Co-authored by Dustin M. Dow

A familiar debate involving alternative methods of statutory interpretation erupted again at the Supreme Court on Monday, January 7, 2013.  The debate unfolded in The Standard Fire Insurance Company v. Knowles, No. 11-1450, a case that could have a significant impact on the business community that has benefitted from several recent class action rulings by the Court. 

Standard Fire will be the latest installment in the Court’s developing class action jurisprudence, and Monday’s oral argument suggests that it could produce an interesting majority when the decision is issued sometime before July.  Moreover, the potential effect of the decision was underscored by Justice Kagan in a remark to Theodore J. Boutrous, attorney for Standard Fire, near the end of oral arguments.  “Then you really are asking us to blow up the whole world,” Justice Kagan said in response to Boutrous’ contention that putative class action representatives should not be able to defeat federal court removal jurisdiction by stipulating to an artificially low set of damages below the threshold for federal court jurisdiction.

Whether Standard Fire succeeds in “blow[ing] up the whole world”, depends on how a majority of the Court views the class action world and one of the statutes governing it, the Class Action Fairness Act of 2005 (CAFA).  The oral argument suggested that perhaps a reluctant majority of six or seven justices may be inclined to side with Standard Fire in order to stem plaintiffs’ allegedly repeated artificial bypasses of CAFA’s rules.  Yet the argument also revealed that no Justice is having an easy time resolving the conflict between statutory text and its purpose, as expressed in the legislative history.

Neither party disputed that the primary purpose of CAFA was to stop perceived class action abuses.  The statute targeted plaintiffs’ attorneys who artfully drafted class actions to prevent removal to federal court.  One of CAFA’s primary reforms involved a provision that provided federal removal jurisdiction so long as the aggregate claims of class plaintiffs surpassed $5 million.  Under CAFA’s removal provision, a defendant facing class action liability in a plaintiff-friendly state court venue could remove the case to federal court where the rules governing class actions will be more uniformly and fairly applied.  But, CAFA does not expressly prohibit plaintiffs’ attorneys from stipulating to damages of less than $5 million, which was the tactic the Standard Fire plaintiffs used to defeat federal removal jurisdiction, even though the stipulation is not binding on absent class members.  According to Boutrous, plaintiffs’ lawyers were “slicing and dicing the classes up into pieces to thwart jurisdiction and manipulate jurisdiction.” 

Even if Boutrous’ arguments are accurate, the Court will have to decide if such manipulation under CAFA is permissible.  Resolving the difference between what CAFA says and what it means will require the Justices to engage in a struggle they’d rather not have: whether to defer to the actual text of the statute or to allow the legislative history behind the statute to close what Justice Breyer termed a strategic “loophole because it swallows up all of Congress’ statute.”

For a court that has been concerned with reforming class action law in recent years, the prospect of taking another step in the same direction may be attractive.  It will nonetheless be fraught with the peril of elevating the statutory purpose above text.  After all, as Justice Kagan noted, “usually we look to the text and the text makes very clear that Congress was concerned about many things,” but the CAFA text “did not eliminate the . . . master of the complaint rule,” which would allow plaintiffs to stipulate to an artificially low level of damages.  Chief Justice Roberts acknowledged as much, but seemed willing to explore the legislative history of CAFA. “It’s very difficult to speculate about Congress . . . about what they would have intended,” he said to Knowles attorney David C. Frederick.  But “they may not have thought about the idea that there will be class actions worth a lot more than $5 million, but the plaintiff’s lawyer will only ask for less than $5 million.” The potential for abuse was substantial Justice Roberts said, because a permissible damages stipulation “gives extraordinary leverage to the individual class representative – precisely the sort that Congress was worried about.”

Signaling some agreement with Justice Roberts’ position, Justice Breyer pressed Frederick to justify why a jurisdiction-defeating stipulation that would not actually be binding on absent class members was anything but a “way around” CAFA whose “purpose seems to strongly cut the other way.”  When Frederick responded that “Congress could have addressed any number of those kinds of issues” but didn’t, Justice Kennedy jumped in and accused him of trying to “evade the statute.”

It is perhaps a reflection of the tension in the courtroom that the Justices accused one side of the debate of “evad[ing] the statute” and the other side of wanting to “blow up the whole world.” No clear answer emerged at the end of the argument, except that a majority of the Justices seemed intrigued by the potential of adhering to Congressional purpose even if it meant resorting to legislative history.  On the other side was Justice Kagan, emphasizing a textual approach that would result in preserving the status quo in class action law.

The Bottom Line:

The Supreme Court is deciding whether a party can stipulate to an amount in controversy less than $5 million to avoid CAFA removal.  The case embodies the on-going interpretative conflict between analyzing the text of a statute versus the intent of the law.  CAFA’s rich legislative history reveals an intent to eliminate manipulative tactics used by plaintiffs’ counsel to defeat CAFA removal.  If the Court gives voice to CAFA’s intent, the resulting decision could dramatically alter class action jurisprudence.