Thumbnail image for gavel.jpgBy Gerald L. Maatman, Jr. and Rebecca Bjork

On January 7, the Supreme Court of the United States heard oral argument in Standard Fire Insurance Company v. Knowles (No. 11-1450). The transcript is quite entertaining and is well worth a read. At one point, for example, Justice Kagan informed the defendant’s advocate “Okay. Then you really are asking us to blow up the whole world.” Tr. at 53. 

In this case, the SCOTUS will construe an important provision of the Class Action Fairness Act (CAFA),  which was enacted in 2005 to curb abuses of class action lawsuits.  The Senate Report on the CAFA explained that “[o]ne key reason” why class action litigation was unfair for defendants and absent class members alike, which motivated the Congress to act, “is that most class actions are currently adjudicated in state courts, where the governing rules are applied inconsistently (frequently in a manner that contravenes basic fairness and due process considerations) and where there is often inadequate supervision over litigation procedures and proposed settlements.” S. Report 109-14 (Feb. 28, 2005), at 4. Readers of this blog who face such lawsuits understand this all too well from first-hand experience.

The specific provision at issue in the SCOTUS appeal is one that allows defendants to remove class actions filed in state courts to federal court when the amount-in-controversy — calculated by aggregating all of the claims of the class members — totals $5 million or more. The question on which the Supreme Court granted certiorari is whether a stipulation by the named plaintiff attempting to limit damages he or she seeks to recover below $5 million (perhaps to $4,999,999.99) on behalf of the class can prevent the defendant from removing the case to federal court, as Standard Fire attempted to do in this Arkansas state case involving homeowner insurance claims. Such stipulations can prevent removal in individual plaintiff suits, as that person seeks relief only for him or herself. But when the rights of absent class members are involved, such stipulations should not be allowed to prevent removal under the CAFA, according to Standard Fire. One point made by Knowles’ attorney in the oral argument, on the other hand, was that absent class members could opt-out of the class and pursue their own remedies if they feel the stipulation was too restrictive. At the argument, he explained that the CAFA applies by its express language to “civil actions” and not “claims,” which means that the damages claims of absent class members should not be considered in the amount-in-controversy inquiry. 

While predicting the outcome is always a challenge, it is quite clear from the transcript that some of the Justices seemed skeptical, voicing concern that this would create a loophole that would eviscerate the very purpose of the $5 million rule in the CAFA.    

We will be watching for the Supreme Court’s ruling on this one, and will update you when it is announced.