U.S. Supreme Court to Decide Whether a Class Action Fairness Act Loophole Should be Closed

On August 31, 2012, the U.S. Supreme Court accepted its first Class Action Fairness Act (CAFA) case. In Standard Fire Insurance Co. v. Knowles, U.S., No. 11-1450, certiorari granted 8/31/12, the Court will consider whether a class plaintiff may stipulate to limit his damages to be less than the $5 million CAFA jurisdictional threshold in order to avoid removal to federal court. Read the petition for writ of certiorari.

The question presented to the Court is as follows:

When a named plaintiff attempts to defeat a defendant’s right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a “stipulation” that attempts to limit the damages he “seeks” for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the “stipulation,” exceeds $5 million, is the “stipulation” binding on absent class members so as to destroy federal jurisdiction?

CAFA became law in 2005 as a way to halt the filing of large class action lawsuits of national significance in a few select state court “magnet jurisdictions” that were known to be friendly to class action plaintiffs, including Miller County, Arkansas (where the Standard Fire case was filed). CAFA provides that when a named plaintiff files a putative class action in a state court against a defendant that is not a citizen of the state where suit is filed, federal jurisdiction exists if the $5 million amount in controversy is satisfied.

Class action plaintiff attorneys have recently attempted to circumvent CAFA by utilizing the following procedural maneuver: although the actual amount in controversy on the claims pleaded exceeds $5 million, the complaint is accompanied by a purportedly binding stipulation limiting to under $5 million not only the named plaintiff’s own damages, but also the damages of the putative class members the plaintiff hopes to, but does not yet, represent.

The complaint in Standard Fire contained just such a stipulation. But Standard Fire notes in its petition for writ of certiorari that the plaintiff left some doors open, including potentially modifying or negating his “stipulation” at a later date, limiting the damages the plaintiff could accept for the class if awarded at trial, and wording the stipulation so that it will not apply if the class definition is altered at a later point.

Standard Fire removed the case from the Miller County, Arkansas Circuit Court to the Western District of Arkansas, and the plaintiff moved to remand. The District Court then concluded that the plaintiff’s “stipulation” was sufficient for him to prove that the amount in controversy fell below $5 million — even though the named plaintiff had never been authorized to represent the class members or to stipulate away their rights.

Standard Fire petitioned the Eighth Circuit of Appeals for permission to appeal pursuant to CAFA; the petition was denied without explanation. After Standard Fire petitioned for rehearing en banc, the Eighth Circuit issued a new opinion on the CAFA issue. In Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), the Eighth Circuit affirmed an order of remand under CAFA based on a “stipulation” by the named plaintiff purporting to limit the damages of putative class members to less than $5 million.

After issuing the opinion in Rolwing, the Eighth Circuit again denied rehearing to Standard Fire without comment.

In its petition for writ of certiorari, Standard Fire explains that the Eighth Circuit’s decision and others like it violate the constitutional rights of proposed class members and the basic principles of removal law and class action law. Under the Court’s recent decision in Smith v. Bayer Corp., putative class members are not bound by actions taken by named plaintiffs or litigation outcomes before certification.

Therefore, Standard Fire reasons that a named plaintiff has no right to stipulate a binding cap on the damages of people he or she does not represent. Such a limitation, if effective at the time suit is filed, would violate the due process rights of the proposed class members.

Note that there is a split in the federal appeals courts — the Fifth, Sixth and Seventh Circuits have all issued opinions suggesting that they would disagree with the Eighth Circuit on this issue. For example, in Smith v. Nationwide Prop. & Cas. Ins. Co., 505 F.3d 405, 407 (6th Cir. 2007), the Sixth Circuit explained that “[a] disclaimer in a complaint regarding the amount of recoverable damages does not preclude a defendant from removing the matter to federal court upon a demonstration that damages are more likely than not to meet the amount in controversy requirement, but it can be sufficient absent adequate proof from defendant that potential damages actually exceed the jurisdictional threshold.”

 

However, the Eighth Circuit, in Rolwing, was the first Circuit directly to address the CAFA question presented. Stay tuned as we continue to follow this case as it moves through the Supreme Court.