Supreme Court Strikes Blow to Class Action “Forum-Shopping”

“At issue in Standard Fire Insurance Co. v. Knowles was the transparent attempt by a named plaintiff to ouster federal court jurisdiction by ‘stipulating’ that the damages sought through a class action complaint would not exceed the $5,000,000 minimum jurisdictional limit of CAFA.” (Barger & Wolen)

On March 20, 2013, the Supreme Court handed down a unanimous ruling in Standard Fire Insurance Co. v. Knowles that will change the landscape (and the venue) of class action lawsuits across the country.

The background, from attorneys Thomas Byrne and Valerie Strong Sanders at Sutherland Asbill & Brennan:

Knowles is a proposed class action filed in an Arkansas state court claiming that Standard Fire Insurance Company unlawfully failed to include general contractor fees (for overhead and profit) when it settled homeowners’ insurance claims. In the complaint, and in an attached affidavit, [Greg Knowles] stipulated that he ‘will not at any time during this case . . . seek damages for the class . . . in excess of $5 million in the aggregate.’”

Why the stipulation to keep damages under $5 million? The Class Action Fairness Act (CAFA), explain Dustin Dow and John Lewis at law firm BakerHostetler:

“Congress enacted CAFA in 2005 as a response to what were perceived as abusive forum-shopping practices by class action plaintiffs’ attorneys who sought out favored state-court venues. To combat the rising tide of nationally important cases being decided in state-court outposts having little connection to them, CAFA created mandatory federal removal jurisdiction whenever $5 million in dispute and minimal diversity existed. Plaintiffs, including Knowles, began navigating around CAFA by stipulating to damages of less than $5 million.”

Knowles wanted to argue the lawsuit in a state court rather than federal court, so he promised he wouldn’t seek more than $5 million in damages. And that’s where he went wrong… From attorneys at Skadden Arps:

“… the [Supreme] Court, in an opinion by Justice Breyer, held that a plaintiff may not thwart CAFA-based removal of a class action filed in state court by stipulating in the state court action that the class will seek to recover no more than $5 million in damages. The Court reasoned that at the point when the named plaintiff enters the stipulation, the plaintiff cannot bind the entire class – because no class has been certified at that time. In other words, ‘His precertification stipulation does not bind anyone but himself.’ Because a certified class could, in the absence of the stipulation, claim amounts in excess of $5 million, the federal courts have jurisdiction over the case…”

The ruling is good news for defendants of proposed class actions in general, write attorneys at Bradley Arant Boult Cummings, because it “will certainly make it easier to remove putative class actions to federal court.” But it may come with a price:

“… 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.”

In plain English: if plaintiffs are required to litigate in federal court, they’re likely to start claiming a lot more than the usual $5 million in damages…

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