Recent Cases Regarding Federal Jurisdiction Under CAFA
Two recent federal appellate court decisions addressed whether there is federal jurisdiction pursuant to the Class Action Fairness Act, 28 U.S.C. § 1332(d) (“CAFA”) in two different circumstances. One was a split decision, while another confirmed a split among two different Circuit Courts.
In Bacher v. Boehringer Ingelheim Pharmaceuticals, Inc., 110 F.4th 95 (2d Cir. 2024), the Second Circuit considered whether a proposed consolidation of nine lawsuits in state court allowed the defendant to remove the case to federal court pursuant to CAFA’s provision regarding mass actions. In a 2-1 split decision, the Second Circuit ruled that the plaintiffs only intended to agree to consolidate the cases for pre-trial purposes, and therefore CAFA did not provide a basis for federal jurisdiction.
At issue was the provision in CAFA that confers subject matter jurisdiction in the federal courts for “mass actions … in which monetary relief claims of 100 or more persons are proposed to be tried jointly.” 28 U.S.C. §1332(d)(11)(B)(i). The term “mass action” expressly excludes claims that “have been consolidated or coordinated solely for pretrial proceedings.” 28 U.S.C. §1332(d)(11)(B)(ii)(IV). Each complaint at issue in Bacher—seven of which had 99 plaintiffs; two of which had 80 plaintiffs—contained “virtually indistinguishable state-law personal injury claims” against the same eight defendants that marketed the product. Bacher, 110 F.4th at 98. Each suit included three defendants and one plaintiff domiciled in Connecticut and contained fewer than 100 plaintiffs. Id.
The plaintiffs’ counsel and defense counsel communicated regarding the plaintiffs’ desire to consolidate the actions and transfer them to a specialized state court complex litigation docket. After the agreed motion for consolidation was filed, the defendants removed the case to federal court. The defendants argued that the motion sought to consolidate the cases pursuant to a Connecticut state statute, Conn. Prac. Book § 9-5(a), which provides that it allows consolidation “for trial.”
The Second Circuit rejected the defendants’ argument, holding that the proper inquiry was focused on the plaintiffs’ intent regarding consolidation. And the court found the plaintiffs had evinced a clear intent to avoid federal jurisdiction in how they had structured their complaints—including by inserting a “lengthy, express disclaimer of federal jurisdiction.” Id. at 99–101. This showed that the plaintiffs did not intend to seek consolidation for trial purposes and that the citation to the relevant Connecticut state statute was insufficient to establish otherwise. While the Bacher dissent took a different view—finding that the plaintiffs sought consolidation under a section of a statute “that refers to consolidation ‘for trial,’” and that nothing in the record showed they sought to limit their motion to merely pretrial proceedings, id. at 105-06—the majority opinion governs. And it establishes that plaintiffs’ intent regarding consolidation is the governing inquiry.
In another recent opinion, Kim v. Cedar Realty Trust, Inc., No. 23-1905, 2024 WL 4031409, -- F.4th -- (4th Cir. 2024), the Fourth Circuit reaffirmed its split with the Second Circuit regarding CAFA’s exception for certain aiding and abetting breach of fiduciary duty claims. Specifically, CAFA precludes federal jurisdiction for “any class action that solely involves a claim … (B) that relates to the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporate or organized; or (C) that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security….” Id. at *5, quoting 28 U.S.C. §1332(d)(9)(B)-(C).
In Kim, a putative class of preferred shareholders alleged that Cedar and its directors breached their contractual and fiduciary duties. The plaintiffs also sued the third-party company, Wheeler, which had acquired Cedar, claiming tortious interference with their contractual rights and aiding and abetting Cedar’s breach of fiduciary duties. A different group of preferred shareholders had brought similar claims against these same defendants in New York state court, which the defendants had removed to the United States District Court for the Eastern District of New York. Krasner v. Cedar Realty Tr., Inc., 86 F.4th 522 (2d Cir. 2023). There, the Second Circuit held that the “securities-related” exception applied to preclude federal jurisdiction, and it found that the case properly was remanded back to state court.
In Kim—a case brought by a different group of Cedar preferred shareholders against the same defendants as in Krasner and asserting similar claims—the Fourth Circuit held the opposite. The Kim court expressly disagreed with the Second Circuit, finding its “path … foreclosed” by Fourth Circuit precedent which states “that a claim for aiding and abetting a breach of fiduciary duty against a corporate outsider does not ‘relate[] to’ internal corporate governance or the rights and duties created by a security.” Kim, 2024 WL 4031409 at *5, quoting Dominion Energy, Inc. v. City of Warren Police & Fire Retirement Sys., 928 F.3d 325, 335-43 (4th Cir. 2019). According to the Fourth Circuit, if a class action complaint includes an aiding and abetting claim against a corporate outsider, the action “falls outside the statute’s jurisdictional exceptions.” Id. The Fourth Circuit held that the inclusion of the aiding and abetting claim against Wheeler allowed the federal court to assert jurisdiction over the claims, as it otherwise met the requirements of CAFA and did not fall into the exception to federal jurisdiction of 28 U.S.C. §1332(d)(9)(B)-(C).