On March 19, in The Standard Fire Insurance Company v. Knowles, No. 11-1450, the United States Supreme Court ruled that stipulations by a named plaintiff on behalf of a proposed class prior to certification cannot serve as the basis for avoiding federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

In Knowles, the named plaintiff filed a proposed class action in Arkansas state court alleging defendant The Standard Fire Insurance Company (“Standard Fire”) failed to include a general contractor fee in its homeowners’ insurance loss payouts.  Standard Fire Ins. Co. v. Knowles, No. 11-1450, Slip Op. at 1-2.  In his complaint, Knowles sought to certify a class of hundreds or thousands of other policy holders.  Id. at 2.  He also included a stipulation that he and the class would not seek aggregate damages exceeding $5 million.  Id.

Standard Fire removed the case to federal court, relying on CAFA which affords federal courts original jurisdiction over class actions where, among other requirements, the aggregate amount of all claims exceeds $5 million.  Id.  The federal district court found the aggregate amount in controversy exceeded $5 million, but remanded to state court based on Knowles’ stipulation that he and the proposed class would not seek more than $5 million in damages.  Id.   Standard Fire appealed the decision to the Eight Circuit, which declined to hear the appeal.  Id.

In reversing the district court’s decision to remand the case to Arkansas state court, the Supreme Court relied on the basic premise that “[s]tipulations must be binding.”  Id. at 3.  The Court further reasoned that Knowles’ stipulation could not bind the class members because a named plaintiff in a class action “cannot legally bind members of the proposed class before the class is certified.”  Id. at 4.  Thus, while Knowles’ stipulation validly bound Knowles from seeking more than $5 million in damages, it could not bind any other potential class members.  Id.  Moreover, the Court recognized that requiring federal courts to “ignore nonbinding stipulations does no more than require the federal judge to do 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)).   Ultimately, the Court held that any other outcome would run counter to CAFA’s objective of ensuring “Federal court consideration of interstate causes of national importance.”  §2(b)(2).  Id.  (quoting § 2(b)(2), 119 Stat. 5)).

Unfortunately, this decision limits the possibility of an early agreement as to the aggregate value of a class action lawsuit.  In the past, class action defense attorneys comfortable litigating in state court could incentivize class action plaintiffs to seek less than $5 million in damages by agreeing not to remove their cases to federal court.  Standard Fire, however, renders any such agreement by plaintiffs prior to certification meaningless.  Now, many defense attorneys may wait until the class is certified and the named plaintiff retains the power to bind all class members before entering into any stipulation regarding the aggregate amount of damages the plaintiff class seeks.  The inability to enter into early valuation agreements will likely serve to increase the costs of litigation and enhance the winning party’s attorneys’ fees, rather than foster a prompt and efficient resolution of that issue.