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CAFA Class Action Defense Cases – Louisiana v. Allstate: Fifth Circuit Holds State’s Parens Patriae Lawsuit Removable To Federal Court Under Class Action Fairness Act (CAFA) Based On “Real Parties In Interest” And “Real Nature” Of Action

Antitrust Lawsuit Brought by State on Behalf of Insurance Policyholders as a Parens Patriae Action, not a Class Action, Removable to Federal Court under Class Action Fairness Act (CAFA) because “Real Parties in Interest” were Policyholders and “Real Nature” of Lawsuit was “Mass Action” Fifth Circuit Holds

The State of Louisiana filed a parens patriae action (not a class action) against numerous insurance companies, including Allstate, State Farm, Farmers and USAA, alleging violations of the state’s antitrust laws; specifically, the complaint alleged that defendants “worked together to form a ‘combination’ that illegally suppressed competition in the insurance and related industries” and that “[i]n a scheme to thwart policyholder indemnity and in direct violation of their fiduciary duties, insurer defendants and others continuously manipulated Louisiana commerce by rigging the value of policyholder claims and raising the premiums held in trust by their companies for the benefit of policy holders to cover their losses as taught by McKinsey Company. Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418, 421-22 (5th Cir. 2008). Pursuant to the Class Action Fairness Act (CAFA), defense attorneys removed the lawsuit to federal court, id., at 422. The defense urged that the law was “in substance” a “class action” or a “mass action” within the meaning of the Class Action Fairness Act because it seeks treble damages on behalf of all Louisiana insurance policyholders. Id., at 423. Louisiana moved the district court to remand the action to state court, arguing that CAFA did not apply because the lawsuit was not a class action. Id., at 422-23. Focusing on who the “real parties in interest” are, the district court denied the motion. As permitted by the Class Action Fairness Act, the Fifth Circuit granted Louisiana permission to appeal the remand order. The central issue on appeal was “whether the ‘person who [was] injured in his business or property’ – in this case the policyholders – are the real parties in interest.” Id., at 430. The Fifth Circuit concluded, “We have no reason to believe that they are not,” id., and affirmed.

We do not here discuss the factual allegations in the State’s complaint. See Allstate, at 422-23. The Fifth Circuit summarized defendants’ arguments as follows: Even though the complaint is styled as a parens patriae action, it is “in substance and in fact” a class action within the meaning of the Class Action Fairness Act. Id., at 423. Defense attorneys argued that the fact Louisiana was not proceeding under Rule 23 was not dispositive; rather, they urged the district court to “look beyond the labels used in the complaint and determine the real nature of Louisiana’s claims,” and they “highlighted that several other similar purported class actions are and/or were pending before the same federal district court, where the same group of lawyers filed, or attempted to file, nearly identical claims as those alleged in this case by the state of Louisiana, as further evidence that this lawsuit is in fact a class action.” Id., at 423 (citations omitted). The Circuit Court explained at page 423 that “the district court was primarily concerned about who the real parties in interest are in this case.” The district court believed that he was obligated to examine the true nature of the lawsuit, explaining that “it’s the Court’s responsibility to not just merely rely on who a plaintiff chose to sue, or, in this case, how the plaintiff chose to plead, but I have to look at the specific substance” of the action. Id. The district court concluded that the State was but a nominal party, and the real parties were the insurance policyholders; accordingly, it concluded that the lawsuit was properly removable under CAFA and denied the motion to remand. Id.

On appeal, Louisiana argued that the lawsuit was not a class action but a parens patriae action. Allstate, at 424. The Fifth Circuit noted, however, that whether the complaint uses the words “class action” or “mass action” “does not end our inquiry” because “[i]t is well-established that in determining whether there is jurisdiction, federal courts look to the substance of the action and not only at the labels that the parties may attach.” Id. (citations omitted). Thus, “‘defendants may pierce the pleadings to show that the …. claim has been fraudulently pleaded to prevent removal.” Id., at 424-25 (quoting Burchett v. Cargill, Inc., 48 F.3d 173, 175 (5th Cir.1995)). The Fifth Circuit reviewed parens patriae jurisprudence, see id., at 425-28, the Court agreed that Louisiana “has statutory and constitutional authority to bring parens patriae antitrust actions,” id., at 428. However, like the district court, the Fifth Circuit concluded that “as far as the State’s request for treble damages is concerned, the policyholders are the real parties in interest.” Id., at 429. The Court noted that Louisiana’s complaint “makes clear that it is seeking to recover damages suffered by individual policyholders.” Id. (italics in original, footnote omitted). Because the insurance policyholders are real parties in interest, the Fifth Circuit held that the action was properly removed under CAFA “because the requirements of a ‘mass action’ are easily met given the factual circumstances of this case.” Id., at 430. It did not address whether the lawsuit was also removable as a “class action” under CAFA, id.

NOTE: The Circuit Court’s opinion was not unanimous. The dissenting opinion of Circuit Judge Southwick may be found at pages 432-36.

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