The Third Circuit Court of Appeals has remanded to state court under the Class Action Fairness Act’s (CAFA’s) “local controversy” exception a contract dispute involving oil and gas leases in Pennsylvania. Vodenichar v. Halcón Energy Props., Inc., No. 13-2812 (3d Cir., decided August 16, 2013).

The Third Circuit rejected the district court’s determination that the “home state” exception to federal jurisdiction applied on the basis of the lower court’s finding that the two Pennsylvania-based defendants were the only primary defendants. Under this exception, all of the primary defendants must be citizens of the state in which the action was originally filed. According to the Third Circuit, CAFA does not define “primary,” but legislative statements indicate that a primary defendant must have direct versus secondary liability, and courts have looked to the allegations “to identify the defendants expected to sustain the greatest loss if liability were found” and whether these “defendants have substantial exposure to significant portions of the proposed class.”

“[C]ourts must assume liability will be established,” the appeals court said, and thus “the District Court’s reliance on Halcón’s denial of liability was misplaced.” Halcón, which was not a citizen of Pennsylvania, was the third defendant and would be directly liable to the plaintiffs who “appear to apportion liability equally among the defendants, and seek similar relief from all defendants. … Thus, Halcón is a ‘primary defendant.’” The court also determined that because Congress used the word “the” instead of “a” before the words “primary defendants,” “the statute requires remand under the home state exception only if all primary defendants are citizens of Pennsylvania.” With Halcón a primary defendant not from the same state as the Pennsylvania class members, the Third Circuit ruled that “remand based upon this exception is not warranted.”

The court also rejected the district court’s determination that the local controversy exception did not apply in light of another class action that had been filed arising from the same facts and asserting similar claims. According to the Third Circuit, “‘no other class action’ had been filed as contemplated under CAFA, and therefore remand of this case pursuant to the local controversy exception is appropriate.” Here, the plaintiffs filed their first lawsuit against Halcón in federal court, but Halcón indicated during a case management conference that it intended to add as necessary parties the leasing agents involved in the transaction. Because the leasing agents were based in Pennsylvania and the plaintiffs knew that adding these parties to the complaint would destroy diversity jurisdiction, they filed a motion to dismiss the first action without prejudice, with the intent of pursuing their claims against all defendants in state court. Halcón agreed that these parties should be joined but asserted that the case should proceed in federal court, given the discovery already produced and ongoing alternative dispute resolution (ADR) activities.

The district court granted the motion to voluntarily dismiss the first action without prejudice, but ordered the parties to complete the ADR process and directed them to retain the discovery produced to facilitate the ADR process and assist in the state litigation. The plaintiffs filed a state court class action against all three defendants; the claims were identical to the first filed complaint except for the addition of the two in-state defendants, several facts to support additional causes of action against them and a few exhibits. Halcón removed the second action to federal court, and it was assigned to the same judge as the first action.

According to the Third Circuit, while CAFA’s local controversy exception requires that “no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons” in the preceding three years, the first-filed suit here did not constitute an “other class action.” Rather it was “the same case, albeit enlarged.” “In practical terms,” the court said, “Plaintiffs’ actions were no different from a situation where a party amends a pleading to join parties to an existing case.” It did not raise the specter of the types of copycat suits in multiple forums that Congress sought to remedy with CAFA, which “seeks to control the impact of multiple class actions filed by different members of the same class against a defendant by providing a single forum to resolve similar claims.”

Thus, the court concluded, “the local controversy exception to CAFA jurisdiction mandates remand of this truly local case involving Pennsylvania landowners and their land.”