Some defense counsel breath a sigh of relief after they manage to remove a class action to federal court but, as the case below illustrates, the battle may be far from won.

The Class Action Fairness Act of 2005 (“CAFA”) permits defendants to remove a diversity action from state to federal court when certain criteria are met, including that the parties are minimally diverse and the amount in controversy exceeds $5,000,000. A plaintiff whose action has been removed can secure a remand to state court based on the “local controversy” exception.

The recent Ninth Circuit opinion in Coleman v. Estes Express Lines Inc.pdf. (Case No. 10-56852, January 25, 2011), considered whether the federal district court is limited to the complaint in determining if two of the criteria for the local controversy exception are satisfied.

Coleman claimed in his complaint based on California law that Estes West and Estes Express (a) failed to pay overtime, (b) failed to provide meal and rest periods, (c) failed to timely pay earned wages after discharging employees, (d) failed to pay earned wages to current employees, (e) failed to provide wage statements, and (d) engaged in unlawful business practices.

After the defendant companies removed the action to federal court under CAFA, Coleman moved to remand to state court contending that the local controversy exception was applicable. The local controversy exception requires that a federal district court “shall decline to exercise [removal] jurisdiction . . . over a class action in which –

(I) greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed;

(II) at least 1 defendant is a defendant –

(aa) from whom significant relief is sought by members of the plaintiff class;

(bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and

(cc) who is a citizen of the State in which the action was originally filed; and

(III) principal injuries resulting from the alleged conduct or any related conduct of each defendant where incurred in the State in which the action was originally filed.” 28 U.S.C. § 1332(d)(4)(A)(i). (Emphasis added).

The plaintiff seeking remand has the burden of demonstrating that the local controversy exception is met.

Here, the companies contended that two necessary criteria for the local controversy exception were not satisfied. And, they filed the declaration of Estes Express’ Director of Human Resources in support. First, the companies argued that Estes West (a California corporation) lacked sufficient funds to satisfy a judgment and that hence “significant relief” had not been “sought” from it. See 28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa). Second, the companies argued that Estes Express (a Virginia corporation) exercised almost total control over the operations of Estes West and that therefore Estes West’s “alleged conduct” did not “form a significant basis for the claims asserted by the proposed plaintiff class.” Id.

The district court found it could only look to the complaint’s allegations to determine if Coleman sought significant relief from Estes West. After analyzing only the complaint, it held Coleman had met the significant relief requirement of §1332(d)(4)(A)(i)(II)(aa). As to the issue of whether Estes West’s “alleged conduct form[ed] a significant basis” for Coleman’s claims, the district court held regardless of the declaration that the plaintiff had satisfied the conduct requirement of §1332(d)(4)(A)(i)(II)(bb).

On appeal, the Ninth Circuit considered both the text and legislative history of the exceptions to determine if extra-complaint materials was admissible. First, the appellate court held “that CAFA’s language unambiguously directs the district court to look only to the complaint in deciding if the criteria in [subsections (aa) and (bb)] are satisfied.”

The Ninth Circuit compared the language in subsections (aa), (bb) and (cc) – relating to criteria that must be met before the local controversy exception to CAFA jurisdiction applies. While subsections (aa) and (bb) used the words “sought” and “alleged”, which can be drawn from the complaint, subsection (cc) uses the word “is” which signals that the “actual fact must be established.”

While the Ninth Circuit was not required to consult the legislative history because the text was unambiguous, it did so because several courts had relied on a Senate Judiciary Committee Report in reaching an opposite conclusion. However, the Court didn’t find anything in the Report that was inconsistent with its conclusion. The Report indicated there could be fact-finding on the questions of citizenship and amount-in-controversy but not as to subsections (aa) and (bb) -- relief sought and alleged conduct – that were before the Court.

So, the Ninth Circuit concluded that Coleman’s complaint “seeks sufficient relief against Estes West to satisfy subsection (aa)” and sufficiently alleges conduct of Estes West to satisfy subsection (bb). Since Estes West was the actual employer the allegations were significant. Finally, the Court noted because of different state pleading requirements, a district court might, in its discretion, either “require or permit” the plaintiff to file an amended complaint to facilitate analysis of the relevant CAFA criteria.

The Bottom Line: As to the local controversy exception, a careful analysis of the complaint is required including any attached materials. Sometimes, a plaintiff’s zeal to attach company documents may actually assist the defendant. And, if there is ambiguity on a key CAFA issue, a motion to seek an amended complaint may be helpful. The Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), and Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007), decisions may be useful in attempting to secure a complete explanation of the claims of the putative class.