CRITICAL UPDATE ON INSURANCE LITIGATION
THE IMPACT OF THE CLASS ACTION FAIRNESS ACT 2005
ON THE INSURANCE INDUSTRY AND ITS PRACTICES
By Jack T. Riley, Jr.
I.
THE IMPACT OF THE CLASS ACTION FAIRNESS ACT 2005 ON
MULTISTATE CONSUMER FRAUD CLASS ACTIONS
A.
Will the Act Mark the End of “Forum Shopping” for Class Action Litigants?
Recent Post CAFA Removal Decisions Regarding Applicability of CAFA
The Class Action Fairness Act of 2005 (CAFA) makes significant changes to class action
procedure in federal courts. CAFA extends federal diversity jurisdiction, with certain exceptions,
over class actions with 100 or more class members in which more than $5 million is in
controversy after aggregating class members’ claims, and in which minimal diversity exists.
Section 9 of CAFA makes its provisions applicable to “any civil action commenced on or after
the date of enactment of this Act.” Courts have determined that the date of enactment of CAFA
was February 18, 2005, the date on which President Bush signed it into law. Pritchett v. Office
Depot, Inc., 404 F.3d 1232 (10th Cir. 2005), opinion amended and superseded by, 2005 WL
1994020 (10th Cir. Aug. 18, 2005); Lander and Berkowitz, P.C. v. Transfirst Health Services,
Inc., 2005 WL 1457910 (E.D. Mo. 2005). Therefore, defendants in class action lawsuits filed in
state courts before February 18, 2005, may not rely on CAFA to remove such class actions to
federal courts unless the plaintiffs in those cases have taken some affirmative step since February
18, 2005 to commence a new civil action.
Such an affirmative step constituting commencement of a new civil action has been
found in cases where plaintiffs have filed an amended complaint after February 18, 2005, that
could not relate back, under the requirements of Federal Rule of Civil Procedure 15, to a
complaint filed before February 18, 2005. Senterfitt v. Suntrust Mortgage, Inc., 2005 WL
2100594 (S.D. Ga. 2005) (second amended complaint significantly increased the size); Adams v.
Federal Materials Co., Inc., 2005 WL 1862378 (W.D. Ky. 2005) (amended complaint added
third-party defendant as defendant); Heaphy v. State Farm Mut. Auto. Ins. Co., 2005 WL
1950244 (W.D. Wash. 2005) (amended complaint added a new plaintiff asserting claims on
behalf of absent class members with additional factual allegations). Appendix A contains a
chronological list and brief summary of decisions dealing with the question of when an action
was commenced for purposes of applying or not applying the extended federal jurisdiction of
CAFA.
B.
Will CAFA be the “Death Knell” of Multistate Consumer Fraud Class
Actions After Removal to Federal Court? “Moving Ships Out of the Harbor
So They Can be Sunk”
1
Once removed under CAFA, Federal Courts have proven to be hostile to class
certification. For example, in In the Matter of Bridgestone/Firestone, Inc., Tires Products
Liability Litigation1, the Seventh Circuit held that class certification for fraud claims is
inappropriate because the claims must be adjudicated under the law of so many jurisdictions and
therefore a single nationwide class is not manageable.2 In reaching its decision, Judge
Easterbrook writing for the court emphasized that “only ‘a decentralized process of multiple
trials, involving different juries, and different standards of liability, in different jurisdictions will
yield the information needed for accurate evaluation of mass tort claims.”3 Moreover,
“differences across states may be costly for courts and litigations alike, but they are a
fundamental aspect of our federal republic and must not be overridden in a quest to clear the
queue in court.”4
Following the Seventh Circuit’s rationale a number of federal district courts have refused
to certify nationwide class actions where the substantive law of multiple states must be applied5.
It is significant that some other district courts outside of the Seventh Circuit have followed the In
re Bridgestone/Firestone rationale6 suggesting that the influence of In re Bridgestone/Firestone
is not limited to the Seventh Circuit and therefore may have a universal impact on federal class
certification of multistate consumer fraud class actions.
C.
Alternative Strategies that Plaintiffs May Adopt to Keep Multistate
Insurance Fraud Class Actions Alive in Federal Court
1.
Violations of Section 43(A) of the Lanham Act 15 U.S.C. § 1125(a)
Due to False Advertising as a Basis for Class Action
Federal Courts have consistently found that plaintiffs, as consumers, do not have standing
to sue under the Lanham Act.7 The seminal case is the 1971 Second Circuit decision in Colligan
v. Activities Club of N.Y., Ltd.8 In Colligan the court held that the purpose of the Lanham Act is
“exclusively to protect the interests of a purely commercial class against unscrupulous
commercial conduct.”9 Moreover, the court declined to find that in enacting the Lanham Act,
Congress intended to “create a whole new body of substantive law [concerning consumer
protection] completely outside the substantive scope of unfair competition” which would “lead to
a veritable flood of claims brought in already overtaxed federal district courts, while adequate
private remedies for consumer protection, which to date have been left almost exclusively to the
1
In the Matter of Bridgestone/Firestone, Inc., Tires Products Liability Litigation, 288 F.3d 1012, 1018 (7th Cir.
2002)
2
In re Bridgestone/Firestone involved certification of a nationwide class of owners and lessees of Ford Explorers or
Firestone tires under breach of warranty and consumer fraud theories
3
In re Bridgestone/Firestone, 288 F.3d at 1020 (quoting In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293,1299 (7th
Cir. 1995)
4
In re Bridgestone/Firestone, 288 F.3d at 1020
5
Lewis Tree Service, Inc. v. Lucent Technologies, Inc., 211 F.R.D. 228, 236 (S.D.N.Y. Nov. 20, 2002)
6
See Benner v. Becton Dickinson & Co., 214 F.R.D. 157, 171 (S.D.N.Y. Mar 28, 2003), Lewis Tree Service, Inc. v.
Lucent Technologies Inc., 211 F.R.D. 228, 233 (S.D.N.Y. Nov 21, 2002), In re Rezulin Products Liability Litigation,
210 F.R.D. 61, 71 (S.D.N.Y. Sep 12, 2002)
7
Gotlin, et al. v. Lederman, et al., 367 F.Supp.2d 349, 355 (E.D.N.Y. May 3, 2005)
8
442 F.2d 686 (2d Cir. 1971)
9
Id. at 692 (emphasis added)
2
States, are readily at hand.”10 Accordingly, it does not appear that current Federal Court
jurisprudence would allow for section 43(a) of the Lanham Act to be a vehicle for consumer
fraud classes to stay alive in Federal Court.
2.
Consumer Fraud Class Actions Launched as Violations of the
Racketeer Influenced and Corrupt Organizations Statute (“RICO”)
18 U.S.C. § 1962, the Mail Fraud Statute 18 U.S.C. § 1341, and/or the
Wire Fraud Statute 18 U.S.C. § 1343
a.
RICO may be resurrected by plaintiff lawyers as they try to assert
consumer fraud claims in federal court. This is possible because
all consumer transactions involve mail or wires. Some federal
courts have certified multistate consumer fraud class actions based
on RICO. Klay, M.D. v. Humana, Inc. et al., 382 F.3d 1241 (11th
Cir. 2004)
b.
Established defenses to RICO Class Actions will be crucial: the
focus will be on reliance, enterprise, causation.
In Bank of China, New York Branch, v. NBM LLC, et al., 359 F.3d
171 (2nd Cir 2004), in order to prevail in civil action under
Racketeer Influenced and Corrupt Organizations (RICO) Act
predicated on any type of fraud, including bank fraud, plaintiff
must establish reasonable reliance on defendants’ purported
misrepresentations or omissions. However, the defendant bank
could not reasonably rely on borrowers’ allegedly fraudulent
misrepresentations, and thus could not establish bank fraud as a
predicate offense in civil action under Racketeer Influenced and
Corrupt Organizations (RICO) Act, if its officers were aware of,
and participated in, borrowers’ activities, even if officers were
acting adversely to bank, unless officers’ actions exhibited total
abandonment of bank’s interests.
RICO Section 1962(c) makes it “unlawful for any person
employed by or associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of racketeering activity.”
Baker v. IBP, Inc., 357 F.3d 685 (7th Cir. 2004). The court then
found that the defendant company along with its employees could
not be the “enterprise” and that since the company had not
“manipulated, disrupted, or suborned a distinct entity or even a
distinct association in fact,” it did not satisfy the enterprise
requirement.
10
Gotlin, 367 F.Supp.2d at 355 (quoting Colligan, 442 F.2d at 693)
3
However, contrast that decision with Williams v. Mohawk
Industries, Inc., 411 F.3d 1252 (11th Cir. 2005), where the
Eleventh Circuit Court of Appeals held in a similar suit that a
cause of action under RICO had been properly established.
Finally, the essential factual allegations of plaintiff regarding
causation were found insufficient by the Seventh Circuit Court of
Appeals in Midwest Grinding Company, Inc. v. Spitz, et al., 976
F.2d 1016 (7th Cir. 1992), where Judge Flaum noted that “the
complaint must, at minimum, describe the predicate acts with some
specificity and state the time, place, and content of the alleged
communications perpetrating the fraud.” It was also noted that
plaintiff failed to show the requisite pattern of racketeering, and
did not show that the predicate acts were related to one another or
posed a threat of continued criminal activity.
c.
Practice Tips: Smart defense lawyers will use Rule 11 and
immediately attack association in-fact enterprises. Another tactic
is to make it very expensive to send notice to the class. The new
front: Due process challenges to publication notice. Defendants
should raise challenges early and strongly.
Johnson & Bell, Ltd.
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4
APPENDIX A
Lander and Berkowitz, P.C. v. Transfirst Health Services, Inc., 374 F.Supp.2d 776 (E.D. Mo.
May 19, 2005)
 Case was filed in state court on February 17, 2005, the day Congress passed the Act and
one day before President Bush signed the Act into law.
 The court noted that the date of enactment of CAFA was the issue.
 The court found that the date of enactment of CAFA was February 18, 2005, the day
when it was signed into law by the President, and CAFA was, therefore, inapplicable to
the case at hand.
 Case remanded to state court.
Knudsen v. Liberty Mutual Insurance Co., 411 F.3d 805 (7th Cir. June 7, 2005)
 As to a state-court class action originally filed prior to the effective date of CAFA, and
thus not removable under CAFA, the purported significant change to class definition did
not constitute “commencement” of a new action, so as to permit removal.
 Change to class definition did not present novel claim or add new defendant(s).
 However, the court noted that “removal practice recognizes this point: an amendment to
the pleadings that adds a claim under federal law (where only state claims had been
framed before), or adds a new defendant, opens a new window of removal.”
 The court concurred with the holding in Pritchett v. Office Depot, Inc., see above, that a
civil action is “commenced” for purposes of Section 9 of CAFA when it is filed in state
court and not when some later step occurs in it prosecution.
 Case remanded to state court.
Adams v. Federal Materials Co., Inc., 2005 WL 1862378 (W.D. Ky. July 28, 2005)
 Post-CAFA, defendant filed third-party complaint; plaintiff subsequently amended
complaint adding that party as a defendant.
 Court denied motion to remand because the plaintiffs’ decision to add the added
defendant as a defendant presented precisely the situation in which it can and should be
said that a new action has “commenced” for the purposes of removal pursuant to CAFA.
 Determined construction of CAFA defining “commenced” from point of view of each
defendant is appropriate.
 Motion to remand denied.
Natale v. Pfizer, Inc., 379 F.Supp.2d 161 (D. Mass. July 28, 2005).
 Court held that the term “commenced” in the provision of CAFA making the Act
applicable to any civil action commenced on or after the Act’s effective date referred to
the date that the action was first filed in state court, not the date that it was removed to
federal court, regardless of the timeliness of removal.
 Case remanded to state court.
Pfizer v. Lott, 417 F.3d 725 (7th Cir. Aug. 4, 2005)
5




State class action filed one day prior to effective date of CAFA; removed to federal court
after CAFA was enacted.
Held removal provision of CAFA was not applicable, noting that the term “commenced”
in the provision of CAFA refers to the date the action was first filed in state court, not the
date that it was removed to federal court.
See also Natale v. Pfizer, Inc., 379 F. Supp.2d 161 (D.C. Mass. July 28, 2005)
Case remanded to state court.
Schorsch v. Hewlett-Packard Co., 417 F.3d 748 (7th Cir. Aug. 8, 2005)
 Change of class definition from purchasers of drum kits to purchasers of all printer
consumables did not add new claim or add new defendant.
 Therefore, post-CAFA change to class definition did not constitute commencement of a
new action.
 The court stated, “creative lawyering will not be allowed to smudge the line drawn by the
2005 Act: class actions “commenced” on or before February 18, 2005, remain in state
court.”
 Case remanded to state court.
Heaphy v. State Farm Mut. Auto. Ins. Co., 2005 WL 1950244 (W.D. Wash. Aug. 15, 2005).
 First amended complaint was filed post-CAFA adding a new plaintiff asserting claims on
behalf of absent class members who, unlike the originally named plaintiff, owned their
insured vehicles.
 First amended complaint added factual allegations based upon the accident involving the
plaintiff added in the amendment.
 The claims of the original plaintiff had been fully adjudicated through arbitration.
 Court held the first amended complaint was “sufficiently independent of the original
contentions that it must be treated as fresh litigation” and denied motion to remand.
 For purposes of Federal Rules of Civil Procedure 15, the first amended complaint did not
relate back to the original complaint.
 Motion to remand denied.
Pritchett v. Office Depot, Inc., 404 F.3d 1232 (10th Cir. 2005), opinion amended and superseded
by, 2005 WL 1994020 (10th Cir. Aug. 18, 2005)
 The removal provisions of CAFA do not apply to state court cases that were pending at
the time of the Act’s enactment and were removed after that date.
 As a matter of first impression, the action was “commenced” for purposes of Section 9 of
CAFA when it is filed in state court, not when it was removed.
 Case remanded to state court.
Hall v. State Farm Mut. Auto. Ins. Co., Case No. 05-72164 (E.D. Mich. Aug. 19, 2005)
 State class action filed pre-CAFA.
 Post-CAFA, amended complaint filed substituting new plaintiff for original plaintiff; new
plaintiff not related to original plaintiff; claims arose from different accident, different
vehicle.
 Court held amendment commenced a new action under CAFA.
6

Case retained by federal court.
Yescavage v. Wyeth, Inc., 2005 WL 2088429 (M.D. Fla. Aug. 30, 2005).
 Court noted that, to its knowledge, no federal court has adopted the defendants’ position
that the provisions of CAFA apply because the case was removed to federal court after
the enactment of CAFA.
 Instead, the court found numerous cases which supported the plaintiff’s position that the
commencement date of the suit, for purposes of CAFA, is the date such suit was filed in a
court of appropriate jurisdiction.
 Case remanded to state court.
Senterfitt v. Suntrust Mortgage, Inc., 2005 WL 2100594 (S.D. Ga. Aug. 31, 2005)
 Second amended complaint, filed on March 21, 2005, significantly increased the size of
the class by expanding the class to include individuals who received loan payoff
statements during an additional sixteen-year period.
 The court determined that the second amended complaint could not relate back, under the
requirements of Federal Rule of Civil Procedure 15, because the prior pleadings did not
adequately put the defendant on notice of the enlarged class.
 Because second amended complaint did not relate back to the original complaint it
commenced a new action after the enactment of CAFA.
 Motion to remand denied.
Morgan v. American International Group, Inc., 2005 WL 2172001 (N.D. Cal. Sept. 8, 2005)
 Adding a defendant which corrected a misnomer—actual trustee had been misnamed-did not commence a new action under CAFA.
 Case remanded to state court.
7