United States: Supreme Court To Consider Impact Of Stipulation Limiting Damages On CAFA Jurisdiction

On August 31, 2012, the Supreme Court granted a petition for a writ of certiorari in the Standard Fire Insurance Co. v. Knowles case ("Knowles"),¹ where the Court may interpret the boundaries of the Class Action Fairness Act of 2005 ("CAFA"), 28 U.S.C. § 1332(d). Specifically, the Court will consider whether a named plaintiff in a putative class action may limit by stipulation the damages sought by the putative class to stay under the CAFA threshold, enabling the plaintiff to defeat removal and stay in state court. This case raises a number of significant issues including the lasting impact of Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), a previous Supreme Court case limiting a named plaintiff's ability to bind putative class members in the context of a prior denial of class certification, and the application of CAFA.

The Knowles case was brought as a putative class action in Arkansas state court against The Standard Fire Insurance Company ("Defendant"). The plaintiff, Greg Knowles ("Plaintiff"), claimed that Defendant breached a contract due to its underpayment of insurance claims. Plaintiff had requested payment for hail damage to his home under his policy but was not fully reimbursed.² He sought relief for himself and others similarly situated.

In the class action complaint, Plaintiff stated that neither his nor any individual class member's claim was equal to or greater than seventy-five thousand dollars, inclusive of costs and attorneys fees, individually or on behalf of any class member, and that the total aggregate damages of the plaintiff and all class members, inclusive of costs and attorneys fees, were less than five million dollars.³ Plaintiff also stated that he and the class stipulated they would seek to recover total aggregate damages of less than five million dollars.⁴ Exhibit A to the complaint was a "Sworn and Binding Stipulation," signed by Plaintiff, affirming he would not seek at any time during the pendency of the case damages for himself or any other class member in excess of seventy-five thousand dollars or seek damages as a class in excess of five million dollars (inclusive of costs and fees).⁵

Defendant removed the case to federal court arguing that Plaintiff had fraudulently framed the class definition to limit recovery to two years (rather than five years) under the applicable statute of limitations, and that Plaintiff's counsel had failed to sign a stipulation that they would not seek or accept attorneys fees that would allow the total amount to exceed state jurisdictional limits.

Defendant also asserted that Plaintiff lacked the authority to bind the other class members by agreeing to a limited recovery.⁶

In response to the removal, Plaintiff filed a motion to remand, citing his binding stipulation and the fact that as plaintiff, he was the master of his complaint and could limit his claims.⁷ After discussing the relevant initial legal burden for the defendant, which the court deemed satisfied, the district court focused on whether the plaintiff had satisfied his burden that his claim fell under the five million dollar threshold of CAFA.⁸ The court initially affirmed that "[t]he law in this circuit is clear that a binding stipulation sworn by a plaintiff in a purported class action will bar removal from state court if the stipulation limits damages to the state jurisdictional minimum," citing the Eighth Circuit case Bell v. Hershey Co., 557 F.3d 953 (8th Cir. 2009).⁹ And it noted that the Arkansas legislature passed a statute codifying Bell and expressly allowing such a stipulation.¹⁰ The court rejected Defendant's argument that the stipulation was invalid for lack of adequately binding language, noting, inter alia, that "[m]agic words" are not required.¹¹ The Court also rejected Defendant's argument that because counsel did not sign the stipulation attorneys' fees and costs would not be limited, noting that the stipulation is explicitly inclusive of such costs and fees.¹² Defendant expressed concern about the possibility of an amended complaint and how that might raise the amount of damages sought, but that too was quickly dispensed of by the district court. "If Plaintiff were to amend his Complaint after remand . . . it follows that Defendant would have the right to remove again, should removal be justified."¹³

Finally, the court turned to alleged due process concerns for the class when as-yet-unknown class members have had their damages limited, but rejected such concerns and stated that putative class members could opt out if they felt adversely affected by the limitations.¹⁴ Thus, the court determined that Plaintiff demonstrated that the aggregate damages were below the CAFA threshold and remanded the case back to state court.¹⁵

The Eighth Circuit denied permission to appeal and denied both a rehearing en banc and a panel rehearing.¹⁶ Defendant (now "Petitioner") sought review by the Supreme Court, which granted certiorari.

In its initial brief, Petitioner initially gave some pre-CAFA history of class actions in Miller County, Arkansas (where the case was brought), and raised the question of forum shopping and how CAFA was intended to remedy this issue.¹⁷ Petitioner then argued that the order below was erroneous in light of Smith v. Bayer Corp.: "Under Smith, Plaintiff's unauthorized 'stipulation' on behalf of people he has not been authorized to represent is a legal nullity."¹⁸ This is because in Smith the Supreme Court "held that members of a proposed class are not parties to a case" and the Court adopted a rule that "in the absence of certification . . . [n]either a proposed class action nor a rejected class action may bind non-parties," and "the mere proposal of a class . . . could not bind persons who were not parties."¹⁹ Also stressed by Petitioner was that absent putative class members' due process rights were violated when the named plaintiff was able to limit damages in this manner.²⁰ Petitioner argued that the decisions below were also contrary to the text and intent of CAFA, as the statute did not provide any way to limit the damages of the putative class and if stipulations were permitted, the purpose of CAFA, to allow defendants to defend large interstate class actions in federal court, would be obviated.²¹ Finally, Petitioner asserted that several circuits have rejected the Eighth Circuit's view on the effect of stipulations limiting damages in purported class actions.²²

In response, Plaintiff (now "Respondent") focused on several arguments. Respondent argued a procedural issue, that the case does not involve a decision by the Eighth Circuit, as the Eighth Circuit rejected the appeal.²³ Respondent also focused on the prematurity of the issue because the state court had not yet considered class certification and Petitioner may later invoke CAFA if the class action ever seeks more than five million dollars in damages.²⁴ The Respondent then argued, among other things, that the decision below does not conflict with Smith v. Bayer Corp., as that case "did not involve a binding stipulation or subject-matter jurisdiction under CAFA."²⁵

Both the Chamber of Commerce and the Center for Class Action Fairness submitted amicus curiae briefs in support of Petitioner urging the Court to grant the writ because, inter alia, the issue is of great importance to class-action defendants and absent class members. This case has not yet been set for argument, but it appears this case will be argued at the November-December sitting of the Supreme Court.

Footnotes

1 This case arises from an unpublished decision of the District Court for the Western District of Arkansas.

Knowles v. Standard Fire Ins. Co., No. 4:11-CV-04044, 2011 WL 6013024 (W.D. Ark. Dec. 2, 2011).

2 The charge at issue is known as the general contractors' overhead and profit ("GCOP") and is a fee routinely

assessed by contractors when repairing damaged property. Id. at *1.

3 Id. at *2.

4 Id.

5 Id.

6 Id. at *1.

7 Id. at *1.

8 Id. at *3-4.

9 Id. at *4.

10 Id. at *5.

11 Id. at *4.

12 Id. at *5.

13 Id.

14 Id. at *6.

15 Id.

16 Petition for a Writ of Certiorari at 9, Standard Fire Ins. Co. v. Knowles, No. 11-1450 (U.S. May 30, 2012).

After requesting a response to Defendant's petition for rehearing, the Eight Circuit issued an opinion affirming

a remand under CAFA based on a stipulation by the named plaintiff limiting damages in Rolwing v. Nestle

Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012).

17 Petition for a Writ of Certiorari at 5-6.

18 Id. at 11.

19 Id. (quoting Smith v. Bayer Corp., 131 S. Ct. at 2380, 2382) (internal quotation marks omitted).

20 Id. at 13-15.

21 Id. at 15-16.

22 Id. at 17-19.

23 Brief in Opposition to Petition for Writ of Certiorari at 6-8, Standard Fire Ins. Co. v. Knowles, No. 11-1450

(U.S. July 2, 2012).

24 Id. at 8-11.

25 Id. at 11.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.