In Standard Fire Insurance Co. v. Knowles, a unanimous United States Supreme Court held that class action plaintiffs cannot avoid federal jurisdiction under the Class Action Fairness Act (“CAFA”) merely by stipulating that total class damages will not exceed $5 million. The decision is a victory for defendants who often prefer that class actions be decided in federal court.

Congress enacted CAFA in 2005 to ensure federal jurisdiction for many class actions involving significant amounts in controversy. Subject to certain exceptions, CAFA provides federal jurisdiction over class actions where the class has more than 100 members; the parties are minimally diverse (generally meaning that at least one plaintiff resides in a different state than at least one defendant); and the aggregate amount in controversy for all class members exceeds $5 million.

Knowles addressed whether a plaintiff could avoid having his lawsuit removed to federal court pursuant to CAFA merely by stipulating that the class will not seek damages in excess of $5 million. Plaintiff Greg Knowles sought to represent a class consisting of hundreds, and possibly thousands, of persons allegedly denied payments under homeowners insurance policies issued by Standard Fire Insurance Company. Knowles alleged in his complaint that “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.” Knowles limited his class to Arkansas residents.

The defendant removed the case to federal district court under CAFA. Knowles sought remand, contending that the case did not meet the $5 million CAFA jurisdictional prerequisite. The district court found that the amount in controversy for Knowles’ sizeable class would, absent the stipulation, exceed $5 million. However, it nevertheless held Knowles’ stipulation sufficient to bar federal jurisdiction. The Eighth Circuit refused defendant’s appeal, and the Supreme Court granted review.

The Supreme Court held the stipulation insufficient to bar CAFA jurisdiction, for two reasons. First, the stipulation was not binding on the class before certification: “[A] plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Thus, Knowles’ precertification stipulation bound only Knowles and could not affect the value of the claims of the class Knowles purported to represent.

Second, the Supreme Court held that ruling in Knowles’ favor would “exalt form over substance and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’” Such a ruling would conflict with CAFA’s purpose by, in effect, “allowing the subdivision of a single $100 million action into 21 just-below $5 million state-court actions simply by including nonbinding stipulations.”

Knowles confirms the clear terms of the CAFA and closes the loophole Knowles attempted to invoke. The decision helps prevent state-court class action abuses by confirming, as Congress intended, federal jurisdiction for certain large class actions.

Q:     Does Standard Fire Insurance Co. v. Knowles pose any potential negative drawbacks for employers?

A:     Overall, the Knowles decision is a significant win for employers as it keeps large class actions in federal court, a forum that is often more favorable for employers. However, plaintiffs now have little incentive to limit their damage claims by committing to a cap on damages to stay out of federal court. Furthermore, the Knowles decision probably will not lead to a sharp decline in class action filings, as plaintiffs may simply file in federal court if their case meets the requirements for federal jurisdiction.