Co-Authored by: Dustin M. Dow

The U.S. Supreme Court resoundingly signaled an end to a form of statutory manipulation in the class action arena Tuesday. A unanimous Court held that named plaintiffs in class actions may not defeat federal removal jurisdiction by stipulating to artificially low damage claims.  The Court rejected an oft-used tactic by plaintiffs’ attorneys to get around the broad federal jurisdiction grant of the Class Action Fairness Act of 2005 (“CAFA”).  Tuesday’s holding in The Standard Fire Insurance Company v. Knowles, No. 11-1450, 568 U.S. __ (2013), instructed lower courts to ignore such devices. 

“To hold otherwise,” wrote Justice Stephen Breyer for the Court, “would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’”

Congress enacted CAFA in 2005 as a response to what were perceived as abusive forum-shopping practices by class action plaintiffs’ attorneys who sought out favored state-court venues.  To combat the rising tide of nationally important cases being decided in state-court outposts having little connection to them, CAFA created mandatory federal removal jurisdiction whenever $5 million in dispute and minimal diversity existed. Plaintiffs, including Knowles, began navigating around CAFA by stipulating to damages of less than $5 million.  BakerHostetler attorneys filed an amicus brief in Standard Fire on behalf of the Cato Institute, highlighting CAFA’s purpose and arguing that due process violations were implicated by pre-certification stipulations such as Knowles’. 

Justice Breyer’s opinion touched briefly on the purpose behind CAFA, but turned on the non-binding nature of Knowles’ damages stipulation.  The stipulation stated that Knowles, as the named plaintiff, would not seek more than $5 million in damages.  But as Justice Breyer pointed out both during oral argument and in the opinion, a named plaintiff cannot bind unnamed class members prior to certification of a class.

“[T]he stipulation at issue here can tie Knowles’ hands, but it does not resolve the amount-in-controversy question in light of his inability to bind the rest of the class,” Justice Breyer wrote.  He distinguished stipulations by individual plaintiffs to avoid removal to federal court because “they are legally binding on all plaintiffs.”

So under Standard Fire, any purported stipulation regarding relief is nonbinding and must be ignored when analyzing removal jurisdiction under CAFA.  Interestingly, Knowles argued that a stipulation is binding as a limitation on attorneys’ fees so the amount in controversy remains below the $5 million threshold. But the Court did not consider the issue “because Knowles stipulation did not provide for that option.”

Going forward, the Supreme Court has unequivocally spoken that named plaintiffs’ damages stipulations are nonbinding and therefore may not be used to defeat CAFA removal jurisdiction.  No longer will the capacity to remove in the face of a stipulation depend upon courthouse geography.  Standard Fire restores to defendants in all jurisdictions the ability to remove to federal court so long as minimum CAFA requirements are met regardless of a plaintiff’s damages stipulation.  The impact for class action defendants is significant because it ensures them access through CAFA’s door to federal courts where class certification jurisprudence follows predictable and consistent lines, adhering to the strictures of Rule 23.

Defendants currently faced with such stipulations in pending cases, however, may not find removal available under Standard Fire.  A significant body of case law with some exceptions holds that subsequent unrelated decisions, such as a Supreme Court ruling, do not provide a basis for removal in pending cases that were not otherwise removable.  See, e.g., Sclafani v. Ins. Co. of N. Am., 671 F. Supp. 364 (D. Md. 1987).  Nevertheless, the Standard Fire Court may provide alternative relief to those defendants because as Justice Breyer noted, a plaintiff with a damages stipulation may very likely be “an inadequate representative due to the artificial cap he purports to impose on the class’ recovery.”

Bottom Line:

This opinion frees CAFA from artificial restraints and allows it to function consistent with its legislative history.  Thus, damage stipulations by named plaintiffs that attempt to defeat removal jurisdiction must be ignored when analyzing the amount-in-controversy for the purposes of jurisdiction under CAFA.