Williams v. Homeland Ins. Co. of N.Y., No. 11–30646, 2011 WL 4346714 (5th Cir. La. Sept. 19, 2011).
In this case, the Fifth Circuit held that a class arbitration does not qualify as a class action under CAFA, and consequently, a prior class arbitration does not frustrate CAFA’s local controversy exception.
The plaintiff, George Raymond Williams, brought a class action in Louisiana state court on behalf of a class of Louisiana medical providers against three Louisiana defendants: Med–Comp USA, Risk Management Services (“RMS”), and SIF Consultants of Louisiana, alleging that the defendants failed to comply with the preferred provider organization (“PPO”) notice provisions of Louisiana law, La. R.S. 40:2203.1(G).
Med–Comp operates a PPO network, contracting with the plaintiff class of medical providers for discounted rates. RMS and SIF Consultants apply the Med–Comp PPO discount when administering workers’ compensation claims for Louisiana employers.
Over one year after filing the initial state court petition, Williams amended the petition to add three non-Louisiana defendants: Corvel Corporation and its insurers, Homeland Insurance Company and Executive Risk Specialty Insurance. Corvel provides claims administration services using both the Med–Comp PPO discounts and its own CorCare PPO network rates.
Executive Risk removed the case to federal court claiming federal jurisdiction under CAFA.
The District Court remanded the action to state court holding that CAFA’s local controversy exception under 28 U.S.C. § 1332(d)(4) applied.
Upon Homeland’s appeal, the Fifth Circuit affirmed the remand order.
First, to establish that two-thirds of the proposed class are Louisiana citizens, Williams submitted evidence identifying a total class of 1,388 members and showing that 1,055 of the 1,388 (or 76%) are business entitiies incorporated under Louisiana law.
Homeland, however, argued that the correct percentage of Louisiana citizens should either be 45.4% or 65.4%. Homeland first argued that many of the 1,055 should no longer count as Louisiana citizens because they were inactive or not in good standing with the state. The Fifth Circuit, however, observed that inactive corporations remain citizens of their state of incorporation, which in this case was Louisiana.
Homeland next argued that the percentage of Louisiana citizens still fell to 65.4% by removing only the more problematic cases, such as entities that allegedly no longer exist. The Fifth Circuit found that Homeland’s math was incorrect because it removed the non-existent companies from the numerator of Louisiana citizens without also removing them from the denominator of total plaintiffs. Correcting this error, Homeland’s objections meant that 72.4% of the plaintiff class were definitively Louisiana citizens, still well above CAFA’s two-thirds requirement.
Second, regarding significant relief, the Fifth Circuit noted that Williams sought statutory damages from Med–Comp in conjunction with thousands of discounts, including the discounts applied by the other defendants. Moreover, Med–Comp’s alleged conduct was the common denominator with all the other defendants, as RMS, SIF Consultants, and Corvel applied Med–Comp discounts to Med–Comp clients. Thus, the Fifth Circuit stated that Med–Comp’s alleged conduct formed the basis of all claims against itself, but also formed a significant basis of the claims against the other defendants.
Finally, this class action existed for over a year with only local defendants, and it was unclear to the Court how the addition of Corvel could render all of the original defendants insignificant.
Next, the Fifth Circuit found that the principal injuries resulting from each defendant’s alleged or related conduct occurred in Louisiana because a supermajority of plaintiffs are Louisiana citizens, who rendered services in Louisiana, and who alleged that the defendants violated the Louisiana PPO Act. The injuries from these statutory violations occurred by the failure to provide notice at the point of medical service in Louisiana.
Although Homeland is an out-of-state defendant who insured the out-of-state Corvel, the CAFA exception was satisfied because Homeland’s related conduct as insurer included Corvel’s failure to notify in Louisiana. Here, the sole claims against Homeland were by virtue of the Louisiana Direct Action statute and based on the conduct of Homeland’s insured. Because this case did not involve first party insurance claims against Homeland, the location of the principal injuries did not depend on the state of issuance of Homeland’s insurance policy, the Fifth Circuit concluded.
Finally, the Fifth Circuit noted that the local controversy exception requires that “no other class action has been filed” alleging similar facts against any of the defendants “during the 3–year period preceding the filing of that class action.” The parties disputed whether a class arbitration qualifies as a class action under CAFA. The District Court decided that a class arbitration is not a class action, relying on Black’s Law Dictionary 119, 284 (9th ed. 2009) where “arbitration” resolves disputes outside of court, while a “class action” is a form of lawsuit within the court.
The Fifth Circuit noted that CAFA defines the term “class action” to mean “any civil action filed under Fed. R. Civ. P. 23 or similar State statute or rule of judicial procedure.” Homeland argued for an expansive reading of the term to encompass arbitrations, which often are commenced under rules that mimic Rule 23. The Fifth Circuit, however, remarked that if “any civil action” includes arbitrations, then CAFA would require district courts to exercise original jurisdiction over any arbitration that satisfies CAFA’s threshold requirements. Accordingly, the Fifth Circuit held that a class arbitration is not a class action, and consequently, a prior class arbitration does not frustrate the CAFA exception.
Accordingly, the Fifth Circuit found that the District Court properly concluded that the local controversy exception applied.