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Class Action Rules Difficult to Understand, Important for Successful Litigation

The Class Action Fairness Act of 2005 was passed in an effort to prevent class action lawsuit abuse. CAFA changed the practice of class action litigation in state and federal courts. This change was accomplished by CAFA’s jurisdictional alterations in both the diversity and removal components of the traditional framework of class action practice, i.e. Rule 23 of the Federal Rules of Civil Procedure.

In Williams v Homeland Insurance, the Fifth Circuit applied the “local controversy” exception of CAFA to the facts of the case, determining that a class arbitration is not, nor does it preclude a class action. Williams provides a lesson in the application of the elements of CAFA and an understanding of CAFA’s features. The decision also demonstrates yet another unique feature of Louisiana law that distinguishes it from the law of all of the other jurisdictions in the United States: the Louisiana Direct Action Statute.

CAFA changed the rules for federal diversity jurisdiction and removal. The Act enables large class action law suits to be filed in and/or removed to federal court. CAFA changed the numerosity requirement of Rule 23 from by raising the requirement from 40 class members to more than 100 class members; the citizenship requirement of Rule 23 by relaxing the diversity criteria, i.e. any class member must be diverse from any defendant; and the amount-in-controversy (from one named plaintiff having a claim of more than $75,000) to the total of $5 million. In addition, CAFA incorporated looser removal rules: in diversity cases any defendant can remove the case (including in-state defendants); any defendant can remove without the unanimous consent of the other defendants; there is no 1 year limit on the timing for removal of the case to another court’s jurisdiction; and the decision to grant or deny a remand is subject to appellate review.

CAFA “essentially makes the resolution of large class actions with minimal diversity a federal court matter”, while reserving “for the states certain types of large class actions arguably more local in nature. Four key exceptions to CAFA’s jurisdictional expansion accomplish this reservation of state authority.” The exception discussed in Williams is the “local controversy” exception.

The local controversy exception requires the district court to decline its jurisdiction under CAFA:
(A)(i) over a class action in which-
(I) greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed;
(II) at least 1 defendant is a defendant-
(aa) from whom significant relief is sought by members of the plaintiff class;
(bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and
(cc) who is a citizen of the State in which the action was originally filed; and
(III) principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed; and
(ii) during the 3–year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.
When the Fifth Circuit looked at George Raymond Williams vs. Homeland Insurance Company of New York, Homeland Insurance was appealing the “district courts remand of a class action to Louisiana state court.” George Williams had brought a class action in Louisiana state court, representing a class of medical providers against 3 Louisiana defendants: Med-Comp USA, Risk Management Services, and SIF Consultants of Louisiana. The plaintiffs contracted with Med-Comp (an operator of a PPO network) for “discounted rates” and SIF and RMS applied Med-Comp’s discounts when administering worker’s compensation claims for Louisiana employers. A year later, Williams joined 3 non- Louisiana defendants: “Corvel Corporation and its insurers Homeland Insurance Company and Executive Risk Specialty insurance.”

Corvel and the plaintiffs agreed to settle their claims. However, before the settlement was approved in state court, Executive Risk removed the case to Federal court, claiming federal jurisdiction under CAFA. This action demonstrates the new removal rules of CAFA, e.g. that removal does not require unanimity amongst defendants as it does under the prior and traditional rules.

Williams and Corvel responded by moving that the case be remanded back to state court under the “local controversy” exception of CAFA. The district court found that Williams satisfied all of the elements of the “local controversy” exception and remanded the case to state court. Homeland appealed this decision to the Fifth Circuit and the Fifth Circuit reviewed the district court’s remand under CAFA’s “local controversy” exception: de novo. If any of the elements of the “local controversy” exception are not met, remand would be improper. Homeland disputed all of the elements of the exception.

First, Homeland disputed that less than 2/3 of the plaintiff class were citizens of the state of Louisiana, and thus did not meet that requirement of the local controversy. The total number of class members numbered 1,388, many of which were registered corporations in the state of Louisiana. In its argument in front of the district court, Williams argued persuasively that 1055 of these plaintiffs met the criteria for membership in the class, i.e. that they were citizens of Louisiana. In front of the Fifth Circuit, Homeland was claiming that the plaintiff class represented either 45.4% or 65.4% Louisiana citizenship. Homeland argued that in either circumstance, the percentage did not rise to the appropriate level required by CAFA. Homeland arrived at the 45.4% by identifying many of the business organizations that made up the plaintiff class as inactive corporations, and removing them from the total number of plaintiff members. This argument was denied because “inactive corporations remain citizens of their state of incorporation.” The 65.4% was a number arrived at by Homeland though a mathematical error, and was dismissed appropriately
Williams’ claims meet the second group of elements of the “local controversy” exception pretty simply because Med-Comp is a local defendant, and Williams seeks “thousands of discounts, including discounts applied by other defendants.” The exception requires a “local defendant, from whom significant relief is sought, and whose conduct forms a significant basis for the claims asserted.” Med Comp clearly fulfills these criteria.

The third element that the “principle injuries resulting from each defendant’s alleged or related conduct must have occurred in Louisiana” was found to be fulfilled by the district court because, “the record showed that a supermajority of plaintiffs are Louisiana citizens, who rendered services in Louisiana and who allege that the defendants violated the Louisiana PPO act.” The defendants are alleged to have “violated the Louisiana PPO Act” and the injuries occurred “by the failure to provide notice at the point of medical service in Louisiana.”

It is this discussion of the fulfillment of the third element of the “local controversy” exception that provides the context and opportunity for the digression into a discussion of a unique feature of Louisiana law: the Louisiana Direct Action statute. “Louisiana is one of the few states in the country with a direct action statute. A direct action statute allows an injured person (the plaintiff) to sue the insurance company of the person or entity who caused their injury directly.”

The direct action statute is mentioned in relation to the defendant Homeland and the fact that Homeland’s conduct “must have occurred in Louisiana,” the requirement of CAFA. “Although Homeland is an out-of-state defendant who insured the out-of-state Corvel, the CAFA exception is satisfied because Homeland’s related conduct as insurer includes Corvel’s failure to notify in Louisiana.”

The claims asserted against Homeland are described by the Fifth Circuit as “unique” in nature because the “sole claims against Homeland are by virtue of the Louisiana Direct Action statute and based on the conduct of Homeland’s insured.” These claims would clearly not be possible in most states because most states do not have a direct action statute.

The Fifth Circuit does not elaborate on, or even mention the rarity of a direct action statute. However, the statute is important to take notice of out of the discussion of the Fifth Circuit because it plays a very important part in Louisiana insurance law. “There may be no other Louisiana statute which has so affected the development of an area of the law as has the Direct Action Statute. ” The Direct Action statute is not of primary importance in the discussion in Williams v Homeland Insurance, but it is important exactly because it does permit claims to be made against Homeland that otherwise could not be made directly.

The last element of the “local controversy” exception provokes the most interesting feature of the Fifth Circuit’s discussion, and provides the context for the major holding of the case: “a class arbitration is not a class action”. The element of the exception is as follows: “during the 3–year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.”
The parties disputed whether a class arbitration qualified as a class action. Consequently, the Fifth Circuit addressed the question. The district court had determined that the two were different because an arbitration involved out-of-court resolutions to disputes, while a class action involved in-court resolutions to disputes. The Fifth Circuit decided that “a class arbitration is not a class action, and consequently, a prior class arbitration does not frustrate the CAFA exception.” The Court looked at the CAFA definition of “class action,” i.e. “any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure.” Homeland argued for an “expansive reading” of the definition to “encompass arbitrations”, but the Court determined that this expansive of a reading would “require district courts to exercise original jurisdiction over any arbitration that satisfies CAFA’s threshold requirements. We hold that a class arbitration is not a class action, and consequently, a prior class arbitration does not frustrate the CAFA exception.”

Williams v Homeland Insurance is an interesting case because of the important holding that makes the distinction between class arbitrations and class actions. This decision will not only provide precedent for Louisiana, but will provide persuasive law for other jurisdictions. This holding will probably be followed in other jurisdictions. The discussion reveals the features and dynamics of CAFA, which has made a significant impact upon class action jurisprudence in Louisiana and the nation as a whole. Lastly, the discussion in Williams reveals the unique and distinguishing feature of Louisiana insurance law: the Direct Action Statute.