A Unanimous U.S. Supreme Court Prevents Class Action Plaintiffs from Sidestepping Federal Jurisdiction under the Class Action Fairness Act

            Class action defendants hit a home run in Standard Fire Insurance Co. v. Knowles, 568 U.S. ___  (Mar. 19, 2013), one of the U.S. Supreme Court’s latest class action decisions and its first decision to address the Class Action Fairness Act of 2005 (“CAFA”).  Knowles questioned the power of class action plaintiffs to legally bind class members prior to class certification and, in particular, whether class action plaintiffs could avoid federal jurisdiction under CAFA by stipulating with the complaint that the class would not seek damages in excess of the $5 million CAFA threshold.  We first discussed Knowles in a series last year after the Court granted certiorari to review the District Court’s ruling that the plaintiff’s stipulation was binding and established to a legal certainty that the amount in controversy was below the CAFA threshold. (See series part 1, part 2, and part 3).  While the January 7, 2013 oral arguments suggested that the defendant might have an uphill battle (see my previous post on the arguments), the Court’s unanimous, 7-page opinion ushered forth a resounding validation of the defendant’s position that class action plaintiffs cannot use these stipulations to manipulate the amount in controversy and avoid jurisdiction under CAFA, because they lack the authority to bind absent class members prior to class certification.  We highlight the main points underlying the Court’s decision below.  And you can read my additional thoughts regarding the impact of Knowles in Law360’s March 19th article “Class Action Lawyers React to Supreme Court’s CAFA Ruling.”

            The Supreme Court’s opinion is straightforward and succinct, relying on a few primary principles.  First, to determine the amount in controversy under CAFA “the claims of the individual class members shall be aggregated,” and the “class members” include “persons (named or unnamed) who fall within the definition of the proposed or certified class.”  The District Court in Knowles found that the amount in controversy would have exceeded $5 million but for the plaintiff’s stipulation.  Second, the plaintiff’s stipulation could not reduce the value of damages of the proposed class because, as established by Smith v. Bayer Corp., 564 U. S. ___ (2011), a plaintiff cannot legally bind members of a proposed class before the class is certified.  The Court also stressed that “the amount to which Knowles has stipu­lated is in effect contingent” because it is not binding.  Therefore, it would be improper to base the jurisdictional determination on a contingency that ultimately may fail.  And treating the non-binding stipulation as if it were binding would thwart the primary purpose of CAFA, which is “ensuring ‘Federal court consideration of interstate cases of national importance.’”  The Court reasoned that instructing judges 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.’”  Despite taking seven pages, the Court stated: “Our reason [for reversing the lower court] is a simple one: Stipulations must be binding. The stipulation Knowles prof­fered to the District Court, however, does not speak for those he purports to represent.”

            Some class action plaintiff’s attorneys have described Knowles as an insignificant decision, suggesting that very few class actions are brought in state court anyway and very few class actions involve such small damages amounts.   But, the High Court acknowledged the potential to use these types of stipulations to artificially break up large class actions of national importance into many smaller class actions just to avoid federal jurisdiction by stating: “It would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations; such an outcome would squarely conflict with the statute’s objective.”  The Court’s ruling in Knowles answered the defendant’s plea for confirmation of “whether CAFA is a strong remedy for state court abuses in class actions, as Congress expressly intended, or if it has a loophole that allows plaintiffs’ lawyers to easily avoid federal jurisdiction.”

            While attorneys on opposite sides of the “v” may not agree on the ultimate impact that Knowles will have on the class action machine, it is clear who gets the win in this case.  The Supreme Court issued another class action opinion yesterday in Comcast v. Behrend, 569 U. S. ____ (2013), reversing the Third Circuit Court of Appeals’ decision to grant class certification due to its failure to consider certain arguments because they overlapped with the merits of the case.  So, the score in the class action arena so far is 1-2 with Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___ (Feb. 27, 2013) going to the plaintiffs and Knowles and Comcast to the defendants.  The Supreme Court heard arguments in American Express Co., et al. v. Italian Colors Restaurant, et al., (S.Ct. No. 12-133) on February 27th regarding the enforceability of class arbitration waivers in federal antitrust cases, and in Oxford Health Plans, LLC v. Sutter, (S.Ct. No. 12-135) on March 25th regarding what constitutes a sufficient contractual basis to determine that parties agreed to class arbitration. We will update you on the stats after we see those opinions.  In the meantime, we will bring you highlights from the Oxford Health arguments and the Comcast decision.

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