Authored by Barry Miller
The Supreme Court held that a would-be class action plaintiff cannot avoid federal court by “stipulating” that he will seek damages that are less than the amount necessary to give rise to jurisdiction under the Class Action Fairness Act. In Standard Fire Insurance Co. v. Knowles, the named plaintiff claimed that his homeowners insurer had shorted him and “hundreds [or] possibly thousands” of other policyholders in the putative class that he sought to represent by failing to include certain benefits when paying out claims. Greg Knowles filed the case in Arkansas state court and attempted to avoid removal to federal court by including in his complaint and an accompanying affidavit from his counsel a statement that he would not seek more than $5,000,000 in damages on behalf of the class.
The defendant removed the case to federal court, invoking CAFA notwithstanding Knowles’ statements about the damages he would seek. Under CAFA, federal District Courts have jurisdiction over a putative class action case if at least one class member is a citizen of a different state than at least one defendant, the proposed class includes at least 100 members, and the total amount in controversy exceeds $5,000,000. In analyzing whether the federal court had jurisdiction, the District Court concluded that the total potential damages posed by the plaintiff’s class action claim exceeded the threshold amount. However, the court concluded that the plaintiff’s statements that he would not seek more than $5,000,000 on behalf of the class served to limit the amount in controversy to less than the jurisdictional minimum, and as a result, CAFA did not apply.
The Supreme Court overturned the trial court’s holding and found that the plaintiff’s supposed “stipulation” did not limit the amount in controversy in the case. Writing for a unanimous Court, Justice Breyer noted that while the plaintiff could agree to limit his own request for damages, he could not do so on behalf of absent members of an uncertified class that no court had yet empowered him to represent. This left open several possibilities by which the class might seek damages in a greater amount than described Knowles’ stipulation, if for example, Knowles was replaced as the named plaintiff or another class member sought to intervene in the case. Because Knowles’ stipulation was not effective, the District Court’s original finding that the total potential damages in the case exceeded $5,000,000 was controlling and the requirements for CAFA jurisdiction were met.
This ruling has significant implications for wage and hour litigation because CAFA jurisdiction is often at issue when plaintiffs bring claims under state wage laws to avoid the federal courts or to seek enhanced damages. The Supreme Court’s ruling makes clear that class action plaintiffs and their attorneys cannot avoid federal court through an artificial (and possibly temporary) limitation on the damages sought in their complaints. There may be a broader and more subtle message in the Supreme Court’s ruling, as well. Since CAFA was enacted in 2005, plaintiffs and their attorneys have sought to circumvent the statute and avoid the federal courts by attempting to exploit numerous supposed loopholes in the statute. For example, plaintiffs have been known to remain mum about the damages they seek and attempt to put the defendant to the burden of providing evidence about the value of a vaguely defined case at an early stage of the proceedings. Some Courts of Appeal have indulged this gambit, and others have rejected it. The Supreme Court has not yet addressed all of the means by which plaintiffs might seek to avoid CAFA, but the Justices’ unanimous opinion in Knowles might suggest that they have limited tolerance for such maneuvers.