Are class action lawyers in Arkansas snubbing SCOTUS (and CAFA)?

October 4, 2012

Over the summer, the justices of the U.S. Supreme Court made one of the most improbable grants of certiorari you will ever see.

The timing alone was unusual. The court granted cert in Standard Fire Insurance v. Knowles on Aug. 31, almost a month before the first conference of the new term on Sept. 24. But that’s just the beginning of this case’s oddities. There’s no split among the federal circuits on the issue presented in Standard Fire: whether a class action plaintiff can defeat removal to federal court under the Class Action Fairness Act by stipulating on behalf of the entire class to seek less than $5 million, the statutory cutoff for a state-court class action. In fact, there couldn’t possibly be a circuit split on that question because only one appellate court, the 8th Circuit Court of Appeals, has addressed it. And though Standard Fire comes out of 8th Circuit turf in Arkansas, it is not even the case in which the 8th Circuit opined on these class action damages stipulations, which have become an oft-used tactic of plaintiffs’ lawyers who want to keep their cases in state court.

Indeed, as name plaintiff Greg Knowles argued in his brief opposing cert, there is no appellate opinion at all in the Standard Fire case. After a federal court in Arkansas remanded Knowles’s class action to state court in Miller County, where it was filed, the 8th Circuit twice declined to review the district court’s remand opinion. Yet the Supreme Court nevertheless agreed to take the case. Standard Fire’s merits brief is due later this month, and oral arguments will take place later in the term.

That’s quite an extraordinary procedural history for a Supreme Court case, and Standard Fire’s new appellate counsel at Gibson, Dunn & Crutcher regard the high court’s eagerness to hear the case as a sign that the justices take very seriously Standard Fire’s allegations that the plaintiffs’ lawyers are using improper tactics to keep their case in the friendly confines of Miller County state court. So Standard was taken aback last month when class action lawyers at Keil & GoodsonNix, Patterson & Roach; and Crowley Norman refused the insurer’s informal request to stay the litigation until the Supreme Court has decided whether the case belongs in state or federal court. Without an informal deal to defer to the high court, Standard’s class action defense lawyers at Mitchell, Williams, Selig, Gates & Woodward formally moved to stay the state court case in September.

The class action lawyers promptly opposed the motion. Even if the Supreme Court decided that the damages stipulation improperly bound absent class members under the court’s ruling last year in Smith v. Bayer — which class counsel emphatically believe it does not — the plaintiffs’ lawyers argued that their damages in the statewide class action would still be under $5 million, even without the stipulation. Whichever way the Supreme Court rules, they said, the case is staying in state court.

On Thursday, Miller County Judge Kirk Johnson will hear arguments on the stay motion. Standard counsel Theodore Boutrous of Gibson Dunn told me Wednesday that the plaintiffs’ insistence on continuing to litigate while the case is before the Supreme Court reflects a lack of respect for the justices and for the jurisdiction of the highest federal court in the land. “It’s somewhat emblematic,” Boutrous said.

Standard has more motive here than merely showing its regard for the wisdom of the Supreme Court; the insurer claims that if Johnson doesn’t stay the class action against it, which involves allegations that it refused to pay policyholders’ contractors’ fees, Standard will have to spend upwards of $2 million to comply with the discovery demands the class has already served. But that’s the modus operandi of the plaintiffs’ lawyers in the case, according to Standard. By the insurer’s telling, in its petition for certiorari and the 8th Circuit brief that’s attached to the petition, the plaintiffs’ lawyers in this case are running what amounts to a class action factory in Miller County. Beginning about a decade ago, lawyers began filing national and statewide cases against insurers and other large defendants in Johnson’s court, where they were permitted to engage in extensive discovery before the defendants filed motions to dismiss or motions opposing class certification.

As a result — at least according to Standard, other defendants and the U.S. Chamber of Commerce, which supported Standard’s cert petition — defendants were forced to settle to avoid discovery costs and the uncertainty of trial before plaintiffs-friendly jurors. In an 8th Circuit brief filed last March in another Miller County insurance class action, the insurance company Travelers included a chart outlining the recoveries of the small fraternity of class counsel filing these Arkansas state-court cases: Plaintiffs reached more than $1 billion in settlements in about 26 cases, for which they received $175 million in fees.

You can regard that as a tribute to the skill of class counsel — or you can say it’s exactly why Congress passed the Class Action Fairness Act, removing class actions worth more than $5 million to federal court. All of the Arkansas settlements cited in the Travelers brief were in cases filed before CAFA took effect in 2007. Since then, according to Gibson Dunn, the plaintiffs’ lawyer group has filed at least 20 more class actions in state court in Arkansas. And in all of them, the name plaintiffs have included stipulations that they do not intend to seek damages of more than $5 million. That’s careful language; as both Travelers and Standard have pointed out, the stipulations don’t say the class won’t accept more than $5 million if it’s offered in a settlement. In fact, according to the Travelers brief, the plaintiffs suggested a settlement of $21 million to one group of insurers they sued in a post-CAFA class action, despite the name plaintiffs’ $5 million stipulation.

So far, defense claims that the stipulations are a sham to keep cases out of federal court have gone nowhere, at least in the 8th Circuit. The appeals court turned down appeals by Travelers and Standard, and when it finally took a case earlier this year, handed down a five-page ruling okaying stipulations in a case called Rolwing v. Nestle, rejecting arguments that absent class members cannot be bound by name plaintiffs’ promises not to seek more than $5 million.

That’s the due process question now before the Supreme Court. Thursday’s hearing will determine whether Standard can sit back and wait for an answer or continue to dump dollars into a purportedly $5 million case.

Plaintiffs’ lawyers Michael Angelovich and Brad Seidel didn’t respond to a request for comment.

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