Earlier this week, the U.S. Supreme Court issued a significant decision that signals that the Class Action Fairness Act (“CAFA”) should be given its full reach. In Standard Fire Insurance Company v. Knowles, 11-1450, the Court held that a putative class representative could not avoid federal jurisdiction by stipulating that the class will not seek damages exceeding CAFA’s $5 million jurisdictional threshold.
The plaintiff filed a putative class action in state court. Plaintiff stated, both in the complaint and an attached affidavit, that he would not seek to recover aggregate damages in excess of $5 million. Defendant removed the case to federal court under CAFA. The district court held that, absent the stipulation, the amount in controversy would have exceeded $5 million. But the court gave effect to the stipulation, held that CAFA’s threshold was not met, and remanded the case to state court. The Eighth Circuit declined to review the decision.
The Supreme Court vacated the remand order. Writing for a unanimous Court, Justice Breyer rested the holding on a simple proposition: “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” The Court recognized, for instance, the “very real possibility” that the class may not be certified unless the stipulation is dropped. Accordingly, at the time the case is filed, a stipulation binds only the Plaintiff himself. As to the absent class members, the stipulation is contingent on future events. Because the removal inquiry focuses on the time the case is filed, a stipulation cannot cap the amount in controversy.
Significantly, the Court affirmed that “CAFA’s primary objective” was to “ensur[e] ‘Federal court consideration of interstate cases of national importance.’” Plaintiffs will no longer be permitted to circumvent this objective with stipulations, which “exalt form over substance.” This language potentially opens the door for many arguments that would give full reach to CAFA’s other provisions.
Further, by relying on the need to bind absent class members, the Court left undisturbed the longstanding rule permitting individual plaintiffs to avoid removal by making a similar stipulation. An individual plaintiff can bind himself, but not the rest of the class. And as the Court noted, a named plaintiff’s willingness to impose an “artificial cap” on absent class members’ recovery could be a basis for challenging his adequacy as class representative.
The unanimous decision is a resounding victory for both class action defendants and absent class members. Congress enacted CAFA to curb the abuses of the class action device that were rampant in some state courts. Now, named plaintiffs and their counsel will no longer be able to end run federal jurisdiction in controversies that are clearly “interstate cases of national importance.”