Mere Allegation Of 'Joint Liability' Does Not Satisfy 'Significant Basis' Test For Local Defendant

Opelousas General Hosp. Authority v. Fairpay Solutions, Inc., No. 11–30610,2011 WL 3902996 (5th Cir. La. Sept. 6, 2011).

While reversing a district court's remand order under the local controversy exception, the Fifth Circuit held that the mere fact that relief might be sought against the local defendant for the conduct of others (via joint liability) does not convert the conduct of others into the conduct of the local defendant so as to satisfy the 'significant basis' requirement.

The plaintiff, Opelousas General Hospital, sued three defendants -- FairPay Solutions, Inc., LEMIC Insurance Company and Zurich American Insurance Company -- in Louisiana state court for violations of the Louisiana Racketeering Act.

The plaintiff alleged that FairPay, a Texas bill review company, reviews the bills from Louisiana hospitals (the plaintiff class) and calculates a recommended payment below the rate required by the Louisiana Workers' Compensation Act. Zurich and LEMIC, insurance companies based in Illinois and Louisiana respectively, apply FairPay's recommended payment when reimbursing the plaintiff hospitals. The plaintiff alleged an enterprise between all three defendants to misappropriate funds using FairPay's under-calculation, arguing that the Louisiana's Racketeering Act made each member of the enterprise liable in solido for the acts of the other.

The defendants removed the case to federal court, and after discovery, the plaintiff moved to remand under CAFA's local controversy exception.

The district court concluded that the local controversy exception applied and remanded the action to state court.

The defendants requested permission to appeal, which the Fifth Circuit granted.

The Fifth Circuit noted that only two aspects of the local controversy exception were at issue in the appeal – whether at least one local defendant is a defendant from whom significant relief is sought by members of the class and whose alleged conduct forms a significant basis for the claims asserted, 28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa) and (bb). Because failure of either element would require reversal, the Fifth Circuit elected to focus on the second element—whether the alleged conduct of the Louisiana defendant, LEMIC, formed a significant basis for the claims asserted by the proposed plaintiff class.

The Fifth Circuit observed that the plain text of § 1332(d)(A)(i)(II)(bb) relates the alleged conduct of the local defendant, on one hand, to all the claims asserted in...