Defendants trying to remove class action cases to federal court can face a challenge in meeting CAFA’s $5 million amount in controversy standard. It is often unclear what damages a plaintiff seeks or how plaintiff’s requested relief might be valued. Removing defendants are often challenged with how to establish that $5 million is in controversy.

The Seventh Circuit has just made it easier for removing defendants to show that the amount in controversy requirement is met. In Back Doctors Ltd. v. Metropolitan Property and Casualty Ins. Co., the Seventh Circuit vacated a district court order remanding a class action complaint to state court. Slip op., No. 11-8003 (7th Cir. Apr. 1, 2011). The district court erroneously required the defendant to show a “reasonable probability” that the amount in controversy was met. Slip op. at 2. Instead, the district court should have deferred to the defendant’s estimate that more than $5 million was in controversy unless recovery of that amount was “legally impossible.” Id. at 4.

The case was filed by Back Doctors against defendant Metropolitan in Illinois state court. Metropolitan allegedly violated the Illinois Consumer Fraud Act and breached a contract by paying less than required under insurance policies. Id. at 1-2. Metropolitan removed under CAFA, contending the amount in controversy exceeded $5 million because plaintiff admittedly sought at least $2.9 million, and the potential for punitive damages exceeded $2.1 million. Id. at 2

The district court remanded, holding punitive damages should not be considered because the complaint did not request punitive damages and did not allege Metropolitan acted wantonly or maliciously. Id. The district court believed that remand was appropriate because Metropolitan had not established a “reasonable probability” that the amount in controversy exceeded $5 million. Id.

The Seventh Circuit reversed. The court began by noting that there is no presumption against federal jurisdiction or removal. Id. at 4 (“[CAFA] must be implemented according to its terms, rather than in a manner that disfavors removal of large-stakes, multi-state class actions.”).

The court went on to hold that the “reasonable probability” standard had been misapplied by the district court, and a number of other district courts. The court held that the standard only applied to “jurisdictional facts, such as which state issued a party’s certificate of incorporation, or where a corporation’s headquarters are located, [which] need be established by a preponderance of the evidence.” Id. at 4 (emphasis in original).

A different standard applies to establishing the amount in controversy. A removing defendant can make its own (presumably good faith) estimate of the amount in controversy. Id. (“When removing a suit, the defendant as a proponent of federal jurisdiction is entitled to present its own estimate of the stakes; it is not bound by the plaintiff’s estimate.”) Id. The court should defer to the defendant’s estimate unless it is “legally impossible.” Id. at 5 (“the estimate of the dispute’s stakes advanced by the proponent of federal jurisdiction controls unless a recovery that large is legally impossible.”).

The court vacated the remand because recovery of $5 million, including $2.1 million in punitive damages, was not impossible. The court rejected Back Doctors’ argument that punitive damages would not be awarded because the complaint did not ask for such relief. The court noted that plaintiffs can amend their complaints as litigation progresses. Id. at 6. And, juries can award damages not requested in a complaint. Id. at 7. Because the complaint alleged fraud, the court found that a punitive award exceeding $2.1 million was legally possible, so the amount in controversy requirement was met. Id. at 7.

The Seventh Circuit left open the possibility that a plaintiff could prevent removal by “forswearing any effort to collect more than the jurisdictional threshold.” Id. at 5. The court noted that an Illinois plaintiff may prevent removal by filing a binding stipulation or affidavit with the complaint. Id. at 5, 7. Back Doctors had not done so, and the court held that the district court could not rely on Back Doctor’s post-removal declaration that it does not “now” want punitive damages. Id. at 5. The court said this disavowal was ineffective because “events after the date of removal do not affect federal jurisdiction.” Id. at 5-6.

The court also noted a problem with a plaintiff trying to limit damages in a class action. The court said that a class representative could not minimize the class recovery if doing so violated the representative’s fiduciary duty to the class. And, because a court could later replace the plaintiff with a class representative that was willing to seek punitive damages, stipulating to a recovery under $5 million may not be binding on the class in any event:

Back Doctors has a fiduciary duty to its fellow class members. A representative can’t throw away what could be a major component of the class’s recovery. Either a state or a federal judge might insist that some other person, more willing to seek punitive damages, take over as representative. What Back Doctors is willing to accept thus does not bind the class and therefore does not ensure that the stakes fall under $5 million. Id. at 6.

By giving removing defendants the general ability to make a controlling estimate of the amount in controversy, the Seventh Circuit has made it easier to remove. And, by recognizing the limits on a plaintiff’s ability to minimize the damages sought, particularly in a class action, the court has made it more difficult for a plaintiff to use artful or ambiguous pleading to manipulate jurisdiction.