Can class plaintiffs stipulate damages to avoid federal court?

Insurer argues damages could exceed $5M

By Kimberly Atkins
The Daily Record Newswire
The justices of the U.S. Supreme Court considered whether the Class Action Fairness Act allows plaintiffs to avoid removal to federal court by promising to seek less than the monetary damages threshold.

The case of Standard Fire Insurance Co. v. Knowles stems from a purported class action filed in Arkansas state court on behalf of homeowners seeking reimbursement from their insurer for the cost of hiring a general contractor to repair storm damage caused to their homes. The named plaintiff in the suit stipulated that recovery would be limited to less than $5 million, the statutory minimum requirement for removal to federal court.

But the insurer successfully moved to remove the case to federal court, arguing that it met all the removal requirements, including a potential damages award of more than $5 million.

The plaintiffs moved to remand the case back to state court based on the damages stipulation. The court found the stipulation legally binding and sent the case back to state court. The 8th Circuit denied the company’s petition for interlocutory appeal, and the U.S. Supreme Court granted certiorari.

‘Perverse results’
At oral arguments in the case on Monday, Theodore J. Boutrous Jr., a partner in the Los Angeles office of Gibson, Dunn & Thatcher, argued on the insurer’s behalf that the CAFA was passed for the very purpose of stopping abusive practices such as forum shopping at particular state courts. Named plaintiffs cannot decide to limit the recovery of other class members, both absent and present, to avoid federal court.

“Congress’s express focus on the claims of the individual class members in the text of the statute, rather than on the amount being sought by the would-be class representative, is dispositive,” Boutrous said.

But Chief Justice John G. Roberts Jr. wondered whether requiring courts to consider a hypothetical recovery number was a better solution.

“It seems to me that it’s a bit of a slippery slope if you start saying we’re going to look at what the class could recover,” Roberts said.

Boutrous said that considering potential actual damages, rather than taking the named plaintiff’s word, will allow courts to prevent shady litigation tricks.

“I think that what has happened here is the plaintiff’s lawyers [are] slicing and dicing the classes up into pieces to thwart jurisdiction and manipulate jurisdiction,” he said.

“Your approach leads to particularly perverse results,” Roberts said. “You’re at the position of arguing, ‘they are seeking less than $5 million, but we’re responsible for a lot more damage than that.’ … I assume that admission could be used against you under principles of judicial estoppel.”

“It’s an unusual position to be in, [but] it’s not quite what we’re arguing,” Boutrous said. “We’re arguing that [courts must] look at the complaint and say, what’s the maximum amount the plaintiff can get?”

‘Monkey business’

David C. Frederick, a partner in the Washington office of Kellogg, Huber, Hansen, Todd, Evans & Figel, argued on behalf of the homeowners that courts have long recognized the rights of plaintiffs to file complaints where and how they’d like.

“A putative class representative makes all kinds of strategic judgments about how best to maximize value for his clients and for the class,” Frederick said. “And that entails judgments about whether to assert various legal theories here.”

Justice Stephen G. Breyer pointed out that such stipulations could be used for “monkey business.”

Breyer asked if there was “some power in court to set aside certain stipulations which were used for manipulative purposes?”

Frederick said that litigants already must adhere to standards of “good faith,” or “whether or not there is something misleading or deceitful in the way that this stipulation would be framed.”

Justice Ruth Bader Ginsburg questioned how class members could bind those who have not agreed to the terms.

“How is it binding when you said in your brief it doesn’t bind the unnamed class members?” she asked.

Frederick responded: “Whoever is covered by that civil action will forever be bound by the $5 million stipulation.”

But if there is a settlement, Roberts noted, “that is going to set the limit for other classes, including the class members who opt out of this action.”

“This gives extraordinary leverage to the individual class representative of precisely the sort that Congress was worried about,” Roberts said.

A decision is expected later this term.