Supreme Court to hear case regarding the ability of a class action plaintiff to frame the amount in controversy

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by Michael Heygood

The U.S. Class Action Fairness Act of 2005 expanded federal jurisdiction over many large class action lawsuits. One aspect of the Act is that it gives federal courts jurisdiction over class actions in which the total amount in controversy exceeds $5 million.

On August 31, 2012, the U.S. Supreme Court granted a petition for a writ of certiorari filed by Standard Fire Insurance Company about a class action lawsuit filed against the insurance company by Greg Knowles. The Court will consider whether Mr. Knowles may keep the case out of federal court by stipulating that the damages sought by the class he seeks to represent will be less than $5 million.

Knowles filed the putative class action in Arkansas state court against The Standard Fire Insurance Company. Knowles claims that the insurance company breached its contract when it failed to properly pay his claim for damage and repairs to his home. Knowles alleges the insurance company failed to include an amount for “general contractors’ overhead and profit” even though the policy covered such amounts. He asserts that Standard Fire violated Arkansas state law and he seeks to represent a class composed of other Arkansas residents who were treated similarly by Standard Fire.

Both within his complaint and in a separate sworn statement filed with the lawsuit, Knowles stipulated that he was seeking a total of less than $5 million for all class members. Thus, Knowles argues, there is no federal jurisdiction over the case.

A stipulation by a plaintiff that he will only seek less than the amount required for federal jurisdiction is not unusual. Federal courts have long accepted such stipulations as an acceptable way to defeat federal jurisdiction. For example, in 1938, the United States Supreme Court recognized that, if a plaintiff “does not desire to try his case in the federal court he may resort to the expedient of suing for less than the jurisdictional amount, and though he would be justly entitled to more, the defendant cannot remove.” St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 294 (1938).

However, Standard Fire argues that Knowles should not be allowed to defeat federal jurisdiction by limiting the amount that the proposed class members might recover because Knowles has not yet been approved by a court to act on behalf of the class.

In response to Standard Fire’s petition to the Supreme Court, Knowles maintained that:

[Th]e decision to stipulate to damages of a certain size is no different from innumerable other decisions that class representatives inevitably make as masters of their complaints. Named plaintiffs bringing putative class actions necessarily “limit” the recovery of the proposed class by, for example, picking and choosing which defendants to sue, which causes of action and elements of damages to include, and what kinds of litigation tactics to pursue in discovery, pretrial motions, and beyond. The ability of a court at the certification stage to consider a stipulation (along with other litigation decisions by the proposed class representative) in assessing adequacy of representation does not mean that the stipulation and other features of the complaint may be disregarded in determining whether there is federal subject-matter jurisdiction at the time of removal.

Otherwise, removal jurisdiction would arise in virtually any class action filed in state court, even if it involved only state residents and pleaded solely state law claims below the CAFA jurisdictional minimum. If a putative class representative’s decisions in framing the complaint could be disregarded, a federal court could always speculate (for example) that an entirely hypothetical new class representative might assert a federal claim for the class (establishing federal question jurisdiction) or might expand the class to meet the CAFA jurisdictional minimum. (Brief in Opposition to the Petition for Cert)

The specific question raised by the petition for writ of certiorari is:

When a named plaintiff attempts to defeat a defendant’s right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a “stipulation” that attempts to limit the damages he “seeks” for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the “stipulation,” exceeds $5 million, is the “stipulation” binding on absent class members so as to destroy federal jurisdiction?

It is expected that the Supreme Court will hear oral argument on the case this year.

At Heygood, Orr & Pearson, we have handled numerous class action lawsuits. If you believe you may be part of a class that has been the victim of wrongdoing, contact the lawyers at Heygood, Orr & Pearson for your free case evaluation and to learn more about your legal rights. You can reach us by calling toll-free at 1-877-446-9001, or by filling out a free legal consultation form.