High Court Agrees Class Rep’s Stipulation Doesn’t Bar Federal Jurisdiction

by Pillsbury Winthrop Shaw Pittman LLP
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The U.S. Supreme Court, in Standard Fire Insurance Co. v. Knowles, resolved the debate between the plaintiffs’ bar and defense bar regarding whether a class representative’s stipulation that damages would not exceed $5 million could defeat federal jurisdiction under the Class Action Fairness Act of 2005. In a common sense opinion, the high court concluded that the class representative’s stipulation does not act as a bar to federal jurisdiction under CAFA because it is not binding on the other class members.

In a unanimous opinion, the U.S. Supreme Court, in Standard Fire Insurance Co. v. Knowles – No. 11-1450 – (Mar. 19, 2013), answered the question whether a class action plaintiff who stipulates, prior to certification of the class, that he, and the class he seeks to represent, will not seek damages that exceed $5 million in total, removes the case from the scope of the Class Action Fairness Act of 2005 (“CAFA”). The Court concluded: “In our view, it does not. Our reason is a simple one: Stipulations must be binding,” and the class representative’s stipulation is not legally binding on members of the proposed class before the class is certified. It vacated and remanded the matter.

CAFA provides that the federal “district courts shall have original jurisdiction” to hear a “class action” if the class has more than 100 members, the parties are minimally diverse and the “matter in controversy exceeds the sum or value” of $5 million. When determining whether the matter in controversy exceeds that sum, “the claims of the individual class members shall be aggregated.” The “class members” include “persons (named or unnamed) who fall within the definition of the proposed or certified class.” The court’s inquiry is limited to examining the case “as of the time it was filed in state court.”

In Standard Fire, the representative plaintiff filed the class action seeking to certify a class of “hundreds, and possibly thousands” of similarly situated Arkansas policyholders. In describing the relief sought, the complaint alleged that the “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.” In an attached affidavit, 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.

Standard Fire removed the case to federal court, establishing with evidence presented by it that the “sum or value” of the “amount in controversy” would, in the absence of the stipulation, have fallen just above the $5 million threshold. The federal district court, however, in light of Knowles’ stipulation, concluded that the amount fell beneath the CAFA minimum and ordered the case remanded to the state court. The Court of Appeals for the Eighth Circuit declined to hear Standard Fire’s appeal, and Standard Fire petitioned the Court.

The Court considered whether the stipulation makes a critical difference in the district court’s determination as to whether it has jurisdiction. It answered: “In our view, it does not. Our reason is a simple one: Stipulations must be binding.” Knowles’ stipulation does not speak for those he purports to represent, because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. Because, in determining jurisdiction, the court’s inquiry is limited to examining the case “as of the time it was filed in state court,” “Knowles lacked the authority to concede the amount-in-controversy issue for the absent class members.” Accordingly, because the stipulation was only binding on Knowles, “Knowles has not reduced the value of the putative class members’ claims.” It further reasoned that “to ignore a nonbinding stipulation does no more than require the federal judge to do what she must do in cases without a stipulation and what the statute requires, namely ‘aggregat[e]’ the ‘claims of the individual class members.”

The Court’s common sense opinion is consistent with, and reinforces, the intent of CAFA to confer concurrent federal jurisdiction over substantial class actions.

Click here to read Standard Fire Insurance Co. v. Knowles, issued March 19, 2013.

 

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