Supreme Court Raises the Bar for Bringing Class Actions in State Court
by: Scott D. Gilchrist, Attorney
The United States Supreme Court has ruled unanimously that under the 2005 federal Class Action Fairness Act a plaintiff may not avoid having his or her case removed from state court to federal court by stipulating that the total damages for the combined class are less than $5 million. Under the Act, federal courts have original jurisdiction over class actions in which, among other things, the combined amount in controversy for all proposed class members exceeds $5 million. 28 U.S.C. § 1332(d)(2). In some federal judicial circuits, plaintiffs filing smaller class actions in state court have been able to avoid having their claims removed to federal court by stipulating that the total amount at stake is less than $5 million. In Standard Fire Ins. Co. v. Knowles, Supreme Court Case No. 11-1450 (March 19, 2013), the high Court ruled that such stipulations were not effective.
In Knowles, an Arkansas homeowner brought a proposed class action in state court against his property insurance carrier. The plaintiff alleged that the company had failed to pay the insurance benefits due to the plaintiff and other policyholders for hail damage to their homes from a 2010 storm. When filing the lawsuit, the plaintiff stipulated in writing that he would seek less than $5 million for himself and other Arkansas homeowners insured by Standard Fire. Nonetheless, the insurer removed the case from state court in Miller County, Arkansas, to the Federal District Court for the Western District of Arkansas, citing to the Class Action Fairness Act for federal jurisdiction and asserting that, notwithstanding the plaintiff’s stipulation, the amount in controversy for all proposed class members exceeded $5 million.
When the homeowner plaintiff sought to have the case returned to state court, the Federal District Court found that the damages for the proposed class were in fact likely to exceed $5 million, but that the plaintiff’s stipulated promise to seek less prevented the federal court from having jurisdiction. The insurer appealed and the Eighth Circuit Court of Appeals agreed with the District Court that the case should be returned to the Arkansas state court where it was filed. On the further appeal, the United States Supreme Court disagreed and ordered that the case should remain in federal court.
Writing for a unanimous Court, Justice Stephen Breyer first noted that the Class Action Fairness Act requires that the value of the claims of all proposed class members be aggregated to determine if the sum exceeds $5 million. Justice Breyer then concluded that the plaintiff homeowner could not, by stipulation, prevent a finding that the claims of all proposed class members exceeded $5 million, because the plaintiff did not have the authority at the outset of the case to bind the other proposed class members. “[A] plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. … Because his precertification stipulation does not bind anyone but himself, Knowles has not reduced the value of the putative class members’ claims.” Justice Breyer therefore concluded that the Federal District Court should have ignored the plaintiff’s stipulation and allowed the case to remain in federal court.
With the Knowles decision the Supreme Court has resolved any disagreement over the ability of a plaintiff to avoid federal court jurisdiction under the Class Action Fairness Act by stipulating to limited damages. For plaintiffs seeking to bring smaller class actions in state court, however, the Knowles decision will likely make the removal of such cases to federal court by defendants even more common, and undoubtedly raises the bar for plaintiffs seeking to have their state law class action claims decided by state courts.