Seventh Circuit Addresses Mandatory Local Controversy Exception to the Class Action Fairness Act

Since its enactment in 2005, the Class Action Fairness Act (CAFA) has provided defendants with additional opportunities to remove state-law claims to federal court. Among other things, the statute expands federal courts’ diversity jurisdiction to cases where at least one proposed class member is a citizen of a state different than at least one defendant, as long as the amount in controversy exceeds $5 million. But CAFA includes a number of mandatory and discretionary exceptions to the diversity jurisdiction that it provides.

Yesterday, in Schutte v. Ciox Health, LLC, No. 22-1087, 2022 WL 792258 (7th Cir. Mar. 16, 2022), the Seventh Circuit tackled an issue of first impression for the court concerning CAFA’s mandatory “Local Controversy” exception, 28 U.S.C. 1332(d)(4)(A).

The Posture of the Case

The plaintiff alleged that a Wisconsin health care provider and its medical records contractor violated Wisconsin’s patient health care records act by charging her lawyers for electronic copies of records relating to her treatment following a car accident.¹ The complaint sought certification of a class of all persons who requested medical records from a Wisconsin health care provider and were charged fees by the defendants for electronic copies. In response, the medical records contractor removed the case to the Eastern District of Wisconsin under CAFA, and the plaintiff moved to remand to state court based on (among other arguments) the Local Controversy exception. When Judge Adelman denied the plaintiff’s remand motion, the Seventh Circuit accepted her petition for interlocutory review under 28 U.S.C. § 1453(c) — another provision added by CAFA — because the court had “not yet construed the relevant provision” of the Local Controversy exception.

The Local Controversy Exception

The Local Controversy exception strips federal courts of jurisdiction that would otherwise be provided by CAFA if several conditions exist: (1) more than two-thirds of the class members are citizens of the state in which the case was originally filed, (2) at least one defendant from whom “significant relief is sought” and whose “alleged conduct forms a significant basis for the claims” is a citizen of that state, (3) the “principal injuries” sustained by class members were incurred in that state, and (4) “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” within the previous three years. 28 U.S.C. 1332(d)(4)(A). It was this last condition — the other class action “exception” to the Local Controversy exception — that was contested in Schutte and resolved by the Seventh Circuit.

A Dispute of Interpretation

The medical records contractor argued that the Local Exception did not apply because it had been named as a defendant in another medical records class action with similar factual allegations filed in Montana in 2020.

In response, the plaintiff argued that the Montana case was different because it alleged violations of a different state’s laws and involved conduct in states other than Wisconsin. She also asserted that 28 U.S.C. § 1332(d)(4)(A)(ii)’s requirement that the previous class action have been brought “on behalf of the same or other persons” necessarily implies that there be “some connection between the two class actions” beyond mere factual similarity. 

Judge David Hamilton, in writing his unanimous opinion for the three-judge panel, rejected both the plaintiff’s arguments and affirmed denial of the remand motion.

The Meaning of “Similar Factual Allegations” under CAFA

Drawing on the Tenth Circuit’s decision in Dutcher v. Matheson, 840 F.3d 1183 (10th Cir. 2016), Judge Hamilton explained that “differences in the legal theories asserted do not place two complaints with similar factual allegations outside the provision’s sweep,” given that the statute requires two class actions with “similar factual allegations” and says nothing about “similar legal theories or claims.” Comparing the factual allegations in the Schutte complaint to those in the Montana action, the court deemed them “nearly identical” because both lawsuits challenged “paper copies” fees charged for the provision of electronic records, such that the two cases asserted “the same basis of wrongdoing.”

Judge Hamilton buttressed his conclusion that class actions arising from different states can still involve “similar factual allegations” for purposes of § 1332(d)(4)(A)(ii) by noting that CAFA’s legislative history indicated concern among committee members that the Local Controversy exception might otherwise undermine the ability of the Judicial Panel on Multidistrict Litigation to coordinate copycat lawsuits filed around the country against the same defendant. While acknowledging that “harder cases are sure to arise,” the court held that “the nearly identical nature of the factual allegations” meant that the Schutte and Montana cases were “factually similar for CAFA’s purposes.”

The Limits of the Anti-Surplusage Canon

The court also rejected the plaintiff’s fallback argument that the interpretation it adopted created surplusage in CAFA, rendering the language “on behalf of the same or other persons” meaningless. According to the plaintiff, because every class action is brought “on behalf of the same or other persons,” that language as used in CAFA must be read to imply the need for “some connection” between the class action at bar and the class in the previously filed case.

The opinion compiles a scholarly summary of authority regarding the anti-surplusage canon, highlighting how arguably redundant language is often the unfortunate byproduct of messy legislative negotiations (such as those underlying CAFA’s enactment). The court held that the case before it “illustrates the limits of the anti-surplusage canon:” While class actions are always brought on behalf of “other persons,” CAFA’s language explaining that a previous class action could apply if filed “on behalf the same or other persons” clarified that it was not necessary for there to be overlap between the class members in both cases. And Judge Hamilton again buttressed his statutory interpretation analysis with practical reasoning: The court’s interpretation avoided legislators’ concern that the Local Controversy exception might preclude removal of a series of class actions in different states with similar factual allegations against the same defendant and thus prevent them from being consolidated in a multidistrict litigation process in federal court.

Conclusion

The Schutte opinion resolves an issue of first impression within the Seventh Circuit, explicating the scope of the Local Controversy exception to the diversity jurisdiction provided by CAFA. Defendants facing class actions around the country will be interested in the court’s holding that the Local Controversy exception does not bar removal of lawsuits that are based on similar factual allegations as previously filed class actions, even if they are premised on different state laws or conduct occurring in another jurisdiction. More generally, Judge Hamilton’s approach to statutory interpretation, pairing careful textual analysis with broader consideration of the practical realities of the legislative process, is notable for litigants presenting other statutory interpretation cases to the Seventh Circuit.