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Class Action Defense Cases-Morgan v. Gay: Third Circuit Holds As Matter Of First Impression That Under CAFA (Class Action Fairness Act Of 2005) Defense Still Bears Burden Of Establishing Amount-In-Controversy

Federal Class Action Fairness Act of 2005 (CAFA) did not Shift Burden of Proving $5 Million Amount in Controversy to Plaintiff and Plaintiff’s “Damages-Limitation Provision” could be used to Avoid Federal Court Provided Plaintiff did not Thereafter Seek to Recover More than $5 Million Third Circuit Holds

Plaintiff filed a putative class action in New Jersey state court based on false advertising claims in the sale of the skin cream StriVectim-SD and asserting various state law claims. Morgan v. Gay, 471 F.3d 469, 471 (3d Cir. 2006). Defense attorneys removed the class action to federal court under the federal Class Action Fairness Act of 2005 (CAFA), and plaintiff moved to remand the class action to state court. Id. The district court granted the motion, concluding that defense attorneys had failed to establish CAFA’s $5,000,000 amount-in-controversy requirement, and the Third Circuit granted the defense leave to appeal. Id., at 471-72. As a matter of first impression in the Third Circuit, the Court of Appeals held that CAFA did not shift to plaintiff the burden of proving the amount in controversy for removal purposes, and affirmed the district court order remanding the class action to state court.

With respect to the amount in controversy, plaintiff’s class action complaint expressly stated that the damages sought in the action, including treble damages and punitive damages, “‘shall not [in total] exceed $5 million in sum or value.'” Morgan, at 471. The district court granted the motion to remand because the defense had not established that the amount in controversy met the $5 million threshold. Id. On appeal, the Third Circuit first addressed whether CAFA shifted the burden of establishing federal court jurisdiction from the defense to the plaintiff. Id., at 472. The Circuit Court agreed with defense attorneys that the legislative history evidenced a willingness to “switch the burden of proof from the party seeking removal to the party seeking remand,” id., but ultimately concluded – as a matter of first impression in the Third Circuit – that CAFA did not alter the time-honored burden of proof and held that “the party seeking to remove the case to federal court bears the burden to establish that the amount in controversy requirement is satisfied,” id., at 473.

Turning to whether the district court erred in its analysis, the Circuit Court recognized that “[t]he Supreme Court has long held that plaintiffs may limit their claims to avoid federal subject matter jurisdiction.” Morgan, at 474 (citation omitted). The Third Circuit held that CAFA did not alter this rule. Id. The question in this case, then, became one of “good faith,” id.; if it was clear that plaintiff’s damages would “in all likelihood exceed[] $5 million” then the Court of Appeals may have reached different conclusion, id., at 475. However, the defense failed to establish a likelihood of punitive damages, provided no information as to the amount of profit allegedly subject to disgorgement, and did not submit sales information in support of a damage analysis. Id., at 475-76. The upshot of the limited amount of evidence submitted by the defense was that the Third Circuit held that defense attorneys had not shown “to a legal certainty, that the amount in controversy exceeds the statutory minimum.” Id., at 476.

Finally, the Circuit Court addressed the “risk” that plaintiff could recover in state court more than $5 million despite the express limitation contained in the class action complaint. The Third Circuit noted the “tension” presented by a legal analysis of the issue, and ultimately stated at page 477: “we admonish that a verdict in excess of the [$5 million] demand could well be deemed prejudicial to the party that sought removal to federal court when the party seeking remand uses a damages-limitation provision to avoid federal court.”

NOTE: Originally the class action had been filed in federal court on behalf of a nationwide class, but plaintiff voluntarily dismissed that complaint and filed a new class action lawsuit in New Jersey state court. Morgan, at 471.

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