Supreme Court agrees to review class action case involving issues of federal jurisdiction

Michelle Keahey Sep. 4, 2012, 9:00am

U.S. Supreme Court

WASHINGTON (Legal Newsline) - The U.S. Supreme Court has granted a writ of certiorari to an insurance company seeking clarification of federal jurisdiction involving class action litigation.

The case that was granted for review on Friday, Knowles v. Standard Fire Ins. Co., involves allegations that the insurance company failed to fully reimburse Arkansas homeowners for losses sustained to property.

Standard Fire is asking the Supreme Court for guidance on whether a plaintiff can limit unnamed class members' recovery so as to keep the case in "friendly" state courts.

Plaintiff Greg Knowles filed the original lawsuit as a putative class action on April 13, 2011 in the Circuit Court of Miller County, Ark., against defendant The Standard Fire Insurance Co., which is a unit of Travelers Cos. The lawsuit claims breach of contract due to Standard Fire's underpayment of claims for loss or damage to property made under a homeowner's insurance policy.

In the suit, named plaintiff Knowles requested payment for damage to his home caused by hail on March 10, 2010. He claims that the insurance company did not pay for charges associated with retaining the services of a general contractor to repair or replace damaged property, charges known as general contractors' overhead and profit (GCOP), that are an extra 20 percent fee routinely assessed by contractors when repairing damaged property. Standard Fire is accused of fraudulently concealing the obligation to pay the GCOP on homeowners' insurance contracts throughout the state of Arkansas.

Standard Fire removed the case to federal court in May 2011 and argued that the plaintiff fraudulently defined the purported class in an effort to evade federal jurisdiction. The original complaint included a stipulation which limits Knowles' recovery to under $75,000 and unnamed class members recovery to under $5 million.

In its court fight over state court or federal jurisdiction, Standard Fire argues that the plaintiff lacks the authority to place a limit on recovery that would bind other class members.

In response, the plaintiff argues that the stipulation is binding and limits his and the class's recovery to within state jurisdictional limits. He also argues that he is the "master of his complaint" and has the right to limit his claims in order to bring the lawsuit in the forum of his choice, the Circuit Court of Miller County, Ark.

On Friday, Aug. 31, the Supreme Court agreed to hear the central issue of whether the plaintiff can defeat the defendant's right of removal under the Class Action Fairness Act (CAFA) by filing a stipulation with the class action complaint that attempts to limit the damages to less than the $5 million threshold for federal jurisdiction. Without the stipulation, Standard Fire states that the actual amount in controversy will exceed $5 million.

It calculated the amount in controversy using the GCOP at 20 percent of the total damages allegedly owed to class members over the course of two years. In a December 2011 order, U.S. District Judge P. K. Holmes, III wrote that Standard Fire met the initial burden of proof and showed that the actual amount in controversy reaches, if not exceeds, the federal court's minimum threshold for jurisdiction pursuant to the CAFA.

Although he agreed the amount placed the case in federal court jurisdiction, using the guidelines confirmed by the Eighth Circuit holding Bell v. Hershey Co., Judge Holmes remanded the case back to Miller County Circuit Court.

Bell, Holmes held, concluded that a clear stipulation would meet the requirements for defeating removal.

"...If a stipulation is legally binding and made in good faith, it can satisfy the plaintiff's legal certainty burden and defeat removal," he wrote.

Further, he wrote that if putative class members find the limitations as too restrictive, they may simply opt out of the class and pursue their own remedies.

Standard Fire appealed the decision to the Eighth Circuit Court of Appeals, which denied permission to appeal without explanation and also denied rehearing en banc. In response, Standard Fire Insurance Co. filed a petition for writ of certiorari with the Supreme Court, which was granted on Friday.

In its petition for certiorari, Standard Fire Insurance asks for further clarification on whether a plaintiff can bind absent class members so as to destroy federal jurisdiction. It argues that in longstanding principles of class action law, putative class members are not bound by actions taken in litigation before certification of the class.

"A named plaintiff has no right to stipulate to a bind cap on the damages of people he or she does not represent," Standard Fire states. "Such a limitation, if effective at the time suit is filed, would violate the due process rights of the proposed class members."

In previous decisions, the Supreme Court found that without certification of the proposed class the named plaintiff does not represent them and cannot bind nonparties.

Therefore, the insurance company concludes, that since the amount in controversy is determined at the time of removal, and the stipulation was not binding, it must be disregarded in determining whether federal jurisdiction exists.

In a brief filed with the Supreme Court, the U.S. Chamber of Commerce wrote that the when a plaintiff waives some of the potential class recovery, dissatisfied absent class members could file additional lawsuits seeking remuneration after the original named plaintiff settles. "It threatens the finality of otherwise concluded class-action litigation and undermines incentives for voluntary resolution," the brief states.

(Legal Newsline is owned by the U.S. Chamber of Commerce Institute for Legal Reform).

In Arkansas, state law prevents class certification until just before trial. Many businesses, such as Standard Fire Ins. Co., claim that this postponement of class certification allows the plaintiff to pursue expensive and burdensome discovery and, ultimately, forces the defendants into settlement.

The plaintiffs' attorneys in this case have made tens of millions of dollars in attorney's fees where similar GCOP cases settled before trial and before class certification.

The case will be heard in the Supreme Court's next term which starts on Oct. 1. Oral arguments could be scheduled as soon as November or December. A decision in the case is expected by the end of June 2013.

Standard Fire Insurance Co. v. Knowles, U.S. Supreme Court No. 11-1450

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