In The Standard Fire Insurance Co.v. Knowles, No. 11-1450, a unanimous decision yesterday written by Justice Breyer, the Supreme Court held that a plaintiff cannot stipulate to an amount of damages for a putative class in order to avoid federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).
CAFA was enacted, in part, to ensure that class actions were filed in federal court unless they met a limited number of exceptions, thus avoiding often pro-plaintiff state courts. As previously described on this blog, in Knowles, plaintiff’s counsel tried to avoid the federal jurisdiction mandated by CAFA — in favor of Arkansas state court — by stipulating that the damages sought by the putative class would be less than the $5 million CAFA threshold.
The Supreme Court held that stipulations must be binding to be effective and that the “stipulation Knowles proffered to the District Court . . . . does not speak for those he purports to represent. Relying on its recent decision in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), the Court held that “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Significantly, this is in contrast to individual actions in which stipulations are binding and thus can affect the jurisdictional analysis. The Court spoke loudly and definitively — named plaintiffs in uncertified classes cannot speak for the class because they do not represent the class.
The Court squarely rejected the argument that any issues with the validity or binding nature of the stipulation would be considered in the class certification process: “We do not agree that CAFA forbids the federal court to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process… To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.'” In addition, the Court rejected a similar plaintiff’s tactic — dividing up a class into smaller classes to avoid CAFA jurisdiction through the use of non-binding stipulations.
Knowles is significant not just in its limitations on plaintiff’s tactics to avoid federal jurisdiction, but because it clearly holds that pre-certification representations purportedly made on behalf of a class are not valid or binding. The decision thus could have broader ramifications.