U.S. Supreme Court to decide whether a Class Action Fairness Act loophole should be closed

On August 31, 2012, the U.S. Supreme Court accepted its first Class Action Fairness Act (CAFA) case. In Standard Fire Insurance Co. v. Knowles, U.S., No. 11-1450, certiorari granted 8/31/12, the Court will consider whether a class plaintiff may stipulate to limit his damages to be less than the $5 million CAFA jurisdictional threshold in order to avoid removal to federal court. Read the petition for writ of certiorari.

CAFA became law in 2005 as a way to halt the filing of large class action lawsuits of national significance in a few select state court “magnet jurisdictions” that were known to be friendly to class action plaintiffs, including Miller County, Arkansas (where the Standard Fire case was filed). CAFA provides that when a named plaintiff files a putative class action in a state court against a defendant that is not a citizen of the state where suit is filed, federal jurisdiction exists if the $5 million amount in controversy is satisfied.

Class action plaintiff attorneys have recently attempted to circumvent CAFA by utilizing the following procedural maneuver: although the actual amount in controversy on the claims pleaded exceeds $5 million, the complaint is accompanied by a purportedly binding stipulation limiting to under $5 million not only the named plaintiff’s own damages, but also the damages of the putative class members the plaintiff hopes to, but does not yet, represent.

In its petition for writ of certiorari, Standard Fire explains that this maneuver violates the constitutional rights of proposed class members and the basic principles of removal law and class action law. Under the Court’s recent decision in Smith v. Bayer Corp., putative class members are not bound by actions taken by named plaintiffs or litigation outcomes before certification. Therefore, Standard Fire reasons that a named plaintiff has no right to stipulate a binding cap on the damages of people he or she does not represent. Such a limitation, if effective at the time suit is filed, would violate the due process rights of the proposed class members.

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