What is a “Class Action” Under the Class Action Fairness Act?

Erie Ins. Exchange v. Erie Indemnity Co., 68 F.4th 815 (3d Cir. 2023). As Judge Smith stated in his opinion in this case, the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (“CAFA”), considers a state court proceeding as a “class action” subject to removal only if “it is ‘filed under’ a ‘State statute or rule of judicial procedure’ that ‘authoriz[es] an action to be brought by 1 or more representative persons as a class action’ and otherwise is ‘similar’ to [Federal Rules of Civil Procedure] Rule 23. 28 U.S.C. § 1332(d)(1)(b).” Appealing from a District Court decision that remanded this case to Pennsylvania state court, defendant argued that this was a “class action” and was properly removed to federal court. The Third Circuit disagreed and affirmed the District Court.

The background of this ruling was this. Erie Insurance Exchange (“Exchange”) “is an unincorporated association that operates as a reciprocal insurance exchange under Pennsylvania law…. Exchange is owned by its members, who are subscribers to insurance plans offered by Erie Insurance Group (“Group”). Exchange is, essentially, a pool of funds comprised of insurance premiums and other fees paid by subscribers.” Defendant Erie Indemnity Co. (“Indemnity”) “is a Pennsylvania corporation that serves as the managing agent and attorney-in-fact for Exchange. In return, and under an agreement between Indemnity and each Erie Insurance Group subscriber, Indemnity receives a management fee paid out from Exchange’s funds.”

In 2021, certain Exchange subscribers (“the Stephenson plaintiffs”) sued Indemnity in Pennsylvania state court, alleging that Indemnity had breached its fiduciary duty to Group subscribers by charging an excessive management fee. The Stephenson plaintiffs pled that case as a class action on behalf of themselves and other “Pennsylvania residents” who subscribed to Group policies.

Indemnity removed the Stephenson case to federal court under CAFA. The Stephenson plaintiffs voluntarily dismissed that case shortly afterward.

About a month later, Exchange filed this case against Indemnity in Pennsylvania state court. ” “As in Stephenson, the Complaint here alleges that Indemnity breached its fiduciary duty by charging an excessive management fee. The operative facts and the legal theory in this case are identical to those in Stephenson. But unlike Stephenson, this case is not pled as a class action— rather, it is pled in Exchange’s name ‘by’ Troy Stephenson, Christina Stephenson [two of the Stephenson plaintiffs], and Steven Barnett (the ‘Individual Plaintiffs’). The Individual Plaintiffs purport to bring the case ‘on behalf of Exchange and .. . to benefit all members of Exchange.”

The Complaint characterized the claim as being brought under two Pennsylvania state court rules of civil procedure, in the alternative. One of those “authorizes ‘[a]n action prosecuted by an association . . . in the name of a member or members thereof as trustees ad litem for such association,’” permits “a corporation or similar entity” to prosecute an action ‘in its corporate name.’”

Indemnity removed that new case to federal court, purportedly under CAFA. “Indemnity argued that the case is in substance a class action insofar as Exchange is a stand-in for a class of Erie Insurance Group subscribers. Indemnity also argued that the case was a continuation of Stephenson and therefore fell within the District Court’s jurisdiction under “the well-established rule that plaintiffs cannot extinguish federal jurisdiction” once it has attached.”

The District Court granted plaintiffs’ motion to remand. Indemnity was granted leave to appeal to the Third Circuit, but that court affirmed the District Court’s ruling, applying de novo review.

Judge Smith first determined that the case was not a class action. That ruling was required by a prior Third Circuit decision, Erie Ins. Exch. v. Erie Indem. Co., 722 F.3d 154, 158 (3d Cir. 2013) (“Erie Insurance I”). That case ” involved the same nominal parties and the same state procedural rules as this case.,” and the Third Circuit there held that it was not a class action for CAFA purposes because the state court rules relied on were “not similar to [Federal] Rule 23,” the class action Rule. The panel in this case was bound by the decision in Erie Insurance I unless there was some artifice in the pleading that, once pierced, would reveal that this was “in substance an interstate class action.” Judge Smith found that there was no such thing. “[T]here are no facts beyond the Complaint that could alter our conclusion that the relevant state rules are dissimilar to Rule 23 and that this case therefore falls beyond the scope of CAFA jurisdiction.”

Indemnity argued that, in enacting CAFA, Congress intended to expand the jurisdiction of the federal courts over class actions, and that that intent should ovecome the language of CAFA that defined what is a class action. Judge Smith did not agree. “Congress’s ‘policy concerns cannot trump the best interpretation of the statutory text.” Patel v. Garland, 142 S. Ct. 1614, 1627 (2022). And that text plainly dictates that this case falls beyond CAFA’s ambit.”

Indemnity’s contention that this case was merely a continuation of Stephenson fared no better. Citing Circuit Court authority elsewhere, Judge Smith said that a voluntary dismissal without prejudice “leaves the situation as if the action had never been filed,” which means that “any future lawsuit based on the same claim is an entirely new lawsuit unrelated to the earlier (dismissed) action.” There were other bases for that ruling as well, including that Stephenson was pled as being brought on behalf of “Pennsylvania residents” only, while the present case was filed on behalf of “all members of Exchange.”

Judge Smith recognized “the substantial factual and legal overlap” between this case and Stephenson. But the panel was “not prepared to essentially set aside a basic principle of Anglo-American law: that distinct cases filed by distinct plaintiffs deserve distinct judicial treatment. We therefore will not gloss over the differences—however minor or formalistic—between this case and Stephenson, and so will not treat Exchange’s individual suit as a mere amendment to the Stephenson Plaintiffs’ class action.”

This decision applied several fundamental rules. First, prior Third Circuit panel decisions on the same issue are binding absent being overruled by the en banc court. Second, plaintiffs are the masters of their complaints, and defendants cannot rewrite the basis for a plaintiff’s pleading to suit themselves. Third, courts must apply clear statutory language. And finally, a voluntary dismissal leaves no trace of the dismissed case, so that it cannot affect a later-filed action. The court’s opinion was correct for all those reasons.