SCOTUS to class action bar: You can’t stipulate out of federal court

By Alison Frankel
March 20, 2013

The U.S. Supreme Court’s¬†unanimous seven-page ruling¬†Tuesday in¬†Standard Fire v. Knowles¬†proves that sometimes the best way to get through a thorny briar patch is with a machete. The court cut through¬†incredibly complex jurisdictional arguments¬†and¬†what-if scenarios¬†to reach the essential intent of the Class Action Fairness Act, a law passed in 2005 to assure that big-money class actions are litigated in federal court. And according to the Supreme Court’s decision, name plaintiffs and their lawyers cannot evade federal court jurisdiction by simply stipulating that their damages fall beneath CAFA’s $5 million threshold.

The ruling, written by Justice¬†Stephen Breyer, should put an end to a tactic by which¬†class action lawyers have managed¬†to keep their cases in plaintiff-friendly state courts, according to¬†Theodore Boutrous¬†of¬†Gibson, Dunn & Crutcher, who argued for the insurer Standard Fire. (Boutrous actually used the word “abuses” rather than tactics but I’ll give plaintiffs’ lawyers the benefit of the doubt.) You probably remember the backstory: After CAFA was enacted, enterprising class action lawyers in places like Miller County, Arkansas, figured out that if name plaintiffs stipulated to classwide damages of less than $5 million (and also avoided CAFA’s other jurisdictional criteria), they could have cases remanded to state court after defendants removed them to federal court under CAFA. Class action defendants groused that once the cases were back in state court they were often forced to settle for more than $5 million simply to avoid the risk of class litigation before state court judges, but the 8th Circuit Court of Appeals was unsympathetic to their purported plight.

The Supreme Court’s 2011 ruling in¬†Smith v. Bayer¬†gave Standard Fire a wedge, however. Last summer, after the 8th Circuit refused to hear its interlocutory appeal of the remand of Knowles’s class action to state court, the insurer went to the justices with a¬†petition for certiorari, arguing that Smith v. Bayer precluded name plaintiffs from stipulating damages on behalf of absent class members. The justices were apparently so intrigued by the question (or disturbed by Standard Fire’s description of events in Miller County) that the court made an¬†extraordinary grant of certiorari¬†before conferencing on the case.

Smith v. Bayer¬†put Knowles in a bind, as his Supreme Court counsel,¬†David Frederick¬†of¬†Kellogg, Huber, Hansen, Todd, Evans & Figel¬†implicitly acknowledged in the name plaintiff’s¬†merits brief¬†to the court last November. Knowles couldn’t sign away the rights of the rest of the class, but without stipulating that damages were less than $5 million, he couldn’t get back to state court. So Frederick conceded that Knowles’s stipulation was binding only on him, not on everyone else in the purported class suing Standard Fire. The name plaintiff’s assessment of damages, the brief argued, was relevant for the purposes of determining jurisdiction under CAFA, but if the class was subsequently certified, the stipulation “has no effect on the merits of absent class members’ claims.” Nevertheless, the brief contended, name plaintiffs are the masters of their own complaints, so federal judges weighing remand motions must accede to their preliminary assessment of damages.

That theory could have¬†gutted CAFA, as I’ve explained. But as the justices signaled at¬†oral arguments¬†in January, they weren’t buying Knowles’s attempt to have his jurisdictional cake and then to feast on damages. Breyer’s opinion makes that abundantly clear. To treat a non-binding stipulation as if it were binding simply for the purpose of determining jurisdiction under CAFA would “exalt form over substance and run directly counter to CAFA’s primary objective,” the court wrote. Breyer also signaled that he was onto the class action bar’s game. Permitting name plaintiffs to stipulate to damages merely for jurisdictional purposes “would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations,” he wrote. “Such an outcome would squarely conflict with the statute’s objective.”

The court said that while it might be simpler for federal judges deciding jurisdiction to assess potential classwide damages on the basis of a name plaintiff’s stipulation, their responsibility is to follow CAFA’s dictates and determine the aggregate value of class members’ claims. And since stipulations of damages bind only the name plaintiffs who sign them, the Supreme Court said, judges should ignore them for the purposes of CAFA-evading remands.

Class action lawyers can at least be relieved that the justices didn’t take the opportunity of this case toexpandfederal-court jurisdiction¬†over their cases, as some of Standard Fire’s amici urged the court to do. The court’s ruling takes CAFA at its word, no more and no less.

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