Class Action Fairness Act (CAFA): Federal Jurisdiction, Removal & Coupon-Settlement Rules

The Class Action Fairness Act of 2005 (CAFA), codified mainly at 28 U.S.C. §§ 1332(d), 1453, and 1711–1715, is a federal law that expanded federal court jurisdiction over large class actions. It lets federal courts hear a class action when the proposed class has at least 100 members, more than $5 million is at stake in the aggregate, and there is minimal diversity — meaning any one class member is a citizen of a different state from any one defendant. Congress passed it to move nationwide and multistate class actions out of plaintiff-friendly state courts and into federal court, and it also added consumer protections to class-action settlements.

Under 28 U.S.C. § 1332(d), a federal court has CAFA jurisdiction over a class action when three conditions are met: (1) the proposed class has at least 100 members; (2) the amount in controversy exceeds $5,000,000 in the aggregate, after combining all class members' claims and excluding interest and costs; and (3) there is minimal diversity — at least one class member is a citizen of a state different from at least one defendant. This is a much lower bar than ordinary diversity jurisdiction, which requires complete diversity and more than $75,000 per plaintiff.

Minimal diversity means only one class member needs to be a citizen of a different state from one defendant. It is far easier to satisfy than the "complete diversity" required in an ordinary diversity case, where no plaintiff can share a home state with any defendant. Because a nationwide class almost always includes members from many states, minimal diversity is usually met, which is a big reason CAFA pulls so many class actions into federal court.

Removal is when a defendant moves a case that a plaintiff filed in state court into federal court. CAFA's removal provision, 28 U.S.C. § 1453, makes removing a class action easier than under the normal rules: any defendant can remove without the consent of the others, the usual one-year limit on diversity removals does not apply, and an order remanding the case back to state court can be appealed. This lets defendants who are sued in a state court they consider unfavorable shift the case to federal court.

CAFA includes exceptions so genuinely local disputes stay in state court. Under the home-state exception, a court must decline jurisdiction when at least two-thirds of the class and the primary defendants are citizens of the state where the case was filed. Under the local-controversy exception, the court declines when more than two-thirds of the class are from the filing state, at least one significant defendant is from that state, the principal injuries occurred there, and no similar class action was filed in the prior three years. There is also a discretionary exception for cases where one-third to two-thirds of the class shares the forum state's citizenship.

CAFA's settlement provisions, 28 U.S.C. §§ 1711–1715, target abuses Congress saw in coupon settlements — deals where class members get discount coupons while the lawyers get large cash fees. When attorneys' fees are based on the value of coupons, CAFA ties the fee to the value of the coupons actually redeemed by class members, not the theoretical face value of every coupon issued. Courts must also hold a hearing and make a written finding that a coupon settlement is fair, and CAFA requires that appropriate federal and state officials be notified of a proposed settlement so they can object.