U.S. Supreme Court: Class Plaintiffs Cannot Stipulate to Lesser Damages to Avoid Federal Jurisdiction Under CAFA
In Standard Fire Insurance Co. v. Knowles, the U.S. Supreme Court today resolved a circuit split on the issue of whether a named plaintiff in a putative class action can avoid federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA) by stipulating to damages, on behalf of himself and the absent class members, in an amount less than the $5 million jurisdictional minimum. Vacating and remanding the Eighth Circuit’s prior ruling, the court held that while the plaintiff’s stipulation may tie his hands as to recoverable damages, “it does not resolve the amount-in-controversy question in light of his inability to bind the rest of the class.” As a result, the damages stipulation did not defeat federal jurisdiction.
The named plaintiff in Knowles filed a class action in Arkansas state court, alleging that Standard Fire Insurance Co. breached his insurance contract by underpaying property damage claims. The complaint was brought on behalf of a statewide class and included an affidavit from the plaintiff stating that he sought damages less than $5 million for both himself and the putative class. The defendant removed the case to federal court, and the plaintiff sought remand. Following Eighth Circuit precedent that, among other things, concluded that the named plaintiff is the “master of his complaint” and may plead himself into or out of federal court, the district court remanded the case, effectively agreeing that the stipulation could defeat CAFA jurisdiction. The Eighth Circuit denied an appeal.
The U.S. Supreme Court disagreed, however, ruling that the stipulation was ineffective with respect to the proposed class members since the named plaintiff could not legally bind an uncertified class. In other words, “[t]he stipulation Knowles proffered to the District Court . . . [did] not speak for those he purport[ed] to represent.” Knowles conceded to the court that “federal jurisdiction cannot be based on contingent future events.” Therefore, Knowles’s damages stipulation, which was necessarily contingent on the future certification of the class, had no effect on the jurisdictional question as to that putative class. According to the court, “[t]o hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalting form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’”
Practical Effect
For class action defendants, the Knowles decision is a significant victory and clear affirmation of the broad scope of federal jurisdiction under CAFA, which was passed in response to rampant state-court abuses of the class action device. The ruling will not only help to curb plaintiff forum-shopping but also reduce litigation costs and uncertainty for the large percentage of defendants who prefer the federal system’s structure and procedural consistency.
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