Supreme Court: Damages Stipulation Does Not Defeat CAFA Jurisdiction

Originally published on CyberInquirer.

The Supreme Court held today that a named class plaintiff's pre-certification stipulation that the class will seek less than $5 million in damages does not defeat federal diversity jurisdiction under CAFA.

In Standard Fire Insurance Co. v. Knowles, a unanimous Court reversed the order of a federal district court in Arkansas remanding a class action to state court based on the named plaintiff's affidavit, filed with the complaint, stating that the plaintiff would not seek damages "in excess of $5,000,000 in the aggregate." The district court, applying Eighth Circuit precedent, held that the affidavit was sufficient to establish the required "legal certainty" that the amount in controversy fell below $5 million. The Eighth Circuit denied Standard Fire's permission to appeal.

Standard Fire then petitioned for rehearing en banc. While the petition was pending, the Eighth Circuit, in a separate case, affirmed an order of remand based on a stipulation similar to the affidavit submitted in Knowles. The Eighth Circuit subsequently denied rehearing en banc in Knowles.

In an opinion written by Justice Breyer, the Court stated that its reason for holding that the stipulation could not defeat jurisdiction "is a simple one: Stipulations must be binding." Because a plaintiff who files a proposed class action cannot legally bind members of the proposed class until the class is certified, a stipulation filed with the complaint cannot reduce the value of the unnamed class members' claims.

The Court further characterized the stipulation as "contingent" on future events and therefore impermissible as a juridicitional basis. For example, the Court noted, the state court, on remand, might order the stipulation excised as a condition of class certification, or find the named plaintiff an inadequate class representative based on his proposed recovery cap. Or another class member might intervene with an amended complaint and no stipulation, and the action might proceed with a new representative. Refusing to exercise federal jurisdiction based on the stipulation would require an unwarranted assumption that these scenarios are "farfetched."

Justice Breyer described the plaintiff's strongest argument as his contention that any such modification would effectively create a different case than the one filed, and that CAFA permits the district court to consider only the complaint that the plaintiff has filed. He responded, however, that the Court "do[es] not agree that CAFA forbids the federal courts to consider, for purposes of determining the amount in controversy, the very real possibility that a non-binding, amount-limiting separation may not survive the class certification process." Such an outcome, Justice Breyer wrote, would not "result in the creation of a new case," and to hold otherwise would "treat a nonbinding stipulation as if it were binding" and "exalt form over substance."

The Court's decision is a resounding victory for class action defendants seeking to ensure federal court jurisdiction. Standard Fire had argued that the plaintiff's counsel in Knowles had filed numerous class actions in Arkansas state court, most of them in the same county, and had obtained orders deferring briefing on all dispositive motions until after discovery is complete and class certification was decided. The state court, according to Standard Fire, would then typically "force" settlement in the cases by permitting "staggeringly expensive discovery," compliance with which was ordered "prior to briefing on certification in order to force massive nationwide settlements in cases in which the federal courts would never have certified a class." Today's opinion removes the damages stipulation as a means of circumventing CAFA jurisdiction.

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