MORRISON v. YTB INTERNATIONAL, INC. (July 27, 2011)

YourTravelBiz.com (also known as YTB International) is based in Illinois and operates a business in which its customers purchase the right to act as a travel agent and sell travel services to the public. A number of its customers brought suit against YTB. They brought the suit as a class action on behalf of all of YTB’s customers and invoked jurisdiction under the Class Action Fairness Act. The class alleged that YTB's business practices violated the Illinois Consumer Fraud Act's prohibition on pyramid schemes. The Act prohibits businesses in which a customer's income is based primarily on inducing others to participate rather than on the amount of goods or services sold. Judge Murphy (S.D. Ill.) dismissed the complaint. First, he ruled that YTB's transactions with the non-Illinois class members were not covered by the Act. Second, he ruled that he should decline to exercise CAFA jurisdiction over the remaining intrastate claims under § 1332(d)(4). Plaintiffs appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Flaum and Rovner vacated and remanded. The Court rejected the district court's rationale for dismissing the case. CAFA jurisdiction is examined at the time of the filing of the complaint. Here, the plaintiffs proposed a nationwide class that met the CAFA jurisdictional requirements. Although the district court labeled its dismissal of the non-Illinois plaintiffs as one based on standing, it was wrong. The ruling that the Illinois Act does not cover transactions with out-of-state plaintiffs is a ruling on the merits, not a jurisdictional one. Notwithstanding the district court's error, the Court concluded that it also had to resolve the Illinois Consumer Fraud Act question. It likened § 1332(d)(4) to abstention, a concept under which a federal court has jurisdiction but declines to exercise it. If non-resident plaintiffs are covered by the Act, the claim is predominately interstate and a federal court should resolve the entire claim. Whether the non-resident plaintiffs are covered by the Act is governed by the Illinois Supreme Court's decision in Avery. There, the court concluded that the Act applies if "the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois." The Court found the factors here quite balanced: YTB's only office was in Illinois, it included an Illinois choice of law clause in its contracts, and it conducted training sessions in Illinois -- but the class members come from many different states, the class members' losses incurred in different states, and some states may not prohibit pyramid schemes. On balance, the Court concluded that the factors, although they may not compel application of Illinois law, they certainly did not defeat its application. The complaint therefore must survive a motion to dismiss.