News Release

April 18, 2024
ALF Argues That CAFA's "Internal Affairs" Removal Exception Should Be Interpreted Narrowly

Question Presented:

Whether a putative class action that has been removed to federal court under the Class Action Fairness Act must be remanded to state court where the plaintiffs' claims do not solely involve the internal affairs of a corporate defendant
"Class actions involving interstate issues of national importance should be litigated in federal, not state, court."
Atlantic Legal Foundation
Congress enacted the Class Action Fairness Act (“CAFA”) to make it easier for corporate defendants to remove interstate class actions of national importance from state trial courts to federal district courts. See 28 U.S.C. §§ 1332(d) & 1453.

The pending certiorari petition in Country Mutual Insurance Company v. Sudholt (23-1024) requests the Supreme Court to resolve well-defined splits of authority on the scope of two specific statutory exceptions to CAFA’s relaxed provisions for removal of class actions on diversity grounds: (i) the “home state” exception, where “the primary defendants[] are citizens of the State in which the action was originally filed,” 28 U.S.C. § 1332(d)(4)(B), and (ii) the “internal affairs” exception, where a class action “solely involves a claim [that] relates to the internal affairs or governance of a corporation or other form of business enterprise,” 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2).

ALF, joined by the DRI Center for Law and Public Policy, has filed an amicus brief urging the Supreme Court to grant review. Appellate specialist Sarah Elizabeth Spencer of Spencer Willson, PLLC, authored the brief, which focuses on the internal affairs exception and discusses why it should be narrowly construed and applied.

Case Background

The plaintiffs filed a putative class action in Illinois state court essentially alleging that mutual insurance companies must sell insurance “at cost.” More specifically, the plaintiffs’ suit against Country Mutual and many of its current and former officers contends that the company’s surplus reserve, which is intended to protect policyholders throughout the nation, is excessive and must be distributed. Pointing to the potential nationwide implications of the plaintiffs’ claims, Country Mutual removed the action under CAFA to an Illinois federal district court, which denied the plaintiffs’ motion to remand. The Seventh Circuit reversed, holding that both the home state and internal affairs exceptions apply. As to the latter, the court of appeals held that because the plaintiffs’ claims involve alleged corporate mismanagement in the form of retaining “excess” surplus, they relate to Country Mutual’s internal affairs regardless of whether the claims implicate additional legal issues.

ALF's Amicus Brief

ALF's brief discusses why the Supreme Court should address the critical issue of how the Second, Seventh, and Ninth Circuits have misinterpreted CAFA's internal affairs exception. These circuits have been returning to state court national class actions that should remain in federal court due to their broader implications beyond corporate governance. ALF argues that a strict interpretation of the internal affairs exception is needed to maintain the relaxed federal removal jurisdiction that CAFA was enacted to enable.

The brief urges the Court to clarify the scope of the internal affairs exception, which is essential to prevent forum shopping and ensure consistent judicial outcomes across the nation's States. The brief explains that the Fourth Circuit's narrower interpretation of the internal affairs exception is more appropriate because it focuses on the need to adjudicate interstate class actions within the federal judicial system. In contrast, the other circuits' broader interpretations undermine CAFA by allowing significant class actions to be handled inconsistently by state courts.

The amicus brief also emphasizes that the Second, Seventh, and Ninth Circuits' broader interpretations could lead to many different types of class actions being improperly remanded to state courts. This could include, for example, class actions involving consumer protection or environmental issues, which have national implications and should be litigated at the federal level.

ALF is urging the Court to grant review and resolve the inter-circuit split on the scope of the internal affairs exception to reinforce CAFA's goals and ensure that national class actions are adjudicated by federal courts.
Media Contact: Larry Ebner | Tel: 202-349-1421
About the Atlantic Legal Foundation

For more than 47 years, the Atlantic Legal Foundation, a national, nonprofit, nonpartisan, public interest law firm, has advocated in the Supreme Court, federal courts of appeals, and state appellate courts for individual liberty, free enterprise, property rights, limited & responsible government, sound science in judicial & regulatory proceedings, and effective education, including parental rights and school choice.
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