United States: US Supreme Court Opens Loophole For Potential Influx Of State Court Suits

On January 14, 2014, the United States Supreme Court unanimously reversed the Fifth Circuit and held that the Class Action Fairness Act's ("CAFA") mass action provision did not provide for jurisdiction over a parens patriae suit filed by the attorney general of Mississippi.

This ruling has important consequences for corporations that face class action litigation because it effectively opens up a loophole in CAFA that will allow private class action lawyers to file what are essentially private class actions through state attorneys general and keep those cases in state courts that are viewed as plaintiff-friendly. Indeed, the state attorneys general that most often use the parens patriae device in this manner represent some of the same states whose court systems were subject to the class action abuses that led to CAFA's passage in the first place. Thus, this recent decision is likely to encourage an increase in the filings of such lawsuits, which have already experienced an uptick in recent years particularly in the pharmaceutical and financial industries as well as in the antitrust context.

The Mississippi v. AU Optronics Corp. decision.

The AU Optronics case was filed by the attorney general of Mississippi following the settlement of a private class action alleging essentially identical claims based on the defendants' alleged price fixing conspiracy in the liquid crystal display (LCD) market. The defendants removed the case to federal court arguing that the monetary recovery sought belonged to individual purchasers, not the state, and therefore the parens patriae suit was essentially a "mass action" involving the claims of "100 or more persons" that would be jointly tried. The district court rejected that argument and ordered the case remanded to state court, but the Fifth Circuit reversed. Based on its prior precedent in Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008), the Fifth Circuit held that the real parties in interest were indeed the individual purchasers that the attorney general sought to represent. Thus, CAFA's "mass action" provision—"a civil action . . . involving the monetary claims of 100 or more persons that is proposed to be tried jointly . . . ," 28 U.S.C. § 1332(d)(11)(B)(i)— applied to the complaint. Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796, 799-800 (5th Cir. 2012). According to the Fifth Circuit, the claims and damages sought were:

  • monetary claims;
  • that belonged to more than 100 purchasers; and
  • the attorney general sought to have those claims tried jointly. Id. The Fifth Circuit did not address the alternative ground of whether the case was also removable as a class action under CAFA. Id.

In reaffirming its prior precedent, the Fifth Circuit declined to follow the reasoning of the Fourth, Seventh, and Ninth Circuits, which had rejected the Caldwell rule and adopted a rule known as the "whole case" approach under which any independent interest of the state is sufficient to bring the parens patriae action outside of CAFA's scope even if private individual monetary claims were also sought within the same complaint. See AU Optronics Corp. v. South Carolina, 699 F.3d 385, 393-94 (4th Cir. 2012) (holding CAFA mass action provision did not apply to parens patriae complaint because the state also had a sovereign interest at stake); Nevada v. Bank of Am. Corp., 672 F.3d 661, 671 (9th Cir. 2011) (similar principle); LG Display Co. v. Madigan, 665 F.3d 768, 772 (7th Cir. 2011) (similar principle).

The United States Supreme Court granted certiorari in the AU Optronics case in order to consider this circuit split regarding whether CAFA's mass action provision could apply to parens patriae actions filed by state attorneys general. On January 7, 2014, the Supreme Court reversed the Fifth Circuit in a unanimous ruling authored by Justice Sotomayor. Mississippi ex rel. Hood v. AU Optronics Corp., Case No. 12-1036 (U.S. Jan. 14, 2014). The Supreme Court's analysis focused on the specific text of the mass action provision, and in particular the requirement that mass actions involve the claims of at least "100 or more persons," which the Supreme Court equated with "plaintiffs" based on the context of that language and the similarity of the interchangeable usage of the terms "plaintiffs" and "persons" in CAFA and in Federal Rule of Civil Procedure 20 which deals with joinder of parties. Slip Op. at 6-7. The Supreme Court also concluded that reading the term "persons" to mean something other than "plaintiffs" led to incongruities in the statutory text because one of the requirements of the mass action provision was that the claims of the 100 or more "persons" must be proposed for joint trial with the "plaintiffs." Id. at 7. As the Court put it, "[i]t is difficult to imagine how the claims of one set of unnamed individuals could be proposed for joint trial on the ground that the claims of some completely different group of named plaintiffs share common questions. The better understanding is that Congress meant for the "100 or more persons" and the proposed "plaintiffs" to be one and the same." Id.

The United States Supreme Court also recognized an inherent problem with the defendants' reliance on the mass action provision, which—unlike the class action provision of CAFA—only provides for federal jurisdiction over claims that individually meet the $75,000 amount in controversy requirement. Id. at 8-9. As the Supreme Court correctly noted, it is unlikely that any of the claims in these cases would meet that threshold and thus would remain in state court anyway, and determining which claim is which would involve an "administrative nightmare that Congress could not possibly have intended." Id. at 8.

For all those reasons the United States Supreme Court determined that the plain reading of the mass action provision meant that the 100 or more persons must be named plaintiffs, not absent parties or real parties in interest. Id. at 9-10. The Supreme Court further reinforced its conclusion based on a discussion of the statutory context of the mass action provision, which, as noted above, it determined was intended to play a limited and specific role "as a backstop to ensure that CAFA's relaxed jurisdictional rules for class actions cannot be evaded by a suit that names a host of plaintiffs rather than using the class device." Id. at 10-11.

Finally, the Court also rejected the Fifth Circuit's decision to engage in a real party in interest inquiry. Id. at 11. While the Supreme Court recognized its prior precedents often look to the substance of the action and not merely labels in determining if jurisdiction exists in a variety of contexts, it held that such an inquiry was improper in this case because it was being misused to alter and trump the specific statutory text in a way that the Supreme Court held Congress did not intend. Id. at 11-14.

Potential Arguments to Close the Parens Patriae Loophole in Specific Cases

Although the Supreme Court's decision soundly rejected any argument that CAFA jurisdiction exists under the mass action provision for parens patriae actions, other potential arguments and strategies may remain to prevent such cases from being litigated in hostile state courts. Dentons lawyers have substantial experience with such complex removal issues and the defense of these parens patriae actions and stand ready to help guide your company around the potential traps and pitfalls that can significantly impact the outcome of such cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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