Earlier today, the Supreme Court issued a unanimous decision in Standard Fire Insurance Co. v. Knowles, No. 11-1450, that should make it a lot harder for plaintiffs and their counsel to avoid federal-court jurisdiction over significant class actions.
The Class Action Fairness Act of 2005 authorizes the removal of class actions to federal court when, among other things, the amount “in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs.” 28 U.S.C. § 1332(d)(2). Some class-action plaintiffs have sought to defeat federal-court jurisdiction under CAFA—and thereby force a remand to state court—by stipulating that the maximum recovery that they will seek on behalf of the proposed class is less than CAFA’s $5 million jurisdictional threshold. The plaintiff in Knowles, for example, attached to his state-court complaint a stipulation stating that he would not “at any time during this case, whether it be removed, remanded, or otherwise . . . seek damages for the class . . . in excess of $5,000,000.”
Today, the Supreme Court held that such stipulations do not destroy federal jurisdiction under CAFA when the defendant has presented evidence that, but for the stipulation, the amount in controversy would exceed $5 million. The Court’s reasoning was, in its words, “simple”: To be effective, “[s]tipulations must be binding,” but “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Therefore, a nonbinding stipulation must be ignored when assessing the amount in controversy under CAFA.
Because a precertification stipulation binds only the named plaintiff, the Court explained, it cannot “reduce the value of the putative class members’ claims.” In part, that is because a “nonbinding, amount-limiting, stipulation may not survive the class certification process.” If, for example, a case were remanded to state court, the stipulation might then be voided in the class-certification process in order to protect the interests of the unnamed class members. The stipulation’s effectiveness would at best be “contingent” and hypothetical.
In short, the Court refused to treat “a nonbinding stipulation as if it were binding,” because that result would “exalt form over substance, and run directly counter” to CAFA’s “primary objective” of ensuring that the federal courts have jurisdiction over important (i.e., relatively large) interstate class actions. The Court therefore directed federal courts to “ignore” stipulations purporting to limit damages to a proposed class when determining the aggregate amount in controversy of a removed class action.
The Knowles decision is of enormous significance to businesses that may be targeted by class actions. Significantly, the Court pointed out that artful pleading, such as subdividing “a $100 million action into 21 just-below-$5-million state-court actions,” would “squarely conflict” with CAFA’s objectives, and therefore is forbidden. Knowles strongly suggests that the Court will look askance at future efforts by plaintiffs to gerrymander complaints in an effort to avoid federal-court jurisdiction and subvert CAFA’s purposes.