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Supreme Court Says Federal Courts Not So Easily Avoided In Class Cases

March 21, 2013

By Lisa Nowlin

The Supreme Court yesterday settled a circuit split over whether plaintiffs bringing class actions could escape federal jurisdiction under the Class Action Fairness Act (CAFA) by stipulation. CAFA gives federal district courts original jurisdiction over class actions in which, among other things, the aggregate claims of the individual class members exceed $5 million. In

, Greg Knowles filed a proposed class action in Arkansas state court. Defendants removed to federal district court, and the district court found the amount in controversy to be just above $5 million. However, because Knowles stipulated that the class would seek less than $5 million in damages, apparently in an attempt to keep the case in the plaintiff-friendly state court, the district court remanded to state court. The question before the Supreme Court was whether Knowles’ stipulation sufficed to keep the class action out of the reach of CAFA, and therefore out of federal court.

In a unanimous decision, the Supreme Court held that the legal effect of Knowles’ stipulation was to bind only himself – he could not legally bind members of the proposed class prior to the class’s certification. Because the stipulated damages limitation was not binding, it could not reduce the value of the putative class members’ claims to avoid the CAFA jurisdictional threshold. The Court stated that the district court should have ignored the stipulation and evaluated federal jurisdiction as dictated by CAFA, based on the court’s best determination of the aggregated value of the individual claims.

Had the Court held otherwise, plaintiffs would have been able to depress artificially the value of class claims in order to push class cases into purportedly more plaintiff-friendly state-court venues. Standard Fire argued, and the Court agreed, that such an outcome would have conflicted with CAFA’s objective of ensuring federal court consideration of interstate cases of national importance.

However, the decision may not be an unalloyed victory for defendants: the Court’s ruling removes any incentive for plaintiffs to limit their claimed damages. Defendants that once may have faced the prospect of (admittedly multiple in some instances) smaller class claims now may find those claims magically more significant in asserted scope.

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