United States: Can A Complaint Be Mislabeled To Avoid CAFA?

Last Updated: March 17 2014
Article by CAFA Law Blog

Erie Insurance Exchange v. Erie Indemnity Company, 722 F.3d 154 (3d Cir. 2013).

In this appeal, a majority of a Third Circuit panel held that an action brought by an insurance exchange – an entity, not a conglomerate of individuals – was not class action under CAFA. 

The plaintiff, a reciprocal insurance exchange (the "Exchange"), brought suit in Pennsylvania state court, asserting claims for breach of contract, breach of fiduciary duty, and equitable relief arising out of the defendant Erie Indemnity Company's alleged misappropriation of funds.

Members of the Exchange purchased insurance policies and received indemnification for losses out of the Exchange's pool of funds.  To receive insurance, exchange members signed identical subscriber agreements, which appointed the defendant as attorney-in-fact for the Exchange.  These agreements gave the defendant broad managerial power over the Exchange's business affairs, including issuing policies, collecting premiums, and investing the Exchange's funds.  Exchange members who paid their insurance premiums in installments also paid service charges, as well as late payment and policy reinstatement fees.

The state court complaint alleged that, beginning in 1997, the defendant retained for itself the service charges that exchange members paid to the Exchange.  Additionally, the complaint stated that, starting in 1998, the defendant misappropriated more than $300 million in late payment and policy reinstatement fees.  The complaint named the Exchange as plaintiff and stated that four exchange members, as trustees ad litem, were prosecuting the suit on behalf of all exchange members.

The defendant filed a notice of removal in the United States District Court for the Western District of Pennsylvania on the basis that this suit was a class action within the meaning of CAFA.  The Exchange moved to remand, and the district court granted the Exchange's motion.  On appeal, a Third Circuit majority affirmed.

The Third Circuit majority began its analysis by noting that CAFA defines a "class action" as any civil action filed under Federal Rule 23 or a similar state statute authorizing an action by one or more representative persons as a class action. 28 U.S.C. § 1332(d)(1)(B).  Here, the defendant did not argue that this dispute satisfied CAFA's statutory definition.  Instead, this action was originally brought pursuant to Pennsylvania Rule of Civil Procedure 2152, which allows members of an unincorporated association to prosecute suit on behalf of the association. Rule 2152, however, lacks the defining characteristics of Rule 23, namely Rule 23's numerosity and commonality requirements.  For its part, the defendant noted that Pennsylvania Rule 2177, not Rule 2152, was the proper procedural mechanism for filing a lawsuit on behalf of an insurance exchange, and Rule 2177 requires suits by an exchange to be filed in its corporate name.  The Third Circuit remarked that, even if this were the case, Rule 2177 was even less like Rule 23, as it contained none of Rule 23's class-action requirements.  The Third Circuit further remarked that, in contrast to Rules 2152 and 2177, Rules 1701 through 1704 of the Pennsylvania Rules of Civil Procedure contained specific procedural requirement for filing class actions.  Based on its reading of these Pennsylvania rules, the Third Circuit concluded this was a suit by an entity, not a class of individuals.

The majority refused to sift through the complaint for magic words invoking a class action.  The plain, unambiguous language of CAFA instead requires a court to look to the procedural rule under which a case is filed.  In sum, "no amount of pleading will change the statute or rule under which the case is filed.  If this is a formalistic outcome, it is a formalism dictated by Congress." 722 F.3d at 160 (quoting In re Vioxx Prods. Liab. Litig., 843 F. Supp. 2d 654, 664 (E.D. La. 2012)). 

Unable to prove this case was a class action as defined under CAFA, the defendant unsuccessfully resorted CAFA's legislative history to satisfy its burden of establishing removal.  In this regard, the defendant argued that CAFA's legislative history indicated that diversity jurisdiction over class actions should not be confined to lawsuits that are labeled class actions.  But the Third Circuit rejected this argument, stating its decision did not hinge on whether the class-action label was missing from the complaint; rather, the dispositive factor in the Court's analysis was that this case was not brought under any rule sufficiently similar to Rule 23.  Accordingly, the Third Circuit affirmed the district court's remand order.  

Judge Jane R. Roth dissented.  Importantly, Judge Roth emphasized that CAFA's primary objective is to ensure interstate class actions of national importance remain in federal court.  In Judge Roth's view, the majority opinion contravenes Congress's express intent that CAFA broadly confer jurisdiction on federal courts to adjudicate class actions.  According to Judge Roth, the majority's formalistic approach opens the door for plaintiffs to forum shop and strategically avoid CAFA jurisdiction by disguising their class claims using inaccurate filings under non-class action procedural rules.  To avoid these undesirable consequences, a civil suit should be considered a class action for purposes of CAFA if the complaint states sufficient facts to satisfy the four prerequisites of a class action under Rule 23 or an equivalent state law.  A close examination of the complaint in this case reveals that the Exchange pled sufficient facts to satisfy Rule 23's numerosity, commonality, typicality, and adequacy requirements.  As such, Judge Roth would find that CAFA jurisdiction exists and reverse the district court's order remanding this case to state court.  

While the Third Circuit ultimately ruled that the Exchange's complaint did not meet the statutory definition of a "class action" under CAFA, this decision nonetheless highlights a possible tension between the majority's formalism and Judge Roth's reliance on congressional intent that may surface again in future cases.

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