U.S. Supreme Court Prevents Class Action Plaintiffs from Evading Federal Jurisdiction under CAFA

March 20, 2013

On March 19, 2013, the U.S. Supreme Court unanimously held that a putative class representative may not evade federal jurisdiction under the Class Action Fairness Act of 2005 ("CAFA") by attempting to stipulate that the class will not seek to recover more than $5 million.  In an opinion authored by Justice Breyer in Standard Fire Insurance Co. v. Knowles, No. 11-1450, the Court held that a named plaintiff cannot bind absent members of the proposed class before the class is certified, and therefore cannot unilaterally limit the claims of the absent class members. 

Greg Knowles filed a putative class action in Arkansas state court against the Standard Fire Insurance Company, alleging that Standard Fire had underpaid general contractor fees in repairs covered by homeowners’ insurance policies.  Knowles sought to certify a class of Arkansas policyholders and attached an affidavit to the complaint stipulating that he would "not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate."

Standard Fire removed the case to federal district court under CAFA, arguing that the amount in controversy exceeded CAFA’s $5 million amount-in-controversy requirement.  Although the district court found that the amount in controversy would have been above the $5 million threshold absent the stipulation, it remanded the case to state court in light of the stipulation.  Standard Fire petitioned for permission to appeal the remand order, but the Eighth Circuit declined to hear the appeal. 

The Supreme Court granted Standard Fire’s petition for a writ of certiorari and, after briefing and argument, unanimously reversed the remand order.  The Court explained that the lower courts "should have ignored the stipulation" altogether (slip op. at 7), because "a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified."  Id. at 4 (citing Smith v. Bayer Corp., 131 S. Ct. 2368, 2380 (2011)).  The Court rejected Knowles’s argument that class action plaintiffs, as "masters of their complaints," can "avoid removal to federal court . . . by stipulating to amounts at issue that fall below the federal jurisdictional requirement."  Id. at 6-7.  Although that is true for individual plaintiffs, a stipulation in the class-action setting "does not resolve the amount-in-controversy questions in light of [the named plaintiff’s] inability to bind the rest of the class."  Id. at 7. 

The Court further explained that, by its plain terms, CAFA provides that "the claims of the individual class members shall be aggregated" to determine whether jurisdiction exists.  Id. at 3 (quoting 28 U.S.C. § 1332(d)(6)).  Thus, "the statute tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of Knowles’ proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case."  Id. at 3.  To hold otherwise," the Court explained, "would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding," thereby permitting the "subdivision of a $100 million action into 21 just-below-$5-million state-court actions"–a result that would "squarely conflict with the statute’s objective" of "ensuring ‘Federal court consideration of interstate cases of national importance.’"  Id. at 6. 

The Court’s decision is of great importance for defendants targeted by class actions in plaintiff-friendly state-court jurisdictions, particularly "magnet" jurisdictions like Miller County, Arkansas.  The decision enforces the clear provisions of CAFA and sends a strong message that jurisdictional manipulations by class-action plaintiffs’ lawyers will not succeed.  In enacting CAFA, Congress sought to ensure that sizeable interstate class actions are heard in federal court, where Rule 23 provides uniform class-certification standards and affords defendants with important due process protections.  After the Knowles decision, plaintiffs will no longer be able to evade federal courts and subject defendants to the abuses of certain state courts that lack such protections by slicing and dicing class-action claims. 

Gibson Dunn represented Standard Fire on the merits before the U.S. Supreme Court.  Theodore J. Boutrous, Jr. argued the case in the U.S. Supreme Court on January 7, 2013.

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