Cruz-Alvarez_FFeatured Expert Column

Frank Cruz-Alvarez, Shook, Hardy & Bacon, L.L.P. (co-authored with Talia Zucker, Shook, Hardy & Bacon, L.L.P.)

On March 19, 2013, the Supreme Court of the United States issued a unanimous opinion in Standard Fire Insurance Company v. Knowles, No. 11-1450, 2013 WL 1104735 (2013), derailing a plaintiff’s efforts to sidestep the provisions of the Class Action Fairness Act (“CAFA”) by way of a precertification stipulation for damages of less than $5 million.  With clever plaintiffs’ lawyers constantly dreaming up ways to prevent removal and avoid the rigorous proceedings in federal court, this opinion will assist defendants in future jurisdictional battles by eliminating this particular avenue for defeating jurisdiction.

Knowles had filed a putative class action lawsuit in Arkansas state court against Standard Fire Insurance Company.  Knowles, 2013 WL 1104735, at *2.  In describing the relief sought, the complaint provided that plaintiff and the class (which had yet to be certified) would seek to recover total aggregate damages of less than $5 million.  Id.  The insurance company removed the case to federal court pursuant to CAFA.  Id.  Although the district court found that in the absence of the stipulation the amount in controversy would have fallen just above the $5 million threshold, it remanded the case to state court in light of the stipulation.  Id.  The insurance company appealed the remand order, but the Eighth Circuit declined to hear the appeal.  Id.  The Supreme Court, however, granted the insurance company’s writ of certiorari in light of conflicting lower court viewpoints.  Id.

CAFA provides federal courts with original jurisdiction over class actions in which, among other things, the matter in controversy exceeds $5 million.  28 U.S.C. § 1332(d)(2).  To determine whether that sum is exceeded, the claims of the individual class members are aggregated. § 1332(d)(6).  The issue presented to the Supreme Court – whether a precertification stipulation can defeat federal jurisdiction under CAFA – was answered in the negative.  Knowles, 2013 WL 1104735, at *3.

In a well-reasoned opinion, the Court explained that a stipulation must be binding.  Id.  And, “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”  Id.  Simply put, Knowles (and other plaintiffs seeking to bring putative class actions), lack the authority to concede the amount in controversy issue for absent class members.  Id. at *4.  Although a crafty strategy by plaintiff’s lawyers, the use of a precertification stipulation will not serve to evade federal jurisdiction when the CAFA jurisdictional threshold has been satisfied.  Id.  The Supreme Court did observantly remark, however, that individual litigants may avoid removal to federal court by stipulating to a cap on their damages because such stipulations are legally binding on the plaintiff as master of their complaint.  Id. at *5.

The ruling is certainly a victory for businesses which find the state judiciary and state juries far too lenient with plaintiffs.  They will no doubt hope that Knowles inspires lower courts to adhere to the purposes of CAFA and that it will discourage frivolous class action lawsuits.  Indeed, plaintiffs’ lawyers seeking to game the system by keeping their cases in state courts, or what they deem a more favorable jurisdiction, should dither before hastily filing a class action lawsuit.  Now, only time will tell what other strategies counsels for plaintiffs can fashion to evade federal court.