MONTGOMERY, Ala. (Legal Newsline) -- Alabama Attorney General Luther Strange called a U.S. Supreme Court ruling against plaintiffs lawyers trying to place monetary limits on class action lawsuits an "important victory" for class action fairness and free enterprise.
In an unanimous decision Tuesday, the court ruled in Standard Fire Insurance Co. v. Knowles that a class action filed by plaintiffs in Arkansas state court instead belonged in federal court under the Class Action Fairness Act.
The question presented to the nation's highest court concerned a class-action plaintiff who stipulated, prior to certification of the class, that he -- and the class he seeks to represent -- would not seek damages that exceed $5 million in total.
The court said such a stipulation does not remove the case from CAFA's scope.
The act, signed into law by former President George W. Bush in 2005, gives federal courts jurisdiction to certain class actions in which the amount in controversy exceeds $5 million, and in which any of the members of a class of plaintiffs is a citizen of a state different from any defendant -- unless at least two-thirds or more of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the state in which the action was originally filed.
In Knowles, plaintiff Greg Knowles filed a stipulation with his complaint stating he would not seek more than $5 million.
Knowles filed the original lawsuit on April 13, 2011, in Miller County Circuit Court in Arkansas against Standard Fire Insurance Co.
The lawsuit claims that Standard Fire breached its contract by systematically underpaying claims of loss or property damage made under a homeowner's insurance policy. Specifically, Knowles claims that the insurance company did not pay for general contractors' overhead and profit charges associated with damage to his home caused by hail on March 10, 2010.
Although in Arkansas the lawsuit could include class members with claims going back for five years, lawyers decided to limit potential class members as those with claims going back for only two years throughout the state of Arkansas.
In addition to this limit on class members, Knowles filed a stipulation stating he would not seek more than $5 million and waived his right to certain damages.
Defendant Standard Fire removed the case to federal court in May 2011, arguing that the plaintiff fraudulently defined the purported class in an effort to avoid federal court jurisdiction.
However, the case was remanded back to state court based on the Knowles' stipulation to limit his recovery to under $75,000 and limit unnamed class members' recovery to under $5 million.
Alabama authored and filed an amicus brief to the Supreme Court, arguing that the case should be in federal court.
In particular, the brief argued that the "stipulation procedure," if approved, would "subvert the interests of absent class members to the interests of the class's lawyers."
Alabama noted that the only "logical explanation for the procedure is that counsel wish to avoid important reforms that have been incorporated into federal law, including the requirement that state officers be given an opportunity to challenge the fairness of any proposed settlement," which "raises serious concerns about efficiency, fairness, notice and adequacy of representation."
Justice Stephen Breyer, who authored the Supreme Court's seven-page opinion, said Knowles' stipulation does not defeat federal jurisdiction under CAFA.
"As applied here, the statute tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of Knowles' proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case," Breyer explained.
"The District Court in this case found that resulting sum would have exceeded $5 million but for the stipulation. And we must decide whether the stipulation makes a critical difference. In our view, it does not."
The court said its reason is simple: Stipulations must be binding.
"The stipulation Knowles proffered to the District Court, however, does not speak for those he purports to represent. That is because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified," Breyer wrote.
"Because his precertification stipulation does not bind anyone but himself, Knowles has not reduced the value of the putative class members' claims."
The Supreme Court ruled that since Knowles lacked the authority to concede the amount-in-controversy issue for the absent class members, the federal court "wrongly concluded" that his precertification stipulation could overcome its finding that the CAFA jurisdictional threshold had been met.
To ignore a non-binding stipulation, the court noted, does no more than require the federal judge to "do what she must do in cases without a stipulation and what the statute requires, namely 'aggregate' the 'claims of the individual class members.'"
The court vacated the federal court's judgment and remanded the case.
Strange praised the court's ruling.
"Alabama is an excellent place to live and do business; our Legislature has passed laws to protect defendants and consumers from collusive class action settlements and unfair procedures," he said. "Although Alabama is no longer 'tort hell,' abusive lawsuits and unfair procedures in other state courts can still harm Alabama businesses and consumers.
"Thankfully, the Supreme Court unanimously agreed with our position that there should be universally accepted minimum safeguards for the most significant interstate class actions."
Alabama's brief was joined by Arizona, Colorado, Connecticut, Florida, Georgia, Indiana, Kansas, Michigan, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, Washington and West Virginia.
DRI: The Voice of the Defense Bar also filed an amicus brief in the case.
In a statement Wednesday, the organization said the court's decision "sends a clear signal" that it is taking Congress at its word -- that CAFA was enacted to make it more difficult for plaintiffs to engage in "gamesmanship" to defeat federal jurisdiction.
"Clearly this was an attempt by plaintiffs to do an end-around the will of the Congress," said Mary Massaron Ross, DRI president. "And clearly the Supreme Court was having none of it."
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.