May 16, 2017 / 6:35 PM / 8 months ago

Spokeo backlash: Dismissed in federal court, class actions move to states

(Reuters) - The discount brokerage Scottrade did everything right when it was hit with multiple class actions after a 2013 hack exposed the personal information of some of its customers. Scottrade persuaded plaintiffs’ lawyers to agree to transfer their cases to a single federal district, St. Louis, Missouri. Then the brokerage moved for the dismissal of its customers’ consolidated class action, arguing that plaintiffs could not establish their constitutional right to sue in federal court because they couldn’t show a concrete injury.

Scottrade’s strategy worked perfectly. Citing the U.S. Supreme Court’s 2016 ruling in Spokeo v. Robins, U.S. Magistrate Judge Shirley Mensah tossed the consolidated class action last July. When she entered judgment for Scottrade a few weeks later, she dismissed the case with prejudice.

End of litigation, right?

Wrong. One group of plaintiffs appealed the dismissal to the 8th U.S. Circuit Court of Appeals, as you’d expect given uncertainty in the appellate courts about interpreting Spokeo. But more intriguingly, two other sets of plaintiffs, in Florida and California, filed class actions in state court that essentially repeated allegations from the dismissed federal-court class action, albeit on behalf of statewide customer classes.

As you would expect, Scottrade defense lawyers from Thompson Coburn removed the Florida and California class actions to federal court under the Class Action Fairness Act. Scottrade then asked for the cases to be dismissed, arguing that customer claims have already been dismissed with prejudice in the St. Louis federal magistrate’s decision. Plaintiffs, who are represented by the same lawyers in both the state court class actions and the 8th Circuit appeal, responded that federal judges in California and Florida can’t dismiss the cases at all but must remand them to state court for lack of jurisdiction.

According to the plaintiffs’ theory, Scottrade is absolutely right that Judge Mensah’s decision in the consolidated federal-court class action in St. Louis has a res judicata effect. Her finding that Scottrade customers lack constitutional standing binds all federal courts. But the proper course for federal judges overseeing follow-on statewide class actions removed to federal court, according to the Scottrade plaintiffs, is to remand the cases to state court.

There’s case law to back that theory. The most important precedent for plaintiffs is the 9th Circuit’s 2016 in Polo v. Innoventions International, in which the 9th Circuit reversed a federal trial judge’s grant of summary judgment for a defendant facing a consumer class action originally filed in state court. The appeals court said, in language that applies to situations like those in the Scottrade data breach litigation, that once the trial judge determined the plaintiffs did not have standing to sue in federal court, she should have remanded the class action to state court.

“Remand is the correct remedy because a failure of federal subject-matter jurisdiction means only that the federal courts have no power to adjudicate the matter,” the 9th Circuit said in Polo. “State courts are not bound by the constraints of Article III.” That rule, the appeals court added, applies to class action removed to federal court under CAFA as well as to any other case.

Last January, in the California wing of the Scottrade data breach case, U.S. District Judge Jeffrey Miller of San Diego agreed with plaintiffs that their class action should be sent back to California state court, not dismissed outright. Judge Miller acknowledged that the 9th Circuit has previously allowed federal judges to dismiss removed cases if they conclude the litigation would undoubtedly fail in state court, he said the 9th Circuit’s Polo ruling cast doubt on the futility doctrine. Moreover, the judge held, the case raises “legitimate issues” about whether the St. Louis dismissal precludes a California state-court class action – and no federal court can answer the question because they don’t have jurisdiction under the St. Louis standing decision.

The Florida branch of the case is several months behind California. Last week, plaintiffs’ lawyers from Blood Hurst & O’Reardon, Siprut, Cohelan Khoury & Singer and other firms asked U.S. District Judge James Whittemore of Tampa last week to remand their state-court class action, noting, of course, that his California counterpart did just that in January. (The remand brief also refutes a new argument by Scottrade that the Florida class action belongs in federal court under the Securities Litigation Uniform Standards Act.)

Defendants ought to be watching to see whether Judge Whittemore agrees with Judge Miller and sends the statewide class action back to state court. The implications, if federal judges allow class actions to proceed in state court after they’ve been bounced out of federal court on Article III grounds could undermine whatever benefit defendants have received from CAFA and Spokeo. Consumer class action defendants will be stuck right back in state court, exactly the venue they’ve worked so hard to escape.

Timothy Blood of Blood Hurst, who’s leading all of the Scottrade cases, told me the Florida and California state class actions were less a stroke of brilliance than a necessity after the brokerage won dismissal of the consolidated class action in federal court in St. Louis. “Calling it a strategy overstates it,” he said. “It was just the logical conclusion of what the defendants are doing.”

Blood agreed that the state court strategy will have to change if the 8th Circuit finds they had federal court standing after all. (Covering all of his bases, Blood actually argued the 8th Circuit case for plaintiffs in April.) But in the meantime, he said, if defendants intend to bounce class actions out of federal court for lack of standing, he’ll keep filing statewide class actions asserting the same claims.

“This is one of those times you can say, ‘Hey defendants! Be careful what you ask for,’” Blood said.

I left a message for Scottrade counsel Brandi Burke of Thompson Coburn but didn’t hear back.

The views expressed in this article are not those of Reuters News.

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