Think twice about whether the Class Action Fairness Act’s “local controversy” exception applies to your case. Even if more than two-thirds of the proposed class members are citizens of the forum state, there is a significant in-state defendant and the claims asserted arise from conduct in that state, that is not necessarily enough for the plaintiffs to avoid CAFA jurisdiction under a new Fifth Circuit decision. Under this decision, if any of the putative class members’ injuries occurred outside of the forum state, the “local controversy” exception does not apply. This decision could enable defendants to remove some single-state putative class actions that might have been thought unremovable under the “local controversy” exception. And, as the Fifth Circuit also concluded, a denial of remand on this issue was appealable as of right.

The “local controversy” exception provides that a federal district court “shall decline” jurisdiction over a putative class action if more than two-thirds of the proposed class are citizens of the state where suit was filed, at least one defendant is a citizen of that state and satisfies certain requirements, and no other class action “asserting the same or similar factual allegations” against any defendant has been filed during the prior three years. 28 U.S.C. § 1332(d)(4). The additional requirements to qualify as an in-state defendant are that the defendant is one “from whom significant relief is sought by members of the plaintiff class,” “whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class,” and “principal injuries arising from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed.” Id. (emphasis added). A lot of lawyers likely assumed that this exception would apply if more than two-thirds of the class are citizens of the forum state and their injuries (but not every single class member’s injury) were suffered in that state. Not so, according to a new Fifth Circuit decision.

In Cheapside Minerals, Ltd. v. Devon Energy Production Co., L.P., Nos. 23-40591, 24-40026, – F.4th –, 2024 WL 886951 (5th Cir. Mar. 1, 2024), the plaintiffs sued for underpayment of oil-and-gas royalties on Texas properties. As you might expect, more than two-thirds of the proposed class members were Texas citizens, but some class members were citizens of other states and the United Kingdom. The defendant successfully argued that that the “principal injuries” requirement means that all putative class members must have suffered their injuries in Texas for the exception to apply. The Fifth Circuit reasoned that the word “principal” means “primary” or “chief,” that “CAFA ties the ‘principal injuries’ sustained to the entire class, not just a subset of it,” and that “[t]here is no exception for cases in which most plaintiffs sustain the principal injury in the forum state but some do not.” (Emphasis in original.) The court found support for its interpretation in other sections of CAFA that were more specific about how you count class members for certain purposes. The court also concluded that the exception must be construed narrowly. The court noted that CAFA’s legislative history appeared to be inconsistent with the court’s ruling, but found no ambiguity in the statute and therefore did not consider the legislative history.

Given that the only injury in this case was a financial harm, the court concluded that the injuries occurred wherever the class members resided. Because some putative class members were not Texas citizens, the local controversy exception did not apply.

Notably, this decision did not address the mandatory exception to CAFA jurisdiction applicable where “two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.” 28 U.S.C. § 1332(d)(4)(B).

The Fifth Circuit also agreed with the Eighth and Eleventh Circuits (see my blog post about the Eleventh Circuit decision) that an order remanding a case based on the “local controversy” exception is a remand based on “abstention principles” that is appealable as of right, without the need to petition for permission to appeal under CAFA.

Overall, this decision seems likely to result in an increased number of single-state class actions being removable to federal court, at least in the Fifth Circuit. It might not be too late to remove such cases where the complaint did not clearly plead an amount in controversy over the $5 million threshold. See, for example, Cutrone v. Mortgage Electronic Reg. Sys., Inc., 749 F.3d 137, 145 (2d Cir. 2014) (blog post).