Practice Tip: The SPILL Act

The Class Action Fairness Act of 2005: An Attempt at Class Action Containment

Most product liability lawyers have by now navigated the sometimes murky waters of CAFA, enacted in 2005 to combat class action abuse. According to its drafters, a key reason for CAFA enactment was the mishandling of class actions by state courts, where the governing rules are applied inconsistently (frequently in a manner that contravenes basic fairness and due process considerations) and where there is often inadequate supervision over litigation procedures and proposed settlements. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *5.

To combat this perceived problem, CAFA amended the diversity jurisdiction statute (28 U.S.C. 1332) to permit easier removal of class actions to federal courts. As CAFA drafters explained: [N]ational (interstate) class actions are the paradigm for federal diversity jurisdiction because ' they implicate interstate commerce, foreclose discrimination by a local state, and tend to guard against any bias against interstate enterprises. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *8. Yet prior to CAFA, the diversity jurisdiction statute put class actions beyond the reach of the federal courts.

CAFA remedied that problem by granting federal courts jurisdiction over interstate class actions where “(a) any member of the proposed class (named or unnamed) is a citizen of a different state from any defendant (often referred to as minimal diversity; and (b) the aggregate amount in controversy exceeds $5 million (exclusive of interest and costs).” 28 U.S.C. 1332(d)(2).

Not surprisingly, CAFA had quite a few detractors at the time of its enactment, many of whom urged that the Act would hurt, not help, consumers. Particular criticism was lodged against CAFA potential impact on pharmaceutical product liability litigation, with critics insisting that CAFA would make it more difficult for consumers to bring actions against pharmaceutical manufacturers and that an exception should be carved out for drug litigation. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *64. CAFA drafters rejected such an exception, responding that it would unfairly single out the pharmaceutical industry and encourage duplicative lawsuits in state courts, leading to inefficiencies, inconsistent judgments, and possibly usurping Food & Drug Administration oversight of the pharmaceutical industry. Id. at *64-66.

Yet another criticism charged that CAFA would intrude on state sovereignty by preventing state attorneys general from suing bad corporate actors to vindicate the rights of state citizens. 151 CONG. REC. S1157-02, 2005 WL 309648, at 2. Indeed, Arizona Senator Mark Pryor introduced an amendment seeking to exempt class actions filed by attorneys general from removal under CAFA. In the ensuing debate, several of CAFA's sponsors testified that the Pryor amendment was unnecessary because parens patriae actions would not fall within CAFA definition of class action and would be unaffected by the Act. See, e.g., Id. at 11 (statement of Senator Grassley, responding); See Also Id. at __ (statement of Senator Hatch).

Early Interpretations of CAFA: More Confusion

Despite testimony from CAFA's sponsors indicating that CAFA would not impact state AGs' right to proceed as parens patriae in state court, subsequent case law proved otherwise. Most notably, in State of Louisiana ex rel. Caldwell v. Allstate Insurance Co., 536 F.3d 418 (5th Cir. 2008), the Fifth Circuit held that a parens patriae action brought by the State of Louisiana was properly removed to federal court under CAFA, even though the words “class action” did not appear in the complaint. As the court explained, “[i]t is well-established that in determining whether there is jurisdiction, federal courts look to the substance of the action and not only at the labels that the parties may attach.” Id. at 424. Thus, the courts may “pierce the pleadings to show that the ' claim has been fraudulently pleaded to prevent removal.” Id. (internal quotation and citation omitted). Applying this reasoning, the Fifth Circuit looked at the nature of the claims asserted and held that those claims, which sought economic damages on behalf of injured insurance policyholders whose insurance claims were allegedly undervalued by the defendants, belonged to the injured policyholders rather than the State of Louisiana. Id. at 428-29. Having determined that the policyholders were the real parties in interest, the court held that the action was properly removed under CAFA. Id. at 430.

Following the Fifth Circuit's reasoning in Caldwell and employing a claim-by-claim analysis of the complaint, the Eastern District of Pennsylvania also reached a similar conclusion in West Virginia ex rel. Darrell v. Comcast Corp., __ F. Supp. 2d __, 2010 WL 1257639, at * 4 (E.D. Pa. Mar. 31, 2010). As the Darrell court explained, federal courts should carefully examine actions removed under CAFA to ensure that legitimate removal requests are not thwarted by jurisdictional gamesmanship. Id. By looking at the substance of the claims themselves rather than t the named parties or the labels assigned to the claims by the parties, the court prevented the state from “attempt[ing] to disguise itself as the real party in interest for claims for which the true real parties in interest are individual consumers.” Id. at *5.

Although other courts have reached different conclusions regarding CAFA application to parens patriae actions, the Caldwell and Darrell cases make clear that CAFA did not fully immunize state AG actions from removal to federal court.

The SPILL Act: Clarification Or Carve-Out?

On July 1, 2010, the House of Representatives passed H.R. 5503, termed The SPILL Act. Sponsored by U.S. House Judiciary Committee Chairman John Conyers (D-MI) and Louisiana Rep. Charlie Melancon (D), the Act amends several pieces of decades-old legislation, with the aim of permitting victims of the Gulf Coast oil spill to recover non-pecuniary damages, like pain and suffering and loss of consortium, more easily. As Rep. Conyers explained, “We should not allow reckless corporations to use 19th century laws to shortchange their victims. There is simply no reason to limit the legal accountability of multibillion-dollar corporations arbitrarily at the expense of hardworking American families.” Press release, Chairman Conyers, Rep. Melancon Introduce SPILL Act: Address Death on the High Seas Act, Other Legal Liability Issues Arising from Gulf Oil Catastrophe (June 10, 2010). But while denominated an act to assist oil spill victims, the Act also alludes to its provision of other relief with much broader implications. In particular, the Act includes Section 5, which amends the definition of class action under CAFA to exclude arbitrarily an action brought by a State or subdivision of a State on behalf of its citizens. H.R. 5503, 111th Cong., 2d Sess. (June 10, 2010).

On its face, Section 5 of the SPILL Act appears to apply to any action brought by a state, however styled and regardless of whether the actual allegations lend themselves to state action or implicate state interests. Certainly, state AGs will argue that the amendment should be read that way, and should exempt any action involving the state from removal to federal court under CAFA.

It can, however, be argued that Section 5 merely expresses what was already implicit in CAFA: that CAFA does not impact true parens patriae actions or a state AG's right to have such actions heard in state court. In other words, the amendment is merely an expression of existing law. That is certainly what CAFA sponsors testified in opposing a nearly identical amendment to CAFA text at the time of its enactment. Indeed, Sen. Chuck Grassley (R-IA) testified that, because almost all civil suits brought by State attorneys general are parens patriae suits, similar representative suits or direct enforcement actions, it is clear they do not fall within this definition [of class action]. That means that cases brought by State attorneys general will not be affected by this bill. 151 Cong. Rec. at 1163 (daily ed. Feb. 9, 2005). Applying this logic, it is possible to interpret the SPILL Act as a mere clarification of CAFA and not a change in the law.

If Section 5 is merely a clarification of existing law, then arguably Caldwell and Darrell remain good law, and courts should continue to look to the substance of the action and not only the labels that the parties may attach in determining the applicability of CAFA. In other words, courts should continue to engage in the type of claim-driven analysis to pierce the pleadings and determine whether the state is the real party in interest to the suit. In those cases where it is clear that the state is not vindicating a sovereign or quasi-sovereign interest (and thus not acting on behalf of its citizens as a whole), arguably the state action is not one that should be exempt under CAFA.

Navigating the Jurisdictional Waters

Depending on its interpretation, there is a real possibility that the exception embodied in Section 5 of the SPILL Act could swallow the rule effectuated by CAFA. Indeed, under the SPILL Act, arguably all an aggrieved plaintiff need do to avoid federal jurisdiction is to persuade a sympathetic AG to lend his or her name to the pleadings. It is not inconceivable that a state AG would do so, even where the state has no real stake in the outcome of the suit particularly if the issues involved are politically popular. But this type of jurisdictional gamesmanship is precisely what CAFA was designed to avoid. Thus, as a policy matter, perhaps courts should continue to intervene to ensure that actions involving class action-type allegations with potential interstate implications continue to find their way to a neutral federal forum.

While this type of policy argument is certainly attractive, it seems unlikely to succeed, for two reasons. First, it is hard to ignore the plain language of Section 5, which excludes from the definition of class action any action brought by a State or subdivision of a State on behalf of its citizens, regardless of whether the State is the real party in interest or has any stake in the outcome of the proceedings. Given courts' reticence to read ambiguity into statutes that otherwise lend themselves to straightforward interpretation, it seems unlikely that courts will attempt to undercut Section 5 with interpretations akin to the analysis done in Caldwell and Darrell. Second, the SPILL Act's legislative history makes clear that the sponsors' intent was to unravel the Fifth Circuit's decision in Caldwell. In its report on the SPILL Act, the House Judiciary Committee noted Attorney General Jim Hood's testimony that CAFA impeded his ability to pursue claims on behalf of the State of Mississippi against parties responsible for violating state law. H. Rep. 111-521, 111th Cong., 2d Sess., at 12 & n.46 (June 30, 2010). Citing this testimony and the Fifth Circuit's decision in Caldwell, the Committee explained that the SPILL Act “will clarify that actions brought by a State attorney general in his official capacity under his State law ' are not subject to removal to Federal court under CAFA.” Id. at 12. In view of this legislative history and the plain language of Section 5, defendants will have an uphill battle keeping state-sponsored actions out of state court. Assuming the SPILL Act passes the Senate, Section 5 may spell the death knell of federal jurisdiction over state AG actions, whatever their purpose and however class-like they may appear.

Conclusion

What remains to be seen is whether the SPILL Act will spur a proliferation of state AG suits seeking to vindicate otherwise individual rights as a means of ensuring that historically plaintiff-friendly state courts decide the issues at hand. If it does, CAFA's days of class-action containment may well be over.

Amy Rudd is an associate in the Mass Tort and Product Liability group of Dechert LLP, resident in the Austin, TX, office. She can be reached at [email protected].

Much has been said recently about the far-flung effects of the Gulf Coast oil spill, and much has been done to contain it. But thanks to a recent act of Congress, the oil spill may be seeping into product liability law. Meet the SPILL Act (Securing Protections for the Injured from Limitations on Liability), legislation drafted in response to the recent oil spill and designed to permit families of deceased oil workers to recover non-pecuniary damages from those responsible. Buried in the Act is Section 5, a proposed amendment to the Class Action Fairness Act ( CAFA), which would redefine class actions to exclude actions brought by a State or subdivision of a State on behalf of its citizens. On its face, this amendment appears to allow state AGs to avoid federal jurisdiction and pursue parens patriae actions ' suits brought by AGs on behalf of their injured citizens in state court without the threat of removal.

So what's the problem? Proponents of Section 5 would argue state AG actions were never subject to federal jurisdiction, that CAFA has long been misinterpreted to apply to parens patriae actions, and that this amendment just clarifies what was supposed to be the law after CAFA. Detractors would argue that this amendment will allow state AGs to game the system and pursue what should be private class actions in their more class action-friendly home courts. That, opponents will say, would fundamentally undermine the very purpose of CAFA.

It may be too early yet to predict whether the SPILL Act amendment will stick, and even harder to predict whether or how soon it will change the class action playing field, but it is an amendment worth exploring nonetheless, as it has the potential to spill over into product liability law and impact the way in which future plaintiffs conceptualize class actions.

The Class Action Fairness Act of 2005: An Attempt at Class Action Containment

Most product liability lawyers have by now navigated the sometimes murky waters of CAFA, enacted in 2005 to combat class action abuse. According to its drafters, a key reason for CAFA enactment was the mishandling of class actions by state courts, where the governing rules are applied inconsistently (frequently in a manner that contravenes basic fairness and due process considerations) and where there is often inadequate supervision over litigation procedures and proposed settlements. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *5.

To combat this perceived problem, CAFA amended the diversity jurisdiction statute (28 U.S.C. 1332) to permit easier removal of class actions to federal courts. As CAFA drafters explained: [N]ational (interstate) class actions are the paradigm for federal diversity jurisdiction because ' they implicate interstate commerce, foreclose discrimination by a local state, and tend to guard against any bias against interstate enterprises. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *8. Yet prior to CAFA, the diversity jurisdiction statute put class actions beyond the reach of the federal courts.

CAFA remedied that problem by granting federal courts jurisdiction over interstate class actions where “(a) any member of the proposed class (named or unnamed) is a citizen of a different state from any defendant (often referred to as minimal diversity; and (b) the aggregate amount in controversy exceeds $5 million (exclusive of interest and costs).” 28 U.S.C. 1332(d)(2).

Not surprisingly, CAFA had quite a few detractors at the time of its enactment, many of whom urged that the Act would hurt, not help, consumers. Particular criticism was lodged against CAFA potential impact on pharmaceutical product liability litigation, with critics insisting that CAFA would make it more difficult for consumers to bring actions against pharmaceutical manufacturers and that an exception should be carved out for drug litigation. S. REP. 109-14, 109th Cong., 1st Session 2005, 2005 WL 627977, at *64. CAFA drafters rejected such an exception, responding that it would unfairly single out the pharmaceutical industry and encourage duplicative lawsuits in state courts, leading to inefficiencies, inconsistent judgments, and possibly usurping Food & Drug Administration oversight of the pharmaceutical industry. Id. at *64-66.

Yet another criticism charged that CAFA would intrude on state sovereignty by preventing state attorneys general from suing bad corporate actors to vindicate the rights of state citizens. 151 CONG. REC. S1157-02, 2005 WL 309648, at 2. Indeed, Arizona Senator Mark Pryor introduced an amendment seeking to exempt class actions filed by attorneys general from removal under CAFA. In the ensuing debate, several of CAFA's sponsors testified that the Pryor amendment was unnecessary because parens patriae actions would not fall within CAFA definition of class action and would be unaffected by the Act. See, e.g., Id. at 11 (statement of Senator Grassley, responding); See Also Id. at __ (statement of Senator Hatch).

Early Interpretations of CAFA: More Confusion

Despite testimony from CAFA's sponsors indicating that CAFA would not impact state AGs' right to proceed as parens patriae in state court, subsequent case law proved otherwise. Most notably, in State of Louisiana ex rel. Caldwell v. Allstate Insurance Co. , 536 F.3d 418 (5th Cir. 2008), the Fifth Circuit held that a parens patriae action brought by the State of Louisiana was properly removed to federal court under CAFA, even though the words “class action” did not appear in the complaint. As the court explained, “[i]t is well-established that in determining whether there is jurisdiction, federal courts look to the substance of the action and not only at the labels that the parties may attach.” Id. at 424. Thus, the courts may “pierce the pleadings to show that the ' claim has been fraudulently pleaded to prevent removal.” Id. (internal quotation and citation omitted). Applying this reasoning, the Fifth Circuit looked at the nature of the claims asserted and held that those claims, which sought economic damages on behalf of injured insurance policyholders whose insurance claims were allegedly undervalued by the defendants, belonged to the injured policyholders rather than the State of Louisiana. Id. at 428-29. Having determined that the policyholders were the real parties in interest, the court held that the action was properly removed under CAFA. Id. at 430.

Following the Fifth Circuit's reasoning in Caldwell and employing a claim-by-claim analysis of the complaint, the Eastern District of Pennsylvania also reached a similar conclusion in West Virginia ex rel. Darrell v. Comcast Corp. , __ F. Supp. 2d __, 2010 WL 1257639, at * 4 (E.D. Pa. Mar. 31, 2010). As the Darrell court explained, federal courts should carefully examine actions removed under CAFA to ensure that legitimate removal requests are not thwarted by jurisdictional gamesmanship. Id. By looking at the substance of the claims themselves rather than t the named parties or the labels assigned to the claims by the parties, the court prevented the state from “attempt[ing] to disguise itself as the real party in interest for claims for which the true real parties in interest are individual consumers.” Id. at *5.

Although other courts have reached different conclusions regarding CAFA application to parens patriae actions, the Caldwell and Darrell cases make clear that CAFA did not fully immunize state AG actions from removal to federal court.

The SPILL Act: Clarification Or Carve-Out?

On July 1, 2010, the House of Representatives passed H.R. 5503, termed The SPILL Act. Sponsored by U.S. House Judiciary Committee Chairman John Conyers (D-MI) and Louisiana Rep. Charlie Melancon (D), the Act amends several pieces of decades-old legislation, with the aim of permitting victims of the Gulf Coast oil spill to recover non-pecuniary damages, like pain and suffering and loss of consortium, more easily. As Rep. Conyers explained, “We should not allow reckless corporations to use 19th century laws to shortchange their victims. There is simply no reason to limit the legal accountability of multibillion-dollar corporations arbitrarily at the expense of hardworking American families.” Press release, Chairman Conyers, Rep. Melancon Introduce SPILL Act: Address Death on the High Seas Act, Other Legal Liability Issues Arising from Gulf Oil Catastrophe (June 10, 2010). But while denominated an act to assist oil spill victims, the Act also alludes to its provision of other relief with much broader implications. In particular, the Act includes Section 5, which amends the definition of class action under CAFA to exclude arbitrarily an action brought by a State or subdivision of a State on behalf of its citizens. H.R. 5503, 111th Cong., 2d Sess. (June 10, 2010).

On its face, Section 5 of the SPILL Act appears to apply to any action brought by a state, however styled and regardless of whether the actual allegations lend themselves to state action or implicate state interests. Certainly, state AGs will argue that the amendment should be read that way, and should exempt any action involving the state from removal to federal court under CAFA.

It can, however, be argued that Section 5 merely expresses what was already implicit in CAFA: that CAFA does not impact true parens patriae actions or a state AG's right to have such actions heard in state court. In other words, the amendment is merely an expression of existing law. That is certainly what CAFA sponsors testified in opposing a nearly identical amendment to CAFA text at the time of its enactment. Indeed, Sen. Chuck Grassley (R-IA) testified that, because almost all civil suits brought by State attorneys general are parens patriae suits, similar representative suits or direct enforcement actions, it is clear they do not fall within this definition [of class action]. That means that cases brought by State attorneys general will not be affected by this bill. 151 Cong. Rec. at 1163 (daily ed. Feb. 9, 2005). Applying this logic, it is possible to interpret the SPILL Act as a mere clarification of CAFA and not a change in the law.

If Section 5 is merely a clarification of existing law, then arguably Caldwell and Darrell remain good law, and courts should continue to look to the substance of the action and not only the labels that the parties may attach in determining the applicability of CAFA. In other words, courts should continue to engage in the type of claim-driven analysis to pierce the pleadings and determine whether the state is the real party in interest to the suit. In those cases where it is clear that the state is not vindicating a sovereign or quasi-sovereign interest (and thus not acting on behalf of its citizens as a whole), arguably the state action is not one that should be exempt under CAFA.

Navigating the Jurisdictional Waters

Depending on its interpretation, there is a real possibility that the exception embodied in Section 5 of the SPILL Act could swallow the rule effectuated by CAFA. Indeed, under the SPILL Act, arguably all an aggrieved plaintiff need do to avoid federal jurisdiction is to persuade a sympathetic AG to lend his or her name to the pleadings. It is not inconceivable that a state AG would do so, even where the state has no real stake in the outcome of the suit particularly if the issues involved are politically popular. But this type of jurisdictional gamesmanship is precisely what CAFA was designed to avoid. Thus, as a policy matter, perhaps courts should continue to intervene to ensure that actions involving class action-type allegations with potential interstate implications continue to find their way to a neutral federal forum.

While this type of policy argument is certainly attractive, it seems unlikely to succeed, for two reasons. First, it is hard to ignore the plain language of Section 5, which excludes from the definition of class action any action brought by a State or subdivision of a State on behalf of its citizens, regardless of whether the State is the real party in interest or has any stake in the outcome of the proceedings. Given courts' reticence to read ambiguity into statutes that otherwise lend themselves to straightforward interpretation, it seems unlikely that courts will attempt to undercut Section 5 with interpretations akin to the analysis done in Caldwell and Darrell. Second, the SPILL Act's legislative history makes clear that the sponsors' intent was to unravel the Fifth Circuit's decision in Caldwell. In its report on the SPILL Act, the House Judiciary Committee noted Attorney General Jim Hood's testimony that CAFA impeded his ability to pursue claims on behalf of the State of Mississippi against parties responsible for violating state law. H. Rep. 111-521, 111th Cong., 2d Sess., at 12 & n.46 (June 30, 2010). Citing this testimony and the Fifth Circuit's decision in Caldwell, the Committee explained that the SPILL Act “will clarify that actions brought by a State attorney general in his official capacity under his State law ' are not subject to removal to Federal court under CAFA.” Id. at 12. In view of this legislative history and the plain language of Section 5, defendants will have an uphill battle keeping state-sponsored actions out of state court. Assuming the SPILL Act passes the Senate, Section 5 may spell the death knell of federal jurisdiction over state AG actions, whatever their purpose and however class-like they may appear.

Conclusion

What remains to be seen is whether the SPILL Act will spur a proliferation of state AG suits seeking to vindicate otherwise individual rights as a means of ensuring that historically plaintiff-friendly state courts decide the issues at hand. If it does, CAFA's days of class-action containment may well be over.

Amy Rudd is an associate in the Mass Tort and Product Liability group of Dechert LLP, resident in the Austin, TX, office. She can be reached at [email protected].