Illinois law. Avery holds that a choice-of-law clause is not dispositive, because a claim under the Consumer Fraud Act is independent of the contract, but Martin says that it is nonetheless a mark in plaintiffs’ favor. 

The Seventh Circuit remarked that the named plaintiffs lived outside of Illinois; thus, if they had dealt with YTB in Illinois, YTB dealt with them in their home states, which is not Illinois. For example, named plaintiff Morison sent payments to Illinois, which means that any loss occurred in her home state, Missouri. YTB and Morrison transacted electronically through a network that is in Thailand. This could be important if applying Illinois law would frustrate some policy of Missouri, other states where other named plaintiffs live because, some states allow gambling; others don’t. Some allow fireworks; others don’t. Perhaps some allow pyramid schemes. Thus, the Seventh Circuit opined that expanding Illinois law in a way that overrode the domestic policy of other states would be problematic. 

YTB, however, did not contend that any state allows pyramid schemes, or even that any state defines a pyramid scheme differently from the way Illinois does. Thus, the Seventh Circuit stated that this position favored for uniform application of Illinois law, which was what plaintiffs wanted, what YTB wanted, and what would enable one court to resolve the controversy under the law of the state in which YTB operates its business.

Although this was not enough to compel a conclusion that Illinois law applied, the Seventh Circuit maintained that ‘each case must be decided on its own facts’. Accordingly, the Seventh Circuit observed that the complaint did not defeat application of Illinois law; thus it survived a motion to dismiss.

Consequently, the Seventh Circuit vacated the judgment and it remanded the case for further proceedings consistent with its opinion.