Kaufman v. Allstate New Jersey Insurance Company, et al, 561 F. 3d 144 (3rd Cir. 2009).

When I read this case I thought hmm, insurance, New Jersey, the Sopranos. Then I thought, is it really fair to the mafia to compare them to the insurance industry? Then I thought , I miss the Sopranos. HBO has not had a show as good as that one. Well, Deadwood was good, but we only got two seasons. And I have never gotten in to Entourage. Then I thought, what is on TV tonight? I wish Lost would start. Wouldn’t it be nice to go to Hawaii for a vacation. I can’t go on a vacation, I’ve got work to do. What was I doing, oh yeah, a CAFA post. That my friends, is the thought process that sometimes goes into blog writing. And to think, many people today get their “news” from blogs. Lord, help us.

OK, on to the business at hand. This is actually an interesting case which addresses issues of first impression for the Third Circuit Court of Appeals. The specific issue is the application of the local controversy exception to CAFA jurisdiction. The decision is quite detailed and I would encourage those of you struggling with this exception to read the decision of the Court of Appeals. 

Procedural Summary: Insureds brought class action against six insurance companies alleging a practice of NOT PAYING diminished value insurance claims (hence, the Sopranos quote). Companies remove, insureds file motion to remand based on local controversy exception. District Court grants motion to remand. Court of Appeals, deciding an issue of first impression, vacates in part and remands to district court for further review.

The plaintiffs originally sued six insurance companies. After the case was remanded, the plaintiffs dropped three of the non-Jersey companies and replaced Allstate with Allstate NJ. At the time the motion to remand was heard, one defendant was a NJ company and the other two were not. The plaintiffs alleged that the case fell under the local controversy exception of CAFA. 28 U.S.C. §1332(d)(4).

For those who have not perused this exception in while, the gist is that a district court must decline jurisdiction if a controversy is uniquely local and does not reach into multiple states. The local controversy exception may apply when at least one significant defendant and more than two thirds of the members of the putative class hale from the state the lawsuit is filed. That one local defendant’s conduct must form “a significant basis for the claims asserted by the putative class.”

The issue before the district court when considering the motion to remand was this: does the local controversy exception require that every class member must assert a claim against the local defendant (in this case, Allstate NJ). In other words, how local is local.

First off, the Court of Appeals determined that the district court committed error when it made its determination based on all six of the original defendants. The Court of Appeals concluded that the local controversy exception requires consideration of the defendants in the action at the time the motion to remand was heard. The Court noted that to rule otherwise could result in the local controversy exception being applied to defendants as of filing even though all the local defendants had been dismissed by the time the remand was heard. The Court of Appeals further held that the district court correctly determined that the plaintiffs had the burden to prove the exception to CAFA jurisdiction applied.

Now, we get to the nut of the matter. GEICO and Allstate NJ made an impressive textual argument to support their interpretation They argued that based on the language of the provision, “the proposed plaintiff class” each member of the class must assert claims against the local defendant. Because the term “class” is defined as “all of the class members in a class action,” 28 U.S.C. § 1332(d)(1)(A), the phrase “the proposed plaintiff class” refers to all the members of the proposed plaintiff class (methinks someone was on law review).

The insurance companies contrasted CAFA’s use of the term “class,” as opposed to “members,” to emphasize that CAFA uses different terms to distinguish between all class members and a subset of those class members. For example, a provision in the local controversy exception requires that the class action include at least one local defendant “from whom significant relief is sought by members of the plaintiff class.28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa). Similarly, the home-state exception provides an exception to CAFA jurisdiction when “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 Court of Appeals said, “We like it.” Yeah, said the insurance companies, we prevail yet again. Not so much. 

Even though the Court of Appeals said in one paragraph of the decision that the insurance companies were right, the Court of Appeals comes back around three paragraphs later and rejects the argument they just said they liked. That, is the beauty of the law. 

The Court of Appeals held that the significant basis provision requires at least one local defendant whose alleged conduct forms a significant basis for all the claims asserted in the action. But that don’t mean that every member of the class has to assert a claim against the local defendant. What it means is that the local defendant’s “conduct” forms a “sufficient basis” for the claims asserted by the proposed class.

If you foresee a long evidentiary hearings raise your hand! The Court of Appeals stated, “Whether this condition is met requires a substantive analysis (i.e. a whole bunch of evidence) comparing the local defendant’s alleged conduct to the alleged conduct of all the Defendants.” And don’t think evidence of market share is gonna do it. No, sir. 

The Court of Appeals rejected this evidence, which formed the basis for the district court’s determination the exception applied. Market share does not equal “conduct.” The Court of Appeals came to the conclusion that just because Allstate NJ might have sold a whole bunch of policies in the Garden State did not mean all of those policies were crap, err I mean, that those policies excluded coverage for diminished value. 

So, the case was remanded for, what I suspect was a bunch of discovery and lots more hearings. Hey, who am I to complain. We attorneys got to eat, too.