Synopsis: There is a split of authority on whether punitive damages claims of multiple plaintiffs may be aggregated to satisfy the "amount-in-controversy" requirement for federal diversity jurisdiction. The 8th U.S. Circuit Court of Appeals has not yet decided the matter. This article examines the issue and discusses recent cases from other circuits.

Title 28 U.S.C. § 1332(a) grants jurisdiction to United States district courts over suits between citizens of different states where "the matter in controversy exceeds the sum or value of $75,000."¹ In determining the amount in controversy, both punitive damages and attorney's fees are considered along with actual damages.² In joint or class actions, each plaintiff's damages will often be limited to an amount under $75,000 in an effort to defeat the defendant's right to remove the action to federal court under 28 U.S.C. § 1441(a). To support removal, defendants will argue that the damages sought may be considered in the aggregate, thereby satisfying the amount-in-controversy requirement. Despite authority to the contrary, this article concludes that federal courts should not allow such aggregation of punitive damages when the underlying claims for actual damages cannot be aggregated.

The traditional judicial interpretation of Congress's grant of diversity jurisdiction has been, from the beginning, that separate and distinct claims of two or more plaintiffs cannot be aggregated to satisfy the jurisdictional amount. By 1916 the Supreme Court was able to say in Pinel v. Pinel,³ that it was "the settled rule" that separate and distinct claims could not be aggregated. In Snyder v. Harris,⁴ the Court held that the doctrine applied with equal force to class actions brought under Federal Rule of Civil Procedure 23. The Court explained: "The doctrine that separate and distinct claims could not be aggregated was never . . . based upon . . . any rule of procedure. That doctrine is based rather upon this Court's interpretation of the statutory phrase 'matter in controversy.'"⁵ In Snyder the named plaintiff was a shareholder of an insurance policy who brought a diversity suit against the company's board of directors on behalf of herself and approximately 4,000 other shareholders. Although Snyder's own claim totaled less than the then $10,000 jurisdictional amount, she defended the motion to dismiss for lack of jurisdiction on the ground that if all 4,000 potential claims were aggregated, the amount in controversy would well exceed $10,000. The district court granted the motion to dismiss, the court of appeals affirmed, and the Supreme Court affirmed the court of appeals. This holding was reaffirmed several years later in Zahn v. International Paper Co.⁶

The corollary to this rule is that aggregation is permitted when two or more plaintiffs unite to enforce a single title or right in which they have a "common and undivided interest." Id. In Troy Bank v. Whitehead & Co.,⁷ the Court held that in a suit filed jointly by two plaintiffs to enforce a vendor's lien, the value of the lien was the amount in controversy because the lien was "a single thing or entity in which the plaintiffs have a common and undivided interest, and which neither can enforce in the absence of the other." Similarly, in McDaniel v. Traylor,⁸ a suit for the removal of a cloud from title to property, the amount in controversy was held to be the value of the property where the three plaintiffs jointly owned "an undivided interest" in the property.

It appears the Supreme Court was overly optimistic in its assessment in Snyder that "lower courts have developed largely workable standards for determining when claims are joint and common, and therefore entitled to be aggregated, and when they are separate and distinct and therefore not aggregable." 394 U.S. at 341. The terms have proven to be elusive and elastic, and distinguishing a "common and undivided" interest from claims that are "separate and distinct" remains a difficult task in many cases. Stating the maxim is far easier than determining the principles that underlie it, and then applying it correctly.

The question arises in its most interesting form in the context of punitive damages - neither Snyder nor Zahn speaks in terms of actual as opposed to punitive damages, and a split of authority has emerged on whether claims for punitive damages of multiple plaintiffs may be aggregated even if their claims for actual damages could not. The answer to this question is of both practical import as well as philosophical interest, as it turns on the very nature of punitive damages. The 8th U.S. Circuit Court of Appeals has not yet ruled on the question.

The lead case for the position that punitive damages may be aggregated for jurisdictional purposes is from the 11th Circuit. Tapscott v. MS Dealer Serv. Corp.,⁹ was a state law fraud action arising out of the sale of extended service contracts in connection with the sale of retail products. The named plaintiffs averred that the putative class consisted of at least 10,000 members, each of whom was seeking damages in an amount under the jurisdictional amount. The individual transactions in the case were, in fact, relatively small -- under $1,000 each. It was not disputed, however, that if considered in the aggregate, punitive damages would exceed the jurisdictional amount.

After the defendant removed the case to federal court, plaintiffs sought a remand on the ground that the amount in controversy was under the jurisdictional amount. The district court denied the motion to remand and plaintiffs appealed. Plaintiffs argued that the punitive damages could not be aggregated because the case involved individual, separate contracts between the various parties, and not a single wrong by defendant, such as a mass tort. The court rejected this distinction, believing that the proper focus was on "the nature of the claim or right asserted and not on the nature of the wrong underlying the suit."¹⁰

The court went on to analyze the nature of punitive damages under the forum state's law. The purpose of punitive damages, the court explained, is to deter wrongful conduct and punish those responsible. The state and not the victim is considered the true party plaintiff and punitive damages are awarded for the public benefit -- the collective good. Furthermore, the court explained, any punitive damages award in the case before it would be made based on the wrongfulness of defendant's course of action as a whole. The court concluded, "When punitive damages reflect the defendant's course of conduct toward all of the putative class members, it is entirely proper that the damages be considered in the aggregate."¹¹

The court also noted that the defendant was not concerned with the particular distribution of the punitive damages among the plaintiffs, but with the overall size of any such award. The Court believed this supported the conclusion that the plaintiffs had a common interest in the award. Id. n.14. Although the court cautioned that its holding was not to be taken to establish a bright line rule that any class claim for punitive damages may be aggregated to meet the amount-in-controversy requirement, id., it is hard to conceive of a set of facts which would, under the court's approach, dictate nonaggregation of punitive damages in a class action

The enigmatic nature of this issue is keenly reflected in the 5th Circuit's battle-of-panels. In Lindsey v. Alabama Tel. Co.,¹² the plaintiffs brought a class action under Alabama law against two telephone companies, alleging that the defendants wrongfully collected deposits by threatening to discontinue service, and misrepresented their authority to collect the deposits. The plaintiff class claimed $2,000 in actual damages and $1,000,000 in punitive damages. Because the complaint did not mention the number of persons in the class, the panel concluded that the defendants could not show that the class was small enough such that a division of damages would result in each plaintiff meeting the jurisdictional amount. The panel therefore applied Snyder's reasoning to the context of punitive damages in remanding the case to state court.

In a later case, however, a different 5th Circuit panel took the opposite approach. Allen v. R & H Oil & Gas Co.,¹³ upon which Tapscott relied heavily, was a joint state-law tort action brought by residents of a town against operators of a local gas and oil well that had exploded. According to the plaintiffs, they suffered property damage and wide-ranging physical and mental injuries from the explosion. The 512 plaintiffs' individual claims -- the suit was not a class action -- were based on theories of negligence and strict liability, and they sought actual and punitive damages from the operators of the well. No specific amount of damages was pled.

After defendants removed the action to federal court based on diversity jurisdiction, the plaintiffs sought remand on the ground that the amount-in-controversy requirement was not met. The defendants argued in response that each individual plaintiff's potential punitive damage award could be aggregated and applied to the jurisdictional amount. The district court denied the motion to remand and the plaintiffs appealed. The appellate panel recognized that the plaintiffs' claims for actual damages were separate and distinct, and turned to the question of whether the punitive damages claims could, nevertheless, be aggregated for jurisdictional purposes.

The panel began its inquiry into the nature of punitive damages with the simple sentence, "Punitive damages punish." The court reasoned that "punitive damages therefore are [essentially] collective; their purpose is to protect society" by punishing and deterring the wrongdoing and "[t]heir focus is not any one individual plaintiff but, rather they are tailored to [the] defendant's wealth and wrongdoing."¹⁴ Based on this, the court concluded that aggregation was proper. If successful in their punitive damages claim, plaintiffs would collect more than the jurisdictional amount; thus, the court affirmed the denial of the motion to remand.

The panel in Allen examined the nature of punitive damages under the forum state's -- Mississippi -- law. This would appear to a be misstep, as it would be anomalous for there to be federal subject matter jurisdiction in one forum, and not in another, over identical actions. This problem is recognized in a recent case from yet another panel of the 5th Circuit, ARD v. Transcontinental Gas Pipe Line Corp.,¹⁵ which underscores the unsettled state of the law in that circuit. This case also arose out of the explosion of a gas pipeline. Approximately 350 joined in a suit in state court against the owner and operator of the pipeline, seeking both actual and punitive damages. Each plaintiff submitted an affidavit stipulating that his or her claim was for less than the jurisdictional amount

The defendants removed the action to federal district court, arguing that the punitive damages of all plaintiffs could be aggregated. The district court certified its interlocutory order denying the plaintiffs' motion to remand, and the 5th Circuit accepted the appeal. The court of appeals noted the conflict between Lindsey and Allen, and resolved it by concluding that Lindsey stated the general rule, whereas Allen must have been based on the "peculiar nature" of Mississippi law, though the panel was unclear as to what this quirk might be. Id. at 602. Accordingly, the court of appeals reversed the district court's denial of the motion to remand to state court. The case was remanded to the district court for consideration of defendant's alternative argument that some of the affidavits filed by the plaintiffs purporting to limit each claim to less than the jurisdictional amount were not effective to accomplish this result and, therefore, the affidavits could not defeat removal to federal court.

The 2nd Circuit, on the other hand, has come down squarely on the side of nonaggregation. In Gilman v. BHC Sec., Inc.,¹⁶ the named plaintiff filed suit on behalf of a putative class of all parties for whom the defendant, a securities broker, had executed securities transactions for which the defendant received order-flow payments from market makers or exchange specialists.¹⁷ The complaint alleged that these payments were tantamount to kickbacks and defendant's acceptance of and failure to disclose them breached its contractual and fiduciary relationships with the putative class members. Plaintiffs sought recovery of all order-flow payments the defendant had received for handling securities transactions involving the class members' individual orders. The stake of each member of the putative class was trivial. The defendant removed the action to federal district court on the basis of diversity jurisdiction. The issue of subject-matter jurisdiction was not addressed by the district court, but on appeal from the dismissal of the action as preempted by federal law, the jurisdictional issue was confronted.

The court of appeals first concluded that the class members could not aggregate their actual damages claims, as the class members did not have an undivided interest in the damages they might receive. Id. at 1424-28. The court then turned to the question of interest to us here: When claims for actual damages cannot be aggregated to meet the amount-in-controversy requirement, can the concomitant claims for punitive damages be aggregated? The court concluded that the rule in Snyder and Zahn bars the aggregation of punitive damages claims absent a prior determination that the underlying claims assert a single title or right.¹⁸

The paradigm cases of common and undivided interest involve an estate, a piece of property, and an insurance policy.¹⁹ The key feature of a common and undivided interest in a single title or indivisible res is that the rights in such an interest cannot be determined without implicating the rights of every other person claiming a similar entitlement. Manifestly, punitive damages do not work that way. In each of the cases discussed above, each plaintiff could sue separately for punitive damages and, whether anyone prevailed or not, the rights of other possible plaintiffs would remain unaffected.

Another conceptual difficulty is presented in holding that punitive damages claims may be aggregated even when the underlying actual damages claims cannot. A demand for punitive damages possesses no viability absent its attachment to a substantive cause of action.

Lastly, to hold that punitive damages could be aggregated for jurisdictional purposes, even when the underlying claims for actual damages cannot, would eviscerate the holdings of Snyder and Zahn. Furthermore, such a holding runs counter to the strict construction of the amount-in-controversy requirement that those cases mandate, and would defeat the Congressional purpose in continually increasing the jurisdictional amount -- to check the rising case load in federal courts.²⁰ Under the Tapscott and Allen rule, federal courts would have jurisdiction over any diversity class or joint action with a colorable malice claim, where the actual damages were negligible. Since the basic purpose of the amount-in-controversy is to insure that the federal courts adjudicate only those diversity controversies that appear to be substantial, Tapscott and Allen would appear to represent an unwarranted and ill-considered extension of the doctrine of "common and undivided interests" to punitive damages claims.

Endnotes

1 The first Congressional grant to district courts to take suits between citizens of different states, The Judiciary Act of 1789, fixed the requirement for the jurisdictional amount in controversy at $500. In 1887 this amount was increased to $2,000; in 1911 to $3,000; in 1958 to $10,000; in 1988 to $50,000; and in 1998 to $75,000.

2 See Allison v. Sec. Benefits Life Ins. Co., 980 F.2d 1213, 1215 (8th Cir. 1992) (punitive damages); Capitol Indem. Corp. v. Miles, 978 F.2d 437, 438 (8th Cir. 1992) (attorney's fees).

3 240 U.S. 594, (1916).

4 394 U.S. 332 (1969).

5 Id. at 336.

6 414 U.S. 291 (1973).

7 222 U.S. 39, 41 (1911).

8 196 U.S. 415 (1905).

9 77 F.3d 1353 (11th Cir. 1996).

10 Id. at 1357.

11 Id. at 1359.

12 576 F.2d 593 (5th Cir. 1978).

13 63 F.3d 1326 (5th Cir. 1995).

14 Id. at 1333.

15 138 F.3d 596 (5th Cir. 1998).

16 104 F.3d 1418 (2d Cir. 1997).

17 Making payments for order flow is the practice in the securities industry of brokers receiving payments from market makers or exchange specialists for having directed a volume of transactions to these makers and specialists for execution of the orders placed by investors.

18 The 9th Circuit has held that the attorney's fees claimed by members of a class cannot be aggregated for purposes of determining the jurisdictional amount where the claims for actual damages were not aggregable. See Goldberg v. CPC Int'l, Inc., 678 F.2d 1365 (9th Cir. 1982). It is reasonable to assume that this reasoning would be applied to the question of punitive damages in that circuit as well.

19 See 14B C. Wright, A. Miller & E. Cooper (3d ed. 1998).

20 See Snyder, 394 U.S. at 339-340.

Ms. Shapiro has served as law clerk to judges on the Missouri Court of Appeals, the United States Court (E.D. Mo.), and the Eighth Circuit Court of Appeals. She was the Supervisory Staff Attorney for the Eighth Circuit from 1988 to 1992. Ms. Shapiro was the special master on the St. Louis school desegregation case, under the late Hon. George F. Gunn and the Hon. Stephen N. Limbaugh, from 1992 until March 1999, when the case settled. She received her J.D. in 1981 from Washington University School of Law, and plans to remain with the federal courts as a law clerk.

1999, Phyllis Shapiro