Author: National Law Forum

A group of in-house attorneys developed the National Law Review on-line edition to create an easy to use resource to capture legal trends and news as they first start to emerge. We were looking for a better way to organize, vet and easily retrieve all the updates that were being sent to us on a daily basis.In the process, we’ve become one of the highest volume business law websites in the U.S. Today, the National Law Review’s seasoned editors screen and classify breaking news and analysis authored by recognized legal professionals and our own journalists. There is no log in to access the database and new articles are added hourly. The National Law Review revolutionized legal publication in 1888 and this cutting-edge tradition continues today.

5 Ways to Focus a Law Firm Marketing Strategy

Recent National Law Review Business of Law Guest Blogger Margaret Grisdela of Legal Expert Connections provides some quick tips on how to focus a law firm’s marketing strategy:

Clearly targeting law firm clients is one of the key concepts of the Courting Your Clients legal marketing methodology. You will lower marketing costs, increase response rates, and build greater brand visibility with a narrowly defined market niche. Here are 5 ways to focus your law firm marketing strategy:

1. Geographically.

The majority of small to mid-sized law firms simply focus on developing new business located within a 50 to 100 mile radius of an office location. Proximity gives you the benefit of convenient face-to-face meeting opportunities, personal networking, and strong local referral sources.

2. Demographically.

Attorneys who serve a consumer audience in particular (like family law, trusts and estates, or immigration) can focus on known characteristics such as marital status, income, the presence of children, and/or zip codes.

3. By Industry.

Lawyers who serve a business clientele are likely to target specific industries that are well suited to their practice. Examples include intellectual property attorneys who work in the entertainment field, municipal lawyers who serve county officials, or corporate law firms who favor technology companies.

4. By Job Title.

A purchasing agent or key decision maker focus – like the HR Director for labor & employment lawyers or the General Counsel for corporate attorneys – ensures that you target your business development efforts on the person who can sign your engagement letter and check.

5. By Trigger Events.

Transactional attorneys need to find clients with a highly defined need. This could be a personal injury attorney looking for car accident victims, or a corporate lawyer who helps business owners with mergers and acquisitions.

Marketing campaigns will be determined by the focus you bring to your law firm. Of course, there may be multiple parameters that are relevant to your marketing definition, like HR Directors within retail companies located in a specific metropolitan area.

Focus not only helps you to invest your marketing budget wisely, but it also enables attorneys and staff to refine their personal business development efforts in a way that aligns with the firm’s strategy.

U.S. Supreme Court Adopts "Cat's Paw" Doctrine in Discrimination Cases

Posted today at the National Law Review by Bracewell & Giuliani – details of the Staub v. Proctor Hospital decision handed down by the Supreme Court earlier this week:

Employers may be liable for discrimination even though the final decision maker had no discriminatory intent

On March 1, 2011, the U.S. Supreme Court issued its much anticipated decision inStaub v. Proctor Hospital, addressing for the first time the “cat’s paw” doctrine of employer liability in discrimination cases. Under the cat’s paw doctrine, an employee seeks to hold his employer liable based on the discriminatory intent of a supervisor who was not responsible for making the ultimate employment decision.

Facts

This case arose under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Staub, an angiography technician for Proctor Hospital, was a member of the Army Reserves, which required him to attend drill one weekend a month and to train full time for two to three weeks a year. Mulally, Staub’s immediate supervisor, and Korenchuk, Mulally’s supervisor, were hostile to Staub’s military obligations. Mulally told one department employee that Staub’s military duty had been a strain on the department and asked the employee to help Mulally “get rid” of Staub. Korenchuk ridiculed Staub’s military service as a waste of time and taxpayer money. In January 2004, Mulally issued Staub a “Corrective Action” disciplinary warning for purportedly violating a rule requiring him to stay in his work area even when he had no patient. Staub disputed the corrective action claiming there was no such rule and, even if there were, he did not violate it.

On April 2, 2004, Day, a co-worker of Staub’s, complained to Buck, the hospital’s vice president of human resources, about Staub’s frequent unavailability and abruptness. Shortly thereafter, Korenchuk advised Buck that Staub had left his desk without informing a supervisor, in violation of the January Corrective Action – an accusation disputed by Staub. Buck relied on Korenchuk’s accusation and, after reviewing Staub’s personnel file, decided to fire Staub. The termination notice stated that the decision was based on Staub’s having ignored the directive in the January Corrective Action. Staub challenged his termination through the hospital grievance process, denying that he had violated the Corrective Action and claiming that Mulally had fabricated the allegations on which the Corrective Action was based out of hostility toward his military obligations. However, Buck refused to change her final decision.

The Supreme Court Held That:

An employer may be liable for discrimination under USERRA, even though the final decision maker had no discriminatory intent, where another supervisor performs an act motivated by anti-military intent that is intended by the supervisor to cause an adverse employment action, and that act is a proximate cause of the ultimate employment action; in other words, the ultimate decision maker relies on the supervisor’s act in making the final employment decision.
Intent and responsibility for the adverse employment action can be attributed to an earlier agent, e.g., Staub’s supervisors, if the adverse action is the intended consequence of the agent’s discriminatory conduct. As long as the agent intends, for discriminatory reasons, that the adverse action occur, he has the scienter, i.e., knowledge, required for liability under USERRA.
The only way an employer can escape liability for discrimination is if the ultimate decision maker’s investigation results in an adverse action forreasons unrelated to the supervisor’s original biased action.
The supervisor’s biased report may remain a causal factor for the discrimination if the independent investigation takes it into account without determining that the adverse action was, apart from the supervisor’s recommendation, entirely justified.
If the independent investigation relies on facts provided by the biased supervisor – as is necessary in any case of cat’s paw liability – then the employer (either directly or through the ultimate decision maker) will have effectively delegated the fact-finding portion of the investigation to the biased supervisor.

What This Means for Employers

An employer will no longer be able to rely on the ultimate decision maker’s independent investigation as a defense to liability for the discriminatory intent of lower level supervisors, unless the employer can identify a reason for the adverse action that is wholly unrelated to the information or reports provided by the lower-level supervisors.
To avoid liability, before making employment decisions based on information/reports from an employee’s supervisors, employers will now need to determine whether the employee claims that his supervisors were discriminating against him on the basis of his protected class and whether the adverse employment action can be justified on some basis other than the information/report from the employee’s supervisor.
The Supreme Court noted that USERRA is similar to Title VII of the Civil Rights Act of 1964. Accordingly, courts will in all likelihood apply this same analysis to cat’s paw cases under Title VII, the Americans With Disabilities Act, and the Age Discrimination in Employment Act.

Caution: Discussions between Counsel and Client during a Deposition May Not Be Privileged

Recently posted at the National Law Review by Sills Cummis & Gross – conversations during a deposition break appear to be fair game for questioning and are not considered privileged according to a recent case in federal court in New Jersey.

The morning session of the deposition could not have gone better. Defense counsel has not asked too many tough questions and both plaintiff and her counsel are pleased with her answers – except for one. During the lunch break, after discussing their respective plans for the upcoming holiday weekend, plaintiff asks her counsel about one of her answers. She is troubled that, upon reflection, her answer may not have been entirely accurate. Counsel’s immediate response is to assure plaintiff not to worry. His next instinct is to talk through the question and answer with his client to determine whether a clarification is necessary. But, should he? He sees no reason not to do so, as he firmly believes such discussion is within the attorney-client privilege. It is also necessary, not to coach the witness, but to ensure an accurate record. So, counsel and client discuss the answer in detail and determine that plaintiff’s response is, in fact, misleading. Following the lunch break, plaintiff’s counsel interrupts defense counsel’s first question and informs him that plaintiff wishes to amend one of her prior answers. Upon hearing the “new” answer, defense counsel asks plaintiff to describe, in detail, her discussions with her counsel during the lunch break. Plaintiff’s counsel jumps out of his seat, objects and directs his client not to answer on privilege grounds. Does plaintiff have to disclose the subject of her lunchtime conversation with her counsel or is it privileged? In the federal court in New Jersey, such conversations during a deposition break appear to be fair game for questioning and are not considered privileged.

This issue recently arose in Chassen v. Fidelity Nat’l Fin., Inc., Civ. Action No. 09-291 (D.N.J. July 21, 2010) (“Letter Order”). There, Magistrate Judge Salas determined that communications between client and counsel during a break in a deposition are not privileged and may be explored during the deposition, unless the discussion involves issues of privilege. According to Magistrate Judge Salas:

“Defendants have a right to explore whether the discussions counsel had with the Plaintiff during the recess may have influenced her testimony, thus interfering with the fact-finding goal of the deposition process.” Id. at 2. In a Memorandum and Order filed on January 13, 2011, Judge Sheridan agreed.

The Federal Rules of Civil Procedure do not directly address this issue. Fed. R. Civ. Pro. 30(c)(1) provides that deposition testimony should proceed as if it were trial testimony. Thus, the court in Hall v. Clifton Precision, 150 F.R.D. 525 (E.D. Pa. 1993), a case relied upon extensively by Magistrate Judge Salas, found that counsel may not consult with a client at any time after the start of the deposition. “‘During a civil trial, a witness and his … lawyer are not permitted to confer at their pleasure during the witness’s testimony … The same is true at deposition.’” Letter Order, at 1, quoting Hall, 150 F.R.D. at 528.

In Chassen, Deborah Hoffman, a proposed class representative, testified at deposition that she would not be available to attend the trial in the matter because of work. As a proposed class representative, Mrs. Hoffman’s availability to appear at the trial was relevant to her suitability to represent the class. A few moments later, the parties took a break so that the videographer could change tapes. When the deposition resumed, defense counsel asked Mrs. Hoffman, “[d]id you discuss your testimony you gave this morning with your lawyers during the break?” She responded, “Yes.” Defense counsel next asked Mrs. Hoffman to describe the discussion, which drew an objection from plaintiff’s counsel and a direction not to answer. During a brief colloquy, plaintiff’s counsel argued that, “[t]here was no question outstanding when we took the break, and counsel is allowed to consult with [a client] during a break in deposition,” under those circumstances. During another colloquy later in the deposition, plaintiff’s counsel admitted that, “I disclosed my mental impressions and opinions about her testimony” during the break. After defense counsel concluded his questioning, plaintiff’s counsel then asked several questions regarding Mrs. Hoffman’s availability to testify at trial. This time, under questioning by her counsel, Mrs. Hoffman testified that she could attend the trial as required.

Following the deposition, defense counsel filed an application with Magistrate Judge Salas seeking an order permitting defendants to question Mrs. Hoffman about her discussion with her counsel during the break in the deposition. Magistrate Judge Salas held that “counsel and witness are prohibited from engaging in private, off-the-record conferences during any breaks in a deposition, except for the purpose of deciding whether to assert a privilege.” Letter Order, at 1. If such conferences occur, the attorney taking the deposition is entitled to “inquire about the specific content of those communications to ascertain whether any witness-coaching has occurred.” Id. at 1-2; see also Hall, 150 F.R.D. at 532.

In plaintiff’s brief opposing defendants’ application, counsel argued that Hall is not controlling and, in fact, has been subject to much disagreement in other districts. Magistrate Judge Salas rejected plaintiff’s argument, finding that Hall was adopted by the District of New Jersey in Ngai v. Old Navy, Civil Action No. 07-5653, 2009 U.S. Dist. LEXIS 67117 (D.N.J. July 31, 2009). In Ngai, Magistrate Judge Shwartz, relying on Hall, found that text messages exchanged during a deposition between defense counsel and the deponent, who were in different locations, violated Fed. R. Civ. Pro. 30 and were not protected by the attorney-client privilege. Applying Hall, Magistrate Judge Salas held that “Defendants will be permitted to question Mrs. Hoffman about the communications between her and counsel during the break where Mrs. Hoffman admitted she spoke to counsel about her testimony.” Letter Order, at 2.

Plaintiff appealed the decision to Judge Sheridan who focused on two competing issues: (1) “whether the attorney impermissibly ‘coached’ Ms. Hoffman skewing the truthfulness of her testimony”; and (2) “whether such an attorney-client communication is privileged, and should remain confidential despite the coaching (if any).” Memorandum/Order at 1. In attempting to resolve these potentially conflicting positions, Judge Sheridan offered to hold an in camera hearing with plaintiff and her counsel to determine whether the discussions during the deposition were protected by the attorney-client privilege. After both parties rejected this suggestion, Judge Sheridan affirmed Magistrate Judge Salas’s decision and ordered Mrs. Hoffman to be deposed regarding her intra-deposition discussion with her counsel.

Unlike the Federal Rules of Civil Procedure, the New Jersey Court Rules directly address this issue, at least in part. The Court Rules expressly forbid a lawyer from consulting with a client “during the course of the deposition while testimony is being taken” except with regard to issues involving (a) privilege; (b) confidentiality; or (c) a limitation created by a previous order of the court. R. 4:14-3(f). There is some debate, however, as to the scope of the phrase “while testimony is being taken” and whether it is intended to extend the prohibition to breaks during the deposition. The comment to the Court Rule takes the position that the Rule applies only in the deposition room and “clearly does not address consultation during overnight, lunch, and other breaks.” Id., comment 6. However, in In re PSE&G Shareholder Lit., 320 N.J. Super. 112, 116-118 (Ch. Div. 1998), the court, after citing to the comment to the Rule, nevertheless imposed an order prohibiting consultation between lawyers and clients during deposition breaks.

In practice, an attorney defending a deposition needs to be aware that any discussions he/she has with a client during a break may not be privileged. Both the Chassen decision and R. 4:14-3(f) permit counsel to discuss with a client during a deposition issues pertaining to privilege (i.e., whether particular questions implicate privileged communications). However, a witness may be required to testify regarding any other substantive discussions with counsel during a break in the deposition. This is particularly true in cases pending in New Jersey federal court in light of the Chassen decision. Following Chassen, attorneys who discuss substantive matters with a client during a deposition break does so at their peril.

This Alert has been prepared by Sills Cummis & Gross P.C. for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Sills Cummis & Gross without first communicating directly with a member of the Firm about establishing an attorney-client relationship.

April 8-10 the First Annual Young Professionals in Energy International Summit takes place in Las Vegas, Nevada

Young Professionals in Energy (“YPE”) is the first and only interdisciplinary networking and volunteer organization for people in the global energy industry – a place where bankers can connect with engineers, accountants with geologists and so on. Their mission is to provide a forum for knowledge sharing and camaraderie among future leaders of the energy industry. This April 8-10, the first annual YPE International Summit takes place in Las Vegas, Nevada at the Tropicana Hotel, bringing together over 10,000 members and over 40 chapters for the energy’s industry’s biggest networking event of the year.

The Young Professionals in Energy International Summit has been approved by the Nevada Board of Continuing Legal Education for 6.0 credits Continuing Legal Education Attorneys and judges who attend this activity may claim up to the maximum credits indicated based on actual attendance at the event, to be held April 8-10, 2011 .

March 1st is the last day to save $50 on registration! For more information and to register – please click here:

Developments in Securities Law – February 2011

Recent posting including Security Law Updates for February at the National Law Review by Geoffrey R. Morgan, Michael H. Altman, and Jeffrey M. Barrett of Michael Best & Friedrich LLP:

Final Rules

Say-on-Pay Voting Rules

On January 25, 2011, the SEC adopted final rules requiring public companies to conduct separate shareholder advisory votes on executive compensation and “golden parachute” compensation arrangements. These rules were adopted substantially as proposed on October 18, 2010. One notable difference from the proposed rules is a temporary exemption for smaller reporting companies so that these issuers will not be required to conduct either a say-on-pay or say-on-frequency vote until the first annual or other meeting of shareholders occurring on or after January 21, 2013. This temporary exemption does not apply to shareholder advisory votes regarding golden parachute compensation of smaller reporting companies. Because companies that have received TARP funds are required by U.S. Treasury regulations to have an annual say-on-pay vote, which is effectively the same as the say-on-pay vote under these rules, TARP recipients are exempt from the requirement to include an additional say-on-pay vote and a say-on-frequency proposal until their first meeting at which directors are elected after the company is no longer subject to the TARP restrictions.

The Dodd-Frank Act requires public companies to conduct say-on-pay and say-on-frequency votes for their first annual or other such meeting of shareholders occurring on or after January 21, 2011, regardless of whether final rules had been adopted by the SEC. The final rules do not become effective until 60 days following publication in the Federal Register. Companies must comply with the new rules concerning the golden parachute vote and disclosure with respect to any merger proxy statement (and certain other similar filings) filed on or after April 25, 2011.

Michael Best Comments

Say on Pay Could Make for a Rocky 2011 Proxy Season

While the say-on-pay rules just went into effect and the 2011 proxy season has just begun, we are seeing some interesting results that may signal a rocky season. Two of the first 55 say-on-pay votes failed to gain majority approval. While these votes are only advisory, companies whose annual meetings are later this year should take note that proxy advisory firms are playing a significant role in the process, especially for those companies whose say-on-pay proposals failed. Also, given the prohibition on counting broker discretionary votes in say-on-pay and say-on-pay frequency proposals, a major source of votes upon which companies have historically relied, management recommendations on voting have less significance than in the past.

Companies are also required to put to a shareholder vote the frequency with which the say-on-pay vote should occur. Shareholders must be given the choice of annual, biennial or triennial. Shareholders are showing a distinct preference for more frequent review of executive compensation, with the early yet distinct trend towards annual referendums, rather than a biennial or triennial schedule that is favored by most companies. Annual say on pay votes will likely require additional time and cost for companies to design and disclose executive pay programs. There is a discrepancy between management’s recommendation and shareholder’s response to this item. Nearly 60% of companies recommended a triennial vote, while a majority of shareholders at nearly 70% of companies have supported an annual vote. This divergence was more significant for the largest U.S. companies. Most of those companies that were successful in a biennial or triennial vote were controlled by insiders.

Proposed Rules & Final Rules

Net Worth Standard for Accredited Investors

On January 25, 2011, the SEC proposed amendments to its rules to conform the definition of “accredited investor” to the requirements of the Dodd-Frank Act. Section 413(a) of the Dodd-Frank Act requires the definitions of “accredited investor” in the SEC’s rules to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1.0 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act on July 21, 2010, but Section 413(a) also requires the SEC to revise its rules under the Securities Act of 1933 to reflect the new standard.

The change to the accredited investor definition is of significant importance for securities issuers as various exemptions for private or other limited offerings of securities under the Securities Act of 1933 and state “blue sky” laws depend on whether participants are “accredited investors.” One of the bases on which individuals may qualify as accredited is having a net worth of at least $1.0 million, either alone or together with their spouse. Non-accredited investors who participate in private offerings under Rule 505 or Rule 506 of Regulation D must receive financial and other information that is not required to be given to accredited investors, and in offerings relying on Rule 506 there is a limit of 35 non-accredited investors.

Removal of Credit Rating References

On February 9, 2011, the SEC, pursuant to Section 939A of the Dodd-Frank Act, proposed rule amendments that would remove references to credit ratings in rules and forms promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934. The focus of the proposal is to eliminate the use of credit ratings as a condition of “short-form” eligibility, which enables issuers to register securities “on the shelf” on a Form S-3 or F-3. Currently, an issuer can use a Form S-3 or F-3 if it meets certain registrant requirements, including a requirement that, for at least one year, it has been a reporting company and has been filing its periodic reports in a timely manner, in addition to at least one of the applicable form’s transaction requirements. One such transaction requirement allows an issuer to use a short-form registration statement for an offering of non-convertible securities, such as debt securities, provided that such securities be rated “investment grade” by at least one credit rating agency that is a nationally recognized statistical rating organization. Under the proposed rules, the transaction eligibility requirement relating to the offering of non-convertible securities would be replaced with a new requirement, which would permit use of a short-form registration statement for primary offerings of non-convertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement), for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the last three years and otherwise meets the registrant requirements. The proposed standard is modeled on the standard for determining whether an issuer is a “well-known seasoned issuer” based on its debt issuances, where it does not meet the public equity float requirement.

New Compliance & Disclosure Interpretations

Smaller Reporting Companies – On February 11, 2011, the SEC released new Q&A interpretations addressing how to determine whether an issuer is a smaller reporting company as of January 21, 2011. If an issuer is a smaller reporting company as of that date, the issuer will be entitled to rely on the delayed phase-in period for holding say-on-pay and say-on-frequency votes. An issuer’s status as a smaller reporting company is based on such issuer’s public float or annual revenues at the end of the second fiscal quarter of 2010. A change in status, if any, based on the issuer’s second fiscal quarter of 2010 results is effective on the first day of such issuer’s first quarter of 2011, regardless of whether such issuer has filed a report with the SEC indicating its new status.

Sec Releases & Policy Statements

No relevant Releases or Policy Statements.

Seeking CAFA Clarity: A Summary of Recent Case Law Addressing Challenges to Jurisdiction Under the Class Action Fairness Act

Very comprehensive article explaining intracacies of CAFA – the Class Action Fairness Act recently posted at the National Law Review by James A. Comodeca and M. Gabrielle Hils of Dinsmore & Shohl LLP.

I. The Class Action Fairness Act (“CAFA”)

In 2005, CAFA was enacted to assure fair and prompt recoveries for class members with legitimate claims, restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction, and benefit society by encouraging innovation and lowering consumer prices. Pub. L. No. 109-2, 119 Stat. 4 (2005), LEXSEE 109 PL 2.

To achieve these stated purposes, 28 U.S.C. §1332 was amended to expand diversity jurisdiction in class action litigation. Subsection (d)(2) of §1332 provides that in class action cases involving 100 or more class members:

(2)        The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $ 5,000,000, exclusive of interest and costs, and is a class action in which–

(A)        any member of a class of plaintiffs is a citizen of a State different from any defendant;

(B)        any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or

(C)       any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.

CAFA eliminates some of the traditional procedural impediments to removal by no longer placing a 1 year limit on removal, allowing removal even if the defendant is a citizen of the state where the suit was initiated, and no longer requiring the removing defendant to obtain consent to removal from the co-defendants. 28 U.S.C. §1453(b).

Pursuant to 28 U.S.C. §1332(d)(11), mass actions also may be removed to federal court. A mass action is a civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact. Jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the $75,000 jurisdictional amount found in of §1332(a), and if the other requirements of CAFA removal are met, including minimal diversity and an aggregate amount in controversy in excess of $5 million.

Even thought CAFA expands diversity jurisdiction, the removing party still has the burden to establish the court’s jurisdiction by demonstrating that the requisite number of plaintiffs exist, that there is minimal diversity, and that the amount in controversy is sufficient to meet the statutory requirements.

II. Exceptions to CAFA Jurisdiction

Certain class actions are specifically excluded from CAFA’s reach. The exceptions to CAFA jurisdiction are fertile territory for plaintiffs trying to keep their class actions cases in state court. CAFA’s exceptions are found in 28 U.S.C. §1332(d)(3) through (5) and include the following:

·       the discretionary/interests of justice exception,

·       the local controversy exception,

·       the home state exception, and

·       the state action exception.

A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

The discretionary/interests of justice exception allows a district court to decline jurisdiction in the interests of justice and looking a the totality of the circumstances if greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed. In exercising this discretion the court must consider: whether the claims asserted involve matters of national or interstate interest; whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

Under the local controversy exception, a district court shall decline to exercise jurisdiction over a class action which meets the following three criteria. First, 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. Second at least one defendant is a defendant from whom significant relief is sought by members of the plaintiff class; whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and who is a citizen of the State in which the action was originally filed; and 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. Third, 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.

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

The home state exception applies when two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

If the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief then the case falls within the state action exception to CAFA jurisdiction.

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

CAFA applies to class actions and a class action is defined in 28 U.S.C. §1332 (d)(1) (B) as an civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing action to be brought by 1 or more representative persons as a class action. But does CAFA apply if the complaint does not specifically define a proposed class?

In College of Dental Surgeons of Puerto Rico v. Connecticut Gen. Life Ins. Co.,585 F. 3d 33 (1st Cir. 2009) the First Circuit grappled with this issue. The plaintiff, the College of Dental Surgeons of Puerto Rico, brought suit on behalf of its members, consisting of licensed dentists in Puerto Rico, against multiple defendants claiming that the defendants’ claims handling practices were questionable, fraudulent and economically detrimental to the members. Two defendants removed the case to federal court pursuant to CAFA. The district court remanded the case on the basis that the complaint did not sufficiently define the plaintiff class. On appeal, the remand order was vacated. The First Circuit noted that the complaint plausibly alleged claims for class-wide relief and consistently alleged harm to the members as a professional group. The appellate court rejected the argument that remand was appropriate because the case could never be certified since an association cannot be a member of a certifiable class. The Court found that the association met the standing requirements to sue on behalf of its members because the members had standing to sue in their own right, the interests the association sought to protect were germane to its purposes; and neither the claim asserted nor the declaratory relief requested required the participation of individual members in the suit. More importantly, the Court stated that class composition was not the issue at the inception of a class action. Review of the complaint alone typically is insufficient for determining if the class can be certified, so the district court’s ruling on the inadequacy of the class definition was premature.

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

In a series of cases brought in California, the plaintiffs were able to avoid CAFA jurisdiction by pleading around both the jurisdictional amount and the number of persons necessary to satisfy a mass action under §1332(d)(11).

In Tanoh v. Dow Chemical, Co, 561 F.3d 945 (9^th Cir. 2009), cert. denied, 130 S. Ct. 187, 175 L. Ed. 2d 236 (2009) the defendant removed seven state court actions involving over 600 foreign nationals who claimed that they had been injured by exposure to the chemical DBCP while working on banana and pineapple plantations in the Ivory Coast. In each case of the seven cases there were fewer than 100 plaintiffs. The cases were removed to federal court on the basis of diversity jurisdiction and the mass action provisions of CAFA. Dow Chemical argued that the seven actions, taken together, constituted a mass action and that the cases had been filed separately just to frustrate the purposes of CAFA jurisdiction.

The district court disagreed and remanded the actions. Specifically, the court looked at the language in 28 U.S.C. §1332(d)(11) which specifically states that a mass action shall not include claims that are joined upon the motion of a defendant. It found that Dow Chemical’s attempt to aggregate the actions for purposes of CAFA, was tantamount to doing an end-run around this limitation in the statute. On appeal, the Ninth Circuit upheld remand of the actions to state court. It rejected Dow Chemical’s argument that the plaintiffs should not be allowed to structure the complaints in order to defeat CAFA jurisdiction. The appellate court did not consider cases decided under provisions other than CAFA’s mass action provision to be persuasive. See also, Venegas v. Dole Food Co., Inc., 2009 U.S. Dist. LEXIS 22885 (C.D. Cal. Mar. 9, 2009), where approximately 2500 plaintiffs, banana plantation workers, filed multiple lawsuits against the same defendants alleging damages from exposure to a chemical used in banana farming operations in Costa Rica, Panama, Honduras and Guatemala. The plaintiffs were divided into groups alphabetically and by country so that each case had less than 100 plaintiffs. Defendants removed the cases to federal court on CAFA jurisdictional grounds asserting that all the actions should be considered one action because the plaintiffs divided their claims solely for purposes of avoiding federal court jurisdiction. The motion for remand was granted. Remand was granted, in part, because nothing in CAFA suggests that the plaintiffs, as the masters of their own complaint, may not file multiple actions each with fewer than 100 plaintiffs. The court also held that the defendant had not met its burden of demonstrating that amount in controversy exceeded $75,000 individually or $5 million in the aggregate.

C. Is there minimal diversity?

1. For purposes of federal diversity jurisdiction, a corporation is considered a citizen of the state where it is incorporated and of the state where it has its principal place of business. 28 U.S.C. §1332(c)(1). But what constitutes a corporation’s principal place of business?

In Hertz Corp. v. Friend, 130 S. Ct. 1181, 175 L. Ed. 2d 1029 (2010), the U.S. Supreme Court addressed the meaning of principal place of business (“PPB”) for diversity jurisdiction purposes. Plaintiffs, California citizens sued their employer, Hertz, in state court alleging California wage and hour law violations. They brought the suit on behalf of themselves and a class of California citizens suffering similar harms. Hertz removed the case to federal court on the basis of diversity jurisdiction, asserting that its PPB was in New Jersey. The plaintiffs moved for remand alleging that Hertz’s PPB was in California. Hertz submitted a declaration to establish that its PPB was in New Jersey. In the declaration, Hertz stated that it had facilities in 44 states, that its corporate headquarters was in New Jersey, and that its core executive and administrative functions were carried out in New Jersey. With respect to the state of California, Hertz stated that it had 273 of its 1606 car rental locations there, that about 2300 of its 11,230 full time employees were in California and that its business in California amounted to about $811 million of its $4.371 billion in annual revenue. Based on these facts, the district court found that Hertz’s PPB was in California under the Ninth’s Circuit’s test which required the court to examine Hertz’s business on a state-by-state basis. If the amount of activity in one state is significantly larger or substantially predominates, then that is the company’s PPB, but if there is no such state, then the PPB is the corporation’s nerve center, i.e., the place where the majority of its executive and administrative functions are performed. After examining the plurality of Hertz’s business activity in various states, the district court found that its activity in California was significant and so Hertz’s PPB was in California. The Ninth Circuit affirmed the remand order and Hertz appealed.

The United States Supreme Court reversed. Noting that there were many different ways in which the various circuit courts over the years had determined what constitutes a company’s PPB, the Supreme Court thought it necessary to find a single, more uniform interpretation of this statutory phrase. The Court adopted the nerve center test, holding that PPB is best read as referring to the place where a corporation’s officers direct control, and coordinate the corporation’s activities. In practice this should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the nerve center, and not simply an office where the corporation holds its board meetings.

2. What if the plaintiffs sue a limited liability company instead of a corporation. What is the citizenship of an LLC under CAFA?

In Ferrell v. Express Check Advance of SC LLC, 591 F. 3d 698, (4^th Cir. 2010), the plaintiffs filed a class action on behalf of South Carolina citizens against a payday lender for alleged violations of South Carolina law. The lender removed the case under CAFA. Following a long line of case law holding that the citizenship of an unincorporated association is determined based upon the citizenship of each of the association’s members, the lender argued that there was diversity based on the citizenship of its sole member, a Missouri corporation with its PPB in Kansas.

Alternatively, the lender argued that if it was deemed an unincorporated association within the meaning of 28 U.S.C. §1332(d)(10), it was a citizen of Tennessee, under whose laws it was organized, and of Kansas where it had its PPB.

The plaintiff moved to remand, arguing that the defendant’s PPB really was South Carolina, the place where it made all its loans and where all of its employees, but for its top four officers were located. The district court held that the defendant, a limited liability company, was an unincorporated association under 28 U.S.C. §1332(d)(10). Consequently, it was a citizen of the state under whose laws it is organized and of the state where it has its PPB. The district court found that the lender’s PPB was in South Carolina, not Kansas, and therefore the case should be remanded.

On appeal, the Fourth Circuit affirmed. It examined the citizenship language in 28 U.S.C. §1332. Section 1332 (c)(1) provides that a corporation is a citizen of the state of its incorporation and the state of it PPB. Section 1332(d)(10) provides that the citizenship of an unincorporated association is determined by the state under whose laws it is organized and the state where it has it PPB. However, the court observed that the because the provisions relating to the citizenship of corporations and of unincorporated associations are found in different sections of the statute, the provision relating to unincorporated associations in §1332(d)(10) applies only to class actions covered by CAFA. The court concluded that the term “unincorporated association” found in §1332(d)(10) refers to all non-corporate business entities. The appellate court agreed with the district court’s analysis that the defendant’s PPB was in South Carolina so the case was remanded.

D. Is the amount in controversy greater than $5 million?

1. Has the plaintiff alleged any amount in controversy?

When a plaintiff does not allege an amount in controversy in the complaint, the defendant must prove by a preponderance of the evidence that CAFA’s in excess of $5 million amount in controversy has been met. As the following cases demonstrate, this is not always an easy task.

Berniard v. Dow Chemical Co., 2010 U.S. App. LEXIS 16515 (5^th Cir. 2010), involved the remand of seven class actions stemming from a single incident, the sudden accidental release of ethyl acrylate, a potentially noxious chemical. The release resulted in the evacuation of residents and businesses with a 2 mile area east of the facility where the release had occurred. On the day of the release, two class actions were filed in state court. Eventually, three more state court class actions were filed and two class actions were filed in federal court.

The district court examined the allegations in the pleadings to determine if it had jurisdiction under CAFA. It examined the geographical reach of the chemicals, the number of persons affected, the seriousness and extent of the injuries suffered, and the potential monetary value of the damages, including punitive damages. Upon removal, defendants had a choice to either sustain removal by: (1) adducing summary judgment evidence of the amount in controversy; or (2) demonstrating that it is facially apparent from the pleadings alone that the amount in controversy has been met. The defendants chose the latter approach.

To meet the amount in controversy requirement, the defendants offered census data of the geographical areas at issue, and compared the quantum recovery in previously reported cases involving similar incidents and injuries. This was held to be insufficient. The court noted that the defendants had improperly equated the geographic areas in which potential plaintiffs might reside with the population of the class itself. The comparison to damage recoveries in similar cases was found to be speculative. It did not matter that the plaintiffs were claiming compensatory damages, pain and suffering, psychological and long term future damages, and even punitive or exemplary damages.

In Pretka v. Kolter City Plaza II, Inc., 608 F. 3d 744, (11^th Cir. 2010), the court addressed what types of evidence the defendant could present to establish the jurisdictional amount in controversy. The seven plaintiffs brought a putative class action on behalf of themselves and all other similarly situated depositors who had placed deposits on the purchase of luxury condominiums in the defendant’s development in West Palm Beach, Florida. The complaint alleged breach of contract and violation of Florida’s Condominium Act, and sought rescission of the purchase contracts and return of the deposits, but did not state an amount in controversy. Attached to the complaint were the plaintiffs purchase contracts showing an average deposit amount of roughly $105,000. The complaint stated that the class was believed to consist of over 300 members.

The defendant removed the case under CAFA. In support of the removal, defendant attached a declaration of the CFO of its parent company indicating that the company had collected over $5 million in deposits from more than 100 prospective purchasers. The plaintiffs moved for remand arguing that the court could not consider the CFO’s declaration because it was not a paper received from the plaintiffs. In its opposition brief, the defendant attached another declaration from its parent company’s closing manager who had reviewed the closing contracts. She stated that those contracts showed that the defendant possessed purchase deposits totaling over $41 million.

The district court, relying on the 11^th Circuit’s decision in a prior case, Lowery, held that it could not consider either the declaration evidence in support of the amount in controversy, or the contracts of other putative class members because such documents had not been supplied by the plaintiffs. The district court also found that the first declaration impermissibly speculated as to the potential damage claim of all putative class members and the second declaration could not be considered because it had not been submitted with the notice of removal. The district court remanded the case.

The defendant appealed, and the 11^th Circuit held that district court had erred in rejecting the defendant’s evidence of the amount in controversy. In reaching this conclusion, it distinguished its holding in Lowery, and disavowed any statements in the dicta of Lowery that could be considered contradictory to its holding inPretka. The Circuit Court held that when a case is removed under the first paragraph of 28 U.S.C. §1446(b), i.e., within 30 days of receipt of an initial pleading setting forth a claim for relief, that statutory language does not restrict the type of evidence that a defendant may use to satisfy the jurisdictional requirements for removal. This is in contrast, however, to removal under the second paragraph of 28 U.S.C. §1446(b) i.e., within 30 days of receipt of an amended pleading, motion or other paper, upon which it may first be ascertained that the case is removable. In the latter instance, the evidence to be considered is limited to reliance on receipt of an “other paper” due to a voluntary act of the plaintiff.

Contrary to the district court’s ruling, the appellate court recognized that documents generated by a defendant do not necessarily involve impermissible speculation. In the instant case, the CFO’s declaration contained non-speculative knowledge of the amount of every putative class member’s claim which could be considered, since the claims of the individual class members could be aggregated to determine the amount in controversy. The court stated that evidence added post-removal also could be considered by the court. Consequently, upon consideration of all of the defendant’s amount in controversy evidence, the remand order was rescinded.

In McGee v. Sentinel Offender Services LLC, 2010 U.S. Dist. LEXIS 126842 (S.D. Ga. Nov. 30, 2010), the plaintiff challenged the defendant’s CAFA removal on several grounds, including whether the amount in controversy requirement had been met. The Plaintiff filed a putative class action on behalf of all individuals previously convicted of a misdemeanor or ordinance violation in Georgia who were under probation supervised by Sentinel, a private probation company. The plaintiff sued for alleged violation of Georgia’s RICO statute and sought reimbursement in an amount equal to times the amount paid to Sentinel for supervision of the class members in private probation.

Sentinel supported its CAFA removal with a declaration from its COO and Vice President, who stated that there were 35,753 individuals convicted of misdemeanors or ordinance violations in the State of Georgia under probation supervised by Sentinel, and that Sentinel had collected $5,675,639.20 from these individuals in supervision fees. Plaintiff challenged the declaration because it did not specify when the fees were collected, whether they were collected within the statute of limitations period, or if they had been paid by persons who were class members. The court rejected this challenge and retained jurisdiction. The court noted that the declaration set forth an amount reflective of the damages sought by the plaintiff in the complaint. The RICO claim sought the divestiture of any interest in the enterprise or personal property, including all fees collected by Sentinel. As for plaintiff’s statute of limitations argument, the court noted that when determining the amount in controversy for jurisdictional purposes, it could not look past the complaint to the merits of a defense that had not yet been established.

2. Has the plaintiff alleged an amount in controversy less than $5 million?

While some plaintiffs may allege no amount in controversy in the complaint, other plaintiffs may disavow an amount that meets the jurisdictional requisite. For instance, in Freeman v. Blue Ridge Paper Products, Inc., 551 F. 3d 405 (6^th Cir. 2008), the plaintiffs made every effort to avoid CAFA jurisdiction.

The claims involved 300 landowners who sued a paper mill for nuisance created by water pollution. In their first class action suit filed in 2005 in Tennessee state court, the plaintiffs asserted claims covering a 6-year period from 6/1/99 to 8/17/05. At trial in that case, they recovered an aggregate award of $2 million.

Thereafter, plaintiffs filed an additional class action lawsuit in state court, in which they sought damages accruing after 8/17/05 until the date of trial. The name plaintiff disavowed individual damages above $74,000 or aggregate damages above $4.9 million. The defendant removed the suit to federal court, but it was remanded for failure to satisfy the jurisdictional amount.

After remand, the plaintiffs amended the complaint to seek damages from 8/17/05 to 2/17/06. The state court orally granted the motion to amend in December of 2007, but the written order was not entered until February of 2008. In the interim, the plaintiffs filed four more lawsuits in state court , each suit covering a different six month time period. Each complaint was essentially identical and pled the same damage limitations as the initial complaint. On February 4, 2008, the defendant removed all five cases to federal court where they were consolidated and subsequently remanded. Defendant appealed.

On appeal, the Sixth Circuit found that the CAFA threshold had been met because the $4.9 million sought in each complaint had to be aggregated. In so holding, the court noted that the complaints were identical, except for the artificially broken up time periods, and the plaintiffs offered no colorable reason for breaking up the lawsuits other than to avoid CAFA jurisdiction. The court limited its holding to the situation where no colorable basis exists for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate the purposes of CAFA. The Sixth Circuit recognized that generally a plaintiff could avoid CAFA jurisdiction by seeking amounts less than the threshold, “but where recovery is expanded, rather than limited, by virtue of splintering of lawsuits for no colorable reason, the total of such identical splintered lawsuits may be aggregated.” Id. at 409.

E. Arguments for exceptions to CAFA jurisdiction

While the party removing a case has the burden to establish that the federal court has jurisdiction under CAFA, once that burden has been met, the burden then shifts to the party seeking to remand the case to establish that a CAFA exception applies.

1. The Home State Exception.

In Jackson v. Sprint Nextel Corp., 2011 U.S. Dist. LEXIS 7005, (N.D. Ill. Jan. 21, 2011) the plaintiffs sued Sprint, a Kansas Corporation alleging that Sprint conspired with other cell phone providers to impose artificially high prices for text messaging. The action was brought on behalf of a putative class of all individuals who purchased texting from Sprint or an alleged co-conspirator from 1/1/05 to the present, had a Kansas cell phone number, received their cell phone bill at a Kansas mailing address, and paid a Kansas USF fee. Sprint removed based on CAFA jurisdiction and the plaintiffs sought remand on the basis of the home state exception.

The lower court granted remand, finding that the plaintiffs had met their burden of establishing the existence of the home state exception because Sprint was a resident of Kansas and at least two thirds of the members of the proposed class were citizens of Kansas since the class only included members with Kansas billing addresses and cell phone numbers. Sprint appealed.

On appeal the Seventh Circuit reversed, finding that the lower court could not draw conclusions about the citizenship of the class members based on information like the class members cell phone numbers and mailing addresses. Instead, the district court could have relied on evidence of citizenship obtained through affidavits or survey responses in which putative class members revealed whether they intended to remain in Kansas or were a Kansas business. Using statistical principles, the plaintiffs could then establish the two thirds number required under the home state exception. Alternatively, the court noted that the plaintiffs could have defined their class as “all Kansas citizens who purchased text messaging from Sprint Nextel or an alleged co-conspirator. The case was remanded for further proceedings.

On remand, the parties conducted jurisdictional discovery. Following the evidentiary roadmap set forth in the Seventh Circuit’s opinion, the plaintiffs obtained updated customer information from Sprint and its alleged co-conspirators. The plaintiffs conducted a telephone survey of a random sample of putative class members. They searched voter registration, driver license and secretary of state records and collected Internet information to determine the citizenship of those individuals and businesses who had not answered the survey. Using this new data, the Plaintiffs renewed their motion for remand. While Sprint challenged the survey results on various grounds, in the end the court found that the plaintiffs had met their burden of establishing the elements of the home state exception. Hence the case was remanded.

2. The Local Controversy Exception.

Under the local controversy exception, plaintiffs may name a local defendant from whom significant relief is sought and whose alleged conduct forms a significant basis for the claims asserted by the class, and who has not been sued in a class action in the previous three years.

Case in point, LaFalier v. State Farm Fire & Cas. Co., 2010 U.S. App. LEXIS 17588 (10^th Cir. 2010), where the plaintiffs owned properties located in an environmentally contaminated town in Oklahoma. The state established a Trust to purchase the properties and assist the homeowners in relocating. During the purchase/relocation process, many homes were damaged by a tornado. The Trust then offset any amounts the plaintiffs might receive from insurance against the amounts the plaintiffs would receive under the Trust. The plaintiffs eventually brought suit against two individuals responsible for administering the Trust, and two appraisal companies, alleging that the defendants deliberately used appraisals that undervalued the properties, and conducted secret proceedings concerning the appraisals. The plaintiffs also sued ten insurance companies, three from Oklahoma and ten from out of state, alleging that the insurers paid only cash value for the tornado damage because they knew the properties would not be repaired or replaced, failed to reveal all coverage available, and improperly leveraged Trust offsets to urge the insureds to accept lower payments.

State Farm removed the case pursuant to CAFA. The plaintiffs moved for remand under the local controversy exception and the case was remanded. The insurers appealed, but remand was upheld. The insurers argued that the claims against the Trust defendants had been misjoined with the claims against the insurers, consequently, the Trust defendant claims should have been ignored for purposes of analyzing the local controversy exception. The district court disagreed. Every plaintiff had a claim against the Trust defendants, but not every plaintiff had a claim against each named defendant insurer. The Trust defendants were local defendants from whom significant relief was sought and whose conduct formed a significant basis for the claims asserted. The doctrine of procedural misjoinder had not been adopted in the Tenth Circuit, and even if it had, it was not clear that the severed claims against the insurers would meet CAFA’s jurisdictional requirements of over 100 class members and in excess of $5,000,0000.

The lower court also rejected the insurers’ contention that an earlier lawsuit filed by these plaintiffs against the Trust itself, and not against the current named Trust defendants, meant that the plaintiffs could not satisfy the last prong of the local controversy exception. On appeal the Tenth Circuit agreed with the district court, noting that the plain language of 28 U.S.C. §1332(d)(4)(A(ii) says there must be a prior action “against any of the defendants” and not “against any of the defendantsor parties in privity with them” as the insurers would have had the court interpret the statute. The Tenth Circuit also noted that State Farm had admitted that not every plaintiff had a claim against an insurer, and there was nothing before the court to demonstrate that at least 100 plaintiffs had claims against the insurers.

3. The Discretionary/Interests of Justice exception

If greater than one third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed the discretionary exception may apply. One of the difficulties in addressing this exception is that the term “primary defendant” is not defined in CAFA. The definition is important because the statute requires that “all” of the primary defendants be residents of the state where the suit was filed.

In Powell v. Tosh, 40 Envtl. L. Rep. 20251, 2009 U.S. Dist. LEXIS 98564 (W.D. Ky. Oct. 21, 2009), the plaintiffs sought to remand their case to state court based, in part, on CAFA’s discretionary exception. The plaintiffs, 28 Kentucky landowners, brought a class action nuisance lawsuit against nine defendants alleging that noxious fumes from the defendants’ hog farm operations were negatively impacting the value of the plaintiffs’ property and causing personal injuries. Among the defendants were the local operators of the hog farms as well as some diverse defendants who were the owners of the hogs on those farms.

While it was undisputed that the CAFA’s jurisdictional requirements had been met, the plaintiffs argued that the case should be remanded pursuant to two of CAFA’s mandatory exceptions, the local controversy exception and the discretionary exception. With respect to the discretionary exception, the plaintiffs argued that greater than one third but less than two-thirds of the members of the proposed class were citizens of Kentucky and the court agreed. Next, the plaintiffs argued that the primary defendants were citizens of Kentucky. The court disagreed.

The court looked at the language of the exception and determined that the requirement that the primary defendants be citizens of the state where the suit was filed, meant “all” of the primary defendants. Next, the court examined the complaint and noted that all members of the plaintiff class had claims against the diverse defendants. Accordingly, those defendants appeared to be the real targets of the class action. Also indicative of their status as primary defendants was the fact that the diverse defendants had been sued directly and were the subject of a significant portion of the claims asserted by the plaintiffs.

4. The State Action Exception

One of the least argued exceptions to CAFA jurisdiction is the state action exception which applies if the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief. Like the discretionary exception, the state action exception also contains the language “primary defendants” which has been interpreted to mean “all” the primary defendants must be state actors.

The question then turns on whether the defendants can be considered States, State officials or other governmental entities against whom the district court may be foreclosed from ordering relief. The purpose behind the enactment of 28 U.S.C. §1332(d)(5)(A) was to prevent states, state officials or governmental entities from removing a case to federal court, and then arguing that due to immunity the federal court would be prohibited from ordering the relief requested by the plaintiff.

The issue was addressed in Frazier v. Pioneer Americas LLC, 455 F.3d 542 (5^thCir. 2006) where the plaintiffs brought a class action against the operator of hydrogen processing equipment and the Louisiana Department of Environmental Quality (“DEQ”) for damages allegedly caused by seeping mercury. Pioneer removed the case pursuant to CAFA. The plaintiffs moved for remand on multiple grounds including that CAFA’s state action exception applied. The district court denied remand and the plaintiffs appealed. On appeal, the plaintiffs argued that the DEQ was both a primary defendant and a state entity so remand was appropriate. The Fifth Circuit disagreed because the statute requires “all” primary defendants to be States, State Officials or other governmental entities and Pioneer also was a primary defendant. The court rejected the plaintiffs’ argument that such a result violated the 11^th Amendment and the principles of state sovereign immunity. The appellate court noted that unless the state joins in the removal, which it is not required to do so under CAFA, it does not waive its right to assert sovereign immunity. Furthermore, the court may ignore sovereign immunity until the state asserts it. The fact that absent waiver of the immunity, the court may not be able to order relief against the state, does not mean the court cannot assume jurisdiction over a case involving a state.

CONCLUSION
In the six years since CAFA’s enactment, the courts have seen many arguments against CAFA jurisdiction. Several of these arguments could not have been foreseen by the drafters of the legislation. In the coming year, we should expect to see more arguments relating to calculation of the amount in controversy, interpretation of the “mass action” provisions, and interpretation of CAFA exceptions containing undefined phrases such as “primary defendant” and “significant relief.”

Social Media Posts by a Third Party: Florida Bar Rules

From Business of Law Guest Blogger at the National Law Review Margaret Grisdela of Legal Expert Connections – a great quick overview of those tricky Florida State Bar rules concerning social media:

Ethics in Blogging was the topic of a presentation I made this morning at the Broward County Bar Association, with co-presenter Alan Anthony Pascal, Esq. of The Florida Bar.

Posts to a lawyer’s social media page by a third party was one of the topics we covered. Below please find some highlights from the Florida Bar Guidelines for Networking Sites, which applies to Florida attorneys as well as lawyers from other states who are soliciting business in Florida.

Third Party Posts

“Although lawyers are responsible for all content that the lawyers post on their own pages, a lawyer is not responsible for information posted on the lawyer’s page by a third party, unless the lawyer prompts the third party to post the information or the lawyer uses the third party to circumvent the lawyer advertising rules.”

Removal of Non-Compliant Information from a Lawyer’s Page

“If a third party posts information on the lawyer’s page about the lawyer’s services that does not comply with the lawyer advertising rules, the lawyer must remove the information from the lawyer’s page.”

Request for Removal of Info on a Page Not Controlled by the Attorney

“If the lawyer becomes aware that a third party has posted information about the lawyer’s services on a page not controlled by the lawyer that does not comply with the lawyer advertising rules, the lawyer should ask the third party to remove the non-complying information. In such a situation, however, the lawyer is not responsible if the third party does not comply with the lawyer’s request.”

Lawyer Social Media Pages are Exempt from Filing

“Finally, the Standing Committee on Advertising is of the opinion that a page on a networking site is sufficiently similar to a website of a lawyer or law firm that pages on networking sites are not required to be filed with The Florida Bar for review.”

Page references in these guidelines can include a LinkedIn profile, a blog comment, Twitter profile, Facebook page, etc.

Read the Florida Bar Guidelines for Networking Sites here.

IRS Announces Second Special Voluntary Disclosure Initiative for Taxpayers With Undisclosed Offshore Accounts

Posted this week at the National Law Review by Keith R. Gercken of Sheppard Mullin – updated information on 2011’s tax amnesty program for off shore accounts:

The Internal Revenue Service announced on February 8, 2011 the creation of a second special voluntary disclosure initiative for U.S. taxpayers with undisclosed foreign bank and other financial accounts. This new program is a follow-on to the IRS’ original voluntary disclosure initiative that closed on October 15, 2009. The 2009 program reportedly attracted some 15,000 voluntary disclosures by taxpayers with previously undisclosed offshore accounts, and has been viewed within the government as a success in getting taxpayers “back into the U.S. tax system” by offering them the ability to avoid or significantly mitigate various the criminal and civil penalties that would otherwise have potentially applied had their failure to disclose been discovered by the IRS on audit.

As background, U.S. persons are generally required to file an annual information statement with the IRS disclosing any beneficial interest in, or signatory authority over, bank or other financial accounts located outside the U.S. This information statement is filed on Form TD F 90-22.1, and is generally referred to as an “FBAR” (Foreign Bank Account Report). From an accountholder perspective the failure to file FBARs as required can potentially lead to a large array of both civil and criminal penalties – including monetary penalties of up to 50% of the unreported account balance (per year) and criminal penalties if the failure to file was willful.

The new 2011 program represents a second chance for taxpayers who did not take advantage of the original 2009 voluntary disclosure program. While the penalty structure offered by the IRS this time around is slightly less favorable than under the original 2009 program, it still offers taxpayers an opportunity to significantly reduce their penalty exposure. Highlights of the new 2011 program include the following:

The program covers the years 2003 through 2010.
There is an August 31, 2011 deadline to submit all required information to the IRS, including delinquent or corrected FBARs and amended income tax returns reporting any previously unreported income.
In lieu of the normal 50% per year penalty, a participating taxpayer must pay a 25% penalty on the highest aggregate account balance in the undisclosed offshore account during the period covered by the voluntary disclosure. In limited cases, this 25% penalty may be reduced to 12.5% or 5%.
Participating taxpayers must pay all delinquent taxes relating to any unreported offshore income, together with applicable interest and a 20% accuracy-related penalty.
Participating taxpayers must pay any other applicable civil penalties associated with a failure to file returns or failure to pay taxes during the period covered by the voluntary disclosure.
The program includes a generally favorable alternative resolution procedure to enable participating taxpayers to calculate their tax liability associated with investments that may have been made in “passive foreign investment companies” (e.g., foreign mutual funds) through their undisclosed offshore accounts.
Participating taxpayers must fully cooperate with the IRS in providing information on offshore financial accounts, institutions and facilitators.
The IRS will not initiate criminal prosecution of taxpayers who fully comply with the terms of the program.

The IRS remains focused on the potential evasion of U.S. income tax that is facilitated by hiding funds in offshore accounts, and has been increasingly aggressive in pursuing U.S. taxpayers who have failed to properly file FBARs and pay taxes on offshore income. As offshore financial secrecy continues to erode, the IRS has become increasingly able to obtain information relating to U.S. taxpayers directly from foreign banks. As a result, taxpayers with undisclosed offshore accounts that did not previously take advantage of the 2009 voluntary disclosure program may wish to consider the potential advantages of participating in this new 2011 program.

Feb. 25th Deadline Approaching for March Publication for the National Law Review Student Legal Writing Contest

Everybody’s talking about how abysmal the job market is for law students – why not build your resume while still in school? Young lawyers are under increasing pressure to start thinking about business development activities earlier than ever in their careers. One tried and true way of building one’s professional reputation is by publishing. One sure way to get noticed and to help others is to write in a style which is helpful and educational to prospective clients. The National Law Review is one of the nation’s premier resources for secondary legal analysis for businesses and in the Spring & Fall we offer students the opportunity to submit consumer-friendly articles for publication.

The winning articles will be published online starting March. The top article(s) chosen will be featured on the NLR home page and will remain in our searchable database for up to two years.

Please note that although students are encouraged to submit articles addressing Intellectual Property Law for the March publication, you may also submit entries covering current issues related to other areas of the law. Please spread the word !!! Thanks!

Extreme Makeover: Arts Edition Paducah, Kentucky

A postive story about urban redvelopment sparked by the arts from Sheppard, Mullin, Richter & Hampton LLP recently posted at the National Law Review:

The notion that the arts make our culture “richer” is commonplace in our vernacular, but an undeniable trend has emerged giving an entirely new meaning to the phrase: across the board, the country’s nonprofit arts and culture industry has grown by twenty-four percent over the past five years, generating over $166 billion in economic activity a year. Art can be big business, and not just in cosmopolitan meccas like New York and Los Angeles. Across the United States, small and midsized cities are harnessing their creative energy to jumpstart their local economies, often with striking results. Cities that have taken heed of this trend have been rewarded in multiple ways—from the rehabilitation and development of uninhabitable areas of the city to the welcoming of tourists, businesses, and well-heeled residents to those very areas. One seminal example is New York’s Soho and Tribecca neighborhoods, which now exceed the famed Upper East Side and Central Park West neighborhoods in rental and real estate prices. It is a reversal of the commonly held notion that artists drain resources, rather than attract them. Perhaps no city has been more successful in exploiting the economic potential of the arts than Paducah, Kentucky, a town of 27,000 which got the Extreme Makeover formula just right when it implemented what has come to be known as an Artist Relocation Program.

Ten years ago, artists were lured to the blighted downtown neighborhood of LowerTown by the prospect of free home ownership and creative autonomy in developing their properties. As a result, Paducah today has been transformed into a thriving community of galleries, shops, and cafes. It is just the kind of place that attracts visitors and tourism. Paducah’s tourist revenue has drastically increased from $66 million in 1991 to nearly $287 million in 2009. Since the Artist Relocation Program began, the city has attracted 234 new businesses, created over 1,000 jobs, raised over $52 million from private investors and invested nearly $50 million from public funds. Tom Barnett, Paducah’s former city planning director, boasted that for every dollar the city has put into the program, it has received $14 back—an extremely impressive return on its investment. Paducah has indeed become a national model for how a city can reinvent itself as a cultural destination.

Paducah is hardly different in its skeleton than countless cities across the country. It suffered from both a loss of the economy that had helped it prosper (in this case, a uranium enrichment plant), and perhaps more substantially, from suburban flight. LowerTown, which is the oldest neighborhood in the town, was once a thriving, self-contained neighborhood. But as its older residents passed on, the next generation showed little interest in returning from their larger homes outside town. LowerTown’s homes were gradually chopped up into apartments and largely neglected. It is a story repeated across the country. Now, many of these cities are mimicking the Paducah strategy. Chattanooga, Tenn., Pawtucket, R.I., and Oil City, Pa., provide just three of many examples of smaller cities that are wholeheartedly embracing the idea of an Artist Relocation Program.

When pursuing a rehabilitation process, city governments and planning committees begin by first consulting the current zoning laws and maps. Fortunately for Paducah, LowerTown was already designated as a mixed use zone, thus it did not have to drastically adjust the districts’ zoning laws. Mixed use zones accommodate multiple land uses in one zone, allowing a retail store to sit next to a single-family home or a restaurant to be housed on the first floor of a 100-unit condominium complex. On the other hand, conventional zoning, often referred to as Euclidean zoning, divides a city into specific and separate districts and assigns each district a permitted land use, such as residential, commercial, or industrial. To further complicate matters, Euclidean zoning also utilizes overlay zones to control land use, so for instance, a lot will be designated “commercial” and then in addition, the overlay rules will mandate that each lot be a minimum of 10,000 square feet. Zoning laws were originally written to be “as of right.” This means that by consulting the zoning ordinance governing their land, owners can determine what types of projects they are able to develop, subject only to the city’s verification that the owner’s plan complies with the applicable zoning laws. There has been a distinct trend over time to move towards discretionary zoning, which grants a city the right to review virtually all land use projects within a zone and determine whether the project will be approved, rejected or approved with additional conditions. Developers typically prefer ‘as of right’ zoning over discretionary zoning because discretionary zoning requires a public hearing, which often leads to increased costs and time. While most cities have employed discretionary zoning on mixed use zones, Paducah continued to utilize ‘as of right’ zoning in order to encourage growth and minimize expenditures for new developers.

Specifically tailored zoning ordinances allowed Paducah to effectively control both the aesthetic character of renovation projects and the intent of artists and businesses relocating to the city, in order to ensure the city’s rehabilitation project evolved into the community the city hoped to build. Further, Paducah took advantage of its mixed use zoning to enable artists to use their residences as both a home, studio, and sometimes even a gallery, leading to more affordable property values and rental costs. In addition, mixed use zones naturally lend themselves to more compact, close-knit communities that are organized to make walking and biking easier and more pleasant. This is helpful for an art community because it connects artists with the community while simultaneously providing the public easy access to artists’ works and galleries. It also leads to more “mom and pop” owned cafes and boutiques that serve as social hot spots for the local community.

In addition to offering mixed use real estate, Paducah provided qualifying artists with financial incentives to relocate to the city, as well as affordable properties to purchase in connection with a reimbursement program for artists who choose to restore their newly purchased property. For instance, Paducah offered relocating artists up to $2,500 in moving expenses, properties for $1 with an approved qualifying proposal, a $2,500 reimbursement for architectural and professional improvements and up to $5,000 for rehabilitation costs associated with the new property. In addition, the locally owned Paducah Bank offered artists long-term loans with generously fixed interest rates to finance the purchase and renovation costs of their homes. After approving these legislative measures, Paducah began actively seeking out artists via commercials and advertisements that portrayed Paducah as a quirky southern town which embraced the arts. The Artist Relocation Program and successful PR campaign have incentivized over 75 artists to relocate to LowerTown from across the country, helping to reduce the town’s crime rate and revive Paducah’s economy.

Further, the significant twenty-four percent growth in the country’s nonprofit arts and culture industry can largely be attributed to the substantial amount of event-related spending by arts audiences. Art and cultural events generate economic activity for local businesses, including restaurants, hotels, retail stores and parking garages. Astutely realizing this potential, Paducah organizes large-scale events to entice tourists, such as the annual quilting convention that brings in nearly 40,000 tourists and the LowerTown music festival. During these events, the city’s “no vacancies” signs are lit, restaurants are hopping, and local boutiques are brimming with customers. In addition, Paducah plans local events to encourage residents to socialize and support one another. An example of this is Paducah’s “Live On Broadway” series that occurs every Saturday night in the summer. At these events, the city provides free live music, public art demonstrations, and horse-drawn carriage rides throughout the downtown district. Paducah residents are encouraged to support their community by shopping at local galleries and boutiques that remain open late into the evening exclusively for the event. Thus, Paducah effectively capitalizes on the arts’ economic potential by utilizing both large and small scale events to attract tourists and local residents.

Paducah’s future appears to be in good hands under the guidance of Mayor Bill Paxton, who explains, “As a Paducah native, I have watched the City grow and change. It’s always been known as a hub for river traffic and a regional destination for shopping, entertainment, employment, education, and medical facilities. But with the artist relocation program that revitalized LowerTown, the National Quilt Museum of the United States, and the Paducah School of Art, Paducah has become a nationally known cultural center. The City Commission and I are committed to making Paducah even better. We are working hard to bring new jobs to the area, revitalize more neighborhoods, and make the downtown and riverfront areas a destination for all. Everything we do is to improve the quality of life.”

As far as Extreme Makeovers go, one Paducah resident may have said it best when she stated that her city “makes you feel good to live here.” More importantly, Paducah and this overall national trend demonstrate how the arts can serve as an effective catalyst in reviving a community by paving the way for a richer city, both economically and culturally.

1. Geographically.

2. Demographically.

3. By Industry.

4. By Job Title.

5. By Trigger Events.

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Facts

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A. Discretionary/Interests of Justice Exception – 28 U.S.C. §1332(d)(3)

B. Local Controversy Exception – 28 U.S.C. §1332(d)(4)(A)

C. Home State Exception – 28 U.S.C. §1332(d)(4)(B)

D. State Action Exception – 28 U.S.C. §1332(d)(5)(A)

III. Arguments raised to defeat CAFA jurisdiction

A. Is this case a class action?

B. Is this case a mass action under 28 U.S.C. §1332(d)(11)?

C. Is there minimal diversity?

D. Is the amount in controversy greater than $5 million?

2. Has the plaintiff alleged an amount in controversy less than $5 million?

E. Arguments for exceptions to CAFA jurisdiction

1. The Home State Exception.

2. The Local Controversy Exception.

3. The Discretionary/Interests of Justice exception

4. The State Action Exception

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