Advertising Law Blog

The Supreme Court of the United States has closed a loophole used by class action plaintiffs to avoid trying their cases federal court. The case, entitled Standard Fire Insurance v. Knowles, was decided on March 19, 2013. In order to ensure that class actions of national significance were decided in federal, rather than state courts, Congress passed the Class Action Fairness Acts (CAFA) in 2005. It provided for federal jurisdiction over most class action lawsuits where $5 million dollars were at stake. Many plaintiffs' attorneys, however, preferred to be in state court, and came up with a way to avoid having their cases removed to federal court. The ploy they came up with was to file a stipulation or certification with the complaint that the plaintiff was seeking less than $5 million and would not accept any more than that amount. Critics of this tactic pointed out the unfairness of a lead plaintiff compromising the potential recovery of the class he or she claimed to represent. However, many federal courts, notably the Eighth Circuit Court of Appeals sanctioned such arrangements and routinely remanded class actions back to state courts over the defendants' objections.

The Supreme Court unanimously put a stop to this practice. The plaintiff, Greg Knowles sought to represent a class of "hundreds, and possibly thousands" of Arkansas insurance policyholders, who he alleged were denied certain payments by Standard Fire Insurance. In his bid to avoid federal court, Knowles said he "will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate."

In an opinion delivered by Justice Breyer, the Supreme Court said it would be unfair to allow Knowles to compromise the rights of the absent class members "because plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. Because his precertification stipulation does not bind anyone but himself, Knowles has not reduced the value of the putative class members' claims. For jurisdictional purposes, our inquiry is limited to examining the case as of the time it was filed in state court. At that point, Knowles lacked the authority to concede the amount-in-controversy issue for the absent class members. The Federal District Court, therefore, wrongly concluded that Knowles' precertification stipulation could overcome its finding that the CAFA jurisdictional threshold had been met.