Hangarter v. The Paul Revere Life Ins. Co.: Will The Northern District Of California's Decision Allow CAFA's State Action Exception To Swallow The Rule?

Monday, May 1, 2006 - 01:00

Since the Class Action Fairness Act ("CAFA") became effective on February 18, 2005, more than twenty insurance companies have removed class action lawsuits to federal court under CAFA's jurisdictional provisions, and many of these companies have successfully defeated attempts to have cases remanded to state court. However, a recent decision by the Northern District of California threatens to reverse this trend by significantly weakening the argument for federal jurisdiction under CAFA . In Hangarter v. The Paul Revere Life Ins. Co., 2006 U.S. Dist. LEXIS 5295 (N.D. Cal. Jan. 26, 2006), the district court allowed a plaintiff to assert the "state action" exception to jurisdiction under CAFA by naming the California insurance commissioner as a defendant in the lawsuit and asserting a claim for injunctive relief against him.

Given the state insurance commissioners' role in approving the issuance and sale of policy forms, skilled plaintiffs' counsel could conceivably name the insurance regulators of the forum state as a defendant in any insurance-related class action, and could try to invoke the "state action" exception to jurisdiction under CAFA as a matter of course. Therefore, the Hangarter decision could limit insurance companies' ability to establish federal jurisdiction under CAFA. As such, this article reviews CAFA's jurisdictional provisions and the limited exceptions thereto, discusses the Hangarter decision, and argues that it was wrongly decided because it could allow the exception to swallow the rule.

Jurisdiction Under CAFA

Prior to CAFA, federal law allowed a defendant to remove a case to federal court only when (i) a federal question existed or (ii) when the citizenship of each named plaintiff was completely diverse from each defendant and at least one class member had a claim exceeding $75,000.

Under these traditional rules, it was often difficult for a defendant to establish federal diversity jurisdiction because plaintiffs' counsel would frequently add a plaintiff who shared citizenship with the defendant, thereby precluding complete diversity of citizenship, and because individual, non-aggregated claims typically did not exceed $75,000, although plaintiffs' total damages claim might amount to hundreds of millions of dollars.

Citing "abuses in class actions" that "undermine the national judicial system, the free flow of interstate commerce, and the concept of diversity jurisdiction as intended by the framers of the United States Constitution," Congress enacted CAFA to broadly expand federal jurisdiction over class action lawsuits. Under CAFA, courts have original jurisdiction over a class action when (i) the claims of the theoretical class members, when aggregated, exceed $5 million, exclusive of costs and interest and (ii) diversity of citizenship exists between any member of the plaintiff class, whether named or not, and any defendant.

Exceptions To Federal Jurisdiction Under CAFA

Although CAFA broadly expands the scope of federal subject matter jurisdiction over class action lawsuits, Congress did incorporate three exceptions to federal jurisdiction under CAFA. First, it included a "local controversy" exception. This exception provides that no federal jurisdiction exists under CAFA if more than two-thirds of the plaintiffs, and a primary defendant are from the state in which the lawsuits was filed and the principal injuries resulting from the alleged wrongdoing in question were incurred in this state.

Second, Congress included a "home state" exception. Under this exception, there is no federal jurisdiction under CAFA when two-thirds or more of the members of the putative plaintiff class and the "primary defendants" are citizens of the state where the case was commenced.

Third, Congress added the "state action" exception. This exception provides that CAFA shall not provide federal subject matter jurisdiction in any class action where a primary defendant is a State, State official, or other governmental entities against whom the district court may be foreclosed from ordering relief. Congress included this exception because the Constitution precludes federal courts from granting injunctive relief against state actors, and plaintiffs should not be foreclosed from bringing such claims in all fora.

Remarkably, although the existence of a "primary defendant" from the forum state is a prerequisite to home state and state actor exceptions, Congress failed to define this term anywhere in the text of CAFA. The only clarification of the phrase came from a Senate report issued ten days after President Bush signed CAFA into law. Hardly clarifying the phrase, this Senate report explains that "primary defendants" are those who are the "real targets" of the lawsuit, i.e., those would be expected to incur most of the loss if liability is found.

Congress' failure to define the phrase "primary defendant" anywhere within the text of CAFA, along with its failure to distinguish between a primary and secondary defendant with any degree of precision in CAFA's legislative history, has set the stage for courts to define the phrase - and thus the scope of both the home state and state action exceptions to CAFA jurisdiction - on their own. The United States District Court for the North District of California's decision in Hangarter was the first attempt, and will likely influence future decisions.

The Hangarter Decision

In Hangarter, plaintiff brought a putative class action against The Paul Revere Life Insurance Co. ("Paul Revere") and UnumProvident Corp. ("UnumProvident"), alleging that these companies unlawfully accepted premiums on disability insurance policies with no intent to pay benefits, and that they systematically denied claims. Plaintiff also named California's insurance commissioner, John Garamendi, as a defendant, alleging that he failed in his statutory duties to prevent the sale of misleading or unsound policies, and seeking a writ of mandamus ordering him to revoke, rescind or reform the insurance policies in question.

Although federal diversity jurisdiction would not have existed pre-CAFA because there was not complete diversity of citizenship, Paul Revere and UnumProvident were able to remove the case to federal court under CAFA's broader jurisdictional provisions. However, plaintiff moved to remand the case under CAFA's "state action" exception, arguing that the California insurance commissioner, a state actor, was a "primary defendant" against whom the district court would be foreclosed from ordering relief under the sovereign immunity clause of the Eleventh Amendment.

In opposition, Paul Revere and UnumProvident made three arguments in support of their contention that the insurance commissioner was not a primary defendant within the meaning of the state action exception. First, they argued that the insurance commissioner was not a primary defendant because plaintiff did not seek any damages from him. Second, they argued that he was not a primary defendant because he was not the "original source" of any injury, but was merely a tangential regulatory actor. Third, these defendants pointed to the legislative history of CAFA, emphasizing that Congress instructed courts to "cautiously" apply the state action exception, to only apply it when the state actor defendant has "substantial exposure," and to not allow the exception to become subterfuge for avoiding federal jurisdiction under CAFA.

The court rejected all of these arguments. It held that the commissioner was a primary defendant because he was the only named defendant with respect to the prayer for rescission, revocation, or reformation of the policy forms and was a "but for" cause of plaintiff's injuries since he approved of the initial and continued sale of the policies in question. The court also downplayed the importance of the legislative history, noting it was issued ten days after CAFA was signed, but nevertheless explaining that its finding that the insurance commissioner is a primary defendant is consistent with CAFA's legislative history since the commissioner had "substantial" mandamus exposure. The court therefore found that the state action exception to CAFA was applicable and granted plaintiff's motion to remand the case back to state court.

This holding in Hangarter that the California insurance commissioner is a primary defendant threatens to undo CAFA's promise of expanded federal jurisdiction to insurance companies. This holding suggests all plaintiffs' counsel need do to avoid federal jurisdiction under CAFA is to name the insurance commissioner in the forum state as a defendant, and assert an independent claim for injunctive relief against only him. Plaintiffs need not establish that an insurance commissioner was responsible for any culpable conduct other than allowing their co-defendant insurance companies to sell the policy forms at issue. And plaintiffs' counsel could follow these steps in any insurance-related class action. Thus, the Hangarter decision may greatly impact CAFA-based jurisdiction in insurance-related class actions.

Counsel for insurance companies will argue that Hangarter was wrongly decided. First, the court defined primary defendants so broadly as to make the concept of a "secondary defendant" a nullity. Indeed, if the California insurance commissioner was not a "secondary" defendant in Hangarter, it is hard to argue that any insurance commissioner could be a "secondary" defendant. Second, the court never pointed to any statutory, regulatory or judicial support in favor of its interpretation of the term "primary defendant." Had the court made any effort to divine Congressional intent, it would have looked to the stated purpose of CAFA, which is to increase the scope of federal jurisdiction. It would also have given at least cursory weight to the legislative history because, even if the report was issued after CAFA was signed, reliance on an ex post facto report is better than making a determination solely on judicial prerogative.

Counsel for insurance companies should also use plaintiffs' arguments for the application of the state action exception against them in later battles regarding the merits of the lawsuit. Critical to the court's analysis in Hangarter was its finding that the insurance commissioner was a "but for" cause of the alleged injuries inflicted upon the putative class. In other words, the court found that the insurance commissioner reviewed and approved of the conduct at issue in the litigation. Defendant insurance companies can use this finding to support arguments that the insurance practice in question was officially sanctioned and thus presumptively valid, or even immune from attack under the filed-rate doctrine, which does not permit attacks on rates approved by regulatory agencies.

Conclusion

As the adage goes, today's law is tomorrow's loophole. Congress passed CAFA with the intent of broadly expanding federal jurisdiction over class actions, but skilled plaintiffs' attorneys have already devised ways to circumvent federal jurisdiction under CAFA, and to remain in state court. In Hangarter, the Northern District of California sanctioned such an attempt, and insurance companies' ability to remove under CAFA has been placed in jeopardy. Counsel for insurance companies must argue that Hangarter was wrongly decided, or that it be severely limited to its facts, or CAFA's promise of expanded federal jurisdiction will remain a promise unfulfilled.

David L. Yohai is a Partner at the law firm of Weil, Gotshal and Manges in its New York office, where he concentrates his practices in the areas of complex commercial litigation, antitrust and intellectual property. He has represented numerous insurance companies, including Conseco Senior Health Insurance Company, Conseco Life Insurance Company, The Travelers Insurance Company, Penn Treaty American Corporation and Life Re (now Swiss Re), in a variety of matters. David R. Singh is an Associate at the law firm of Weil, Gotshal and Manges in its New York office, where he concentrates his practice in the areas of products liability, and insurance and consumer fraud class actions.

Please email the author at david.yohai@weil.com or david.singh@weil.com with questions about this article.