Monday at SCOTUS: revisiting the Class Action Fairness Act

January 4, 2013

One of the signal achievements of pro-business litigation reformers will come under the scrutiny of the U.S. Supreme Court on Monday, when the justices hear the case of Standard Fire v. Knowles.

Standard Fire, as I’ve previously reported, presents the question of whether class action plaintiffs can proceed in state court by stipulating to damages of less than $5 million — the threshold Congress specified for removal to federal court in 2005’s Class Action Fairness Act — or whether such stipulations improperly impinge on defendants’ due process rights. Depending on how broadly the justices interpret that issue and which way they rule, the case could be the Supreme Court’s opportunity to clamp down on the tactics of plaintiffs’ lawyers to evade CAFA — or a means of undermining tort reformers’ favorite federal law.

Here’s why. In the underlying case, the purported name plaintiff of a statewide class action claiming that Standard Fire underpaid policyholders in Arkansas signed a “sworn and binding” stipulation that he would not ask for damages of more than $5 million. That’s a magic number under CAFA. As you know, the law mandates that almost all class actions proceed in federal court, with an exception for cases involving statewide classes of fewer than 100 people or damages of less than $5 million. That might seem straightforward enough, but Standard Fire and a whole lot of other defendants claim that plaintiffs are abusing the exception, stipulating to damage claims and then, once they get classes certified in state court, extracting settlements of more than $5 million from companies worried about the risk and expense of class action litigation.

Standard Fire asked the Supreme Court to review damages stipulations under the theory that the court’s 2011 ruling in Smith v. Bayer precludes name plaintiffs from signing away damages for other members of classes that haven’t yet been certified. The insurer’s opening brief focused on the rights of absent class members. But then the class made a surprise move. Its response brief asserted that name plaintiff Greg Knowles hadn’t bound the rest of the class when he stipulated to damages of less than $5 million. Knowles’s stipulation, the brief said, merely addressed potential damages at the pleading stage. “Unless and until a class is certified, any limitation on the amount in controversy contained in the complaint or an accompanying stipulation has no effect on the merits of absent class members’ claims,” the brief said.

The class argued that Knowles has the right, as the “master of his complaint,” to frame the case the way he wants, including his assessment of damages. That assessment should guide the preliminary determination of whether the case belongs in state or federal court, the brief said, because otherwise, courts would have to engage in extensive fact-finding on damages just to determine jurisdiction. But the name plaintiff’s stipulation “cannot have a binding effect on the merits of absent class members’ claims unless and until the class is certified.”

You can see the power this theory would give plaintiffs if it were adopted by the Supreme Court. Name plaintiffs in class actions could stipulate to less than $5 million in damages in order to stay in state court, yet the class as a whole wouldn’t be restricted by that stipulation. Name plaintiffs themselves can’t repudiate their own stipulations, but in the class certification process, other class members could challenge their damages assessments or overseeing judges could toss name plaintiffs’ damages stipulations as contrary to the class’s interest. That uncertainty alone would add to plaintiffs’ leverage in settlement discussions.

Standard Fire’s reply brief, filed on Dec. 19, asked the justices not to permit class action plaintiffs to get away with using unenforceable damages stipulations to stay in state court, calling the scenario sketched by the Knowles brief a “legal fiction.” Congress, the brief said, specifically intended to avert the “gamesmanship” of class action plaintiffs when it passed CAFA.

The insurer’s brief gives the Supreme Court a way to decide the case narrowly, arguing that the Knowles brief’s description of his stipulation effectively concedes that damages could exceed $5 million. If the justices agree, they could simply overturn the district court ruling that remanded the case to state court, send the Knowles class action to federal court and call it a day.

But class action watchers are geared up for a more comprehensive discussion of CAFA. The case has inspired copious (and fervent) amicus briefing on both sides. I’ve told you, for instance, about a filing by the National Association of Manufacturers, whose lawyers at Jones Day have proposed a reading of CAFA that would result in federal court jurisdiction for every class action involving plaintiffs and defendants from different states; Public Citizen and Public Justice filed an amicus brief for Knowles that rejected NAM’s reasoning. (Professor Kevin Walsh of the University of Richmond School of Law has a very thorough discussion of the NAM theory and the Public Citizen response.) And the lawyers who will argue the case Monday couldn’t be more qualified to tell the court about class actions: Theodore Boutrous of Gibson, Dunn & Crutcher will argue for Standard Fire and David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel represents the class.

Boutrous and Frederick on the future of class action litigation: It should be an exciting argument.

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