Class action lawsuits are big business. The U.S. Chamber of Commerce — admittedly, not the most objective source — estimates that securities class actions alone cost shareholders $39 billion a year. When you add in all other class actions — for accidents, accounting errors, you name it — you can understand why potential corporate defendants as well as plaintiffs’ lawyers fight tooth and nail over every inch of the legal terrain. When the U.S. Supreme Court takes up an important question of how these class actions will proceed, as it is doing in the case of Dart Cherokee Basin Operating Company LLC v. Owens, it’s worth taking notice of what the court is doing — and why.
The case arose in a fairly typical way. The original plaintiff, Brandon Owens, sued several oil well concerns in Kansas state court alleging underpayment of royalties to a class of people that included him as well as the similarly situated royalty holders. Like most defendants, the oil companies sought to take the case out of state court, thought to be advantageous to plaintiffs, and into federal court, where the rules and practices tend to be more favorable to defendants. The oil companies relied on the Class Action Fairness Act of 2005, which says that a defendant can force the case into federal court if the plaintiff and defendant come from different states, the class has more than 100 members — and the amount in controversy exceeds $5 million.
No one disputed that the first two requirements of CAFA were met. The question was whether the lawsuit was worth $5 million or not. In filing what lawyers call a “notice of removal” from state to federal court, the oil companies stated that they had quantified the expected damages if they were to lose and that it came to $8.2 million. The plaintiffs replied that the case should be sent back to state court because the oil companies had not offered any documentation of their allegation — they had just asserted a number without proof.
In response, the oil companies hastened to provide a more detailed analysis specified on a spreadsheet that they said they had prepared before submitting the notice of removal. The federal district judge in Kansas said that this was too late. She sent the case back to state court — a modest win for the plaintiffs.
The oil companies appealed. Ordinarily, a defendant that has lost its motion to remove the case to federal court isn’t entitled to any appeal. CAFA — a pro-defendant law — uniquely provides that the court of appeals may choose at its discretion to take the case or not. A divided panel of the U.S. Court of Appeals for the 10th Circuit refused to hear the appeal. The oil companies then sought review from the whole 10th Circuit. The circuit divided evenly, which meant that under the rules the case would not be heard and would stay in state court the way the plaintiffs wanted it.
The 10th Circuit judges who wanted to hear the case wrote a stinging dissent from the denial of rehearing, which brought the case to the attention of the Supreme Court. The judges were dismissive of the district court’s decision of the case on a technicality. They condemned the lower court’s insistence that the defendant offer documentation of the value of the case at the exact moment it submitted its notice of removal. This, they said, was reminiscent of the lawyerly forms of action that prevailed in the olden days of the common law, when a party could lose his case by filing the wrong piece of paper — a kind of legal booby trap as Justice Hugo Black once memorably put it. Modern pleading is supposed to be streamlined and substance-based. It should have sufficed that the oil companies provided evidence when challenged by the plaintiff.
The Supreme Court agreed to hear the case — and therein hangs a tale. Ordinarily the Supreme Court does not take cases for what it considers mere “error correction.” To conserve judicial resources, the court takes cases with the goal of setting precedent. For the justices to agree to take the oil companies’ case strongly suggests they intend to send a message that removal to federal court should be made easier, not harder, in CAFA cases. In other words, the court wants to turn a small victory for a single plaintiff into a larger defeat for plaintiffs more generally — and especially for plaintiffs’ lawyers, who live off class actions.
All this would be worth taking seriously — but one quirky feature of the case makes it especially fascinating. As written, CAFA allows only the court of appeals to decide whether to hear the appeal or not. Technically, the 10th Circuit refused to hear the case. So on what basis does the Supreme Court have jurisdiction to consider it?1
Before the Supreme Court, the parties ignored this logically prior issue of whether the Supreme Court even has the authority to hear the case at all. The public interest group Public Citizen filed a smart (or maybe smart-alecky) friend of the court brief pointing it out.
Of course, it would be possible to argue that if the court of appeals can agree to hear an appeal on a removal question, the Supreme Court should have the same authority. This would be a logical, purpose-oriented interpretation of CAFA. But some of the conservative justices who like corporations, such as Justices Antonin Scalia and Clarence Thomas, also reject the idea of interpreting a statute according to its purpose rather than its text. If they want to decide the case for the oil companies, they will find themselves in a serious bind.
It emerges that, if the Supreme Court wants to deliver a victory for defendants, it will have break or at least bend the law. If it does, it’ll be a sign of just how strongly the conservative justices dislike class action lawsuits. The court could also dismiss the case as improvidently granted — but don’t count on it.
1 Of course, the Supreme Court would have authority ask the incredibly narrow question whether the appeals court properly denied review. But because review is discretionary, it’s hard to see what could be wrong with their decision.
[Cross-posted at Bloomberg View]