Saturday, August 1, 2020

FYI: 9th Cir Holds "Reasonably Possible" Punitive Damages Award Supports CAFA Removal

The U.S. Court of Appeals for the Ninth Circuit recently held a defendant that relies on potential punitive damages to satisfy the amount in controversy for removal under the federal Class Action Fairness Act meets that requirement if it shows that the proffered punitive/compensatory damages ratio is reasonably possible.

 

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

 

On June 11, 2019, a consumer filed a putative class action lawsuit against a motorcycle manufacture in California state court for alleged false advertising and alleged violations of the Consumer Legal Remedies Act (CLRA) among other claims.

 

The consumer sought (1) damages "in an amount not less than $1,000,000 for each year beginning June 11, 2015 and continuing to August 23, 2017," (2) reasonable attorneys' fees under a statutory fee shifting provision, (3) punitive damages, and (4) injunctive relief. Consumer proposed a class of "[a]ll consumers who, for the period beginning June 11, 2015 through August 22, 2017, purchased or leased" from motorcycle manufacture and alleges that the class "likely consists of thousands of members." The complaint also stated that "any applicable statutes of limitation[s] should be tolled and are tolled under governing law."

 

The motorcycle manufacturer removed the case to federal court, invoking federal jurisdiction under the Class Action Fairness Act (CAFA). The manufacturer alleged that the following damages satisfied CAFA's requirement that the amount in controversy exceeds $5 million: (1) at least $2,166,666 in compensatory damages based on the prayer in the Complaint (at least $1,000,000/year from June 11, 2015 to August 23, 2017); (2) approximately $2,166,666 in punitive damages based on a 1:1 punitive/compensatory damages ratio; and (3) $1,083,333 in attorneys' fees, or 25 percent of the total amount in controversy.

 

As you may recall, the CAFA gives federal courts original jurisdiction over class actions that have a class of over 100 members, minimal diversity of citizenship between the parties, and an amount of controversy of more than $5 million.

 

The consumer moved to remand the case back to state court, challenging the manufacturer's punitive damages and attorneys' fees amounts arguing that only the CLRA and fraud causes of action allow for punitive damages, and both have a three-year statute of limitations. In addition, the consumer argued that his punitive damages prayers had to be based on his individual claims ($1,399), not the class claims. Finally, the consumer challenged the attorneys' fees amount arguing that the "common fund" fees come out of the total damages and are not added to the total amount in controversy.

 

The motorcycle manufacturer opposed the motion, attaching (1) evidence that juries had awarded punitive damages above a 1:1 ratio in four prior California CLRA cases and (2) evidence that the consumer's attorney sought attorneys' fees totaling 35 percent of the recovery in a similar class action.

 

The trial court granted the consumer's motion to remand holding that the motorcycle manufactures evidence was insufficient because it made "no attempt to analogize or explain how [the] cases [it cited] are similar to the instant action" and therefore had not established by a preponderance of the evidence that the amount in controversy exceeded $5 million. The trial court also noted that the potential recovery for punitive damages was $1,399 not $2,166,166.

 

The motorcycle manufacturer appealed.

 

The Ninth Circuit began its review by addressing the issue of whether the motorcycle manufacturer met the amount-in-controversy requirement, first noting, to meet CAFA's amount-in-controversy requirement, a defendant needs to plausibly show that it is reasonably possible that the potential liability exceeds $5 million. The amount in controversy is the "amount at stake in the underlying litigation." Gonzales v. CarMax Auto Superstores, LLC, 840 F.3d 644, 648 (9th Cir. 2016) "Amount at stake" does not mean likely or probable liability; rather, it refers to possible liability.

 

The Court noted a defendant satisfies the amount-in-controversy requirement under CAFA if it is reasonably possible that it may be liable for the proffered punitive damages amount. One way to meet this burden is to cite a case based on the same or a similar statute in which the jury or court awarded punitive damages based on the punitive-compensatory damages ratio relied upon by the defendant in its removal notice.

 

The Court acknowledged the motorcycle manufacturer met that burden by citing four cases where juries had awarded punitive damages at ratios higher than 1:1 for claims based on the CLRA. In doing so, the motorcycle manufacturer "relied on a reasonable chain of logic" to assume that a similar amount was at stake here, and "presented sufficient evidence to establish that the amount in controversy exceeds $5 million."

 

The Ninth Circuit rejected the trial court's requirement that a defendant "analogize or explain how [the cited] cases are similar to the instant action" by finding that improperly asks defendants to show the likelihood of the plaintiff prevailing on the punitive damages claim, rather than merely establishing the potential amount "at stake."

 

Next, the Court addressed the trial court's ruling that a potential statute of limitations defense precludes damages for unnamed class members.

 

The consumer argued that under China Agritech, Inc. v. Resh, 138 S. Ct. 1800, 1806–07 (2018) and Fierro v. Landry's Restaurant Inc., 32 Cal. App. 5th 276, 292 (2019), only his individual CLRA and fraud claims could be tolled, and that therefore there was only $1,399 of potential punitive damages.

 

However, the Ninth Circuit stated that in order for the trial court adopt this measure of damages, it would have to assume that the motorcycle manufacturer would prevail on its statute of limitations defense against the rest of the class and thus improperly "decide[d] the merits of the case before it could determine if it had subject matter jurisdiction." Geographic Expeditions, 599 F.3d at 1108.

 

Consequently, the Appellate Court held the trial court erred in considering the merits of manufacturer's affirmative defense to determine the amount in controversy, noting the amount in controversy represents only the "amount at stake in the underlying litigation," not the likely liability which is irrelevant to the amount at stake in the litigation. In sum, "just because a defendant might have a valid defense that will reduce recovery to below the jurisdictional amount does not mean the defendant will ultimately prevail on that defense." Geographic Expeditions, Inc. v. Estate of Lhotka ex rel. Lhotka, 599 F.3d 1102, 1108 (9th Cir. 2010).

 

Accordingly, the Ninth Circuit held that the motorcycle manufacturer "met its burden of showing that the amount in controversy exceeds $5 million under CAFA by establishing that the proffered punitive/compensatory damages ratio is reasonably possible."  The trial court's ruling granting the consumer's motion to remand was reversed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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