December 19, 2014

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December 19, 2014

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December 17, 2014

Supreme Court Ruling Reverses Bad 9th Circuit Precedent on Class Action Fairness Act (CAFA)

On March 19, 2013, the U.S. Supreme Court handed down Standard Fire Insurance v. Knowles, a short, narrow, and unanimous opinion addressing removal of class actions to federal court under the Class Action Fairness Act (“CAFA”).  The central holding of the case is that a district court should “ignore” representations by the plaintiff that the amount in controversy is under $5 million and instead consider the actual evidence concerning the number of class members and potential claims.  Although the Court did not expressly address Lowdermilk v. U. S. Bank Nat'l Ass'n, 479 F.3d 994 (9th Cir. 2007)—a 9th Circuit case that held that the defendant must establish with "legal certainty" that the amount in controversy exceeds $5 million when the plaintiff pleads that the amount in controversy is lower—the Supreme Court's reasoning effectively reverses the Lowdermilk line of cases.

The Relevant Facts in Standard Fire Insurance

As relevant, the defendant removed a class action and made a showing through an analysis of the allegations in the complaint that the amount in controversy slightly exceeded $5 million.   The district court found no fault with the analysis, but noted that the Plaintiff had made a formal stipulation that the amount in controversy was less than $5 million. Invoking the old adage that the plaintiff is “the master of the complaint,” the district court held that it was bound to remand the case based on the Plaintiff’s purportedly binding representation that the class was seeking less than $5 million. 

The Supreme Court’s Holding

The limited question the Supreme Court answered was, assuming the evidence otherwise indicated that the class’s potential recovery exceeds the minimum $5 million, did the formal stipulation defeat federal jurisdiction.  The Court answered this question “no.”  The plaintiff, as a mere potential representative for an uncertified class, had no power to bind the class and to require them to agree to the reduced recovery.  This is to be contrasted from where an individual stipulates that his damages are below the amount in controversy in an individual action, which does bind all relevant parties (i.e., there are no absent contingent parties).  The Court went so far as to say that the district court “should have ignored that stipulation.” Instead, the Court directed district court’s the proper process is simply “to add[] up the value of the claim of each person who falls within the definition of [the] proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case.”  In so concluding, the Court cited with approval Frederick v. Hartford Underwriters, 683 F.3d 1242, 1247 (10th Cir. 2012), where the Tenth Circuit rejected an attempt by a plaintiff to avoid federal jurisdiction by pleading in the prayer that the class was seeking only “a total award for compensatory and punitive damages [that] does not exceed $4,999,999.99.”  

How This Impacts Ninth Circuit Precedent

Although I have never encountered a purportedly “binding stipulation” that the amount in controversy is less than $5 million in a class action, it is common in wage/hour cases filed in California for the plaintiff’s counsel simply to plead in an unverified complaint that the amount in controversy is less than $5 million. Under binding 9th Circuit precedent, Lowdermilk v. U. S. Bank Nat'l Ass'n, 479 F.3d 994, 995 (9th Cir. 2007), where a plaintiff includes such a statement in the complaint, the burden on the defendant to establish the $5 million amount in controversy is greatly raised to a “legal certainty” standard, meaning that “the party seeking removal must prove with legal certainty that CAFA's jurisdictional amount is met.” This is contrasted with the general rule where the complaint is silent on amount in controversy that the employer merely must “prove by a preponderance of the evidence that the amount in controversy requirement has been met.” A key rationale for the Lowdermilk rule was that “it is well established that the plaintiff is ‘master of her complaint’ and can plead to avoid federal jurisdiction.”

There is no way to reconcile this reasoning with the Supreme Court’s in Standard Fire Insurance. Implicit in the Supreme Court's reasoning is that pronouncements by the plaintiff about the amount in controversy should have no binding effect, but rather the district court should simply consider the claims pleaded, the number of potential class members, and the potential aggregate recovery for this class while “ignoring” the plaintiff’s asserted conclusions on amount in controversy. There is no logical reason why a formal stipulation to limit jurisdiction should have no impact on the CAFA analysis, while a mere statement in an unverified complaint that the amount in controversy falls below $5 million should have the impact of altering the burden of proof and making it harder for the defendant to establish amount in controversy.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

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