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Blockbuster v. Galeno, 2006 WL 3775326, Docket No. 05-8019 (2d Cir. Dec. 26, 2006).

On March 23, 2006, the United States Court of Appeals for the Second Circuit handed down a summary order remanding this case against Blockbuster back to state court, in order to meet CAFA’s 60 day time limit to render decision under 1453(c)(2). The summary order can be found at Galeno v. Blockbuster, Inc., 171 Fed. Appx. 904 (2d Cir. 2006). On December 26, 2006, Circuit Judge Cardamone, writing for the Second Circuit, handed down an opinion explaining its reasoning behind the summary order.

The case was originally filed as a class action in New York State Supreme Court on February 15, 2005 by Michael L. Galeno and other Plaintiffs against Blockbuster regarding Blockbuster’s “No Late Fee” program. The plaintiffs alleged deceptive business practice under New York law along with unjust enrichment under common law. The court noted that Blockbuster’s conduct resulted in a suit being brought by 47 Attorneys General and the District of Columbia which resulted in settlement and closing of the program by March 15, 2005. 

The no late fee program began on January 1, 2005, and it was widely advertised by Blockbuster.  Under the program, Blockbuster no longer charged customers late fees for keeping rented videos past their due date, but instead automatically converted the rental to a sale of the video on the eighth day past the video’s original due date. The customer was billed for the selling price of the video minus the initial rental fee already paid. If the customer returned the video within 30 days after the sale date, Blockbuster refunded the sales price minus a $1.25 restocking fee. 

The complaint alleged that the advertising was deceptive because it omitted the material fact that customers would be charged a sale fee. Blockbuster included some information on its website, but allegedly did not make the details clear. Also, Blockbuster allegedly omitted pertinent details from its store signage and television advertising. The plaintiff alleged this advertising program violated New York General Business Law. The plaintiff claimed that there were thousands of members of the class with statutory damages of $50 dollars per customer. 

Blockbuster removed the action to federal court on April 1, 2005 asserting diversity jurisdiction under both complete diversity and minimal diversity based on CAFA. The plaintiffs moved for remand on the ground that the federal court lacked jurisdiction because Blockbuster could not satisfy the CAFA amount in controversy of $5 million. Blockbuster filed under seal a declaration by its senior vice president and corporate controller, James Howell. The declaration described the total amount of restocking fees and converted sales incurred by New York customers from January 1, 2005 to May 19, 2005. 

Blockbuster also asserted that CAFA changed the traditional rule applied in the complete diversity context, that the party seeking removal to federal court bears the burden of establishing jurisdiction, citing Yeroushalmi v. Blockbuster, Inc., No. 05-225, 2005 WL 2083008 (C.D. Cal. July 11, 2005) (implicitly overruled by Abrego v. Dow Chemical Company). (Editors’ Note: See the CAFA Law Blog analysis of Yeroushalmi posted on November 28, 2005 and the CAFA Law Blog analysis of Abrego posted on May 25, 2006). 

On July 13, 2005, the district court issued a brief order denying the motion to remand stating “I’m in substantial agreement with [the Yeroushalmi court].” The court did not, however, explain the basis on which it found subject matter jurisdiction. 

The plaintiff filed a motion for permission to appeal the district court’s ruling, which the Second Circuit granted. The Second Circuit issued the summary order on March 23, 2006, and vacated and remanded the order of the district court with instructions that the district court explain its calculation of the reasonably probable damages. 

On this appeal, the issue before the Second Circuit was which party bears the threshold burden of proof of demonstrating the existence of minimal diversity jurisdiction under CAFA upon removal.  (Editors’ Note: To see the CAFA Law Blog view of the issues, see the law review article by CAFA Law Blog Editors Hunter Twiford, Anthony Rollo and John Rouse entitled “CAFA’s New ‘Minimal Diversity’ Standard For Interstate Class Actions Creates A Presumption That Jurisdiction Exists, With The Burden Of Proof Assigned To The Party Opposing Jurisdiction.”). 

The court began by outlining CAFA’s new jurisdictional provisions. Next, the court turned to the case at hand to see if the requirements of CAFA were met, but paused first to discuss the burden of proof. 

Naturally, the parties took separate sides as to the burden of proof question. Blockbuster pointed to CAFA’s legislative history for the answer. The appeals court stated that the district court was wrong in following the Yeroushalmi case. The Court also cited DiTolla v. Doral Dental, a prior ruling of the Second Circuit holding CAFA did not change the burden of proof. (Editors’ Note:  See the CAFA Law Blog analysis of Doral Dental posted on December 28, 2006). The judge conceded that Congress displayed an aim in CAFA to broaden certain aspects of federal jurisdiction for interstate class actions, but that Congress also must have appreciated the law regarding removal as noted in Brill. (Editors’ Note:  See the CAFA Law Blog analysis of Brill posted on November 2, 2005). 

CAFA’s Senate Judiciary Committee Report was of minimal value to the Court because, it says, the Report was issued ten days after the enactment of CAFA. The court cited Abrego and Miedema for the propositions that Congress has to explicitly overrule precedent and committee reports cannot serve as an independent statutory source. (Editors’ Note:  See the CAFA Law Blog analysis of Miedema posted on August 22, 2006.  See also the CAFA Law Blog critique of the Miedema decision posted on August 22, 2006). 

The court followed Abrego, Evans, Brill [In that order, the Ninth, Eleventh and Seventh] noting that every circuit court that has considered the issue has reached the same conclusion. (Editors’ Note:  See the CAFA Law Blog analysis of Evans posted on May 25, 2006 and the critique of Evans posted on May 26, 2006)] The Court did note that a plaintiff seeking remand bears the burden to show the applicability of CAFA’s abstention exceptions, once the threshold subject matter jurisdiction has been established. (Editors’ Note: the court cited Hart, Frazier and Evans for this authority. See the CAFA Law Blog analysis of Hart posted on August 21, 2006 and the analysis of Frazier posted on August 17, 2006). 

After the court’s review of the burden of proof standard, the court returned to determine if minimal diversity was met. The named plaintiff was a resident of New York along with thousands of New York customers identified in the complaint. Blockbuster is a citizen of Delaware and Texas. The court quickly determined the minimal diversity of citizenship requirement was met. 

Next, as to the $5 million requirement, the Second Circuit determined that the district court had not made any findings and offered no explanation as to how it calculated the amount in controversy. Therefore, the Circuit Court could not properly review the district court’s ruling on the issue. The Second Circuit remanded for the district court to explain its calculation of damages. 

(Editors’ Note: For a critique of the Second Circuit’s ruling on the burden of proof issue, see our new analysis describing why the Editors believe that Blockbuster and other Courts’ reliance on the publication date of the Senate Judiciary Committee Report as a ground to discredit that Report leads to an incorrect conclusion.  Our new analysis will be posted tomorrow.  Tune in tomorrow.  Same Bat time.  Same Bat channel.)

Don’t forget.  Please be kind and rewind.