Because a potential punitive damages award in litigation removed to federal court under the Class Action Fairness Act (CAFA) could bring the total damages above the law’s $5 million amount-in-controversy minimum, the Seventh Circuit Court of Appeals has determined that the federal courts have jurisdiction over the matter. Back Doctors Ltd. v. Metro. Prop. & Cas. Ins. Co., No. 11-8003 (7th Cir., decided April 1, 2011). The issue arose in a contract dispute originally filed in state court but removed under provisions allowing the removal of class actions “in which the stakes exceed $5 million, provided that at least minimal diversity of citizenship exists.”

The district court agreed with the plaintiff that the defendant insurer had not established a “reasonable probability” that the amount in controversy exceeded $5 million and remanded the matter to state court. Noting that the reference to a “reasonable probability” standard “entered this circuit’s jurisprudence in 1993 and, we thought, departed in 2006,” the Seventh Circuit clarified that “unless recovery of an amount exceeding the jurisdictional minimum is legally impossible, the case belongs in federal court. Only jurisdictional facts, such as which state issued a party’s certificate of incorporation, or where a corporation’s headquarters are located, need be established by a preponderance of the evidence.”

Here, the recovery of more than $5 million was not impossible, despite the lack of an express request for a punitive award in the complaint or allegations of wanton or egregious conduct. According to the court, such an omission does not make a punitive award impossible because “Plaintiffs can amend their complaints as the litigation progresses. The Illinois statute is about fraud, after all, and the complaint alleges that the insurer concealed from its clients the means it used to avoid paying what the insurance contracts promise. Fraud is a common ground of punitive damages in Illinois.” With $2.9 million in compensatory damages at stake, the court indicated that more than $2.1 million in punitive damages is possible in the litigation, thus meeting the CAFA minimum. The court remanded the case to the district court for a ruling on the merits.