Unanswered questions remain after CAFA decision in Supreme Court

Unanswered questions remain after CAFA decision in Supreme Court

By Victoria Ni, Senior Attorney

The U.S. Supreme Court has issued its first-ever decision interpreting the 2005 Class Action Fairness Act.

Yesterday’s 9-0 ruling held that courts should disregard written promises by plaintiffs who are trying to represent a class in state court that the class will seek damages less than $5 million — the amount that can trigger federal court jurisdiction over a case.

Pedestrian in front of Supreme CourtThe narrow decision in Standard Fire Insurance Co. v. Knowles means that plaintiffs in a proposed class action will not be able to agree in writing to a damage cap in order to stay in state court. But it does nothing to clarify the debate over how courts should figure out how much money really is at stake in a lawsuit, which determines in part whether the defendant may move the case to federal court. This matters deeply to some defendants because federal courts are perceived to be more friendly to business interests.

We joined Public Citizen on an amici brief in the case to argue against a broad approach by the Court that could have undermined legitimate litigation choices by plaintiffs to protect the interests of the class.

So even though the plaintiffs lost, the good news is that the Court did not take a broad approach and refused even to acknowledge the defendant’s repeated attempts to characterize the plaintiff’s stipulation as an underhanded effort to evade federal jurisdiction. The decision did not open the door to second-guessing of the myriad strategic decisions that go into filing a lawsuit; it simply focused on whether the stipulation was binding on the proposed class, finding it was not.

Still confused? A bit of background might help. Class actions are typically lawsuits claiming that a group of people have been mistreated in the same or similar way by one or more defendants. While such lawsuits may be filed by one or only a few plaintiffs — on behalf of lots of unnamed people — eventually a court has to formally approve the lawsuit as a class action — “certify” the class — under a set of criteria too complicated to explain here. In many instances, class actions allow resource-poor individuals to take on rich and powerful entities in court.

CAFA addresses the question of where a class action may be heard. It says that federal courts have the power to hear a class action if the proposed class has more than 100 people, at least one class member is from a different state than at least one defendant, and the “matter in controversy” is more than $5 million. The main idea behind CAFA was that “interstate cases of national importance” should be heard in federal court.

But plaintiff Greg Knowles wanted to stay in Arkansas state court.

Knowles sued under state law, claiming that Standard Fire Insurance Co. breached its contract with Arkansas policyholders by deliberately underpaying on claims for losses or damages under certain homeowner’s insurance policies. Since his proposed class was larger than 100 people, and the defendant insurance company was based in Connecticut, Knowles risked being forced into federal court under CAFA rules. So, to try to keep the case in Arkansas state court, he stipulated that the class would seek to recover less than $5 million.

That’s not enough, the Supreme Court said. It ruled that a stipulation by “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Knowles’ class had not been “certified,” so his stipulation “d[id] not bind anyone but himself,” and it could not definitively establish that the amount at stake in the case was less than $5 million.

So how can you resist removal to federal court? We’re still not completely sure. The Court’s decision leaves many questions unanswered. For example, which party has to prove that a case is worth more (or less) than $5 million? And how do you show, at the beginning of a case, how much it’s worth? The lower courts will continue to struggle with these questions at least until the next time the Supreme Court takes up a CAFA case.

So this is just a blip in the battles over CAFA jurisdiction specifically, and class actions more generally. Stay tuned.

[Photo: Jonathan Ernst/Reuters]

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