The U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court’s order denying a motion to remand a putative class action to Arkansas state court based on the federal Class Action Fairness Act’s (CAFA) “local controversy” exception to jurisdiction because the consumer plaintiffs failed to meet their burden to demonstrate that they sought significant relief from a defendant that was a citizen of the state.
In so ruling, the Eighth Circuit held that the trial court did not err when it considered extrinsic evidence in the form of affidavits from the defendant company because a court “may inquire by affidavits or otherwise, into the facts as they exist,” when deciding whether the court has jurisdiction.
A copy of the opinion in Douglas Atwood v. Stephen Peterson is available at: Link to Opinion.
An Illinois corporation (“company”) offered a free rewards program to its customers. An Arkansas consumer allegedly paid more for products from the company than another customer “because he did not present a rewards card at checkout” like the other customer did.
Based on these two transactions, the consumer filed a class action complaint in state court in Arkansas against the company and two of its district managers who are Arkansas citizens, claiming the defendants violated Arkansas’s statutory prohibition on price discrimination in the sale of manufactured products.
Specifically, the consumer alleged that the company violated Arkansas Code § 4-75-501 because its customer rewards program willfully refused or failed to give all consumers the rebates and discounts that it provided to its rewards cards members. The consumer also alleged that the Arkansas citizen district managers supposedly “implemented the unlawful program” and that they were “independently” liable.
Asserting jurisdiction under CAFA, the defendants removed the case to federal court. The consumer moved to remand to state court based on the CAFA’s “local controversy” exception arguing that the Arkansas district managers were “significant” defendants, as required to defeat jurisdiction.
In response to the motion to remand, the defendants submitted affidavits establishing that the “district managers do not decide which products to offer in the program, nor do they decide the extent of the discount.” Instead, the company makes those decisions at the corporate level and the district managers have “no discretion to vary the products or the prices.”
The trial court denied the motion to remand based on the affidavits “finding that the district managers were not significant defendants under CAFA,” and concluding that the consumer had fraudulently joined them to avoid federal jurisdiction. The trial court also granted the defendants’ motion to dismiss because the company offered the same discount to the consumer, “but he refused to sign up for the free program, essentially declining the discounted price.”
This appeal followed.
Initially, the Eighth Circuit observed that the CAFA exempts “local controversies from federal jurisdiction.”
As you may recall, a federal trial court “must decline to exercise jurisdiction over a class action when a defendant “from whom significant relief is sought by members of the plaintiff class” and “whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class” is a citizen of the state in which the plaintiff originally filed the class action.” 28 U.S.C.§ 1332(d)(4)(A).
The party seeking remand has the burden to prove this narrow exception applies to defeat federal jurisdiction.
The Eighth Circuit framed the issue before it as whether the district managers were “significant” defendants under section 1332(d)(4)(A). However, the Eighth Circuit noted that it could not resolve this by looking at the complaint. The complaint did not allege “any substantive distinctions” between the company’s conduct and the district managers’ conduct. The complaint also did not allege that the district managers had the discretion to determine how to implement the rewards program. Instead, the complaint merely alleged that the district managers “acted on behalf of” the company. These vague allegations failed to demonstrate that the district managers’ conduct was “an important ground for the asserted claims in view of the alleged conduct of all the defendants.”
In contrast, the affidavits established that the district managers’ conduct was not a “significant basis” for the claims asserted. Instead, the company was the “target” defendant.
In response, the consumer argued that the trial court erred by considering this extrinsic evidence. The Eighth Circuit rejected the consumer’s argument because “when a question of the district court’s jurisdiction is raised, . . . the court may inquire by affidavits or otherwise, into the facts as they exist.”
Thus, because the district managers’ conduct did not form a significant basis for the consumer’s claim, the Eighth Circuit held that the trial court did not err when it determined that the consumer failed to meet his burden to demonstrate that the local controversy exception to CAFA jurisdiction applied.
Finally, the Eighth Circuit also rejected the consumer’s argument that the trial court wrongly dismissed the complaint because the Arkansas Supreme Court’s ruling in Rhodes v. Kroger Co. held that a rewards program did not violate section 4-75-501 when a plaintiff, like here, declines to join the free rewards program.
Therefore, the Eighth Circuit affirmed the trial court’s judgment in favor of the defendant company.