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.”