Some class action plaintiffs who want to keep their cases in state court execute “stipulations” not to seek more than $5 million in aggregated damages on behalf of the class. When the case is removed, they argue that the defendant cannot establish that “the matter in controversy exceeds the sum or value of $5,000,000”—the threshold for federal jurisdiction under the Class Action Fairness Act. In a curt, unanimous opinion authored by Justice Breyer, the Supreme Court of the United States today reversed a ruling by the Eighth Circuit Court of Appeals and held that a “stipulation” to this effect cannot keep an Arkansas “overhead and profit” class action out of federal court.

Greg Knowles sued the issuer of his homeowner’s policy, Standard Fire Insurance Company, in Arkansas state court. He alleged that Standard Fire improperly failed to add a general contractor fee to its payments for certain insured property losses. Knowles purported to bring the claim on behalf of a class of similarly situated policyholders. His complaint alleged that “Plaintiff and the Class stipulate they will seek to recover total aggregate damages of less than five million dollars.” There was also an affidavit attached to the complaint, stipulating that Knowles would not seek damages above the jurisdictional threshold.

Standard Fire removed the case to the U.S. District Court for the Western District of Arkansas, where it proved to the court’s satisfaction that the claims in the complaint exposed it to liability in excess of $5,000,000. Nevertheless, the court remanded the case, on the ground that the plaintiff’s stipulation kept the “amount in controversy” short of the CAFA threshold. The Court of Appeals for the Eighth Circuit affirmed, but Standard Fire sought and was granted certiorari.

In Standard Fire Ins. Co. v. Knowles, No. 11–1450 (Mar. 19, 2013), the Supreme Court held that the “stipulation” did not divest federal courts of CAFA jurisdiction, because “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Knowles’s stipulation, the court stated, “does not bind anyone but himself,” and, consequently, it did not “reduce the value of the putative class members’ claims.”

Rather, the amount of damages to which Knowles stipulated was, at best, “contingent”: Any number of future developments might render it inoperative, and jurisdiction must be determined “as of the time [the case] was filed in state court.” Among other things, “a court might find that Knowles is an inadequate representative due to the artificial cap he purports to impose on the class’[s] recovery,” by which he might be found to have violated his “fiduciary duty not to throw away what could be a major component of the class’s recovery.”

The court considered an argument that spun the facts in a different way: The stipulation provides that the amount in controversy is not more than $5 million. The Arkansas court might ultimately rule in a way that increases the amount in controversy, but the amount in controversy will not exceed the CAFA threshold until that contingency arises. At that time, the defendant would be free to remove.

But the court ruled that CAFA does not “forbid[] the federal court to consider . . . the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process.” Failure to consider that possibility would “treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’”

The court remanded the case for further proceedings, in which the district was directed to “ignore” the stipulation while aggregating the proposed class members’ claims.