In Appert v. Morgan Stanley Dean Witter, Inc.,673 F.3d 609 (7th Cir. 2012), the Seventh Circuit held that the securities exception to CAFA jurisdiction found in 28 U.S.C. § 1332(d)(9) did not apply where the plaintiff brought a breach of contract and unjust enrichment action against her financial services firm for allegedly charging excessive fees for postage, handling, and insurance in connection with the mailing of trade confirmation slips following the purchase or sale of securities.  The plaintiff sued in state court on behalf of herself and those similarly situated seeking recovery of fees from 1998 to the present.  She claimed the fees charged were disproportionate to the company’s actual transaction costs.  The defendant removed the case to federal court pursuant to CAFA and the Securities Litigation Uniform Standards Act (“SLUSA”), and moved to dismiss the case as barred by SLUSA, or alternatively, for failure to state a claim.  The court dismissed both the plaintiff’s original complaint and her amended complaint, and the plaintiff appealed.

On appeal, the Seventh Circuit affirmed the district court’s ruling dismissing the case.  The court first analyzed whether it had jurisdiction under SLUSA or CAFA.  While the court determined that SLUSA did not provide grounds for removal, it concluded that the defendant had properly removed the case pursuant to CAFA.  The court then addressed whether 28 U.S.C. § 1332(d)(9) applied.  Subsection 1332(d)(9) has three subparts and generally provides that CAFA shall not apply to any class action that solely involves a claim:  concerning a covered security as defined under 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 78p(f)(3)) and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E); or that relates to the internal affairs or governance of a corporation or other business enterprise or that arises under or by virtue of state law under which the business is organized; or that relates to the rights, duties and obligations relating to or created by or pursuant to any security. 

Prior to Appert, the Seventh Circuit had not addressed whether subsection (d)(9) was a prerequisite or an exception to CAFA jurisdiction.  This distinction affects which party bears the burden of proof.  If subsection (d)(9) is an exception, then many courts have held that once the removing party establishes CAFA jurisdiction, the party seeking remand bears the burden of proving that the exception applies.  On the other hand, if subsection (d)(9) is a prerequisite to CAFA jurisdiction, then the removing party bears the burden of establishing the jurisdictional prerequisite. 

Previously, the Seventh Circuit had held that the burden of proving both the home state and the local controversy exceptions in CAFA fell to the party challenging federal jurisdiction.  In another case, Hart v. FedEx Ground Package Sys. Inc., 457 F.3d 675 (7th Cir. 2006), the Seventh Circuit had implied that another CAFA provision, 28 U.S.C. §1332(d)(5), was a prerequisite to establishing jurisdiction.  Subsection (d)(5) contains language similar to subsection (d)(9).  Specifically, subsection (d)(5) provides that subsections (d)(2)-(4) shall not apply to any class action in which a primary party is a State, State officials or other governmental entities, or the aggregate number of plaintiffs in the proposed classes is less than 100.  The Fifth Circuit has held that subsection (d)(5) as an exception to CAFA jurisdiction, while the Ninth Circuit has held that it is a prerequisite to CAFA jurisdiction. 

Even though subsections (d)(5) and (d)(9) both contain the phrase “shall not apply,” the Seventh Circuit concluded that subsection (d)(9) is an exception, not a prerequisite.  It examined parallel language in the class action removal statute, 28 U.S.C. § 1453(d) which provides:  “Exception. — This section shall not apply to any class action that solely involves — (1) a claim concerning a covered security as defined under 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 78p(f)(3)) and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E).”  The court determined that this language demonstrated Congress’ intention to construe subsection (d)(9) as an exception. 

Since subsection (d)(9) is an exception to CAFA jurisdiction, the burden fell to the plaintiff to prove that the exception applied.  The plaintiff in Appert, however had neither moved for remand, nor raised the securities exception.  The court nevertheless addressed the issue sua sponte starting with an examination of the language in subsection (d)(9)(C) which provides that CAFA shall not apply to any class action that solely involves a claim “that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security . . . .”  Drawing upon Second Circuit case law, the Seventh Circuit determined that the claims at issue did not fit within the language of (d)(9)(C).  That language was not meant to be read so broadly as to encompass all claims that relate to “any” security.  Rather, the claims must be grounded in the terms of the security itself, the terms of the instruments that create and define the securities, or on the duties imposed on persons who administer the securities.  

Next the court examined the language in subsection (d)(9)(A) which states that CAFA shall not apply to any class action that involves a claim “concerning a covered security as defined under 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 78p(f)(3)) and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E).”  While the court recognized that the word “concerning” could be broadly construed, it remarked that the purpose of CAFA legislation did not support such an expansive reading.  CAFA was meant to confer broad federal court jurisdiction with only narrow exceptions.  The Seventh Circuit held that the plaintiff’s claims did not fall within the (d)(9)(A)exception because the plaintiff conceded that she had no intention of asserting that her claims “concerned” her investments with the defendant, and because the fees at issue did not concern a covered security, but instead involved an alleged overcharge for providing receipts for the processing of a securities transaction.  

The Seventh Circuit held that no part of the securities exception applied to the claims, the case had been properly removed, and federal jurisdiction had been established.  The court also affirmed the district court’s dismissal of the plaintiff’s initial and amended complaints.