United States: Second Circuit Decision on Jurisdiction Under Class Action Fairness Act Could Have Dire Consequences

Originally published September 24, 2009

Keywords: lass Action Fairness Act, CAFA, Hotels.com, subject-matter jurisdiction, class certification, federal jurisdiction

In County of Nassau v. Hotels.com, the U.S. Court of Appeals for the Second Circuit recently refused to consider the merits of an appeal from an order dismissing a class-action complaint after deciding sua sponte that there was a question about whether federal subject-matter jurisdiction existed. The Second Circuit remanded the case to the district court with instructions "to determine whether class certification is appropriate" in the course of assessing the existence of jurisdiction under the Class Action Fairness Act of 2005 (CAFA), 28 U.S.C. § 1332(d)(5). As we discuss below, applying the Second Circuit's approach to class actions more broadly would undercut the core purpose of CAFA: to ensure that federal courts hear most class-action lawsuits.

Background

Nassau County, New York, filed a putative class action against Hotels.com and other online hotel room resellers on behalf of other New York local governments that impose taxes on occupants of hotel rooms. The county alleged that the defendants had been underpaying hotel taxes. The parties stipulated that the district court had subject-matter jurisdiction over the class action under CAFA. In granting the defendants' motion to dismiss, the district court held that it lacked jurisdiction because Nassau County had failed to exhaust its administrative remedies.

On appeal, the Second Circuit panel did not address the disputed exhaustion issue. Instead, the panel inquired on its own into whether the district court had jurisdiction under CAFA. The panel explained that although CAFA confers jurisdiction over covered class actions, "[t]here are substantial questions as to whether class certification would be appropriate in this case."

Specifically, because each local government that is a member of the putative class imposes a hotel tax under its own tax law, the Second Circuit stated that each class member's cause of action was "unique," or at the very least "would likely require individualized inquiry even if the language of each hotel tax is broadly similar." Given the "distinct possibility that questions common to the members of the class do not predominate over those affecting only individual members," the Second Circuit remanded the case so that the district court may "in the first instance . . . determine whether class certification is appropriate."

The Second Circuit denied the defendants' petition for rehearing earlier this month.

Analysis

The Second Circuit's approach threatens to have far-reaching consequences for businesses that are targeted by class actions. Under the panel's approach to CAFA jurisdiction, the parties are essentially being required to litigate whether class certification is possible in order to establish federal jurisdiction. Yet the very reason that Congress enacted CAFA was to ensure a federal forum for the resolution of disputes over class certification in putative class actions that are substantial (i.e., involve an amount in controversy of $5 million or more). Consistent with that intent, most courts have held that the fact that a plaintiff alleges that he or she is suing on behalf of a putative class is enough to satisfy CAFA's requirement that the case be a class action. If instead, a federal court has jurisdiction over only those putative class actions that have been held to satisfy Rule 23's certification requirements, then state courts would frequently entertain putative class actions, contradicting Congress's intent that such lawsuits proceed in federal court.

Potentially circuitous results could follow because, if the federal court remands a putative class action to state court because the class is not certifiable, it is arguable that a state court would be "perfectly free to reject the remanding court's reasoning," as the Supreme Court put it in Kircher v. Putnam Funds Trust, and certify the class itself. Although the defendant could attempt to remove the case again if the state court certifies the class, the case may not last long in federal court: That court would likely decertify the class under the law of the case doctrine and then be forced to remand back to state court, which could re-certify the class.

Even worse, defendants may consider themselves to be effectively precluded from removing to federal court any putative state-court class action because, as the proponent of jurisdiction, the defendant would be in the untenable situation of having to champion class certification. There is no evidence that Congress intended such a result when it passed CAFA.

Given the apparent breadth of its holding, it may be that the Second Circuit saw its ruling as limited to the particular facts of this case. For example, the plaintiff had filed the action in federal court and thus was the proponent of jurisdiction under CAFA. In addition, given the uniqueness of each class member's claims—arising in the context of local tax liability—the certifiability of the class was particularly dubious. In cases where the defendant has removed the action and thus bears the burden of establishing jurisdiction, and where class certification is not so obviously a hopeless prospect, the Second Circuit may not require the defendant to prove that the class is certifiable as a threshold to establishing jurisdiction.

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