Supreme Court Issues Key Class-Action Decision

The U.S. Supreme Court recently issued a key decision on class-action lawsuits. The case, Standard Fire Insurance Co. v. Knowles, involved the Class Action Fairness Act of 2005 (CAFA), which gives federal district courts original jurisdiction over class actions in which the matter in controversy exceeds $5 million in sum or value.

The law aims to ensure that large class-action lawsuits are decided in federal court and to deter abuse of the class-action process in state courts. To accomplish this goal, when more than $5 million is at stake, the CAFA allows class actions to be removed to federal court, giving defendants the benefit of federal procedural protections.

The Facts of the Case

The question before the Supreme Court was whether a corporate defendant can be forced to litigate in state court if the plaintiff offers a stipulation purporting to waive any recovery above the $5 million threshold on behalf of not only the named plaintiff but any future class members.

In Standard Fire Insurance Co v. Knowles, the complaint was accompanied by an affidavit that included the following language: “I do not now, and will not at any time during this case, whether it be removed, remanded, or otherwise . . . seek damages for the class as alleged in the complaint to which this stipulation is attached in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees). I understand that this stipulation is binding, and it is my intent to be bound by it.”

The Supreme Court’s Decision

In a unanimous opinion, the justices concluded that the stipulation stating that the class would seek less than five million dollars in damages did not defeat federal jurisdiction under the CAFA.

As explained by the Court in a brief opinion, the precertification stipulation can tie Knowles’ hands because stipulations are binding on the party who makes them. However, it cannot legally bind members of the proposed class before the class is certified. “Because Knowles lacked authority to concede the amount in controversy for absent class members, the District Court wrongly concluded that his stipulation could overcome its finding that the CAFA jurisdictional threshold had been met,” the Court concluded.

The decision is good news for businesses. Groups, including the U.S. Chamber of Commerce, had argued that allowing damages stipulations to defeat federal jurisdiction would encourage the same forum-shopping that Congress intended to stop by enacting CAFA.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Christine Vanek, or the Scarinci Hollenbeck attorney with whom you work.