Supreme Court Bars Class Representatives From Circumventing CAFA By Stipulating to Class Damages Under $5 Million

On March 19, 2013, the U.S. Supreme Court unanimously held in Standard Fire Ins. Co. v. Knowles, No. 11-1450, that class representatives cannot circumvent the Class Action Fairness Act (CAFA) by stipulating to limit their damages claim to less than $5 million to keep their case out of federal court. The decision is available here.

CAFA, which Congress enacted in 2005, provides that federal district courts (subject to certain exceptions) have jurisdiction over class actions if the proposed class has 100 or more members, the parties are minimally diverse, and the amount in controversy exceeds the aggregate sum or value of $5 million. Since CAFA was enacted, lawyers for class action plaintiffs have tried to avoid federal court jurisdiction under CAFA by stipulating that they will not seek more than $5 million for the putative class. In Knowles, the plaintiff sought to employ this very tactic. When the defendant removed the plaintiff’s case from Arkansas state court to federal court, the district court held the plaintiff’s stipulation that the class would not seek to recover total aggregate damages more than $5 million was sufficient for the case to fall outside the reach of CAFA, and remanded the case to state court.Although the Court of Appeals declined to hear the defendant’s appeal of the remand order, the Supreme Court granted certiorari and, in a 9-0 opinion, rejected the district court’s approach. Writing for the Court, Justice Stephen Breyer held that the plaintiff’s stipulation might be binding on the individual plaintiff who filed the suit but cannot bind other members of the proposed class (which had not been certified). The Court also noted that allowing class plaintiffs to use this tactic would lead to abuses of the system, where, for example, plaintiffs could divide a $100 million class action into 21 separate actions that each seek just below $5 million in state court, and therefore avoid CAFA simply by using non-binding stipulations to limit the amount in controversy for each one of those state court actions. This, the Court held, subverted a major congressional objective in passing CAFA: ensuring that the federal courts consider class action cases with national importance.

This decision will have an obvious and direct effect on the efforts of class action plaintiffs who wish to keep their cases in state court—it will be more difficult for them to do so going forward.