The Supreme Court unanimously held today that a class action plaintiff cannot defeat a defendant’s right of removal under the Class Action Fairness Act (CAFA) by stipulating that the class will not seek damages that meet the US$5 million CAFA prerequisite. This holding resolves a split among the lower courts, closes a potentially massive loophole in CAFA, and sends a signal that pleading strategies designed solely to defeat federal jurisdiction over class actions are not acceptable.

Background

In April 2011, Greg Knowles (Knowles) filed a putative class action complaint in Arkansas state court alleging breach of contract by Standard Fire on certain homeowners’ insurance policies. With his complaint, Knowles filed a “stipulation” that the putative – and not yet certified – class would seek less than US$5 million in damages, CAFA’s threshold for removal to federal court. Standard Fire removed the case to federal court, asserting that the actual amount in controversy exceeded the US$5 million jurisdictional requirement of CAFA.

The district court found that absent the stipulation, the amount in controversy would exceed US$5 million – but it rejected Standard Fire’s arguments that Knowles did not have the authority to bind absent putative class members. The court thus concluded that the stipulation controlled and that CAFA was not triggered, and remanded the case to state court. 

After the Eighth Circuit denied Standard Fire’s petition for permission to file an interlocutory appeal, Standard Fire sought certiorari, explaining that the Eighth Circuit’s decision was inconsistent with those of other courts as to the effect (and effectiveness) of such amount-limiting stipulations for CAFA removal purposes. The Supreme Court granted the writ to resolve the “divergent views in the lower courts.”

The Supreme Court’s decision

The Supreme Court unanimously ruled in favor of Standard Fire, explaining that Knowles’s stipulation was not binding and therefore could not be considered in determining whether his complaint triggered CAFA removal. As the Court explained, it held in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), that a plaintiff cannot legally bind proposed class members before class certification. And without binding effect, any such stipulation is necessarily only “contingent” – it cannot limit the actual amount in controversy.

Knowles had argued that his stipulation was effective because a federal court must consider the complaint at the time it was filed; according to Knowles, a new and different case would result if the state court subsequently certified the class and modified the stipulation. The Court rejected that contention, explaining that CAFA does not require a federal court to ignore the possibility that a non-binding stipulation might not survive the class certification process. Crediting Knowles’s argument, the Court went on, would “exalt form over substance” and contradict CAFA’s main objective – to ensure “Federal Court consideration of interstate cases of national importance.” 

Impact

If Knowles’s argument had carried the day in the Supreme Court, putative class representatives would have been able to advantage themselves of a massive CAFA loophole: simply stipulate, on behalf of an absent class, to a damages amount just lower than the removal-triggering threshold (or subdivide huge class actions into multiple sub-US$5-million damages increments), and the cases would remain in state court – perhaps even shedding those cumbersome stipulations along the way. The Supreme Court’s unanimous decision in favor of Standard Fire closes that loophole. It prohibits putative class representatives from avoiding federal court through strategic stipulations or subdivisions. CAFA was enacted to prevent systematic abuses of class-action lawsuits; the Court’s decision today furthers and strengthens that statutory charge.