The Class Action Fairness Act of 2005 creates federal diversity jurisdiction over class actions in which the amount in controversy exceeds $5 million. Suppose a defendant removes a putative class action to federal court, making a showing that the $5 million threshold is met, and the plaintiff signs a stipulation that he or she will not seek more than $5 million on behalf of the class. May the case be remanded on the basis of such a stipulation?
That question will be decided by the Supreme Court this term in Standard Fire Insurance Co. v. Knowles. In Knowles, the complaint was filed in an Arkansas state court and accompanied by the plaintiff’s signed affidavit, which stated that the plaintiff “will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).” Standard Fire removed to federal court, and the plaintiff moved to remand.
The district court, applying Eighth Circuit precedent, held that Standard Fire had satisfied its burden of establishing, by a preponderance of the evidence, that the $5 million threshold was satisfied, shifting the burden to the plaintiff to prove to a “legal certainty” that the amount in controversy fell below $5 million. The district court further held, however, that the plaintiff’s affidavit was sufficient to establish that “legal certainty.” Standard Fire sought permission to appeal to the Eighth Circuit, which was denied.
Standard Fire then petitioned for rehearing en banc. While the petition was pending, the Eighth Circuit decided Rolwing v. Nestle Holdings, Inc., affirming 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.
The case raises important issues about due process and the proper role of a named plaintiff in a putative class action case. Standard Fire argues that a named plaintiff, prior to class certification, has no authority to “stipulate” away damages for, or otherwise bind, a class that he or she does not yet represent. Permitting such a stipulation, Standard Fire contends, violates the due process rights of absent class members. It also allows one party to effectively waive a jurisdictional requirement.
Standard Fire also claims that the underlying lawsuit illustrates precisely the type of abuses CAFA was intended to prevent. According to Standard Fire, the plaintiffs’ counsel in Knowles has filed numerous class actions in Arkansas state court, most of them in the same county, and has obtained orders deferring briefing on all dispositive motions until after discovery is complete and class certification is decided. The state court, according to Standard Fire, then typically “forces” settlement in the cases by permitting “staggeringly expensive discovery,” compliance with which is 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.”
The plaintiff, in turn, contends that the stipulation is just one of a number of lawful methods in which class action plaintiffs structure their complaints to remain under the removal threshold—such as narrowly defining the class or otherwise limiting the scope of the claims asserted. No absent class member is required to “bound” by the stipulation, because any class member who objects to the $5 million limitation is free to opt out of the class.
The Supreme Court’s unusual decision to grant certiorari in a case that was not even heard or decided at the Eighth Circuit level may be a sign that some on the Court are sufficiently troubled by the “stipulation” tactic that they see an immediate need to dispense with it. On its face, the notion that a plaintiff can purport to bind absent members of an uncertified class seems inconsistent with the most fundamental principles of class actions, including the Court’s own recent decisions. If the “stipulation” approach is upheld, the Court may give class action plaintiffs a new path around CAFA.