Client Bulletin #494
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In a unanimous opinion, the U.S. Supreme Court has made it harder for class action plaintiffs to force defendants to stay in state court. The case, Standard Fire Insurance Co. v. Knowles, is being hailed as a victory for employers and other class action defendants.
To fully appreciate the decision, it helps to have a bit of history. The CAFA was enacted in 2005, with a primary purpose to quell class action abuses in state courts. To limit the effects of "home cooking" and weak procedural rules that allowed plaintiffs to extract huge settlements from out-of-state defendants, the CAFA allowed, among other things, defendants to remove class cases to federal court if the claimed damages, in the aggregate, exceeded $5 million.
To avoid CAFA's grasp, lead plaintiffs began stipulating that the class would not seek to recover more than $5 million, which had the effect of keeping the cases in state court.
According to one source, this created a nightmare for defendants in class actions: in one instance, plaintiffs were able to engage in discovery on all issues before the court even decided whether the class should be certified, creating an enormous expense for the defendants.
Not surprisingly, then, the named plaintiff in Standard Fire filed his lawsuit in plaintiff-friendly Miller County, Arkansas – which has been designated a "judicial hellhole" – and stipulated that the class as a whole would not seek more than $5 million. The defendants tried to remove anyway. A federal district court in Arkansas found that the damages would have exceeded $5 million if it hadn't been for the stipulation. The federal court remanded the case to state court, and the U.S. Court of Appeals for the Eighth Circuit, which hears appeals from federal courts in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota, refused to hear the appeal. The defendants petitioned for certiorari to the U.S. Supreme Court. Because the Eighth Circuit had held that a named plaintiff could stipulate on behalf of the class, while the U.S. Court of Appeals for the Tenth Circuit – which hears appeals from federal courts in Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming – had held that a named plaintiff could not, the Supreme Court agreed to hear the case to resolve the conflict.
In a straightforward seven-page opinion by Justice Stephen Breyer, the Supreme Court held that the stipulation, made on behalf of a class before a class was even certified, could not bind anyone except the named plaintiff who had made the stipulation. In other words, the Court found, the stipulation had no effect on anyone except the named plaintiff, Mr. Knowles.
Even though a plaintiff in a non-class case may stay in state court by stipulating that he or she will seek recovery below the minimum required for federal diversity jurisdiction, that situation is different, the Court said, because in that instance the stipulation would be binding. "That essential feature is missing here," the Court said, "as Knowles cannot yet bind the absent class."
The decision does not eliminate the ability to stipulate to limited damages in class cases. But to do so, the named plaintiff would have to be authorized to act on behalf of the class members. In other words, a class would have to have been certified. Alternatively, the court may independently calculate – or a defendant may concede – that the potential recovery will not exceed $5 million in the aggregate.
For employer-defendants the Standard Fire decision is primarily a "win," although it also means that defendants may not be able to benefit from a named plaintiff's stipulation to limited damages before certification of the class. However, for most defendants being able to litigate a class action in federal court outweighs the benefit from a limit on damages.
If you have a question about the Standard Fire decision, please contact any member of Constangy's Litigation Practice Group, or the Constangy attorney of your choice.
About Constangy, Brooks & Smith, LLP
Constangy, Brooks & Smith, LLP has counseled employers on labor and employment law matters, exclusively, since 1946. A "Go To" Law Firm in Corporate Counsel and Fortune Magazine, it represents Fortune 500 corporations and small companies across the country. Its attorneys are consistently rated as top lawyers in their practice areas by sources such as Chambers USA, Martindale-Hubbell, and Top One Hundred Labor Attorneys in the United States, and the firm is top-ranked by the U.S. News & World Report/Best Lawyers Best Law Firms survey. More than 140 lawyers partner with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Alabama, California, Florida, Georgia, Illinois, Massachusetts, Missouri, New Jersey, North Carolina, South Carolina, Tennessee, Texas, Virginia and Wisconsin. For more information, visit www.constangy.com.