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9th Cir. Holds Attorneys’ Fees May Be Included in CAFA ‘Amount in Controversy’

The U.S. Court of Appeals for the Ninth Circuit recently vacated an order sua sponte remanding to state court a putative class action removed under the federal Class Action Fairness Act.

In so ruling, the Ninth Circuit held:

  1. When a notice of removal plausibly alleges a basis for federal court jurisdiction, a federal trial court may not remand the case back to state court without giving the defendants an opportunity to demonstrate that the jurisdictional requirements were satisfied;
  1. The amount in controversy may be based on reasonable assumptions tied to the allegations in the complaint;
  1. When a statute or contract provides for the recovery for attorneys’ fees, prospective attorneys’ fees must be included in the assessment of the amount in controversy; and
  1. The defendants’ summary judgment motion in state court, asserting that the plaintiffs’ claims were barred by a release from a prior class action settlement, did not defeat federal court jurisdiction.

A copy of the opinion in Arias v. Residence Inn by Marriott is available at:  Link to Opinion.

An employee filed a putative class action against her employer in state court, alleging that the employer failed to compensate its employees for wages and missed meal breaks and failed to issue accurate itemized wage statements, all in violation of state wage and hour laws.

The employer removed the case to federal court alleging minimum diversity jurisdiction under the federal Class Action Fairness Act.

As you may recall, a federal trial court has original jurisdiction under CAFA if:  (1) any member of the class is a citizen of a state different from any defendant, (2) the class contains at least 100 members, and (3) the amount in controversy exceeds $5 million.  28 U.S.C. § 1332(d)(2), (d)(5)(B).

To show minimum diversity, the employer alleged that it was a citizen of Maryland and Delaware and the employee was a citizen of California.  To satisfy the class size requirement, the employer provided a declaration stating that it employed at least 2,193 nonexempt employees during the period defined in the complaint.

To satisfy the amount in controversy requirement, the employer relied on its employee data (e.g., number of nonexempt employees, hourly rate of pay, and number of work weeks worked by putative class members), and then made assumptions about the frequency of the violations alleged in the complaint.

Using assumed violation rates, the employer alleged a potential amount in controversy exceeding $15 million, with its most “conservative estimate” totaling over $5.5 million, including attorneys’ fees (which the employer asserted should be included in the calculation).

After the employer filed the notice of removal, the trial court issued an order sua sponte remanding the case to state court.  The trial court stated that the employer’s calculation of the amount in controversy was “unpersuasive” and rested on “speculation and conjecture.”

The trial court faulted the employer for not offering evidentiary support for its assumptions, and concluded that “prospective attorneys’ fees are too speculative” to be included in the amount in controversy.

The litigation proceeded in state court.  The employer filed a motion for summary judgment, arguing that a release from a related class action settlement barred all of the employee’s claims.

The employer filed a timely petition for permission to appeal under 28 U.S.C. § 1453(c)(1), which the Ninth Circuit granted.

The employer argued that the trial court imposed an erroneous burden of proof by sua sponte remanding the case to state court without allowing it an opportunity to support its allegations with evidence.

The Ninth Circuit observed that “when a defendant seeks federal-court adjudication, the defendant’s amount-in-controversy allegation should be accepted when not contested by the plaintiff or questioned by the court.”  Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014).

The appellate court noted that the trial court did not conclude that the employer’s allegations were implausible.  Instead, the trial court stated that the employer failed to meet its burden of proving the amount in controversy with evidence.

The Ninth Circuit also noted that a notice of removal “need not contain evidentiary submissions.”  Dark Cherokee, 574 U.S. at 84.  “[W]hen a defendant’s assertion of the amount in controversy is challenged and both sides submit proof, the court decides by a preponderance of the evidence whether the amount-in-controversy requirement has been satisfied.”  Id., at 88.

Thus, the appellate court held that the trial court’s sua sponte order deprived the employer of “a fair opportunity to submit proof.”

Next, the employer argued that the trial court erred in disallowing its assumptions in its estimate of the amount in controversy.

The Ninth Circuit explained that a removing defendant is permitted to rely on “a chain of reasoning that includes assumptions.”  Ibarra v. Manheim Invs., Inc., 775 F.3d 1193, 1199 (9th Cir. 2015).  However, “assumptions cannot be pulled from thin air but need some reasonable ground underlying them.”  Id.

The employee alleged that the employer “routinely” failed to provide overtime wages and compensation for rest and meal breaks.  The employer assumed six minutes of unpaid overtime per day and one missed rest break per week.

The employer assumed that 100 percent of wage statements were inaccurate because the employee alleged that “[n]ot one of the paystubs that Plaintiffs received complied with Labor Code § 226b.”

Based on the allegations in the complaint, and noting that the amount in controversy was merely an estimate of the total amount in dispute, the Ninth Circuit determined that the trial court mischaracterized the employer’s assumptions as being “speculation and conjecture.”

The employer also argued that the trial court erred by “refusing to consider prospective attorneys’ fees in the amount in controversy.”

The Ninth Circuit agreed, stating that “[w]e have long held (and reiterated [in early 2018]) that attorneys’ fees awarded under fee-shifting statutes or contracts are included in the amount in controversy.”  Fritsch v. Swift Transp. Co. of Ariz., LLC, 899 F.3d 785, 794 (9th Cir. 2018).

Because the complaint sought recovery of attorneys’ fees, and because there was no dispute that at least some of the California wage and hour laws in the complaint entitle a prevailing plaintiff to an award of attorneys’ fees, the Ninth Circuit held that the trial court should not have excluded prospective attorneys’ fees from the amount in controversy.

The employee argued that the employer’s summary judgment motion in state court defeated federal court jurisdiction, because it argued that her claims were barred by a release from a prior class action settlement.

The Ninth Circuit disagreed, explaining that post-filing developments do not defeat jurisdiction if jurisdiction was properly invoked as of the time of filing of the complaint.  Further, the strength of any defense indicated the likelihood of the plaintiff prevailing, but is irrelevant to determining the amount at stake in the litigation.

The employee also suggested that jurisdiction was defeated because she stipulated that the amount in controversy did not exceed $5 million.

However, the U.S. Supreme Court has held that when “a class-action plaintiff stipulates, prior to certification of the class, that he, and the class he seeks to represent, will not seek damages that exceed $5 million in total,” the trial court should ignore the stipulation when assessing the amount in controversy.  Std. Fire Ins. Co. v. Knowles, 568 U.S. 588, 590, 596 (2013).

Accordingly, the Ninth Circuit vacated the trial court’s order refusing federal court jurisdiction, and remanded for further proceedings.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.

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