Morrison v. Ytb Int'l Inc.

• Decision Date: 27 July 2011
• Docket Number: No. 10–2529.,10–2529.
• Citation: 649 F.3d 533
• Parties: Faye MORRISON, et al., Plaintiffs–Appellants,v.YTB INTERNATIONAL, INC., et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

649 F.3d 533

Faye MORRISON, et al., Plaintiffs–Appellants,

v.YTB INTERNATIONAL, INC., et al., Defendants–Appellees.

No. 10–2529.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 25, 2011.Decided July 27, 2011.

Christian G. Montroy (argued), Montroy Law Offices, East St. Louis, IL, for Plaintiffs–Appellants.James G. Martin (argued), Armstrong Teasdale, St. Louis, MO, for Defendants–Appellees.Before EASTERBROOK, Chief Judge, and FLAUM and ROVNER, Circuit Judges.EASTERBROOK, Chief Judge.

Plaintiffs allege that YTB International, a firm based in Illinois and doing business as both YTB and YourTravelBiz.com, is violating the Illinois Consumer Fraud Act. That statute forbids pyramid schemes, 815 ILCS 505/2A(2), which it defines as any venture in which a participant's profit “is primarily based upon the inducement of additional persons ... to participate in the same plan or operation and is not primarily contingent on the volume or quantity of goods, services, or other property sold or distributed ... to consumers.” 815 ILCS 505/1(g). YTB (as we call defendants collectively) denies that its operation, in which its customers sell each other the right to act as travel agencies, as well as selling travel services to the public, comes within this statutory ban. (In discussing the prohibition of pyramid schemes, we do not imply that this is the entirety of plaintiffs' complaint. They also accuse YTB of lying to potential customers. For simplicity we limit discussion to the complaint's reliance on § 505/2A(2).)

The district court did not decide whether YTB operates a pyramid scheme. First it ruled that YTB's transactions with residents of states other than Illinois do not occur predominantly in Illinois and so are outside the Act. 641 F.Supp.2d 768 (S.D.Ill.2009), reconsideration denied, 2010 WL 1558712, 2010 U.S. Dist. Lexis 38405 (Apr. 19, 2010). Then the court dismissed the claims of persons who do live in Illinois, concluding that the suit—as pared down by the first step—is an intra-state controversy that belongs in state court under 28 U.S.C. § 1332(d)(4). 2010 WL 2132062, 2010 U.S. Dist. Lexis 51970 (S.D.Ill. May 26, 2010).

Plaintiffs—seven persons plus one corporation—want to represent a class of everyone, in any state, who has participated in YTB's home-travel-agency program. The proposed class has more than 100 members, the stakes exceed $5 million, and at least one plaintiff is a citizen of a different state from at least one defendant (minimal diversity). Plaintiffs invoked federal jurisdiction under § 1332(d)(2), part of the Class Action Fairness Act of 2005. YTB acknowledged that the complaint meets the statutory requirements but sought to trim the suit by contending that class members from states other than Illinois lack standing to seek relief under the Illinois Consumer Fraud Act. After the district court agreed with that contention, YTB argued that the remaining controversy is centered in Illinois, so that § 1332(d)(4) requires the court to “decline to exercise jurisdiction under” § 1332(d)(2). The district judge agreed with this argument too, which brought the suit to an end.

There is a problem with this two-step procedure. Section 1332(d)(4) applies when at least two-thirds of the members of “the proposed class” reside in the same state as the principal defendant. Plaintiffs have never proposed a class limited to residents of Illinois. The class that plaintiffs propose is nationwide; that's why they filed suit in federal court. Subject-matter jurisdiction depends on the state of things when suit is filed; what happens later does not detract from jurisdiction already established. Thus we held in Johnson v. Wattenbarger, 361 F.3d 991 (7th Cir.2004), that a district court may not dispose of some claims on the merits, then dismiss the suit for lack of jurisdiction because the remaining claims fall short of the minimum amount in controversy. And we applied this principle to the Class Action Fairness Act in Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805 (7th Cir.2010), which holds that § 1332(d) supplies jurisdiction even if the district judge decides not to certify the proposed class. What matters is the size of the proposed class, and the stakes, on the date a suit is filed (or removed under § 1453, if it began in state court). The “proposed class” in this suit is not centered in Illinois, and § 1332(d)(4) therefore does not govern.

YTB believes that the district judge was entitled to apply § 1332(d)(4) to the all-Illinois class that resulted from the dismissal of other plaintiffs for lack of standing. After all, standing is a jurisdictional requirement, derived from the case-or-controversy language in Article III. If the non-Illinois class members lacked standing, then the only claim that was ever within the district court's jurisdiction was one by persons who live in Illinois—and, if that's so, then § 1332(d)(4) requires the court to send the class to state court.

Yet although the district judge many times wrote that the non-Illinois plaintiffs lack “standing,” the word is not an accurate description of what the court held. YTB moved to dismiss the complaint with respect to non-Illinois class members under Fed.R.Civ.P. 12(b)(6), contending that choice-of-law principles articulated in Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100, 179–87, 296 Ill.Dec. 448, 835 N.E.2d 801 (2005), show that the Illinois Consumer Fraud Act does not apply to its customers outside Illinois. That's a contention that the non-Illinois class members should lose on the merits—which is what the district court held. It dismissed the complaint with prejudice. A jurisdictional dismissal, by contrast, would have been under Rule 12(b)(1) rather than 12(b)(6), and without prejudice.

The district court's language was imprecise. There's no problem with standing. Plaintiffs have standing if they have been injured, the defendants caused that injury, and the injury can be redressed by a judicial decision. Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 102–04, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). Plaintiffs allege that they are victims of a pyramid scheme that saddled them with financial loss, which YTB caused. The judiciary can redress that injury by ordering YTB to pay money to the victims. Nothing more is required for standing. If the Illinois Consumer Fraud Act law does not apply because events were centered outside Illinois, then plaintiffs must rely on some other state's law; this application of choice-of-law principles has nothing to do with standing, though it may affect whether a class should be certified—for a class action arising under the consumer-fraud laws of all 50 states may not be manageable, even though an action under one state's law could be. See In re Bridgestone/ Firestone, Inc., Tires Products Liability Litigation, 288 F.3d 1012 (7th Cir.2002). Cf. Wal–Mart Stores, Inc. v. Dukes, ––– U.S. ––––, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011). That a plaintiff's claim under his preferred legal theory fails has nothing to do with subject-matter jurisdiction, see Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946), unless the claim is so feeble as to be “essentially fictitious”. Hagans v. Lavine, 415 U.S. 528, 537, 94 S.Ct. 1372, 39 L.Ed.2d 577 (1974). Not even YTB contends that the claim by the non-Illinois residents is that weak.

To put this differently, subject-matter jurisdiction is a synonym for adjudicatory competence. Morrison v. National Australia Bank Ltd., –––U.S. ––––, 130 S.Ct. 2869, 2876–77, 177 L.Ed.2d 535 (2010). A federal court is the wrong forum when there is no case or controversy, or when Congress has not authorized it to resolve a particular kind of dispute. Other deficiencies in a plaintiff's claim concern the merits rather than subject-matter jurisdiction. Cf. Bond v. United States, ––– U.S. ––––, 131 S.Ct. 2355, 180 L.Ed.2d 269 (2011). All class members (no matter where they live) have an Article III controversy with YTB, and § 1332(d) authorizes federal judges to resolve big-stakes, multi-state class actions. Most members of the only “proposed class” live outside Illinois. It follows that § 1332(d)(4) does not apply. The jurisdiction created by § 1332(d) covers the case as a whole; resolving any part of it on the merits means that it is in federal court until the job has been finished.

We recognize that § 1332(d)(4) does not itself diminish federal jurisdiction. It directs district judges to “decline to exercise” jurisdiction otherwise present and thus is akin to abstention. See Graphic Communications Union v. CVS Caremark Corp., 636 F.3d 971, 973 (8th Cir.2011). But the language of § 1332(d)(4) does not suggest that this principle applies to a subset of the plaintiffs; it takes the “proposed class” as a given. If the suit as a whole is predominantly interstate, the district court must resolve the whole.

This means that we also need to decide whether the district court was right to think that the non-Illinois plaintiffs lack a valid claim under the Consumer Fraud Act. Avery concludes that the Act applies to nonresidents' claims when “the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois.” 216 Ill.2d at 187, 296 Ill.Dec. 448, 835 N.E.2d 801. That's a fuzzy standard. The state court tried to curtail uncertainty by giving one illustration of events that satisfy the standard, and another that does not. It said that these circumstances supported use of the Act in Martin v. Heinold Commodities, Inc., 117 Ill.2d 67, 109 Ill.Dec. 772, 510 N.E.2d 840 (1987), which Avery summarized this way:

(1) the contracts containing the deceptive statements were all executed in Illinois; (2) the defendant's principal place of business was in Illinois; (3) the contract contained express choice-of-law and forum-selection clauses specifying that any litigation would be conducted in Illinois...