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Supreme Court Closes Class Action Loophole

By Jonathan B. Stepanian, Litigation News Associate Editor – July 15, 2013

 

The United States Supreme Court attempted to close the door on litigants doing an end-run around the Class Action Fairness Act (CAFA) requirement that certain class actions be filed in federal court. Some plaintiffs attempted to file class actions subject to CAFA in more favorable state court venues. The Supreme Court attempts to end this practice but its ruling may give rise to more litigation over remand and removal. Standard Fire v. Knowles.


Creative Avoidance of Federal Jurisdiction
CAFA vests federal courts with original jurisdiction over class actions if, among other things, “the matter in controversy exceeds the sum or value of $5,000,000.” CAFA states that the “claims of the individual class members shall be aggregated” to determine whether the value of the claim exceeds the statutory threshold.


In response to CAFA, some plaintiffs began stipulating or pleading that the aggregate value of the class claims did not exceed five million dollars and would file their claims in state court. If the defendants sought to remove the case to federal court, the plaintiffs would point to their stipulation or pleading and assert that they properly filed the claim with the state court.


Standard Fire faced a class claim that pled damages below CAFA’s monetary threshold. Greg Knowles, the plaintiff, filed the proposed class action in Arkansas state court against Standard Fire. He asserted that Standard Fire failed to include a general contractor fee when the company made certain homeowner’s insurance loss payments. Knowles’ putative class included “hundreds, and possibly thousands” of similarly harmed Arkansas policyholders. Knowles nonetheless pled that “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.”


Ability to Bind Entire Class Splits Circuits
Standard Fire attempted to remove the case under CAFA. The United States District Court for the Western District of Arkansas determined that the aggregate value of the amount in controversy likely totaled just more than five million dollars. It concluded, however, that Knowles’ stipulation took the case outside of CAFA’s scope and remanded the case back to Arkansas state court. Standard Fire appealed but the Eighth Circuit Court of Appeals would not accept the interlocutory appeal. The Eighth Circuit’s denial allowed the District Court’s reliance on Knowles’ damages stipulation to stand.


Not all courts have agreed that a class action plaintiff could circumvent CAFA’s jurisdictional requirement by a stipulation limiting damages. The Sixth, Seventh, and Tenth Circuits previously stated that a named plaintiff cannot bind all members of the class with such a stipulation. The Eighth Circuit, however, relied exclusively on the plaintiff’s pleading to determine if removal under CAFA was appropriate.


Because of this split, the Supreme Court accepted Standard Fire’s appeal to resolve “divergent views in the lower courts” concerning a plaintiff’s ability to subvert CAFA with a stipulation that the value of the total claim is less than five million dollars. The Court accepted Standard Fire for review after deciding, in Smith v. Bayer Corp., that a plaintiff cannot bind non-party members of the class until the class action is certified.


The Court’s prior decision in Smithv. Bayer Corp. served as the foundation for its unanimous decision in Standard Fire. Based on Smith, the Court held that the district court improperly relied on Knowles’ stipulation to overcome its finding that the amount in controversy exceeded CAFA’s five million dollar threshold. The Court stated that the non-binding nature of the stipulation did not resolve the inquiry regarding the amount in controversy. The district court, instead, should have “ignored that stipulation” according to the Court.


Expect More Litigation in Absence of Bright-Line Rule
The Court’s decision was significant, but not surprising, according to Catha A. Worthman, Oakland, CA, a member of the ABA Section of Litigation Class Actions and Derivative Suits Committee and coauthor of “The Amount in Controversy Under CAFA” in The Class Action Fairness Act (ABA, forthcoming). “Once it was headed to the Supreme Court, particularly after Smith v. Bayer, I think that most people expected that the Court would hold that the stipulation couldn’t bind absent class members,” says Worthman.


Although the Supreme Court may have intended to clarify the issue, its decision may ultimately create more litigation over remand and removal. “Where plaintiffs had a clear device to prevent removal that worked in some courts—a stipulation limiting damages—they won’t have that anymore,” observes Worthman.


Instead, now that courts will be left to determine an aggregate value, she believes that plaintiffs will attempt to be more specific as to the amount demanded or the elements of the amount in controversy to assist in the courts’ determination. “Courts will still consider the plaintiff’s allegations but they won’t be binding in the way a stipulation is in a traditional individual diversity case,” says Worthman.


Keywords: class action, Class Action Fairness Act, CAFA, amount in controversy


 
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