Back Doctors Ltd. v. Metro. Prop. & Cas. Ins. Co., No. 11-8003, 2011 U.S. App. LEXIS 6760 (7th Cir. Ill. Apr. 1, 2011).
Recently, the Seventh Circuit set at rest the confusion the district courts had with interpreting the scope of the words “reasonable probability” in context of arriving at an amount in controversy as required by CAFA. The Seventh Circuit held that when a plaintiff does not limit the relief to an amount less than the jurisdictional minimum, the defendant is entitled to present a good-faith estimate of the stakes, and if that estimate exceeds CAFA’s jurisdictional minimum of $5 million, it controls and allows removal, unless recovery exceeding the jurisdictional minimum would be legally impossible.
The plaintiff, a service provider, brought a class action in state court, contending that the defendant, an insurer, used software that paid medical providers less than the policies required the insurer to pay, in violation of the contracts between the insurer and the insured and the Illinois Consumer Fraud and Deceptive Business Practices Act.
The defendant removed the action to federal court under CAFA.
The plaintiff moved to remand to state court contending that the amount in controversy was less than $5 million.
The defendant responded that undisputedly the stakes exceeded $2.9 million, and that punitive damages made up the balance. The plaintiff replied that its complaint did not expressly request punitive damages or alleged that the insurer acted wantonly or maliciously; the state judiciary, therefore, would not award punitive damages.
The district court remanded the action concluding that doubts were construed against removal, and that the defendant had not established to a “reasonable probability” that the amount in controversy exceeded $5 million.
Reversing the district court’s order, the Seventh Circuit noted that it had discussed the scope of the words “reasonable probability” extensively in Meridian Security Insurance Co. v. Sadowski, 441 F.3d 536 (7th Cir. 2006). Sadowski traced the phrase’s origin and evolution in connection with the amount-in-controversy requirement from St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 293 (1938),and concluded that it had been misunderstood so frequently that it had to go.
The Supreme Court held in St. Paul Mercury that allegations about the amount in controversy must be accepted unless it is impossible for the plaintiff to recover the jurisdictional minimum. Jurisdictional facts must be alleged and proved by a “preponderance of the evidence”; the phrase “reasonable probability,” when first introduced by the Seventh Circuit in Shaw v. Dow Brands, Inc., 994 F.2d 364, 366 (7th Cir. 1993), was designed to express that point. But many judges misunderstood the phrase as requiring the proponent of federal jurisdiction to establish that it was likely that the plaintiff would obtain a judgment exceeding the amount-in-controversy requirement, the Seventh Circuit remarked. In Brill v. Countrywide Home Loans, Inc., 427 F.3d 446 (7th Cir. 2005), the Seventh Circuit tried to end the misunderstanding and confine the phrase to a search for what the plaintiff actually sought. (Editors’ Note: See the CAFA Law Blog analysis of Brill posted on November 2, 2005). When this clarification proved to be insufficient, the Seventh Circuit decided in Sadowski to ditch the phrase. Because confusion continued despite the findings in Sadowski, the Seventh Circuit decided to take up this appeal to drive the point home.
Based upon these principles, the Seventh Circuit stated that when removing a suit, the defendant as proponent of federal jurisdiction is entitled to present its own estimate of the stakes, and it is not bound by the plaintiff’s estimate. Once this has been done, the presumption is the one stated in St. Paul Mercury: the estimate of the dispute’s stakes advanced by the proponent of federal jurisdiction controls unless a recovery that large is legally impossible. Thus, the Seventh Circuit stated that the question before it was not whether the class was more likely than not to recover punitive damages, but whether Illinois law disallows such a recovery. The Seventh Circuit noted that the plaintiffs did not file in state court a complaint that disclaimed punitive damages or otherwise made a disavowal that was conclusive as a matter of state law. Instead the plaintiffs declared in the district court that it did not “now” want punitive damages, and the District Judge relied on this when remanding the suit.
The Seventh Circuit first observed that because events after the date of removal do not affect federal jurisdiction, declaration by the plaintiff following removal did not permit remand. Second, the Seventh Circuit observed that the plaintiff had a fiduciary duty to its fellow class members because a representative can’t throw away what could be a major component of the class’s recovery. What the plaintiff was willing to accept, thus, did not bind the class and, therefore, did not ensure that the stakes fell under $5 million, the Seventh Circuit remarked.
The Seventh Circuit next noted that although the plaintiff did not expressly ask for a punitive award and did not include in the complaint allegations of wanton or egregious conduct, the plaintiff did not show that such an omission from a complaint makes a punitive award impossible. The Seventh Circuit observed that the plaintiff could amend its complaint as the litigation progresses. The complaint alleged that the insurer concealed from its clients the means it used to avoid paying what the insurance contracts promise. The Illinois statute is about fraud, fraud is a common ground of punitive damages in Illinois, and juries can award damages not requested by the complaint. In addition, Illinois follows the approach set out in Fed. R. Civ. P. 54(c), which states that federal courts should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings. Further, the Illinois Supreme Court has not established that omission of a request from the initial pleading forbids a punitive award. Because a punitive award exceeding $2.1 million was possible in this litigation, the Seventh Circuit concluded that the amount in controversy exceeded $5 million under the approach of St. Paul Mercury.
Because of the broadinterpretation of the scope of the words “reasonable probability,” the amount in controversy may no more be a controversial issue.