U.S. Supreme Court: plaintiffs cannot use damages stipulations to defeat CAFA jurisdiction

The United States Supreme Court issued a unanimous opinion in Standard Fire Ins. Co. v. Knowles, on March 19, 2013, effectively prohibiting plaintiffs from avoiding federal court through pre-class certification damages limitations. The Supreme Court held that class action plaintiffs may not limit damages in their complaints to less than $5 million, thus putting an end to a practice that allowed plaintiffs in certain circuits to avoid federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA).

The February 2013 issue of Nelson Levine’s Class Action Quarterly analyzed the underlying decision, briefing and oral argument in Standard Fire — a putative class action challenging alleged wrongful claims payment practices by a homeowner’s insurer. The complaint, originally filed in an Arkansas state court, contained a provision that the plaintiff and putative class “stipulate they will seek to recover total aggregate damages of less than five million dollars.” Following removal to federal court by the defendant, the Western District of Arkansas remanded the matter back to state court. The District Court found that the plaintiff properly limited the amount in controversy, thus defeating jurisdiction under CAFA. After the U.S. Court of Appeals for the Eighth Circuit declined to accept an appeal, the Supreme Court granted certiorari and heard oral argument in early February.

The Supreme Court’s opinion holds that proposed class representatives may not bind class members to pre-class certification decisions relating to the amount of damages sought in the complaint. Without a binding damages limitation, the class representative in Standard Fire could not reduce “the value of the putative class members’ claims” below CAFA’s $5-million jurisdictional threshold. The Supreme Court vacated the District Court’s judgment and remanded for further proceedings, meaning that the District Court will exercise jurisdiction over the matter pursuant to CAFA.

In determining that class representatives may not avoid federal jurisdiction through pre-class certification damages limitations, the Supreme Court limits plaintiffs’ ability to use such procedural gamesmanship as a means of keeping putative class actions out of federal court.