A narrow exception to CAFA’s broad removal provisions is the “local controversy” exception, which prohibits removal in certain cases where the dispute is deemed sufficiently contained within the forum state that the interests of the state’s courts in adjudicating the dispute trump the federal interest in conferring federal jurisdiction.  According to a recent Ninth Circuit case, invocation of this exception constitutes a rare occasion on which a plaintiff may amend its complaint in order to defeat removal jurisdiction.

The “local controversy” exception applies when the following criteria are met:  (i) greater than two-thirds of the putative class members are citizens of the forum state; (ii) at least one defendant from whom “significant relief” is sought, and whose conduct forms a “significant basis” for the asserted claims, is a citizen of the forum state; and (iii) principal injuries related to each defendant’s alleged conduct were incurred in the forum state.  When these three conditions are met, the federal court is required to remand the action to state court, assuming CAFA is the only basis for removal.

In Benko v. Quality Loan Service Corp., the plaintiffs alleged that six defendants—only one of which was a Nevada citizen–engaged in foreclosure practices that violated Nevada law.  The complaint was originally filed in Nevada state court.  One of the defendants removed the action under CAFA.  The plaintiffs then sought to amend their complaint to bolster their allegations against the Nevada defendant—specifically, by elaborating on estimates of the percentage of total claims asserted against the Nevada defendant, and the dollar value of those claims—in order to invoke the “local controversy” exception.  The federal district court held that it had jurisdiction, dismissed the operative complaint under Rule 12(b)(6), and denied leave to amend on the ground that amendment would be futile.

The Ninth Circuit, in a split panel decision, reversed.  The majority held that the district court abused its discretion in denying the plaintiffs leave to amend, because the proposed amendment related directly to the district court’s CAFA jurisdiction.  Analyzing the allegations in the proposed amended complaint, rather than the operative complaint, the court held that the plaintiffs had met their burden to establish the local controversy exception, and therefore instructed that the case be remanded to state court.

The majority acknowledged the general rule that jurisdiction is analyzed as of the pleadings filed at the time of removal, without reference to subsequent amendments.  The court then held, however, that “[w]here a defendant removes a case to federal court under CAFA, and the plaintiffs amend the complaint to explain the nature of the action for purposes of our jurisdictional analysis, we may consider the amended complaint to determine whether remand to the state court is appropriate.”  The panel expressed the concern “that a class action may be removed to federal court, with a complaint originally drafted for state court” that “may not address CAFA-specific issues, such as the local controversy exception.”  Permitting amendment is appropriate, the majority reasoned, to allow the plaintiffs to address those issues.

The apparent flaw in the majority’s reasoning—one recognized in the dissent—is that every removed complaint is “originally drafted for state court,” and that every state court class action faces at least a possibility that a defendant will attempt to remove it under CAFA.  If a plaintiff has a basis to defeat federal jurisdiction, why should he not be expected to plead it prior to the filing of a removal notice?  And why should the local controversy exception, or even CAFA in general, be exempt from this requirement?  The majority opinion offers no insight as to why a failure to plead that the relief sought from an in-state defendant in a class action is “significant” for local controversy purposes should be curable by amendment, but a failure to plead that the amount in controversy is below $75,000 in a non-class action complaint, for example, should not.

The issue raised by Benko is one that may well give rise to a circuit split over time.  For the moment, at least in the Ninth Circuit, defense counsel are on notice that a state court plaintiff’s failure to plead the local controversy exception in the first instance does not necessarily mean the case can be successfully be removed to federal court.