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

Originally published April 14, 2011

Keywords: Class action, removal, amount in controversy, CAFA

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. The decision, Back Doctors Ltd. v. Metropolitan Property and Casualty Insurance Co., 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.

Back Doctors is an important decision 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 decision, it should be much less onerous for defendants to invoke CAFA and remove class actions from state court.

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