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March 26, 2013Client Alert

Supreme Court Limits Class Action Plaintiffs’ Ability to Avoid Federal Court

In general, class action defendants want to litigate in federal court where the law governing class certification is more advantageous. Unsurprisingly, plaintiffs’ counsel have engaged in numerous tactics to avoid federal courts.

 

 

The U.S. Supreme Court recently put an end to one such practice. In Standard Fire Insurance Co. v. Knowles, the Court unanimously ruled that putative class representatives cannot avoid federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA) by declaring that the class will not seek or accept damages exceeding $5 million. See Case No. 11-1450, 2013 U.S. LEXIS 2370 (U.S. Mar. 19, 2013). This decision will make it easier for defendants to remove large class actions from state to federal court.

 

 

Class Action Fairness Act of 2005

 

CAFA, enacted in large part to prevent plaintiff forum-shopping, was meant to ensure class actions of a certain size and interstate nature would be heard in federal court. Pursuant to CAFA, federal courts have original jurisdiction over class actions when, among other things, the amount in controversy is over $5 million. To determine the amount in controversy, CAFA requires a district court to aggregate the value of all the individual claims of every putative class member.

 

 

Standard Fire Ins. v. Knowles

 

Knowles filed a state-court class action complaint in Miller County, Arkansas, alleging Standard Fire Insurance Company (Standard Fire) breached its homeowner insurance policies by not paying contractor’s retention fees. Knowles sought to defeat federal jurisdiction by declaring, pre-certification, that both, “Plaintiff and Class . . . will seek to recover total aggregate damages of less than five million dollars.”

 

 

Standard Fire removed the case to federal court under CAFA, and Knowles moved to remand. Although the federal district court found Standard Fire had met its burden of proof in showing the amount in controversy exceeded $5 million, it nonetheless granted Knowles’ motion to remand based entirely on Knowles’ declaration. This remand was in accordance with Eighth Circuit precedent, as the plaintiff is “the master of the complaint.” Bell v. Hershey Co., 557 F.3d 953 (8th Cir. 2009) (holding named plaintiffs can avoid federal jurisdiction by purporting to limit the damages of themselves and the putative claims to less than $5 million). After the Eighth Circuit denied permission to appeal, the Supreme Court granted certiorari.

 

 

The question before the Supreme Court was whether, in a putative class-action, a plaintiff could stymie federal jurisdiction simply by declaring the class he or she wishes to represent will not seek damages in excess of $5 million. The Supreme Court unanimously vacated and remanded, holding the stipulation should have been ignored for purposes of determining jurisdiction. Indeed, the Court held Knowles’ declaration was binding on him but not on putative class members. This is because, “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Smith v. Bayer Corp., 564 U.S. __ (2011). As jurisdiction is evaluated at the time the case was filed, and as Knowles was the only plaintiff at that time, the declaration conceding the amount in controversy was binding only as to Knowles and not as to absent class members. The Court pronounced “the stipulation at issue here can tie Knowles’ hands, but it does not resolve the amount-in-controversy question in light of his inability to bind the rest of the class.”

 

 

Implications

 

This ruling helps ensure class action plaintiffs cannot circumvent CAFA’s purpose simply by purporting to limit their own damages and the damages of class members they do not yet represent. This protection for absent class members is consistent with the Supreme Court’s recent ruling in Smith v. Bayer Corp., that proposed class actions do not bind unnamed class members. This case further reinforces the Supreme Court’s trend of taking substance over form; looking beyond artful pleading tactics and analyzing the actual facts of the case at hand.

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