A unanimous United States Supreme Court has now ruled that self-appointed would-be class representatives cannot defeat Class Action Fairness Act (CAFA) removal by simply purporting to limit the damage claims of class members to less than $5 million in the aggregate in the complaint or other precertification filings. Standard Fire Ins. Co. v. Knowles, — U.S. — (Mar. 19, 2013). This landmark decision effectively reverses contrary precedent from the Eighth Circuit and a number of district courts around the country.

The Supreme Court was careful to point out in Standard Fire that in an individual case, a plaintiff can effectively limit his or her own damages to less than the amount in controversy required for diversity removal. See St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 294 (1938) (“If [a plaintiff] does not desire to try his case in the federal court he may resort to the expedient of suing for less than the jurisdictional amount, and though he would be justly entitled to more, the defendant cannot remove”). That is because a plaintiff has the legal power to bind himself by his own stipulation. In a putative class action, however, a named plaintiff and his counsel do not actually have any legal authority to represent, act for, or bind absent class members until a class is actually certified. And unlike the traditional diversity removal statutes, CAFA conditions removal upon the aggregate amount in controversy for all class members. Since a would-be class plaintiff can legally bind only him- or herself with any damages limitation prior to certification, the Court reasoned, a federal court cannot give determinative effect to a purported classwide damages limitation in deciding whether CAFA’s $5 million aggregate amount-in-controversy requirement is met. Instead, the trial court must analyze the amount in controversy just as it would in the absence of any damages stipulation.

This decision will certainly make it easier to remove putative class actions to federal court. However, it also has other implications. First, plaintiffs now have little incentive to limit their damage claims in class actions. This means defendants will lose the exposure reduction benefits of such artificial limits on class damage claims going forward, whether such benefits were real or just theoretical in any given case.

Second, the line of cases that treats such artificial damage limitations as a basis for challenging the adequacy of the class representatives has now been blunted, if not nullified, despite the Supreme Court’s comment noting that courts might view such attempted limitations as a basis for questioning representatives’ adequacy. After all, since precertification classwide damage limitations are no longer binding, a class plaintiff who has included such a limitation in an existing complaint (or as a “bluff” in a future complaint to trap an unwary defense lawyer) has not adversely impacted the rights of his or her class by including it. Only the class representative who intends to maintain the damage limitation after class certification could be accused of adversely impacting the rights of the class, and following this opinion it is highly doubtful that any class representative would seek to maintain such a purported limitation through class certification.

A copy of the Supreme Court’s Standard Fire opinion can be found here: http://www.supremecourt.gov/opinions/12pdf/11-1450_9olb.pdf