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Class Action Defense Cases-Lao v. Wickes: California Federal Court Holds As Matter Of First Impression That Defense Must Establish Removal Under CAFA (Class Action Fairness Act) And Must Disprove CAFA Exceptions To Jurisdiction

As Matter of First Impression in Ninth Circuit, California District Court Holds that Defense must not only Establish Prima Facie Case for Removal Under Federal Class Action Fairness Act (CAFA) but must Establish Further that CAFA’s Local Controversy and Home-State Rule Exceptions to Removal Jurisdiction do not Apply

Plaintiffs filed a putative class action against their former employer, Wickes Furniture Company, for violations of California’s state labor code, and defense attorneys removed the class action to federal court under the Class Action Fairness Act of 2005 (CAFA). Lao v. Wickes Furniture Co., Inc., 455 F.Supp.2d 1045, 1048 (C.D. Cal. 2006). Plaintiffs filed a motion to remand the class action to state court on the ground that it fell within CAFA’s “local controversy” exception or home-state rule provision to federal court jurisdiction. Id. The federal court agreed with the defense that once it established a prima facie case for removal under CAFA, the burden shifted to plaintiffs to demonstrate the applicability of the local controversy or home-state rule. Id., at 1050 et seq. The district court concluded that plaintiffs had met their burden, and remanded the class action to state court.

Plaintiffs worked as commissioned salespersons for Wickes, and filed a state law employment class action on the grounds that they allegedly “regularly performed non-sales (and, hence uncompensated) work, such as attending meetings . . ., cleaning the stores, and researching the prices charged by Wickes’ competitors” Lao, at 1048. The class action complaint alleged further that Wickes improperly stripped salespersons of earned commissions, id. Defendants removed the action to federal court on the basis of CAFA jurisdiction, and plaintiffs’ lawyers filed a motion to remand the action to state court. Id., at 1048-49. Preliminarily, the federal court concluded that defendant had adequately established the requisite $5 million amount in controversy. Id., at 1049-50. Defendants argued that the amount in controversy was $6,000,000, id., and while the district court was “not unsympathetic” to plaintiffs’ claim that this sum was inflated, it found that “some of the blame lies with how plaintiffs drafted their complaint,” id., at 1050.

The district court then turned to the issue of whether the local controversy or home-state rule exceptions to jurisdiction under CAFA applied. The district court characterized the issue of “who bears the burden of proof with respect to the local controversy and home-state rule provisions” under CAFA as the “thornier issue” presented by the remand motion, and observed that this issue had not yet been addressed in the Ninth Circuit. Lao, at 1050. The federal court described CAFA as “a statute in which some major terms are left undefined, certain of the provisions of which have been aptly characterized as ‘bewildering’ or ‘clumsily crafted,’ and whose legislative history is, in part, of questionable interpretive value,” and that “it is a statute that is a headache to construe.” Id., at 1048.

The court performed a detailed analysis, Lao, at 1050 et seq., and concluded that “as a matter of statutory construction, the burden of proving the elements outlined in [28 U.S.C. § 1332(d)(4)] falls on the removing party,” id., at 1060 The district court also observed that “[t]he only dispute is over whether Wickes is a citizen of California,” id., at 1061. On this issue, the federal court found that “a substantial predominance of Wickes’ business activities occur in California and therefore its principal place of business is in this state,” and concluded that because Wickes is a California citizen, “the local controversy rule applies.” Id., at 1066.

NOTE: A North Carolina federal court recently reached the opposition conclusion in Eakins v. Pella Corp., 455 F.Supp.2d 450 (E.D. N.C. 2006), which held that plaintiff bore the burden of establishing the applicability of the local controversy exception.

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