Smith v. Kawailoa Dev. LLP, 2011 WL 6749793 (D. Haw. Dec. 22, 2011).

The angry volcano gods caused an eruption that sent this class action back to Hawaii state court.

In this action, a District Court in California agreed with the Magistrate Judge that under Coleman v. Estes Express Lines, Inc., a court cannot look beyond the complaint in deciding whether “significant relief” was sought from a particular defendant and whether its conduct formed “significant basis” for the plaintiffs’ claims. The court held that this holding does not run counter to the “artful pleading doctrine,” which provides that a plaintiff may not defeat removal by omitting to plead necessary federal questions in a complaint.

The plaintiffs, Marti Smith and Jonalen Kelekoma, employed by Kawailoa Development LLP as food servers and/or waitresses at the Grand Hyatt Kauai Resort & Spa on Kauai, Hawaii, brought a class action asserting that the defendants imposed a service charge or gratuity charge in connection with the sales of food and/or beverage at the Hotel, but failed to distribute all the charges to non-managerial employees in violation of Hawaii state law, Haw. Rev. Stat. §§ 388–6, 481B–14, and ch. 480.

The defendants removed this action to the federal court under CAFA. 

The plaintiffs moved to remand the action back to state court arguing that the Court lacked jurisdiction under the “local controversy exception” to CAFA, 28 U.S.C. § 1332(d)(4)(A)(i). 

The Magistrate Judge recommended granting the motion. 

The defendants objected to the Magistrate Judge’s report & recommendation, which the District Court overruled, and adopted the report & recommendation.

Relying on Coleman v. Estes Express Lines, Inc., 631 F.3d 1010, 1015-17 (9th Cir. 2011), the Magistrate Judge looked solely at the allegations of the plaintiffs’ complaint and found that it alleged sufficient facts to establish that the local defendant, Kawailoa, was a defendant from whom the plaintiffs sought “significant relief” and Kawailoa’s conduct formed a “significant basis” for their claims. The defendants objected to this determination, arguing that the Court should consider evidence beyond the complaint and in any event, the allegations in the complaint were insufficient. 

The Court stated that as to whether it may consider extrinsic evidence, Coleman answered this question with a decisive “no.” (Editors’ Note:  See the CAFA Law Blog analysis of the 9th Circuit’s decision in Coleman posted on February 22, 2011).

Coleman held that the court is so limited due to the statutory language of CAFA, which “unambiguously directs the district court to look only to the complaint in deciding whether the criteria set forth in subsection (aa) (“significant relief”) and (bb) (“significant basis”) of § 1332(d)(4)(A)(i)(II) are satisfied.” Coleman further rejected the argument that this interpretation of CAFA ran afoul of the “common practice of considering extrinsic evidence and making factual determinations in resolving questions of a federal court’s subject matter jurisdiction” due to three reasons. 

First, the plain language of these sub-sections of CAFA “indicates, through the use of the words “sought” and “alleged,” that the district court is to look to the complaint rather than to extrinsic evidence.” 

Second, district courts do not always consider extrinsic evidence in making subject matter jurisdiction determinations. Finally, “factual determinations under subsections (aa) and (bb) are likely to be more expensive and time-consuming than factual determinations of citizenship and amount-in-controversy,” and Congress stressed the need for subject matter jurisdiction determinations under CAFA to be made quickly.

Despite Coleman’s clear explanation that a district court cannot consider extrinsic evidence, the defendants argued that Coleman did not consider the “artful pleading doctrine,” which provides that “a plaintiff may not defeat removal by omitting to plead necessary federal questions in a complaint.” The Court remarked that this doctrine applies, however, in only certain circumstances. Specifically, a state-created cause of action can be deemed to arise under federal law (1) where federal law completely preempts state law, (2) where the claim is necessarily federal in character, or (3) where the right to relief depends on the resolution of a substantial, disputed federal question.  

The Court rejected the defendants’ argument that Coleman left room for application of the artful pleading doctrine in this action — Coleman explained that although some questions of subject matter jurisdiction are questions of fact, it did not believe that this practice should apply to determinations under subsections (aa) and (bb).”  The Court disagreed with the defendants’ argument that interpreting Coleman to prevent consideration of extrinsic evidence would run counter to Supreme Court cases generally discussing this doctrine. The Court noted that unlike the Supreme Court cases cited by the defendants, Coleman specifically rejected that extrinsic evidence should be considered in determining whether subsections (aa) and (bb) are satisfied. 

Further, the Court stated that it was unquestionably bound by the Ninth Circuit law. The Court maintained that where the reasoning or theory of prior circuit authority is clearly irreconcilable with the reasoning or theory of intervening higher authority, a three-judge panel should consider itself bound by the later and controlling authority, and should reject the prior circuit opinion as having been effectively overruled.

Thus, according to Coleman and the plain language of CAFA, the Court concluded that it could not consider extrinsic evidence in determining the applicability of subsections (aa) and (bb).  

Turning to the allegations of the complaint, the Court noted that the Complaint alleged that Kawailoa, a Hawaii limited liability partnership, employed the putative class members during the relevant period, owned and operated Hyatt, provided food and lodging in Hawaii. The Complaint also alleged that Kawailoa along with Hyatt charged customers of the Hotel a “service charge” or “gratuity,” of which only a portion was distributed to staff, and that the defendants “failed to clearly disclose to customers that a portion of the service charge was not distributed to the employees and was in fact retained by the Hotel.” The Court found that these allegations—that Kawailoa was the plaintiffs’ employer, that Kawailoa, in conjunction with Hyatt, failed to pay the plaintiffs the full service charges that were due them, and that the plaintiffs sought damages, declaratory relief, and injunctive relief from both the defendants—established that Kawailoa’s conduct formed a significant basis for the plaintiffs’ claim and that significant relief was sought from Kawailoa.

In finding that the complaint adequately alleged these elements, the Court recognized that the complaint lumped Kawailoa and Hyatt together for some allegations. Although the complaint did not specifically explain the relationship between Kawailoa and Hyatt, the Court remarked that this did not change that Kawailoa’s conduct formed a significant basis for the plaintiffs’ claim and that significant relief was sought from Kawailoa, particularly given the allegation that Kawailoa was the plaintiffs’ employer.

Accordingly, the District Court adopted the Magistrate Judge’s report & recommendation, and remanded the case to the state court.