By a 5-4 vote, the United States Supreme Court this week reversed and remanded Dart Cherokee Basin Operating Co. v. Owens to the Tenth Circuit. The decision is favorable for defendants seeking to remove class actions to federal court because the Court clarifies that a defendant’s notice of removal under CAFA need not provide evidence of an alleged amount in controversy. Moreover, the Court states that there is no “presumption” against removal under CAFA. The Court reached the merits despite the belief of many that the appeal would be dismissed. The majority stated, among other things, that a circuit court’s exercise of its discretion to review a remand order cannot be “rudderless.”
The plaintiff in Dart Cherokee filed a putative class action in Kansas state court seeking alleged damages for unpaid royalties related to oil and gas leases. The plaintiff’s complaint did not specify the amount of damages sought on behalf of the class. The defendants removed the case to the U.S. District Court for the District of Kansas pursuant to the Class Action Fairness Act of 2005 (“CAFA”). Defendants’ notice of removal alleged the amount in controversy to exceed $8.2 million, thereby satisfying CAFA’s $5 million amount-in-controversy requirement.
The plaintiff moved to remand the action to state court, claiming the removal was “deficient as a matter of law” because the pleading contained “no evidence” that the amount in controversy did in fact exceed $5 million. In response, the defendants filed a detailed declaration from an executive supporting an amount in controversy far in excess of $5 million.
Based on its reading of Tenth Circuit precedent requiring a defendant to provide actual proof of the amount in controversy with the notice of removal itself, the district court refused to consider the amount-in-controversy evidence provided in defendants’ declaration and granted plaintiff’s motion to remand. The district court also referenced a “presumption” against removal under CAFA.
The defendants petitioned the U.S. Court of Appeals for the Tenth Circuit for leave to appeal the remand order. A divided Tenth Circuit panel denied the petition, followed by an evenly divided Tenth Circuit rejecting a petition for rehearing en banc. (While a remand order ordinarily is “not reviewable on appeal or otherwise,” 28 U.S.C. § 1447(d), an exception exists for CAFA cases. 28 U.S.C. 1453(c)(1).)
The defendants petitioned the U.S. Supreme Court to review the Tenth Circuit’s refusal to grant their application for leave to appeal the remand order, and the Supreme Court granted certiorari. Oral argument before the Supreme Court suggested a key issue was whether the Court would reach the merits. If the Court were to reach the merits, however, observers believed the Supreme Court would reverse the Tenth Circuit. The Supreme Court has decided the case on the merits, and it has reversed the Tenth Circuit and remanded the action for further proceedings.
In a majority opinion penned by Justice Ginsburg (joined by Roberts, Breyer, Alito and Sotomayor – a somewhat unusual grouping), the Supreme Court held that the Tenth Circuit had abused its discretion by not reviewing the district court’s remand order. This is because the Tenth Circuit’s own precedent held that it should exercise discretion to review remand orders where a failure to do so would mean that a defendant would otherwise be left without recourse. Because the defendants in Dart Cherokee would have no other recourse to challenge the removal order at issue, the Supreme Court held that the Tenth Circuit erred by not agreeing to review the remand order on appeal.
The majority went further, however, and provided clear guidance to the Tenth Circuit and all federal courts concerning the relative burdens that should be applied to amount-in-controversy disputes:
- A defendant seeking to remove a class action to federal court must file a notice of removal “containing a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a).
- When removal is based on diversity of citizenship under CAFA, federal courts have jurisdiction if the amount in controversy exceeds $5 million. 28 U.S.C. § 1332(d)(2).
- When a plaintiff’s state-court complaint demands a monetary sum, that sum is “deemed to be the amount in controversy,” if it is alleged in good faith. 28 U.S.C. § 1446(c)(2).
- When the plaintiff’s complaint is silent concerning the amount in controversy (or one is alleged in bad faith to avoid federal court removal, for example), a defendant is able to assert a good faith amount in controversy in its notice of removal. 28 U.S.C. § 1446(a).
- A defendant’s notice of removal need only include a “plausible” allegation of damages. A defendant does not need to provide “evidence” of those damages with its notice of removal. This is because 28 US.C. § 1446(a) tracks the general pleading requirement stated in Fed. R. Civ. P. 8(a). A defendant needs to include only a “short and plain” statement of the amount in controversy with the notice of removal itself.
- The amount in controversy pleaded by a defendant should be accepted outright unless it is challenged by a plaintiff or a court. When the amount in controversy is challenged: (1) both sides can submit proof, and (2) the court shall decide whether the $5 million threshold is satisfied.
- A court decides an amount-in-controversy dispute by a preponderance of the evidence.
The Supreme Court further held that any supposed “presumption” against CAFA removal – referenced by the district court in ordering remand – does not exist.
Justice Scalia authored a main dissent (joined by Kennedy, Kagan and Thomas (who joined all but the last sentence)), contending that the Court should not reach the merits of the case. Justice Scalia explained that the case posed only the question of whether the Tenth Circuit abused its discretion under CAFA by denying permission for the defendants to appeal the district court’s remand order. Because the Tenth Circuit did not provide a rationale for denying permission, Justice Scalia reasoned, it is not possible for the Supreme Court to determine whether the Tenth Circuit abused its discretion by denying review. Justice Thomas, who offered a separate dissent, further contended that a petition for leave to appeal a remand order does not constitute a “case” that the Supreme Court can properly review.
In responding to the dissents and explaining why it reached the merits, the majority explained: (1) a circuit court’s “discretion to review a remand order is not rudderless”; (2) lower courts abuse their discretion when they rely on an “erroneous view of the law”; (3) “many signals that the Tenth Circuit relied on [a] legally erroneous premise” existed; and (4) the Tenth Circuit’s order denying permission to appeal “was infected by legal error.”
The impact of Dart Cherokee on defendants’ amount-in-controversy pleading requirements is clear and real – defendants are not required to include evidence of alleged damages in the notice of removal itself. Similarly, it is clear and helpful to defendants that the Supreme Court has rejected any notion that there is a “presumption” against removal under CAFA. What is less clear is whether Dart Cherokee is a bellwether for the Supreme Court sidestepping procedural issues to provide more active guidance in future CAFA cases.