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Supreme Court Considers Use of Purported Stipulation to Avoid Removal

In a move that could significantly affect the right to remove a putative class action to federal court, the Supreme Court has agreed to consider the constitutionality of a legal tactic used by plaintiffs: the purported stipulation that damages do not exceed $5 million. Knowles v. Standard Fire Insurance Company. See Case No. 4:11-CV-04044, 2011 WL 6013024 (W.D. Ark. Dec. 2, 2011) leave to appeal denied, 11-8030, 2012 WL 3828891 (8th Cir. Jan. 4, 2012) cert. granted, 11-1450, 2012 WL 1966025 (U.S. Aug. 31, 2012). In Knowles, plaintiff filed suit in a Miller County, Arkansas state court alleging underpayment of homeowner insurance claims. Plaintiff sought to represent a statewide class. In an affidavit attached to his complaint, plaintiff submitted a stipulation stating that he sought damages –for both himself and unknown class members – of less than $5 million.

Standard Fire removed the case to the United States District Court for the Western District of Arkansas alleging there was federal jurisdiction under the Class Action Fairness Act of 2005 ("CAFA"). CAFA allows a party to remove a case to federal court from state court when, along with other diversity related requirements, there is more than $5 million at issue at the time of removal. Knowles sought remand, primarily arguing that the amount in controversy did not satisfy CAFA’s $5 million threshold pursuant to his stipulation.

Standard Fire responded and demonstrated that, but for the alleged stipulation, the actual amount in controversy exceeded the $5 million threshold. Standard Fire further argued that Knowles' stipulation was invalid because (i) Knowles merely agreed not to seek damages exceeding $5 million, leaving open the possibility of accepting additional damages; and (ii) Knowles' attorneys failed to sign or agree to the purported stipulation and therefore could recover fees beyond the $5 million “stipulated" amount in controversy.

The district court disagreed with Standard Fire. A federal judge in Arkansas approved the stipulation, holding that Knowles had shown that damages for all class members would not exceed $5 million to a "legal certainty." Id.Therefore, the jurisdictional threshold in CAFA was not met and federal jurisdiction did not exist. Furthermore, the district court noted that if putative class members find the stipulation to be too restrictive, those class members can simply opt out of the class and pursue their own independent remedies.

The Eight Circuit Court of Appeals denied Standard Fire's request for permission to appeal the remand decision and its request for rehearing, both by the panel and en banc. As a result, Standard Fire filed its writ of certiorari with the Supreme Court, which was granted. In its brief, Standard Fire argues the Arkansas district court ignored the Supreme Court's 2011 decision in Smith v. Bayer Corp, which said a named plaintiff seeking class certification cannot bind absent class members without court approval. In addition, Standard Fire asserts that long-standing principles of class action law dictate that putative class members cannot be bound by actions taken in litigation prior to certification of the class. Because the amount in controversy is determined at the time of removal, before a class is certified, the purported stipulation cannot be binding at this point and must be disregarded when determining whether federal jurisdiction exists and removal is proper.

Finally, one of the primary purposes for passing CAFA was to expand federal jurisdiction over class action cases that were frequently subject to the abuses of the class action device in state courts. The Supreme Court's review of Knowles provides it with an opportunity to ensure that class action plaintiffs cannot circumvent the intended purpose of CAFA by purportedly limiting their damages and the damages sought by putative class members in order to evade federal jurisdiction.

©2002-2020 Fowler White Boggs P.A. ALL RIGHTS RESERVEDNational Law Review, Volume II, Number 317

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About this Author

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Lindsey R. Trowell has experience in class actions, complex commercial and securities litigation.  Some of his representative areas of practice include defense of class actions on behalf of insurers, business entities, and management for alleged improper market conduct or business practices, representation of brokers-dealers, investment advisers, financial institutions, public and private companies, and individuals in a wide range of securities matters including litigation, arbitration, and regulatory investigations and enforcement proceedings involving the U.S. Securities and Exchange...

904-598-3100
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Kristen L. Wenger practices in the areas of commercial litigation and in all types of business litigation including disputes involving corporate liability, class actions, contracts, real property, insurance, risk management, warranty, lending institutions, foreclosures and other corporate and individual business clients.

904-598-3100