FYI: 9th Cir Holds "Unlawful Information Collection and Sharing" Class Action Improperly Removed Under CAFA

In a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit held that a putative class action against state entities and a private contractor for allegedly collecting and sharing personal data without authorization was essentially a local controversy and was therefore correctly remanded to state court under an exception in the federal Class Action Fairness Act ("CAFA").

 

Accordingly, the Ninth Circuit affirmed the ruling of the trial court remanding the matter to state court. 

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiffs ("Plaintiffs") sought to maintain an action in state court on behalf of a class of users of a bridge against two entities of the State of California ("State Entities") and a private company ("Company") that contracted with the State Entities to operate the bridge's toll system.

 

Plaintiffs' principle claims alleged the defendants violated the California privacy statutes prohibiting collection of personal data when they collected personally identifiable information from people driving over toll bridges and then shared the information with various unauthorized third parties.

 

The Company removed the action to federal court under CAFA.  Plaintiffs then moved to remand arguing, among other things, that removal was precluded under 28 U.S.C. § 1332(d)(5)(A) because the Company was acting on behalf of the state even though it is a private company.

 

The trial court concluded that the Company qualified as a state entity because it was exercising the authority of the state with respect to the alleged violation of the Plaintiffs' privacy rights.

 

The trial court held that the Company had the burden of satisfying section 1332(d)(5)(A) and because the burden was not met, removal was improper.  The trial court therefore remanded the matter to state court. 

 

The Company then appealed.

 

As you will recall, under CAFA, a trial court shall have jurisdiction over a class action when: (1) the amount in controversy exceeds five million, and (2) any class member is a citizen of a state different from any defendant.  28 U.S.C. 1332(d)(2). 

 

However, CAFA creates an exception from federal court jurisdiction for cases targeting state, local and other government entities that may claim immunities.  See 28 U.S.C. § 1332(d)(5)(A). 

 

On appeal, the Company argued that the trial court erred because it relied on 42 U.S.C. § 1983 case law to determine that it was a state actor, and that the trial court failed to address the language of CAFA's statutory exception relating to "other governmental entities against whom the trial Court may be foreclosed from ordering relief."

 

The Company's position was that it was a private entity outside the scope of 28 U.S.C. § 1332(d)(5)(A).  It further "accurately point[ed] out that Section 1983 cases are not controlling because the § 1983 state actor analysis looks to an actor's role and conduct while the CAFA inquiry goes to the nature of the entity itself." 

 

Thus, the Company argued, the "trial court's exclusive reliance on § 1983 was not appropriate," rather the "issue is whether [the Company] may be considered an instrumentality of the state." 

 

The Ninth Circuit disagreed, noting that "[th]he trial court's analysis, however, also focused to some extent on the relationship between [the Company] and the state entities ultimately responsible under California law for collecting bridge tolls.  [The Company] is an entity acting on behalf of the state to perform toll related functions required by the statute."

 

As you may recall, the Eleventh Amendment of the United States Constitution provides that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State," which means private individuals may not sue non-consenting state entities in federal court. 

 

Moreover, the Ninth Circuit noted, the state need not be named as a defendant, rather "[t]he Supreme Court has held that 'the reference to actions 'against one of the United States' encompasses not only actions in which a State is actually named as a defendant, but also certain actions against state agents and state instrumentalities.'"

 

"To determine whether an entity is able to invoke such immunity our Court has said we generally look to a number of factors: (1) whether a money judgment would be satisfied out of state funds, (2) whether the entity performs central government functions, (3) whether the entity may sue or be sued, (4) whether the entity has the power to take  property in its own name or only the name of the state, and (5) the corporate status of the entity."

 

In reviewing those factors, the Ninth Circuit ruled that the Company "satisfies the second factor of performing a central government function and it has not asserted that it lacks any of the other characteristics," but the "record does not reflect whether it may satisfy the other factors." 

 

Moreover, "the Mitchell factors are not particularly useful when applied to a private entity because a private entity cannot be an arm of the state when the relationship to the sovereign is by contract only," and "[o]ur case law provides not clear answer as to whether [the Company] qualifies as a governmental entity within the meaning of CAFA."

 

Nevertheless, the Ninth Circuit continued, "[w]e need not decide whether the trial court erred in remanding on the 'other governmental entit[y]' ground pursuant to § 1332(d)(5)(A) because there is a further justification for remand.  The plaintiffs correctly content that the result is required by provisions of CAFA calling for local actions to be heard in state court.  The local controversy exception is one of several exceptions to CAFA removal jurisdiction."

 

Under this exception, "a trial court is required to decline jurisdiction over a class action when: (1) more than two-thirds of the proposed plaintiff class(es) are citizens of the state in which the action was originally filed, (2) there is at least one in-state defendant against whom 'significant relief' is sought and 'whose alleged conduct forms a significant basis for the claims asserted' by the proposed class, (3) the 'principal injuries' resulting from the alleged conduct of each defendant were incurred in the state of filing, and (4) no other class action 'asserting the same or similar factual allegations against any of the defendants' has been filed within three years prior to the present action."

 

In analyzing these factors, the Ninth Circuit determined that "[m]ost of these requirements are met."

 

In so ruling, the Court held that "[t]his is essentially a dispute between those who use the bridge to travel between Marin County, California and San Francisco, California, and defendants who are charged with operating the bridge on behalf of the State of California.  The trial court properly ruled that the case against [the Company], a toll collector, belongs in state court with the California entities that manage the bridge's maintenance and operation." 

 

Accordingly, the ruling of the trial court was affirmed. 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir Holds Property Damage Insurer Improperly Withheld "Labor Depreciation" from Claim Payments

The U.S. Court of Appeals for the Eight Circuit recently affirmed a trial court's order certifying a class of Arkansas homeowners against an insurer that improperly withheld amounts for labor depreciation when paying covered property damage claims under their insurance policies.

 

A copy of the opinion is available at:  Link to Opinion

 

A putative class of Arkansas homeowners ("insureds") sued their insurer alleging that between November 21, 2008 and December 6, 2013 the insurer improperly withheld labor depreciation costs when paying insureds for covered property damage under their insurance policies. 

 

The insureds based their claims on an Arkansas Supreme Court ruling which held that an insurer may not depreciate labor when determining the actual cash value ("ACV") "of a covered loss under an indemnity insurance policy that does not define the term 'actual cash value.'"  A statute that permitted this practice after August 1, 2017 later superseded this holding.

 

The insurer's policy provided its insureds with replacement cost value ("RCV") benefits for covered property damage.  The insurer agreed to first pay the ACV "of the loss of the damaged part of the property" before their insureds made any repairs so long as paying this benefit did not exceed the policy limit or the actual cost "to repair or replace the damaged part of the property." 

 

The insurer calculated the ACV payments by estimating "the amount it would cost to repair or replace damaged property" and then subtracting the depreciation. 

 

The policy does not require the insured "to use this ACV payment to actually make repairs to the property." If the insured elected not to repair the property damage or repaired the damage for less than the ACV payment, then the policy did not require the insured to return any overpayment to the insurer.  If the insured repaired the property and could document that they "incurred costs greater than the ACV payment," then the policy required the insurer to pay the insured the actual RCV amount.

 

The trial court certified the class under Rule 23(b)(3) and this appeal followed.

 

As you may recall, before a trial court may certify a class under Rule 23(b)(3), it must find that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed. R. Civ. P. 23(b)(3). 

 

The insurer argued that the insureds could not meet the predominance and superiority requirements because individual issues of liability and damages for each plaintiff precluded using common evidence to prove liability and damages.  The Eight Circuit rejected this argument finding that the trial court did not abuse its discretion because whether the insurer violated its contractual obligations by depreciating labor when calculating ACV, "is a common question well suited to classwide resolution."

 

The insurer also argued that the Eight Circuit's recent ruling in LaBrier demonstrated that the insureds could not show predominance, as required.  In re State Farm Fire & Casualty Co. (LaBrier), 872 F.3d 567 (8th Cir. 2017).

 

A class of plaintiffs in LaBier sued the same insurer under Missouri law alleging that the insurer "breached its contracts by deducting labor depreciation from their ACV payments."  Missouri law defined ACV "as the difference between the reasonable value of the property immediately before and immediately after loss." The plaintiffs in LaBier did not demonstrate predominance because the insurance policy did not specify how to calculate ACV payments.  Thus, whether the insurer used a methodology that "produced a reasonable estimate of the difference in a property's value before and after a loss was a question for the jury to determine on a case-by-case basis."

 

The Eight Circuit distinguished LaBrier because the policy here defined ACV payments as ""the amount it would cost to repair or replace damaged property, less depreciation."  The relevant Arkansas law at the time prohibited depreciating labor "when using this formula." 

 

Thus, certification under Rule 23(b)(3) was appropriate because  "the only dispute is over including labor depreciation in the calculation, which is a discrete portion of the formula that is easily segregated and quantified."

 

The insurer argued that class certification was inappropriate because plaintiffs that "completed their repairs at or below the cost of the ACV payment, or who ultimately received RCV payments," lacked standing because they could not show an injury-in-fact.  The Eight Circuit rejected this argument because "all individuals who received an improperly-depreciated ACV payment suffered a legal injury -- breach of contract -- regardless of whether the ACV payment was more than, less than, or exactly the same as the ultimate cost of repairing or replacing their property." 

 

The Eight Circuit therefore found that this is a merit question that does not defeat certification because the trial court may amend the class definition at any time before judgment. 

 

The insurer also argued that argued that res judicata bars some of the plaintiffs' claims because they are parties to a separate class settlement. The Eight Circuit dealt with this by instructing the trial court to modify the certification order to exclude any plaintiffs that are parties to the settlement from the class definition.

 

Accordingly, the Eight Circuit affirmed in part and reversed in part, the trial court's judgment and remanded for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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