David_Landon_Speed_v__JMA_Energy_Company__LLC, 2017 WL 4342615 (10th Cir. Oct. 2, 2017).

In this action, while affirming the United States District Court for the Eastern District of Oklahoma’s (the “District Court”) decision remanding the case to Oklahoma state court, the United Court of Appeals for the Tenth Circuit (the “Tenth Circuit”) found the geographic dispersion of the class plaintiffs should not be overemphasized as a factor favoring federal jurisdiction.

Plaintiff David Landon Speed (“Plaintiff”), a mineral-interest owner, brought a putative class action in the District Court of Hughes County, Oklahoma, alleging Defendant JMA Energy Company, LLC (“Defendant”), an operator of oil and gas wells, violated an Oklahoma statute that required payment of interest on delayed payment of revenue from oil and gas production. Plaintiff further asserted Defendant fraudulently concealed from mineral-interest owners it owed interest due under the statute, intending to pay only those who requested interest.

After Defendant removed the action to the District Court pursuant to the Class Action Fairness Act (“CAFA”), the District Court granted Plaintiff’s motion to remand, relying on CAFA’s discretionary exception under § 1332(d)(3). (Editor’s Note: See the CAFA Law Blog analysis of the District Court’s order dated September 18, 2017).  On appeal, the Tenth Circuit affirmed.

The Tenth Circuit noted the discretionary exception allows a federal court to decline to exercise jurisdiction over a class action that is otherwise covered by CAFA based on six enumerated factors. Defendant argued that because Plaintiff bears the burden to justify a remand, a “neutral” factor should count against remand in the overall analysis rather than being viewed as strictly neutral.  The Tenth Circuit, however, disagreed and opined the District Court is charged with evaluating the factors in the aggregate.  The Tenth Circuit found the District Court properly considered the statutory factors and did not abuse its discretion by remanding to the Oklahoma state court.

The first factor refers to whether the claims asserted involve matters of national or interstate interest. Defendant argued the instant suit involved matters of national and interstate interest because the allegedly incorrect payments were distributed to putative class members in nearly every state, and cited an example provided in the Senate Judiciary Committee Report in support.  The Tenth Circuit found the injuries discussed in the Senate Report example were associated with a defective pharmaceutical product placed by a manufacturer into the stream of commerce, causing physical harm to plaintiffs in many different states who may have little or no connection with the forum state.  However, plaintiffs in this case, whatever their state citizenship, purposefully availed themselves of Oklahoma and its laws by owning mineral-interest property in Oklahoma, which ultimately formed the basis of their cause of action.  The Tenth Circuit thus ruled this represented a significantly stronger connection to the Oklahoma state forum than the connection of nationwide plaintiffs to a particular state forum in the Senate Report example.

Defendant further argued the District Court faulted for looking to the location of the oil and gas wells rather than the physical location of the payees. The Tenth Circuit, however, found that the proposed class plaintiffs had a common interest centered on wells physically located in Oklahoma, without which the plaintiffs would have no cause to seek redress from the Defendant in this action.

For the second factor, whether the claims asserted will be governed by Oklahoma law or the laws of other states, Defendant argued the fraud claims against it may be governed by the law of a state other than Oklahoma. The Tenth Circuit found the backbone of the class claim was a claim for failure to pay interest that undoubtedly must be decided under Oklahoma law, as the Plaintiff relied solely on an Oklahoma statute as the source of the duty to pay interest.  The Tenth Circuit opined the reliance on state law for the principal claim in itself argued for remand, and the fraud claim merely piggybacked on that state-law claim, essentially alleging only Defendant failed to inform the class that it was violating the Oklahoma statute.  The Tenth Circuit further noted Defendant cited no case law or other authority suggesting that another state’s law would apply to a fraud claim of any of the class members.  The Tenth Circuit thus opined it saw no abuse of discretion in the District Court’s evaluation that this factor weighed in favor of remand.

For the third factor, whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction, the District Court found Plaintiff had proposed a “natural class” that “encompassed all of the people and claims that one would expect to include in a class action.” Defendant argued the proposed class was not a “natural class” because it excluded publicly traded oil and gas companies and their affiliates, which were most likely of all potential class members to be non-Oklahoma citizens.  Plaintiff asserted he excluded publicly-traded companies because those companies were likely implementing the same improper late payment practices as Defendant.  The Tenth Circuit found Defendant missed the point that the exclusion of publicly traded companies from the class was “natural,” not motivated by a desire to avoid federal jurisdiction, if counsel clearly had excluded those companies even when federal jurisdiction was either desired or not a concern.

Defendant further argued the District Court should not have relied on prior cases filed by the same counsel, because such reliance created the potential for a self-fulfilling analysis. The Tenth Circuit, however, found Defendant’s theory that counsel could define an “unnatural” class in cases where federal jurisdiction was acceptable just so that the class definition could be used later to defeat federal jurisdiction, was speculative and unconvincing, and Plaintiff pointed out that a number of the cases he had cited were filed by other counsel.

For the fourth factor, whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants, Defendant argued the relevant forum was not the entire State of Oklahoma but Hughes County, Oklahoma, the county in which the action was originally filed. Defendant argued the Tenth Circuit must follow the plain language of § 1332(d)(3)(D), which referred to the “forum” rather than the “State.”  The Tenth Circuit, however, found the term “forum” was ambiguous, as it had been used in CAFA cases to refer to both the local court division and the state as a whole.  The Tenth Circuit further found that even if the term forum could refer to the local court division and not just the state as a whole, it did not read the factor to forbid remand whenever the proposed class was widely dispersed within a state or the venue selected by the plaintiff contained only a small fraction of the class.  The Tenth Circuit opined that ordinarily there is a distinct nexus to the forum if there is a distinct nexus to the state and there is no particular reason to distinguish the local court where the case was originally filed from other local courts in the state.  The Tenth Circuit thus ruled the District Court correctly weighed this factor in favor of remand.

Next, the District Court found that the fifth factor, whether the number of citizens of the state in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other state, and the citizenship of the other members of the proposed class is dispersed among a substantial number of states, weighed in favor of remand noting that the number of Oklahoma citizens was about 2.5 times the number of citizens from any other state. Defendant argued the District Court erred because more out-of-state citizens had a potential connection to this action than Oklahoma citizens; and pointed to the Senate Report in support that one or more of the other states involved accounted for more than 5% of the prospective class members.  The Tenth Circuit, however, found that the 5% figure in the Senate Report was solely an example of when plaintiffs are widely dispersed among different states, not a mandatory threshold for evaluating dispersion, and the District Court’s analysis captured the purpose of this factor which was to ensure that no other state had as significant an interest in the controversy as Oklahoma.  The Tenth Circuit thus ruled the District Court correctly determined this factor weighed in favor of remand.

Finally, the Tenth Circuit found that because there was no dispute regarding the sixth factor; that during the 3-year period preceding the filing of that class action, one or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed, this factor favored remand.

The Tenth Circuit therefore held the District Court did not abuse its discretion in ruling that each factor supported remand, and accordingly, affirmed its decision remanding the case to the Oklahoma state court.

Yaron Shaham