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CAFA Showdown in the Supreme Court: Today’s Oral Argument In Standard Fire Insurance Co. v. Knowles

Posted in CAFA, U.S. Supreme Court

This morning I attended the oral argument before the Supreme Court in Standard Fire Insurance Co. v. Knowles, the first major case in which the Court will address the provisions of the Class Action Fairness Act of 2005 (CAFA).   For class-action lawyers on both sides, this case has been seven years in the making.   From where I sat, today’s arguments did not disappoint.

In a nutshell, the issue in Standard Fire is whether a named plaintiff may avoid removal to federal court of a putative class action that would otherwise satisfy CAFA’s $5 million amount-in-controversy requirement by stipulating that he or she does not seek to recover more than $5 million.  If the stipulation tactic were permissible, plaintiffs’ lawyers could avoid removal of class actions to federal court with ease.  That would allow a widespread evasion of CAFA, which was enacted in response to the massive abuse of the class-action device by a number of “magnet” state courts that were (and remain) hostile to out-of-state defendants.  (For a more extensive preview of the case, please see our earlier post.)

The oral argument (transcript (pdf)) focused on two disputed questions.

The first issue is whether CAFA’s text resolves how to calculate the amount in controversy.  Counsel for Standard Fire argued that CAFA provides that “courts shall aggregate the claims of the individual class members” to determine the amount in controversy.  From Justice Kagan’s perspective—who made clear throughout the argument that in her view plaintiffs’ lawyers may use stipulations to avoid federal jurisdiction—this language “didn’t eliminate” the rule that the plaintiff is “the . . .  master of [his or her] complaint.”   She further noted that a named plaintiff in a class action ordinarily “gets to decide whether to seek damages” or “injunctive relief,” “which claims to bring,” “how many years’ worth to ask for,” and “which defendants to sue.”  But as Standard Fire’s counsel explained, “[t]he master of the complaint doctrine has never, ever been applied by this Court where [a] . . . named plaintiff, who’s not been appointed to represent people, seeks to try to alter the claims and judgments of other people and the rights of them to recover.”

In posing a question to Knowles’ counsel, Chief Justice Roberts identified the type of mischief that could occur:  “What if you had a case where a lawyer brings an action in Miller County and says: I want to represent the class of people with these claims and these claims, whose names begin with A to K. It turns out that’s $4 million. And in the next county, at the same time, he files a case saying, I’d like to represent these people whose names begin L to Z. In each of those cases, it’s $4 million. I take it you don’t have any objection to that?”   Knowles’ counsel responded that “for federal jurisdiction purposes . . . that kind of legal strategy is perfectly appropriate. . . .”  This answer caused Justice Breyer to react that an artificial limit on the amount of damages claimed “is just a loophole because it swallows up all of Congress’s statute . . . we have 30 or 40 or $50 million cases being tried in whatever counties Congress liked the least . . . .”  Justice Breyer wondered whether to avoid such a “mechanical method of avoiding the purpose of the statute,” the Court should adopt a reading of CAFA that “you should aggregate the real value” of the claims “that the class is likely to have.”

The second (and related) issue is whether a named plaintiff and his or her counsel can—consistent with due process—seek to stipulate away the amount of damages potentially available to absent class members in order to remain in state court.   Counsel for Knowles—with seeming support from some Justices’ questions—argued that the propriety of such a trade-off could be decided by a state court at the class-certification stage.  But Justice Alito expressed skepticism:  “I don’t understand how absent class members would ever be able . . . to determine whether by failing to opt out, they had compromised part of their claim.”  And Justice Sotomayor echoed that Knowles’s argument “doesn’t deal with the component that’s been troubling, which is that it doesn’t protect the absent class members.”

Justice Kagan suggested that “usually, we assume that State court judges will do their jobs, will pay attention to the Constitution, will apply adequacy of representation standards that come from the due process clause.”  But as Justice Scalia observed, a magnet state court “could find the claim is worth a lot more than [$]5 million but it’s worth that amount to be in this generous court for these generous juries. And you’re really not harming these absent plaintiffs because they ought to want to be here.”  That disagreement mirrors some of the debate that preceded the enactment of CAFA, in which Congress ultimately found that “[s]tate and local courts are . . . sometimes acting in ways that demonstrate bias against out-of-State defendants.”  (For more on the alleged abuses taking place in the Arkansas county from which this case originates, please see this article.)

Moreover, as Justice Ginsburg pointed out, “a named plaintiff, unless and until he is — he is certified to represent the class — doesn’t represent [absent class members].”  Rather, “we have to judge removal at the time removal is made, and at that time, there is no determination of class. So at the removal stage, the stipulation is inoperative as to the non-named class members.”

In short, the argument was a lively one that appeared to assist the Justices in their consideration of the issues.  Although I am hesitant to predict how the Supreme Court will rule in any case, it did seem as though a majority of the Court is likely to conclude that when determining whether a putative class action satisfies CAFA’s amount-in-controversy requirement, federal courts should disregard stipulations by named plaintiffs asserting that they are seeking less than $5 million.