On Tuesday morning, a unanimous U.S. Supreme Court decisively closed a loophole in the Class Action Fairness Act, holding in Standard Fire Insurance Co. v. Knowles that a purported stipulation by the named plaintiff to seek less than the $5 million jurisdictional threshold was irrelevant for purposes of determining whether Federal jurisdiction over the class complaint existed.

Knowles began when the plaintiff’s home was allegedly damaged in a hail storm. In the spring of 2011, Knowles filed a putative class complaint for breach of contract against the defendant, alleging that the defendant had concealed its purported obligation to pay a 20% general contractors’ overhead and profit fee routinely added to invoices for the repair or replacement of damaged property. Knowles proposed a class of “hundreds, and possibly thousands” of Arkansas residents who had failed to receive such payments during 2009 and 2010, but appended a sworn stipulation to his complaint stating that he “will not at any time during this case . . . seek damages for the class as alleged in the complaint to which this stipulation is attached in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).”

The defendant removed the action to federal court, pointing to three flaws in plaintiff’s attempt to avoid removal: (1) plaintiff had deliberately understated possible damages by limiting the class to two years, although the Arkansas statute of limitations on breach of contract was five years; (2) plaintiff’s counsel has not signed a similar stipulation stating that he would not seek or accept an attorneys’ fees award which would push the total amount in controversy past $5 million; and (3) Knowles lacked the authority to bind absent class members anyway.

The defendant’s desire to keep the action out of Arkansas state courts is hardly surprising, given the discussion by defendant and amici before the Supreme Court of Arkansas’ class action law. Although the plaintiff disputed the characterizations of the defense side, amicus the www.appellatestrategist.com/uploads/file/11-1450_pet_amcu_acc_authcheckdam.pdfArkansas State Chamber of Commerce argued that Arkansas rejects the Federal “rigorous analysis” standard for class certification, requiring only “enough of an analysis to enable us to conduct a meaningful review”; presumes class counsel “will vigorously and competently pursue the litigation”; bars trial courts at the certification stage from considering “whether the plaintiffs will ultimately prevail, or even whether they have a cause of action”; will not examine the standing of the class representative at the certification stage; and will not perform a choice-of-law analysis before certifying multi-state classes.

The district court granted plaintiff’s motion to remand the action to state court, noting that Eighth Circuit law recognized class representatives’ stipulations limiting damages, and that a number of district courts had sent putative class actions back to the state courts based on that precedent, relying on similar stipulations. Worries over absent class members’ due process rights were of no moment, the court held, commenting that if the plaintiffs attempted to evade the stipulation, the case could simply be removed again, and any class members dissatisfied with the stipulation could simply opt out and pursue their own actions.

The Eighth Circuit declined to hear the defendant’s appeal. While the defendant’s petition for rehearing was pending, the Circuit decided Rowling v. Nestle Holdings, which affirmed a remand order based on a similar anti-CAFA stipulation. This brought the Eighth Circuit into conflict with the Tenth, which had rejected a stipulation on damages in Frederick v. Hartford Underwriters Ins. Co., and the Supreme Court’s order granting certiorari followed.

The Supreme Court unanimously reversed, dispatching the issue in a mere seven pages.  The plaintiff had a fundamental problem, the Court pointed out; under Smith v. Bayer Corp., prior to certification, a class member had no authority to diminish the rights of the still-absent class members. Therefore, although the stipulation presumably restrained plaintiff’s damages, it had no impact at all on the class members. The Court acknowledged a long-standing line of authority, heavily relied on by plaintiff in his briefs to the district court and the Supreme Court, that a plaintiff is “master” of his or her complaint, and may deliberately state a cause of action in such a way as to keep it out of federal court if he or she chooses, but the Court distinguished those cases as involved stipulations which actually were binding on all plaintiffs. The Court agreed that reversal was necessary in order to vindicate Congress’ purposes in enacting CAFA. If anti-CAFA stipulations purporting to limit damages were recognized, there were a variety of ways for large class actions of national import to remain locked up in state courts: a state court could certify the class on condition that the stipulation be excised from the complaint; or the court could find that plaintiff was by definition an inadequate class representative, given his attempt to limit the class members’ claims, and replace the representative with another plaintiff with an amended complaint. In fact, if stipulations like the plaintiff’s were effective, the Court suggested that there would be no barrier to another plaintiff dividing a $100 million dispute into twenty-one sub-$5 million classes in the state courts.

Although some observers have wondered (subscription req.) in the forty-eight hours since Knowles came down whether the decision will ultimately result in larger damages claims in future class complaints given that we now know that limiting stipulations are ineffective to manipulate jurisdiction, but the concern seems misplaced. After all, much of the discussion in Knowles turned on the significant number of ways in which such a stipulation could be evaded once jurisdiction was settled, so believing that such a stipulation was the last word on possible exposure seems unjustified. I agree with others (subscription req.) who regard Knowles as a significant and unqualified win for the defense bar. If the Court had agreed that a mere stipulation was sufficient to evade Federal jurisdiction, such stipulations would have become even more commonplace, likely resulting in more class actions surviving certification motions. With that door now slammed shut, major cases will go to Federal court as Congress intended, where they will be governed by the far more rigorous Federal standards of Rule 23, as interpreted in Wal-Mart v. Dukes and its successors.