Fifth Circuit: Class Arbitration is not a Class Action under CAFA

In Williams v. Homeland Ins. Co., No. 11-30646 (5th Cir. Sept. 19, 2011), George Raymond Williams brought a class action suit in Louisiana state court on behalf of Louisiana medical providers against operator of preferred provider organization (“PPO”) network and other defendants, alleging violation of PPO notice provisions of Louisiana law.

One year later, Williams amended the petition and added three defendants: Corvel Corporation (“Corvel”), Homeland Insurance Company (“Homeland”), and Executive Risk Specialty Insurance (“Executive Risk”). Corvel and the plaintiff class agreed to settle, however, before the state court approved the settlement, Executive Risk removed to federal court claiming federal jurisdiction under Class Action Fairness Act (“CAFA”). See 28 U.S.C. Sections 1332(d), 1453, and 1711–1715.

Both Williams and Corvel moved for remand, arguing that CAFA’s local controversy exception applied. See 28 U.S.C. § 1332(d)(4). The district court determined that Williams satisfied all the elements of the CAFA exception and remanded the case to state court. Upon remand, the state trial judge gave preliminary approval of Corvel’s settlement. One day later, however, Homeland appealed. Homeland argues that Williams failed to satisfy any of the elements of the local controversy exception.

The issue before the Fifth Circuit was whether that class arbitration counted as a “class action” that would preclude application of CAFA’s local controversy exception. CAFA grants federal courts jurisdiction over class actions in which at least $5 million is at stake and minimum diversity requirements are met. However, under 28 U.S.C. § 1332(d)(4)(A), a “local controversy” is excluded from CAFA.

The court explained that the “local controversy exception” requires the district court to decline jurisdiction under CAFA if : (1) more than two-thirds of the proposed class members are citizens of the forum state; (2) the “principal injuries” resulting from the alleged conduct were incurred in the forum state; (3) no class action asserting similar factual allegations has been filed against any of the defendants in the preceding three years; and (4) at least one defendant is a forum-state citizen from whom “significant relief is sought” and whose alleged conduct is a “significant basis” of the claims.

The parties dispute whether a class arbitration qualifies as a class action under CAFA. The district court, citing Black’s Law Dictionary, had decided that a class arbitration is not a class action, because “arbitration” resolves disputes outside of court, while a “class action” is a form of lawsuit within the court. The Fifth Circuit agreed, reasoning that:

CAFA defines the term “class action” to mean “any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure.” § 1332(d)(1)(B). Homeland argues for an expansive reading of the term to encompass arbitrations, which often are commenced under rules that mimic Rule 23. However, if “any civil action” includes arbitrations, then CAFA would require district courts to exercise original jurisdiction over any arbitration that satisfies CAFA’s threshold requirements. See § 1332(d)(2).

The Fifth Circuit held that prior class arbitration did not constitute a class action, for purposes of CAFA.

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