United States: Recent Supreme Court Decision Will Make It Easier for Companies to Litigate Class Actions and Multi-Party Claims in Federal Court

The Supreme Court last week handed down a ruling with significant consequences for corporations engaged in multi-party and class action litigation. The Court decided two cases that questioned whether all plaintiffs must allege damages in excess of $75,000 in order for a federal court to have jurisdiction over the case. In Exxon Mobil Corp. v. Allapattah Services, Inc. and Ortega v. Star-Kist Foods, the Court ruled that, as long as one plaintiff (or the named representative in a class action) meets the $75,000 "amountin- controversy" threshold, a federal court may exercise "supplemental jurisdiction" over all other plaintiffs in the case. This decision, in conjunction with the recent passage of the Class Action Fairness Act ("CAFA") makes it easier for defendants in multi-plaintiff actions to have their cases heard in federal courts – often a more attractive forum than their state counterparts. (See February 11, 2005 Client Alert:
http://www.goodwinprocter.com/publications/PL_ClassActionFairnessAct_2_11_05.pdf)

Exxon involved a class action brought by Exxon gas station dealers after the company charged its dealers 3% for each transaction paid by a credit card. Even though most of the individual dealers did not allege damages above $75,000, the 11th Circuit exercised supplemental jurisdiction over the entire class. In Ortega, a girl and her family sued Star-Kist in federal court after she cut her finger on a defective can of tuna fish, resulting in permanent damage and scarring. Contradicting the reasoning of the 11th Circuit, the First Circuit ruled that the girl could maintain her federal lawsuit because she alleged damages in excess of $75,000, but it refused to allow her family members to join the case because their potential damages did not satisfy the amount-in-controversy requirement. The Supreme Court granted certiorari to harmonize these two approaches.

Traditionally, to bring a case in federal court that does not involve a federal statute (socalled "diversity" cases), a plaintiff must (i) reside in a different state than all of the defendants; and (ii) allege damages in excess of $75,000. The Supreme Court has long held that each plaintiff in a diversity case must reside in a different state than each defendant. Similarly, the Court had previously ruled that each plaintiff must separately meet the amount-in-controversy requirement – i.e., the plaintiffs could not aggregate their damages to reach $75,000. Similarly, in the class action context, the Court had ruled that each class member must allege $75,000 in damages.

Then, in 1990 Congress enacted the supplemental jurisdiction statute. This law allows federal courts to exercise jurisdiction over cases involving claims that, standing alone, would not be allowed in federal court. The stated purpose of the supplemental jurisdiction law was to permit only a narrow class of claims to be heard in federal court (and to overrule a Supreme Court decision that federal courts did not have jurisdiction over those claims). But the text of the law as enacted is much broader, giving federal courts jurisdiction over "all other claims that are so related to claims in the action within such original jurisdiction . . ." The question for the Supreme Court in Exxon and Ortega was whether the supplemental jurisdiction law overruled the Court’s earlier cases requiring each plaintiff to satisfy the amount-in-controversy requirement.

The Court ruled that it did, upholding the 11th Circuit in Exxon and overturning the 1st Circuit in Ortega. Writing for a 5-4 majority, Justice Kennedy concluded that the plain text of the supplemental jurisdiction law allowed no other result. The supplemental jurisdiction statute states that, as long as a federal court has "original jurisdiction" over a civil action, it has supplemental jurisdiction over "all other claims that are so related to claims in the action . . ." The statute goes on to state that supplemental jurisdiction "shall include claims that involve the joinder or intervention of additional parties." Applying the text to Exxon and Ortega, the Court ruled that because the respective federal courts properly had original jurisdiction over the class representative in Exxon and the injured girl in Ortega, the courts had supplemental jurisdiction over the additional class members and the injured girl’s family because they were "additional parties" with "related" claims.

While the Court was considering the Exxon and Ortega cases, Congress passed the CAFA. Under this new law (which only applies to cases filed on or after February 18, 2005), federal courts have jurisdiction where any member of the class is a citizen of a state different from any defendant (thus amending the "complete diversity" rule) as long as the aggregate amount of the class members’ claims exceeds $5 million. Justice Kennedy, though, made clear that the CAFA had no bearing on the Court’s Exxon decision because the supplemental jurisdiction statute will reach cases not covered by the CAFA (namely, cases filed before February 18, 2005, non-class actions involving multiple plaintiffs, and class actions alleging damages less than $5 million).

The ramifications of Exxon and the CAFA are likely to be favorable for corporations defending multi-plaintiff lawsuits. Corporate defendants, especially out-of-state corporations, often prefer federal courts for a number of reasons. For instance, in the class action context, a federal forum is usually more favorable due to more consistent standards and oversight with respect to class action certification and settlement, and greater safeguards against abuses. Under the CAFA, corporate defendants can remove new class actions to federal court as long as one member of the class is diverse from one defendant and the class alleges $5 million in damages. Now, under Exxon, even if the damages alleged are under $5 million, removal to federal court is proper where at least one member of the class (or one plaintiff in a multi-plaintiff case) alleges $75,000 in damages.

Goodwin Procter is closely monitoring developments in this area to ensure that our clients can take full advantage of any new procedural rules and decisions interpreting Exxon. We will continue to keep you informed of the ways in which these new laws affect class action and multi-party litigation.

David S. Schumacher contributed to the preparation of this article

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.