Keywords: class action fairness act, removal, CAFA

Today the Supreme Court granted certiorari in one case of interest to the business community:

  • Class Action Fairness Act—Removal

Class Action Fairness Act—Removal

A threshold question in many class actions filed in state court is whether the defendant may remove the action to federal court under the Class Action Fairness Act of 2005 ("CAFA"). That law authorizes removal of certain class and mass actions when, among other things, the amount "in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs." 28 U.S.C. § 1332(d)(2). Plaintiffs in removed class actions sometimes seek to defeat federal court jurisdiction under CAFA—and thereby force a remand to state court—by stipulating that the maximum recovery they seek on behalf of the putative class is less than CAFA's $5 million jurisdictional threshold.

Today the Supreme Court has granted review in Standard Fire Insurance Co. v. Knowles, No. 11-1450, to determine whether such a stipulation is binding and thus sufficient to destroy CAFA jurisdiction when the defendant has presented evidence that, absent the stipulation, the amount in controversy would exceed $5 million.

The plaintiff in Knowles had filed a putative class action in Arkansas state court against his insurer, alleging that the company breached certain homeowner insurance policies by failing fully to reimburse customers reporting damages. Attached to the complaint was a stipulation, signed by the plaintiff, stating that "I do not now, and will not at any time during this case, whether it be removed, remanded, or otherwise ... seek damages for the class ... in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys' fees)." The insurance company removed the action under CAFA, and submitted evidence showing that the amount in controversy (absent the stipulation) would exceed $5 million. But the plaintiff successfully moved to remand the case back to state court, relying on the stipulation to challenge the existence of federal jurisdiction under CAFA. 

The insurance company unsuccessfully petitioned the Eighth Circuit for review of the remand order. The Supreme Court then granted a writ of certiorari. In its petition, the insurance company contends that allowing a plaintiff to defeat CAFA jurisdiction by prospectively limiting the putative class's maximum recovery contravenes CAFA and the due-process principle that absent members of a putative class are not bound until the class is certified, as reiterated last Term in Smith v. Bayer, 131 S. Ct. 2368 (2011).

Knowles is of enormous significant to businesses that may be targeted by class actions. If the decision below is affirmed, forum-shopping plaintiffs can file class actions in state courts with lax class-certification standards, and deprive defendants of the protections of federal court that CAFA was intended to secure.

Originally published August 31, 2012

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