A recent Seventh Circuit decision made two rulings on issues arising under the Class Action Fairness Act (CAFA) that defendants may find useful in other cases. First, potential punitive damages exceeding a single-digit ratio may be considered in determining whether the class claims satisfy the $5 million threshold if compensatory damages are small or where a statute provides for punitive damages. Second, the local controversy exception does not apply if another class action asserted the “same or similar factual allegations” against any defendant within the last three years, even if the claims in the prior suit were under a different state’s law and there is no overlap between putative class members.

In Schutte v. Ciox Health, LLC, No. 22-1087, 2022 WL 792258 (7th Cir. Mar. 16, 2022), the plaintiff alleged that the defendant improperly charged for copies of electronic medical records, in violation of a Wisconsin statute that the Wisconsin Court of Appeals held does not allow any such fees. The defendant removed the case under CAFA, the district court denied the plaintiff’s motion to remand, and the Seventh Circuit agreed to hear the plaintiff’s appeal from that order.

On the amount in controversy issue, the plaintiff argued that since her individual claim was for only $61, under Supreme Court precedent generally limiting punitive damages awards to a single-digit ratio, it was unlikely that the punitive damages per claim would reach the point where a class of several thousand class members would recover more than $5 million. Rejecting that argument, the Seventh Circuit explained that “a higher punitive damages ratio may be warranted in cases where compensatory damages are too low to provide meaningful deterrence,” and the statute expressly provides for up to $25,000 for a “knowing and willful” violation, which could be an obstacle to a due process challenge. In any event, “[w]hat matters is the amount ‘in controversy’—not the amount that plaintiffs are most likely to recover.” The court of appeals emphasized that “it is critical for courts to focus on the phrase ‘in controversy’ and to remember the difference between even highly unlikely results and truly impossible results, and to avoid prematurely trying the merits of the case in deciding jurisdiction.” The court’s holding on this issue will be useful to defendants because this is not an uncommon scenario in class actions – the potential individual damages are quite small but punitive damages are sought (or potentially available on the claims alleged).

The second issue focused on CAFA’s local controversy exception, which requires a district court to decline jurisdiction where over two-thirds of proposed class members are citizens of the state where suit was filed, at least one “significant” defendant (satisfying certain requirements) is a citizen of that state, the principal injuries or defendant’s conduct were in that state, and “during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.” 28 U.S.C. § 1332(d)(4) (emphasis added). Most of the requirements for the local controversy exception apparently were satisfied here. The dispute was over whether there had been a class action brought against the defendant within the three-year period involving the “same or similar factual allegations” and “on behalf of the same or other persons.” The defendant pointed to a prior case filed in Montana alleging that it had improperly charged for electronic medical records under Montana law. The plaintiff argued that the Montana case was brought under a different state’s law and involved class members in a different state. Rejecting that argument, the Seventh Circuit emphasized that the statute requires only “the same or similar factual allegations,” not an overlapping legal theory. Moreover, “[i]f geographic differences could render two otherwise identical complaints dissimilar for CAFA’s purposes, then plaintiffs would be able to avoid federal jurisdiction by filing individual actions based on the same kind of misconduct in all fifty states.”

The plaintiff further argued that if the statutory language requiring that the prior suit be brought “on behalf of the same or other persons” did not require any overlap in the proposed classes, the quoted language would be superfluous because in the context of a class action, the second suit would always be brought on behalf of “the same or other persons.” Not so, said the Seventh Circuit, because statutes often have redundancies, and if CAFA had not included the language at issue, courts might wonder whether Congress intended that the proposed classes in the prior and subsequent cases must overlap. The court also pointed to indications that the intent of this three-year exception to the local controversy requirement was so that a series of class actions in multiple states (except for the first one) might be considered for a multidistrict litigation where appropriate.

Overall, the Seventh Circuit appeared to make clear that plaintiffs cannot evade federal jurisdiction under CAFA by bringing similar single-state cases for small individual amounts, if punitive damages are potentially recoverable such that the amount in controversy requirement is satisfied.