The UCL Practitioner
Thursday, February 24, 2005
More thoughts on the Class Action "Fairness" Act
I’ve been thinking some more about the so-called Class Action “Fairness” Act, which empowers the federal district courts to hear many civil class actions in which the amount in controversy exceeds $5 million and "any member of a class of plaintiffs is a citizen of a State different from any defendant." 28 U.S.C. §1332(d)(2) (as amended). The Act establishes a two-thirds/one-third rule under which the district court “may” decline to exercise jurisdiction in any case in which “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.” Id. §1332(d)(3) (as amended). The district court “shall” decline to exercise jurisdiction if “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” and they seek “significant relief” from a defendant “whose alleged conduct forms a significant basis for the claims asserted” and “who is a citizen of the State in which the action was originally filed,” and "principal injuries resulting from the alleged conduct ... were incurred in the State in which the action was originally filed," and “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.” Id. §1332(d)(4) (as amended).

The Class Action “Fairness” Act resembles Proposition 64 in a key respect. Both laws impose changes that are far broader than necessary to fix the “abuses” that the laws were supposedly addressing. That aside, it is interesting to consider how the Class Action “Fairness” Act might impact future UCL claims pleaded as class actions.

The leading case on whether non-California residents may sue for relief under the UCL is Norwest Mortgage, Inc. v. Superior Court, 72 Cal.App.4th 214 (1999), in which the trial court granted nationwide class certification of a UCL claim. The appellate court divided the claim up into three “categories”:
California residents regardless of where [the defendant's] conduct … occurred (Category I members); non-California residents for whom [the defendant's] conduct … occurred in California (Category II members); and non-California residents for whom [the defendant's] conduct … occurred in states other than California (Category III members).
Id. at 222.

The Norwest court was not concerned with the defendant’s “citizenship”—although it observed that Norwest was a California corporation with its principal place of business in Iowa—but only with the fact that much of its conduct emanated from outside California. The court concluded that the UCL was “not intended to regulate conduct unconnected to California,” and that the UCL was therefore “inapplicable to the claims held by Category III members.” Id. at 225-29. The claims of Category I and II class members could proceed, subject to the caveat that California choice-of-law rules might require that other states’ laws govern the claims of Category II class members. (A case now pending before the California Supreme Court, Kearney v. Solomon Smith Barney, no. S124739, will look at the choice-of-law question in the UCL context. The Court of Appeal's opinion in that case is here, and my original post on the Court of Appeal's opinion is here.)

If the Norwest case—or indeed virtually any nationwide class action—were filed today, it would probably be removable to federal court. The Norwest court’s “categories” do not precisely correspond to those of the Class Action “Fairness” Act, but they are useful to illustrate how the "Fairness" Act might impact future UCL cases.

Category I: Because the Category I members are all California residents, and Norwest is a California “citizen” because it is incorporated here, that portion of the case, if filed separately from the rest of the case, would not be removable. If filed together with the claims of too many Category II and III class members, Category I members would be swept up to federal court along with the rest of the case.

Category II: This category is trickier. If the right number of class members from enough other states were joined, the two-thirds/one-third ratio of California class members to non-California class members could be maintained, precluding removal. Quite a few other states might be added to the class definition, depending on relative state populations. For example, suppose hypothetically that the defendant’s alleged conduct affected all the residents of a given state. Since California’s population (as of the 2000 census) was 33.8 million, an additional 16.9 million class members could be added to the case without exceeding the two-thirds/one-third ratio. That would allow inclusion of all the citizens of Florida, for example, which is the fourth largest state. Alternatively, all the citizens of the fifteen smallest states (Wyoming, Vermont, North Dakota, Arkansas, South Dakota, Delaware, Montana, Rhode Island, Hawaii, New Hampshire, Maine, Idaho, Nebraska, West Virginia, and New Mexico) could be included. In theory, a sixteen-state UCL class action could still be brought against a California defendant in California state court and escape removal.

Category III: Out-of-state class members injured by conduct emanating from outside California simply cannot bring a UCL claim in California state court. Under Norwest, they have no UCL claim anyway, and under the “Fairness” Act, if they tried to assert such a claim, their case could be removed to federal court regardless of whether they joined forces with California plaintiffs. In sum, to avoid the risk of removal to federal court, plaintiffs should not bother trying to plead UCL claims on behalf of non-Californians against a defendant that is not a “citizen” of California.
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