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Supreme Court Closes CAFA Federal Court Evasion Loophole; Employers Likely to Benefit

On March 25, 2013 by Schnader in Labor and Employment

By Scott J. Wenner

In a case arising outside the employment context but with clear applicability to employment class actions, the U.S. Supreme Court has unanimously held that a plaintiff filing suit on behalf of a putative class may not skirt federal court jurisdiction under the Class Action Fairness Act (CAFA) by stipulating that, even though a larger sum could be awarded, the class would not seek to recover more than $5 million. (Standard Fire Insurance, Co v Knowles, March 19, 2013.)

In invalidating an order remanding the case back to state court after the defendant had removed it to a federal court, the Supreme Court reasoned that because no class had yet been certified in this early stage case, under settled law the named plaintiff had no authority to bind putative class members to accept a lesser recovery than they might be entitled were the class to prevail. Therefore, the stipulation – an artifice to avoid federal court – was binding only on the representative plaintiff’s own claim. Thus, it failed to show that the $5 million amount in controversy threshold needed to establish federal jurisdiction under CAFA could not be satisfied.

Facts and Procedural Background

The plaintiff brought a putative class action in state court in Arkansas against an insurance company complaining that its practice of excluding general contractor fees from payments it made for homeowner’s insurance losses was unlawful. According to the complaint a class of possibly thousands of similarly harmed policyholders existed which he wished to represent. The complaint included the following language: the “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.” Attached to the complaint was the named plaintiff’s affidavit promising he would not seek a recovery for the class as a whole exceeding $5 million.

Before answering, the defendant removed the case to federal court under CAFA. CAFA’s jurisdictional language provides that federal “district courts shall have original jurisdiction” over a putative “class action” where, inter alia, the “matter in controversy exceeds the sum or value of $5,000,000.” 28 USC §§ 1332(d)(2), (5). To determine whether the matter in controversy exceeds that sum, CAFA directs that the “claims of the individual class members shall be aggregated.” The district court found that more than $5 million actually was in controversy given the claims asserted, but nonetheless remanded the action back to state court based on the named plaintiff’s stipulation that less than $5 million – less than what they might otherwise be awarded should they prevail –  would be sought on behalf of the alleged class members. The Court of Appeals for the Eighth Circuit declined to hear an appeal, but the Supreme Court granted certiorari and emphatically reversed.

Court Protects CAFA Jurisdiction

In its unanimous reversal, the Court observed that the named plaintiff’s stipulation was ineffective to speak for the putative class members and their intentions. It explained that until a class is certified, the putative representative plaintiff cannot legally bind members of the class. Accordingly, he had no authority to compromise the value of the claims of the absent class members by conceding that the amount in controversy would be under $5 million after the district court found that the value of the class claims exceeded CAFA’s jurisdictional threshold. Noting further that federal jurisdiction cannot be based on contingent future events – a point that the plaintiff conceded – the Court observed that the stipulation purporting to diminish the amount in controversy itself was contingent, as it could not bind the putative class members.

The plaintiff pointed out that federal courts routinely permit plaintiffs to avoid removal by stipulating that the amounts at issue fell below the jurisdictional amount, and argued that this case should be treated consistently. The Court demurred, finding that the plaintiff’s stipulation’s non-binding effect on absent class members whose claims were being devalued to avoid federal jurisdiction was a defining difference. The stipulation therefore was ineffective to defeat federal jurisdiction under CAFA and required the district court’s order of remand to state court to be vacated.

The Purpose of CAFA Would be Thwarted by Permitting a Subterfuge

Although Justice Breyer disposed of the case largely in simple and concise terms based on the inability of a named plaintiff to bind members of an uncertified class, his opinion included some language that will be useful in combating future subterfuges by class action mills fearful of venturing outside friendlier state court venues:

“CAFA’s primary objective [is] ensuring ‘Federal court consideration of interstate cases of national importance.’ § 2(b)(2), 119 Stat. 5. It would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations; such an outcome would squarely conflict with the statute’s objective.”

Thus, Standard Fire Insurance offers support for the notion that the district courts should be sensitive and resistant to efforts by the plaintiff’s class action bar to evade CAFA jurisdiction by slicing, dicing or otherwise masking their claims to avoid federal jurisdiction.

Potential Impact on Employment Litigation

The facts of Standard Fire Insurance are commonplace in the world of wage and hour litigation, particularly in states such as California where the available state law remedies dwarf potential Fair Labor Standards Act awards; where state courts are perceived as far more hospitable to the choking volume of wage and hour class actions; and where federal judges seemingly have been eager to remand these cases – including based on pre-certification representations similar to the one before the Supreme Court.  The Standard Fire Insurance opinion can only help the employment defense bar to ensure that CAFA jurisdiction keeps the higher value wage and hour class actions in federal court.

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