ALF Argues That CAFA’s “Internal Affairs” Removal Exception Should Be Interpreted Narrowly
Congress enacted the Class Action Fairness Act (“CAFA”) to make it easier for corporate defendants to remove interstate class actions of national importance from state trial courts to federal district courts. See 28 U.S.C. §§ 1332(d) & 1453. Country Mutual Insurance Co. has filed a certiorari petition requesting the Supreme Court to resolve well-defined splits of authority on the scope of two specific statutory exceptions to CAFA’s relaxed provisions for removal of class actions on diversity grounds: (i) the “home state” exception, where “the primary defendants[] are citizens of the State in which the action was originally filed,” 28 U.S.C. § 1332(d)(4)(B), and (ii) the “internal affairs” exception, where a class action “solely involves a claim [that] relates to the internal affairs or governance of a corporation or other form of business enterprise,” 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2).
The Atlantic Legal Foundation, joined by the DRI Center for Law and Public Policy, has filed an amicus brief urging the Court to grant review. Appellate specialist Sarah Elizabeth Spencer of Spencer Willson, PLLC, authored the brief, which focuses on the internal affairs exception and discusses why it should be narrowly construed and applied.
1. Whether a court should consider a defendant’s ability to pay a judgment when determining whether the defendant is a “primary defendant” under CAFA’s home-state exception, as the Fifth and Seventh Circuits have held, or whether a court should instead determine if the defendant is the “real target” of the litigation, as the Third, Ninth, and Eleventh Circuits have held.
2. Whether a class action should be remanded to state court under CAFA’s internal-affairs exception even if it requires a factfinder to “look beyond” the internal affairs of a corporation and evaluate other legal issues, as the Second, Seventh, and Ninth Circuits have held, or whether such a case should remain in federal court, as the Fourth Circuit has held.
Additional Background:
The plaintiffs filed a putative class action in Illinois state court essentially alleging that mutual insurance companies must sell insurance “at cost.” More specifically, the plaintiffs’ suit against Country Mutual and many of its current and former officers contends that the company’s surplus reserve, which is intended to protect policyholders throughout the nation, is excessive and must be distributed. Pointing to the potential nationwide implications of the plaintiffs’ claims, Country Mutual removed the action under CAFA to an Illinois federal district court, which denied the plaintiffs’ motion to remand. The Seventh Circuit reversed, holding that both the home state and internal affairs exceptions apply. As to the latter, the court of appeals held that because the plaintiffs’ claims involve alleged corporate mismanagement in the form of retaining “excess” surplus, they relate to Country Mutual’s internal affairs regardless of whether the claims implicate additional legal issues.
ALF’s Amicus Brief:
ALF’s brief discusses why the Supreme Court should address the critical issue of how the Second, Seventh, and Ninth Circuits have misinterpreted CAFA’s internal affairs exception. These circuits have been returning to state court national class actions that should remain in federal court due to their broader implications beyond corporate governance. ALF argues that a strict interpretation of the internal affairs exception is needed to maintain the relaxed federal removal jurisdiction that CAFA was enacted to enable.
The amicus brief also emphasizes that the Second, Seventh, and Ninth Circuits’ broader interpretations could lead to many different types of class actions being improperly remanded to state courts. This could include, for example, class actions involving consumer protection or environmental issues, which have national implications and should be litigated at the federal level.
ALF is urging the Court to grant review and resolve the inter-circuit split on the scope of the internal affairs exception to reinforce CAFA’s goals and ensure that national class actions are adjudicated by federal courts.
Status:
The certiorari petition was denied on May 13, 2024.
