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Standard Fire Insurance Co. v. Knowles: The Supreme Court’s First Decision under the Class Action Fairness Act of 2005

In Standard Fire Insurance Co. v. Knowles, 568 U.S. __ (2013) (March 19, 2013), the United States Supreme Court issued its first decision under the Class Action Fairness Act (“CAFA”) and held that the named plaintiff in a class action complaint cannot avoid federal jurisdiction under CAFA by stipulating that the amount in controversy is less than the threshold amount ($5,000,000) for federal court jurisdiction under CAFA.  Aside from being the Court’s first analysis of CAFA since its enactment in 2005, the decision is significant because it limits the ability of class action plaintiffs to avoid federal court jurisdiction.

CAFA gives federal courts original jurisdiction over class actions when the amount in controversy is greater than $5,000,000.  28 U.S.C. §§ 1332(d)(2), (5).  To determine the amount in controversy, the claims of all individual class members “must be aggregated.”  28 U.S.C. § 1332(d)(6)..  The named plaintiff in Knowles filed a class action in Arkansas state court and stipulated that the class he proposed to represent would not seek more than $5,000,000.  The clear purpose of this stipulation was to avoid federal court jurisdiction and to have the case heard in Arkansas state court.

On appeal, the United State Supreme Court held that the plaintiff’s stipulation that he would not seek more than $5,000,000 on behalf of the purported class was insufficient to avoid federal court jurisdiction under CAFA because the stipulation was not binding on the entire class.  The Court noted that a named plaintiff in a class action cannot bind a class before a class is certified. Since the stipulation about the amount in controversy was offered pre-certification, it was binding only on the named plaintiff.  The Court offered examples of several circumstances where the stipulation offered by the named plaintiff on behalf of the class could be overridden: (1) a court could certify a class only on the condition that the stipulation as to damages be eliminated; (2) the named plaintiff could be found an inadequate representative of the class because of his offer to limit damages on behalf of the class; and (3) a different plaintiff could file an amended complaint without the stipulation and be substituted as the class representative.  Based on these possibilities and the fundamental rule that a stipulation only applies to those whom it binds,  the Court remanded the case to proceed in federal court.

As the Court’s first decision under CAFA, Knowles is important because it eliminates the ability of plaintiffs to manipulate the amount in controversy by stipulation to avoid federal court jurisdiction. The very purpose of CAFA is to allow federal courts to decide class actions when certain threshold jurisdictional amounts are at issue, and it is important that creative plaintiffs lawyers not be able to manipulate CAFA’s provisions.  With its decision in Knowles the Supreme Court has imposed significant limits on such efforts.

Eric E. Hudson