U.S. Supreme Court Rejects Attempt To Manipulate Federal Jurisdictional Threshold Under Class Action Fairness Act

The U.S. Supreme Court unanimously ruled in Standard Fire Insurance Co. v. Knowles, 568 U.S. __, No. 11-1450, 2013 WL 1104735 (Mar. 19, 2013), that plaintiffs attempting to bring a class action lawsuit cannot escape federal jurisdiction by agreeing to seek less than $5 million in damages. Thus, the Court sided with Standard Fire Insurance Co. in a closely watched case testing the protections passed by Congress in the Class Action Fairness Act of 2005 (CAFA).

This case arises out of an insurance claim made by plaintiff Greg Knowles regarding his hail-damaged home.  Knowles filed a class action lawsuit in Arkansas state court on behalf of a class of Arkansas policyholders, alleging that Standard Fire failed to include a general contractor's fee when it made certain homeowner’s insurance loss payments to its policyholders.  To avoid CAFA’s $5-million damage threshold, which would have allowed Standard Fire to proceed in federal court rather than state court, Knowles alleged in his complaint that the “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.”  Knowles also attached an affidavit stipulating that he “will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate.”  Standard Fire removed the case to federal court under CAFA, but the district court remanded the case back to state court, concluding that the stipulation controlled the jurisdiction of the case, even though the total amount in controversy for the entire class would have exceeded CAFA’s $5-million threshold.

After the Eighth Circuit Court of Appeals declined to hear the appeal, the U.S. Supreme Court took review and held that “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”  Writing for the unanimous Court, Justice Stephen Breyer stated that for jurisdictional purposes, a court’s inquiry is limited to examining the case as of the time it was filed in state court.  Thus, prior to certification of the class, Knowles lacked authority to concede the amount-in-controversy issue for the absent class members and could not limit the recovery of any class member but himself.  

“To hold otherwise,” the Court explained, “would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective:  ensuring ‘Federal court consideration of interstate cases of national importance.’”  The Court rejected the tactic of using a nonbinding stipulation to subdivide a CAFA-qualifying claim into “just–below–$5–million state-court actions” as an outcome squarely in conflict with CAFA’s objective.

Ultimately, the Court’s decision in Standard Fire reinforces the plain language of CAFA, preventing plaintiffs from manipulating a large class action claim in order to avoid federal jurisdiction.  Although individual litigants remain free to avoid federal jurisdiction through the use of damage stipulations, that is a decision they can make only for themselves.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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