In an important procedural decision, the U.S. Supreme Court held this week in Standard Fire Insurance Co. v. Knowles¹ that a class action representative has no power to stipulate to damages of less than $5 million for the proposed class in order to defeat removal to federal court under the Class Action Fairness Act.² The Court, speaking unanimously, held that the plaintiff, a purported class representative, lacked the authority to bind all proposed class members to the representation that damages of less than $5 million would be sought. This is a very important decision for defendants and insurers since it prevents counsel for plaintiffs from “slicing and dicing” class action claims so as to keep them in more plaintiff-friendly state court forums by avoiding removal to federal court under the Class Action Fairness Act.
Plaintiff filed a proposed class action in Arkansas state court against defendant insurer, alleging that it had systematically underpaid hundreds (and possibly thousands) of claims under homeowners’ policies it had issued. Plaintiff alleged in the Complaint that he would seek damages of less than $5 million in the aggregate, the threshold limit for removal of cases to the federal district court under the Class Action Fairness Act. Defendant Standard Fire removed the case to federal court, arguing that, in fact, the amount in controversy exceeded $5 million. However, in view of the stipulation in the Complaint, the district court concluded that the amount fell below the threshold requirement and remanded the matter to state court.
Defendant appealed the remand order, as is allowed under the Class Action Fairness Act, and the Supreme Court reversed, holding that the District Court should not have considered the stipulation when determining whether the amount in controversy exceeds $5 million. The Court resolved the issue on a simple legal principle: the plaintiff did not have authority to enter into a stipulation to bind class members where the class had not yet been certified.³ The Court pointed out that plaintiffs could commence $100 million worth of actions by filing twenty-one cases in state court, each seeking damages just below the $5 million threshold, which would result in twenty-one class action cases clogging state court dockets and would run contrary to the Class Action Fairness Act’s primary objective of ensuring that federal courts consider interstate cases of national importance.
Knowles is a significant decision for defendants who can frequently be haled into state courts where discovery can be wide-ranging, expensive, and duplicative. The Supreme Court’s decision effectively prohibits class action plaintiffs from manipulating the judicial system by “slicing and dicing” claims in order to defeat federal jurisdiction and also prevents certain state court class action abuses that Congress intended to end by passing the Class Action Fairness Act in 2005.
While plaintiffs undoubtedly will continue to commence class actions in state court, those class actions which genuinely seek substantial damages on the part of a large number of purported class members can be removed to, and litigated in, the federal courts.
¹ ___ U.S. ___, No. 11-1450 (Mar. 19, 2013).
² 28 U.S.C. § 1332(d).
³ Slip Op. at 4.