The Class Action Fairness Act of 2005 (CAFA) was designed to ensure a federal forum for class-action cases “of national importance.” CAFA extends the federal courts’ diversity jurisdiction to most class actions where the amount in controversy exceeds $5 million. Since the statute’s enactment, class action plaintiffs have sought creative ways to avoid the statute and stay out of federal court. On March 19, 2013, the Supreme Court ruled that one strategy will not work: a plaintiff cannot defeat federal jurisdiction by stipulating to seek less than $5 million in damages. See Standard Fire Ins. Co. v. Knowles.
The Court’s unanimous ruling is not a shocker. Only the Eighth Circuit had come out clearly the other way. See Rolwing v. Nestle Holdings, Inc. And the reasoning behind Justice Breyer’s opinion is quite simple: the stipulation is not binding, since the named plaintiff does not have authority to bind a class prior to certification. (As the Court noted, it decided in Smith v. Bayer that a named plaintiff has no power to bind putative absent class members prior to class certification). A non-binding stipulation does not prevent a court from concluding that the amount in controversy exceeds the stipulated amount. As straightforward as it is, the ruling in Knowles has some tantalizing language for defendants and leaves some unanswered questions regarding the amount in controversy requirement under CAFA.
First, the tantalizing language: to allow Plaintiffs to stipulate away the amount in controversy would “exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’ 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 non-binding stipulations; such an outcome would squarely conflict with the statute’s objective.” (Slip op. at 6). The Court rejected the concept that the plaintiff’s mastery of the complaint gives the plaintiff free rein to plead around CAFA, or structure the form of an action to avoid CAFA when the action in substance is an interstate case of national importance. Plaintiffs have had success in the First Circuit, see Download In re Hannaford Bros Co, and elsewhere, in artfully pleading their way into CAFA’s “home state” exception: by defining class membership as limited to the citizens of a single state, plaintiffs have been held to qualify for the home state exception, effectively allowing them to carve up an interstate CAFA class action into individual state pieces that fall outside CAFA jurisdiction. Knowles raises the prospect that the Supreme Court would rule these attempts to plead around CAFA’s “interstate” objective as ineffective.
Now, the unanswered questions.
Question 1: What standard of proof of the amount in controversy should lower courts apply? The party invoking federal jurisdiction – a plaintiff initially filing in federal court or a defendant seeking removal – bears the burden of showing that jurisdiction lies. Some circuit courts require a party invoking CAFA jurisdiction to prove the amount in controversy only by “a preponderance of the evidence.” The First Circuit requires a similar showing of “reasonable probab[ility]” that the amount in controversy meets the jurisdictional minimum. See Amoche v. Guarantee Trust Life Ins. Co. Others require proof to a “legal certainty” that the required amount is in controversy, at least when the complaint alleges less than the statutory amount is in controversy. (This is the inverse of the burden a plaintiff bears when invoking federal jurisdiction: jurisdiction lies unless it be shown to a legal certainty that the claimed amount cannot be recovered). The Supreme Court passes over this issue in silence, but the reasoning of Knowles is difficult to square with the “legal certainty” requirement.
Question 2: Can a stipulation as to elements of recovery other than compensatory damages defeat jurisdiction? Sometimes, the compensatory damages by themselves clearly cannot exceed the jurisdictional amount, but other items of recovery – e.g. punitive damages or statutory or contractual attorney fees – can be aggregated with the compensatory damages to clear the necessary threshold. In such a case, a plaintiff apparently could avoid CAFA jurisdiction by simply not praying for punitive relief or for attorney fees. Can a plaintiff similarly avoid CAFA jurisdiction by limiting the amount of his or her prayer as to those items? The logic of Knowles would seem to apply just as much to such other types of recovery: prior to certification, a plaintiff cannot make a stipulation that is binding as to absent class members to limit the amount of punitive damages or the amount of attorney fees they are entitled to recover. But the Court expressly noted that the Knowles case did not present the question whether a stipulation as to attorney fees is binding or effective to avoid CAFA jurisdiction. (Slip op. at 7).
So, what does Knowles mean? There’s a narrow answer and a broad answer.
Narrowly: Plaintiffs cannot avoid federal court by stipulating away CAFA’s $5 million amount in controversy. But class plaintiffs who continue to see tactical advantage in avoiding federal court likely will continue to seek creative ways to do so, and may try pecking away at the margins of the Knowles ruling by pressing for more stringent application of the burden of proof imposed on removing defendants, and stipulating to limits on non-compensatory relief in an effort to avoid the amount in controversy.
More broadly: Knowles continues a trend in which the Supreme Court is taking a hard look at all elements of class certification and reining in class action practice. Defendants will find encouragement to continue to press for strict application of the Rule 23 and CAFA requirements.
*this post was written by Cliff Ruprecht