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Eighth Circuit Reverses Sanctions for Re-Filing Putative Class Action in State Court

Photo-1429961449642-0d5a0d68245fBy Alexander M. Smith

Earlier this week, the Eighth Circuit reversed an order by the Western District of Arkansas (Holmes, J.) imposing sanctions on counsel who voluntarily dismissed a putative class action immediately before they re-filed the action and sought approval of a class settlement in Arkansas state court.  Although the district court concluded that counsel for the putative class stipulated to the dismissal for the “improper purpose of seeking a more favorable forum” and used “properly attached federal jurisdiction as a mid-litigation bargaining chip,” the Eighth Circuit found that counsel’s conduct was proper because “a reasonable lawyer would have had a colorable legal argument that a stipulation of voluntary dismissal . . . is permissible in a case in which the class has not yet been certified.” 

The Eighth Circuit began its discussion by analyzing whether a stipulated dismissal of a putative class action for the purpose of re-filing in state court violated Federal Rule of Civil Procedure 41(a), which governs voluntary dismissals of actions.  The court held that Rule 41(a)(1)(A)(ii), which allows a plaintiff to dismiss an action without court approval pursuant to “a stipulation of dismissal signed by all parties who have appeared,” authorized the plaintiffs’ counsel to dismiss the federal lawsuit even when the dismissal was entered “for the specific purpose of refiling in another court.”   Relying primarily on a Second Circuit case, Wolters Kluwer Financial Services, Inc. v. Sciadvantage, 564 F.3d 110 (2d Cir. 2009), the court concluded that the plaintiffs’ counsel had the “unfettered right” to dismiss the action pursuant to a stipulation and that “[t]he reason for the dismissal is irrelevant under Rule 41(a)(1).”  

The Eighth Circuit then considered whether Rule 23(e), which requires court approval in order to dismiss or settle the claims of a certified class, barred counsel for the putative class from dismissing the lawsuit for the purpose of re-filing and seeking settlement approval in state court.  Although the court expressly declined to hold that Rule 23(e) applies only to class actions that had already been certified, it held that there was a colorable legal argument that Rule 23(e) only applies to certified class actions and accordingly did not serve as a basis for sanctions.  While the court acknowledged earlier Eighth Circuit precedent holding that Rule 23(e) applies “even if a class has not yet been certified,” the court nonetheless noted that the 2003 amendments to Rule 23 arguably limited its scope to encompass only those cases where a class had been certified.   In so doing, the court also rejected the proposition that the Class Action Fairness Act (“CAFA”) barred a stipulation of dismissal for the purpose of re-filing an un-certified class action in state court.  Whether or not CAFA was intended “to prevent state court abuse of absent class members,” the court reasoned, “nothing in CAFA altered the 2003 amendment to Rule 23(e).”  

Adams v. USAA Casualty Insurance Co., --- F.3d ---- (8th Cir. 2017)