Gold v. New York Life Ins. Co., 730 F.3d 137 (2nd Cir. 2013).
In this appeal, the Second Circuit held (1) that CAFA’s home state exception is not jurisdictional and must be raised within a reasonable time, and (2) that the district court’s discovery schedule, which required the defendant to complete individual discovery before commencing class discovery, excused the defendant’s three-year delay in filing a motion to dismiss under the home state exception.
The plaintiff, a former insurance agent, brought a putative class action against New York Life Insurance Company (the “defendant”) in the United States District Court for the Southern District of New York, seeking recovery of unpaid overtime and wage reductions. The plaintiff claimed that, because he and similarly situated employees made investment recommendations to clients, they were misclassified as outside salesmen and thereby unlawfully denied overtime wages. The plaintiff further alleged that the defendant’s payment system, under which insurance agents received credits for commissions earned and debits for expenses incurred, violated New York labor laws. The plaintiff claimed that jurisdiction was proper under CAFA.
The plaintiff requested a bifurcated discovery plan, whereby individual discovery would occur first, followed by class discovery. The district court approved this plan, and thus class discovery did not start until 2011 – three years after the plaintiff filed his complaint. As class discovery progressed, the defendant soon realized that more than two-thirds of the putative class members were New York citizens. In light of this discovery, the defendant filed a motion to dismiss, or alternatively for the court to decline jurisdiction, under CAFA’s home state exception. The district court granted the defendant’s motion and declined to exercise jurisdiction, finding that the defendant’s three-year delay in raising the exception was excusable in light of the case’s unique discovery schedule. On appeal, the Second Circuit affirmed.
First, the Second Circuit held that CAFA’s home state exception is not a jurisdictional requirement. Under this exception, “[a] district court shall decline to exercise jurisdiction over a class action in which two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.” 28 U.S.C. § 1332(d)(4)(B). The Second Circuit noted that two other circuits have held that the home state exception is not jurisdictional because the “decline to exercise” language implicitly recognizes that, while a district court may have subject matter jurisdiction under CAFA, the court must actively decline to exercise its jurisdiction if the requirements of the exception are satisfied. See Graphic Commc’ns v. CVS Caremark Corp., 636 F.3d 971, 973 (8th Cir. 2011); Morrison v. YTB Int’l, Inc., 649 F.3d 533, 536 (7th Cir. 2011). The Second Circuit sided with these authorities and concluded that Congress’s targeted use of the phrase “decline to exercise” means that CAFA’s home state exception is not a jurisdictional prerequisite.
The plaintiff, however, argued that if the exception was not jurisdictional, then it must be raised within a reasonable time, which the defendant did not do. The Second Circuit agreed that, because CAFA does not specify a time limit for filing a remand motion, a motion to dismiss under the home state exception must be filed within a reasonable time. Although the definition of a “reasonable time” will vary from case to case, the Second Circuit cautioned that such motions should be made “at the earliest practicable time.” But the Second Circuit ultimately rejected the plaintiff’s argument that the defendant did not bring its motion to dismiss within a reasonable time.
The Second Circuit stated that under most circumstances a three-year delay would be unreasonable, but in this case, the application of the home state exception was complicated by the district court’s bifurcated discovery schedule. Because of this discovery plan, the defendant could not uncover the citizenship of the class members until individual discovery was complete, and thus the district court held the defendant’s three-year delay was excusable. While the Second Circuit was somewhat incredulous that an employer could not determine the citizenship of its sales force within three years, it was constrained to review the district court’s decision under a deferential, abuse-of-discretion standard. As the district court was more familiar with pretrial scheduling and discovery matters, it was in a better position to evaluate when the defendant could have raised the home state exception, and consequently the Second Circuit found that the district court did not abuse its discretion.
There are two takeaways from Gold. First, a growing number of federal circuits – e.g., the Second, Seventh, Eighth, and Ninth Circuits – have expressly held that CAFA’s home state exception is not jurisdictional. Gold, 730 F.3d at 141; Graphic Commc’ns, 636 F.3d at 973; Morrison, 649 F.3d at 536; Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1023–24 (9th Cir. 2007). Accordingly, a defendant must raise the exception within a reasonable time or else run the risk of waiving it. Second, although a three-year delay will probably be unreasonable in most cases, the district court will determine what constitutes a reasonable time for raising the home state exception on a case-by-case basis.