The U.S. Court of Appeals for the Third Circuit recently provided guidance on the “home state” and “local controversy” exceptions to federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA). Although the Third Circuit in Vodenichar v. Halcon Energy Properties, Inc., affirmed the District Court’s remand of the action to state court, it declined jurisdiction based on CAFA’s “local controversy” exception, rather than CAFA’s “home state” exception. Significantly, in analyzing CAFA’s exceptions, the Third Circuit provided guidance on two key undefined terms, “primary defendant” and “other class action.” This guidance should be considered by insurers contemplating removal of class actions filed in their home state’s court when the class primarily consists of citizens of that state.
CAFA provides federal courts with jurisdiction over civil class actions if the matter in controversy exceeds $5 million, the aggregate number of proposed class members is 100 or more and any class member is a citizen of a state different from any defendant. It also allows for two exceptions to federal jurisdiction where the controversy is uniquely connected to the state in which the action was originally filed. The party invoking either the “local controversy” or “home state” exception bears the burden of proving it by a preponderance of the evidence.See 28 U.S.C. § 1332(d)(4)(A)-(B).
A party seeking to use the “home state” exception must establish that at least two-thirds of the class and the “defendants” are citizens of the state in which the action was originally filed. “Primary defendant,” however, is not defined in CAFA. Relying on the ordinary meaning of the term, statutory construction and statements by CAFA’s legislative sponsors, the Court reasoned that to determine whether a defendant is a “primary defendant,” courts should assume liability and determine whether the defendant is a “real target.” A defendant is a “real target” if plaintiffs seek to hold the defendant responsible for its own actions and the defendant has significant exposure. Applying this standard, the Third Circuit found that the “home state” exception did not apply in Vodenichar because not every “primary defendant” was a citizen of the state in which the action was filed.
The Court then analyzed the “local controversy” exception, which applies when: (1) greater than two-thirds of the class is local; (2) at least one defendant is local; (3) the principal injuries occurred in the state in which the action was filed; and (4) no “other class action” asserting similar allegations was filed against any defendant within three years. In analyzing the exception, the Court found that although CAFA does not define “other class action,” Congress’ intent was to ensure that defendants did not face similar suits in multiple forums. Applying the “local controversy” exception in light of Congress’ intent, the Court in Vodenichar concluded that, despite a withdrawn class action having been filed against these defendants within the past three years, the defendants were not facing similar class actions and the “local controversy” exception applied necessitating remand.
Vodenichar provides litigants and lower courts with clear guidance as to how certain undefined terms in CAFA’s “home state” and “local controversy” exceptions should be interpreted and should be considered by insurers contemplating removal of a class action filed in their home state’s court when the class primarily consists of citizens of that state.