Thumbnail image for SupremeCourt.jpgBy Gerald L. Maatman, Jr. and Jennifer A. Riley

Today, in its first significant class action ruling of 2013, Standard Fire Insurance Co. v. Knowles, No. 11-1450 (U.S. Mar. 19, 2013), the U.S. Supreme Court expanded the reach of the Class Action Fairness Act (“CAFA”) when it unanimously rejected plaintiff’s attempt to keep a class action in state court by stipulating that he would seek damages less than the CAFA’s $5 million amount-in-controversy requirement. Standard Fire is also the first CAFA ruling by the SCOTUS.

In a significant ruling for companies facing class actions, the Supreme Court held that plaintiff’s stipulation did not prevent removal to federal court because, prior to class certification, plaintiff lacked authority to bind absent class members. In so ruling, the Supreme Court closed a significant potential loophole and ensured that, consistent with the purpose of the CAFA, defendants can continue to remove major class actions to neutral federal courts.

We have recounted numerous efforts by the plaintiffs’ class action bar to “work around” the re-invigorated class certification requirements of Rule 23 in the wake of Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) (read more here, here, here, here and here). Standard Fire deals another potential “work around” stratagem – avoiding federal court altogether – a significant blow by ensuring that defendants can remove appropriate cases to a forum where the applicability of Wal-Mart is certain.

Factual Background

In April 2011, plaintiff Greg Knowles filed a putative class action in Arkansas state court alleging that Standard Fire Insurance Company unlawfully failed to include a general contractor fee when it made certain homeowner’s insurance loss payments. Id. at 1-2. Plaintiff sought to certify a class of “hundreds, and possibly thousands” of similarly harmed Arkansas policyholders. Id. at 2. 

With his complaint, plaintiff stipulated that he and class members “will seek to recover total aggregate damages of less than five million dollars.” Id. Nevertheless, on May 18, 2011, relying on the CAFA’s jurisdictional provision, the company removed the case to federal district court. Id.

The district court remanded the case on the basis that, although the amount in controversy would have exceeded $5 million in the absence of plaintiff’s stipulation, in light of the stipulation, the amount fell beneath the CAFA’s threshold. Id. The Eighth Circuit declined to hear the appeal, but the Supreme Court granted defendant’s petition for a writ of certiorari. Id. at 2-3.

The Supreme Court’s Opinion

The Supreme Court held that plaintiff’s stipulation should not have made any difference in determining whether the case met the CAFA’s thresholds for removal.

The CAFA provides federal district courts with original jurisdiction to hear a class action if the class has more than 100 members, the parties are minimally diverse, and the amount in controversy “exceeds the sum or value of $5,000,000.” Id. at 3 (quoting 28 U.S.C. §§ 1332(d)(2), (5)(B).) The statute provides that district courts should determine whether they have jurisdiction by adding up the value of the claims of each person who falls within the class definition and determining whether the resulting sum exceeds $5 million. Id. 

The Supreme Court found plaintiff’s stipulation irrelevant for a simple reason: “Stipulations must be binding.” Id. In the stipulation he provided the district court, plaintiff did not speak for the class members he purported to represent because, before the class is certified, a plaintiff “cannot legally bind members of the proposed class.” Id. at 4. Thus, plaintiff failed to reduce the value of the putative class members’ claims. Id.

The Supreme Court recognized that, although a federal district court might find it simpler to value the amount in controversy using a stipulation, to ignore a non-binding stipulation “does no more than require the federal judge to do what she must do in cases without a stipulation and what the statute requires, namely, ‘aggregat[e]’ the ‘claims of the individual class members.’” Id. at 6 (quoting 28 U.S.C. § 1332(d)(6).)

The Supreme Court also distinguished cases involving individual plaintiffs. Although federal courts permit individual plaintiffs to avoid removal by stipulating that amounts at issue fall below the federal jurisdictional requirement, the “key characteristic” of those stipulations is that they are “legally binding on all plaintiffs.” That essential feature was missing here. Id. at 7.

Implications For Employers

Although Standard Fire did not arise in the employment context, the Supreme Court’s decision represents good news for employers facing workplace class actions. One purpose of the CAFA was to ensure a neutral federal forum, rather than certain plaintiff-friendly state courts, for litigating class actions. Consistent with that goal, the Supreme Court’s decision shuts down a potentially significant opportunity for forum shopping by the plaintiffs’ class action bar and ensures the continued availability of removal under the CAFA.