The Third Circuit Clarifies CAFA’s “Local Controversy Exception” on Unusual Facts

Walsh v. Defenders, Inc., 894 F.3d 583 (3d Cir. 2018).  The “local controversy” exception to federal jurisdiction over putative class actions under the so-called Class Action Fairness Act of 2005, 28 U.S.C. §1332(d) (“CAFA”), requires certain uniquely local cases that were filed in state court and removed by defendants to federal court to be remanded back to state court.  This opinion by Judge Greenberg (no relation) clarifies the scope of that exception, which until now had been the subject of only one other Third Circuit decision, Kaufman v. Allstate New Jersey Ins. Co., 561 F.3d 144 (3d Cir. 2009) [Disclosure: I was co-counsel for one of the defendants in Kaufman].

This was a consumer fraud class action that was originally filed in New Jersey state court.  Plaintiff claimed that he and members of the putative class purchased home security equipment and monitoring services from defendants, and that defendants’ contracts included illegal provisions regarding fees due upon cancellation of those contracts.  Defendants removed the case, and plaintiff sought remand.  After first denying remand, the District Court reconsidered and granted remand.  Defendants appealed.  The Third Circuit applied de novo review, and affirmed.

The local controversy exception requires a federal court to decline CAFA jurisdiction where more than two-thirds of the putative class are citizens of the state where the case was filed, at least one defendant is also a citizen of that state, and the local defendant is one “from whom significant relief is sought” and “whose alleged conduct forms a significant basis for the claims asserted.”  There was no question that the class consisted largely of New Jersey citizens.  The other criteria, however, were hotly disputed, largely because of the convoluted circumstances of the several defendants.

One of the defendants was ADT SSI-Tyco, a New Jersey citizen.  ADT SSI, a Delaware corporation, owned and drafted the contracts at issue, and that entity converted to ADT SSI-Tyco.  ADT SSI-Tyco then transferred residential contracts to another defendant, ADT LLC, but ADT SSI-Tyco “retained and continued to service the commercial contracts.”

Defendants argued that ADT SSI-Tyco was merely a nominal defendant whose citizenship should not have been considered in the remand calculus.  Judge Greenberg did not agree.  Based on the applicable law, plaintiff could sue ADT SSI-Tyco as the assignee of contracts that contained the allegedly illegal provisions.  Defendants relied on Johnson v. SmithKline Beecham Corp., 724 F.3d 337 (3d Cir. 2013), a non-CAFA case that had found a defendant to be a nominal defendant.  But Judge Greenberg observed that the circumstances there, involving a party that had dissolved, differed from those here.

The other local controversy criteria were not difficult for the panel.  Judge Greenberg found that significant relief was sought from ADT SSI-Tyco because the complaint demanded monetary relief, statutory damages, treble damages, attorneys’ fees, costs, and interest from that defendant.  The demands in the complaint, not whether plaintiff could in fact recover from ADT SSI-Tyco, were what counted, and plaintiff’s requests for relief “collectively constitute ‘significant relief’ for purposes of the local controversy exception.”

Likewise, ADT SSI-Tyco’s conduct formed a “significant basis for the claims asserted.”  That defendant “used the allegedly illegal contract provisions at issue” that ADT SSI had created, and itself “entered into allegedly unlawful service contracts with 35.3% of class members.”  Judge Greenberg emphasized that “the local controversy exception does not require that the local defendant’s conduct be the most significant conduct or that it predominates over claims against other defendants” (emphasis in original).  The panel thus affirmed the remand order.