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18 April 2011

Seventh Circuit Clarifies That Defendants May Remove Class Actions Unless It Is “Legally Impossible” For $5 Million Or More To Be At Stake

In a pair of recent decisions, the U.S. Court of Appeals for the Seventh Circuit has held that federal courts have jurisdiction over a class action that has been removed from state court when a defendant estimates that the $5 million amount-in-controversy requirement has been met, unless the plaintiff can show that it would be legally impossible to recover that amount. These decisions, Back Doctors Ltd. v. Metropolitan Property and Casualty Insurance Co. and Blomberg v. Service Corp. Int’l, should make it less burdensome for defendants within the Seventh Circuit to remove class actions to federal court.

In Back Doctors, an insurance company had been sued in Illinois state court for allegedly violating state consumer-protection laws and for breach of contract. The defendant removed the case to federal court under CAFA. To satisfy CAFA’s requirement that at least $5 million be at stake, the defendant pointed to plaintiffs’ request for $2.9 million in compensatory damages, and noted the potential for punitive damages. The plaintiff moved to remand, arguing that it had neither requested punitive damages in its state-court complaint nor alleged that the defendant had acted wantonly or maliciously (which might lead to an award of punitive damages). The district court agreed and remanded the case, holding that the defendant had failed to show a “reasonable probability” that at least $5 million was in controversy.

The Seventh Circuit reversed. The court explained that the “reasonable probability” standard applies only to jurisdictional facts such as the location of a corporation’s headquarters. But the Seventh Circuit held that, when the issue is the amount in controversy in a diversity case, the Supreme Court had long ago established that the relevant standard is much lower (citing St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283 (1938)). “When removing a suit, the defendant as proponent of federal jurisdiction is entitled to present its own estimate of the stakes; it is not bound by the plaintiff’s estimate.” When a defendant has provided a good-faith estimate that $5 million is at stake, that “estimate . . . controls,” and the case should not be remanded unless “it is ‘legally certain’ that the recovery (from the plaintiff’s perspective) or cost of complying with the judgment (from defendant’s) will be less than” that amount. The Seventh Circuit added that the plaintiff had not met that standard. Although the plaintiff had not requested punitive damages, the plaintiff did not “tie its own hands” by disavowing them, and did not cite any law holding that punitive damages would be impossible under the circumstances.

The Seventh Circuit confirmed this principle two weeks later in SCI. In that putative class action, employees of a funeral arrangement company sued in Illinois state court, alleging, among other things, violations of Illinois minimum wage laws. SCI removed the case under CAFA, but the district court remanded, reasoning that SCI failed to demonstrate by a preponderance of the evidence that the amount in controversy exceeded $5 million.  

The Seventh Circuit reversed, explaining that the “district court here required more of SCI than it should have.” The Seventh Circuit reiterated that a defendant’s “good-faith estimate” that the stakes exceed $5 million “is acceptable if it is plausible and adequately supported by the evidence” “unless it is legally impossible for the plaintiff to recover that much.” In particular, SCI had identified the number of potential class members with overtime claims and then compared their claims to similar—yet smaller—claims in class actions pending in other courts that had been proven to meet the CAFA threshold. This showing, the Seventh Circuit held, met SCI’s burden.

Back Doctors and SCI are important decisions for any business that may be targeted by a class-action lawsuit filed in state court. Courts both within and outside the Seventh Circuit have taken varying approaches to a defendant’s burden of proving the $5 million amount in controversy under CAFA. For example, the Ninth and Eleventh Circuits have held that, when the complaint is silent on the amount sought, a removing defendant must prove the amount in controversy by a preponderance of the evidence. Lowery v. Ala. Power Co., 483 F.3d 1184, 1208 (11th Cir. 2007); Abrego v. Dow Chem. Co., 443 F.3d 676, 683 (9th Cir. 2006). And the Second Circuit requires proof to a reasonable probability. Blockbuster, Inc. v. Galeno, 472 F.3d 53, 55 (2d Cir. 2006). This issue may eventually be resolved by the Supreme Court. In the meantime, under the Seventh Circuit’s decisions, it should be much less onerous for defendants to invoke CAFA and remove class actions from state court.

For more information about the issues raised in this Legal Update, please contact Evan M. Tager, Archis A. Parasharami, or Kevin S. Ranlett.


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