This Week at The Ninth: Answers and Amounts in Controversy

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This week, we take a look at two decisions tackling novel procedural issues.  In the first, the Court strictly applied the amount-in-controversy requirement of the Class Action Fairness Act, faulting a defendant for not substantiating every aspect of its calculations of the plaintiff’s potential recovery.  In the second, the Court held that a defendant need not again file an answer to a plaintiff’s amended complaint in order to preserve its previously asserted affirmative defenses. 

HARRIS v. KM INDUSTRIAL, INC.
A divided panel holds that a defendant invoking the Class Action Fairness Act (CAFA) as a basis for removal to federal court failed to satisfy CAFA’s $5 million amount-in-controversy requirement because the defendant did not adequately support each step in its calculations.

Panel:  Judges Wardlaw, Collins, and Eaton (Court of International Trade), with Judge Eaton writing the opinion and Judge Collins dissenting.

Key highlight:  “Here, the parties had an adequate opportunity to place evidence on the record following the motion to remand, as shown by the fact that KMI took advantage of that opportunity, but only in support of some, not all, of the contested jurisdictional allegations. Our precedent does not direct that KMI should be given another chance to make its case.”

Background:  Plaintiff Levone Harris filed a wage-and-hour class action suit against his former employer, KM Industrial (KMI), in state court on behalf of KMI’s hourly employees.  Among other things, Harris alleged that KMI had failed to provide required meal and rest breaks, and he sought to certify sub-classes of employees whose rights were thereby violated.  The complaint did not specific the total damages sought.

Invoking CAFA, KMI removed the case to federal court.  It claimed that CAFA's $5 million amount-in-controversy requirement was satisfied based on KMI's own calculations of the total damages and fees the various classes might recover if they ultimately prevailed—which KMI estimated at more than $7 million.  These calculations turned in part on the assumption that all hourly employees would also be members of the meal and rest-break subclasses.  Asserting that KMI had not and could not provide evidence to support this assumption, Harris filed a motion to remand.  The district court agreed and remanded the case to state court.

The result:  The Ninth Circuit affirmed.  First, the Court explained that Harris had made a “factual,” rather than “facial,” attack on KMI’s amount-in-controversy calculations by challenging the truth of KMI’s underlying assumptions.  Although Harris had not introduced any evidence, he had contested the premise that all of KMI’s hourly employees worked sufficient hours to be entitled to meal and rest breaks, and a “factual attack . . . need only challenge the truth of the defendant’s jurisdictional allegations by making a reasoned argument as to why any assumptions on which they are based are not supported by evidence.”  As a result, the Court held, KMI was required to submit competent evidence supporting those assumptions.

The Ninth Circuit agreed with the district court that KMI had not met that burden.  Although KMI had submitted a declaration explaining some aspects of its underlying calculations, it had “failed to produce any proof that the members of the Hourly Employee Class and the two subclasses were the same and that they all worked shifts long enough to qualify for meal and rest periods.”  And, the Court held, because the parties had already been granted the opportunity to submit evidence on this question, a remand to the district court for further factfinding was unnecessary. 

Judge Collins dissented.  He assumed, without deciding, that Harris had mounted a “factual” attack on KIM’s jurisdictional contentions.  But, he contended, KMI had met any evidentiary burden that would have been imposed on it.  Observing that “determining the amount in controversy may require putting an appropriate construction on what may in some respects be vague and general allegations in the complaint,” he criticized the district court (and, by implication, the majority) for insisting on a “level of up-front precision” that, Judge Collins asserted, was unnecessary. 

KST DATA, INC. v. DXC TECHNOLOGY CO.
The Court holds, as a matter of first impression, that a defendant is not required to file a new answer reasserting its affirmative defenses when the claim in the amended complaint related to those affirmative defenses remains the same.

Panel: Judges Paez, Bade, and Melgren (D. Kansas), with Judge Melgren writing the opinion.   

Key highlight: “[Enterprise Services] was not required to respond and reassert its affirmative defenses to KST’s Second Amended Complaint because [Enterprise] had already asserted those affirmative defenses in response to the same breach of contract claim in the First Amended Complaint. Before granting summary judgment sua sponte in favor of KST, the district court should have given [Enterprise] notice and an opportunity to assert its affirmative defenses in response to KST’s breach of contract claim.”

Background: Government contractor Enterprise Services sub-contracted with KST Data and another small business, DME, to provide IT services to NASA. In Enterprise’s telling, KST was secretly performing and getting paid for DME’s work, in violation of the NASA’s small business rules.  When NASA fined Enterprise $5.4 million for the alleged violation, Enterprise withheld that amount from invoice payments to KST.  KST filed suit in California court.  Following the case’s removal to federal court, KST filed a first amended complaint alleging various contract claims.  Enterprise filed an answer, asserting various affirmative defenses and counterclaims, and moved to dismiss.  The district court dismissed all of KST’s claims except its breach of contract claim.

KST then filed a second amended complaint reasserting its dismissed claims, and Enterprise moved to dismiss all but the original breach claim. But, importantly, it did not file another answer. At summary judgment, Enterprise moved for summary judgment on this breach of claim; KST did not cross-move and claim that it was entitled to prevail as a matter of law.  Nevertheless, the district court sua sponte granted summary judgment for KST on its breach of contract claim, concluding that Enterprise had waived all its affirmative defenses by failing to file an answer to the second amended complaint.

Result: The Ninth Circuit reversed.  The Court began by explaining that “[u]nder Federal Rule of Civil Procedure 56(f), a district court may sua sponte grant summary judgment if the nonmovant has ‘notice and a reasonable time to respond.’”  The Court noted that while Enterprise had argued in its summary judgment motion that “KST could not satisfy the elements” of breach of contract, it “was not required to, and in fact did not, assert its affirmative defenses at that time.”  Because the district court did not give Enterprise “notice and the opportunity to assert its affirmative defenses,” it “erred in granting summary judgment sua sponte.”

Of course, if Enterprise had waived its affirmative defenses, that error would be harmless.  But the Ninth Circuit disagreed on that point as well.  Federal Rule of Civil Procedure 8(c) requires a party to “affirmatively state any avoidance or affirmative defense” in response to a pleading.  If it doesn’t, those defenses are generally forfeited.   But several district courts in the Ninth Circuit have held that filing an additional answer to an amended complaint is optional, and “when an amended complaint does not add new parties, new claims, or significant new factual allegations, the previously filed response to the original pleading will suffice.”   The Ninth Circuit adopted that reasoning.  As it explained, Federal Rule of Civil Procedure 15(a)(3)—which provides that “any required response to an amended pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later”—is not to the contrary because it doesn’t actually say that a response is always required.  KST was unable to cite any case “involv[ing] the unique situation here—where the defendant did not respond to an amended complaint because it had filed an answer to the previous complaint that contained the same claim.”  In those circumstances, the Court held, a defendant is not required to file a new answer.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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