Diane Flannery and Annie Cai Larson provide their thoughts below on a Seventh Circuit Court of Appeals decision from earlier this year that held a counterclaim-defendant could not rely on CAFA to avoid state court.
The Class Action Fairness Act (CAFA) was enacted in 2005 to expand the subject-matter jurisdiction that Federal courts had over class actions. Yet CAFA’s reach is not unlimited, and in some instances, a corporation may still be stuck litigating a large-scale class action in state court—a venue friendly to class action plaintiffs.
Earlier this year, the Seventh Circuit Court of Appeals held in Tri-State Water v. Bauer that an additional counterclaim defendant was not entitled to remove a class action from state to federal district court under CAFA.
The procedural posture in Bauer set the stage for the decision. The case began as a simple collection action brought by Tri-State Water Treatment, Inc. against Stacey and Michael Bauer. Tri-State alleged that the Bauers failed to pay for a water treatment system it had installed at the Bauers’ house. The Bauers responded by answering the complaint and counterclaiming a multi-state class action against Tri-State for fraud in connection with the sale of the water treatment system.
The Bauers later amended their class action counterclaim by adding two more corporations as counterclaim-defendants. One of the additional counterclaim defendants, Home Depot, filed a notice of removal under CAFA.
The District Court for the Southern District of Illinois remanded the case to state court, and the Seventh Circuit affirmed. The Court reasoned that “[l]ong before 2005, when CAFA was enacted, the Supreme Court held that a plaintiff who files suit in state court is precluded from removing a case to federal court, even if that person is later named as a counterclaim-defendant.” This rule was not modified by the enactment of CAFA.
Notably, the Seventh Circuit was not swayed by Home Depot’s argument that “absurd results would arise if [the Court] were to hold that additional counterclaim-defendants cannot remove actions under CAFA” where lawyers would be able to “use small-claims litigation as springboards for counterclaim class actions that would be stuck in state court.” The Court stated that there is nothing “absurd” about keeping some cases in state court, and that Congress can “fine-tune” the rules of CAFA if it is truly concerned about the effects of rampant forum-shopping.