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March 2013

U.S. Supreme Court Eliminates Loophole Plaintiffs Use to Avoid Federal Court

The U.S. Supreme Court recently held a class action plaintiff cannot stipulate prior to class certification that the plaintiff and the proposed class will not seek damages that exceed $5 million in total. The opinion closes a loophole that allowed plaintiffs to avoid federal jurisdiction under the Class Action Fairness Act (CAFA). 

CAFA provides a federal district court with original jurisdiction over a civil class action lawsuit if, among other things, the matter in controversy exceeds the sum or value of $5 million.  In determining whether the matter exceeds that sum, the claims of the individual class members are aggregated.

In Standard Fire Ins. Co. v. Knowles, 2013 U.S. LEXIS 2370 (U.S. Mar. 19, 2013), the class representative stipulated that he would not at any time during the case seek damages for the class in excess of $5 million.  After the defendant removed the case to federal court, the plaintiff argued for remand on the grounds the district court lacked jurisdiction because the amount in controversy fell below the $5 million threshold.  The district court found that, but for the plaintiff’s stipulation, the resulting sum would have exceeded $5 million. 

In its opinion, the Supreme Court reasoned that, since a plaintiff who files a proposed class action cannot legally bind members of the proposed class before it is certified, the stipulation proffered by Greg Knowles does not bind anyone but Knowles and, therefore, did not impact the value of the putative class members’ claims.  For jurisdictional purposes, a federal court’s inquiry is limited to examining the case at the time it was filed in state court.  When Knowles filed his lawsuit, he lacked the authority to concede the issue of the amount in controversy for the absent class members.  Therefore, the district court erred when finding that the pre-certification stipulation could overcome the CAFA jurisdictional threshold.  However, the high court declined to decide whether stipulations prior to class certification that limit attorneys’ fees can be binding since Knowles’ stipulation did not provide for that option.

The court’s ruling will have a significant impact since class action plaintiff attorneys can no longer unilaterally stipulate to limit a class’ damages in an effort to keep the case in state court, where class certification may be easier to accomplish.  Now, when determining the amount in controversy, federal courts will be directed to ignore any pre-certification stipulations concerning the class recovery offered by the representative plaintiff.

Commercial Litigation

Commercial Litigation