SUPREME COURT CLOSES OFF CLASS ACTION FORUM SHOPPING TACTIC
In 2005, Congress enacted the Class Action Fairness Act, or “CAFA” as it is popularly known. CAFA is a piece of tort reform legislation. It was enacted against the backdrop of a number of notorious state jurisdictions where a large proportion of class actions were filed and where huge verdicts against corporate defendants were rendered. CAFA prevents this type of state court “forum shopping” by granting jurisdiction to the federal courts over class actions involving more than 100 class members and more than $5 million in controversy, among other requirements. Under CAFA, defendants have the ability to remove class actions meeting these requirements from state court to federal court. Predictably, CAFA has inspired creative approaches by plaintiffs’ counsel to avoid federal removal. One frequently employed approach is to concede that less than $5 million is being sought in the action. On March 19, 2013, the U.S. Supreme Court closed off that approach.
In Standard Fire Insurance v. Knowles, the plaintiff had filed a putative class action against a large insurance company in an Arkansas state court, claiming that property losses paid by the company unlawfully failed to include general contractor fees. The complaint alleged that the amount in controversy in the case was below $5 million, and for good measure attached a sworn stipulation to that effect. The insurance company removed the case to federal court under CAFA. The plaintiff objected, citing the stipulation. The federal court remanded the case back to state court, even though the evidence showed that potential damages exceeded $5 million, because it considered the plaintiff’s stipulation binding. The case was eventually taken up by the U.S. Supreme Court.
In a unanimous opinion, the Supreme Court reversed. It held that that before a class action is certified as a class action, any stipulation about damages the plaintiff makes cannot be binding. The reason is that prior to class certification, the named plaintiff does not represent the class. While that plaintiff can stipulate as to his own damages, he does not have power to bind anyone else in the class as to their damages. Rather let a stipulation control, courts must examine the evidence and add up the value of all potential class claims to determine the amount in controversy.
What This Means For You: Despite the relatively obscure jurisdictional question in this case, the Standard Fire decision will have a major impact on California employers. Plaintiffs’ counsel prefer California state courts for wage and hour class actions, in part because it is easier to obtain class certification than in federal court. For many years, wage/hour class action plaintiffs have attempted to prevent removal to federal court through the same tactic used in Standard Fire: alleging in the complaint that less than $5 million was being sought and/or was “in controversy.” That tactic was generally successful because the Ninth Circuit had set a very high bar for establishing amount in controversy under CAFA. In a 2007 case called Lowdermilk v. U.S. Bank Nat’l Ass’n, the Ninth Circuit had held that where the complaint asserts an amount below the $5 million threshold, the defendant must establish with “legal certainty” that the amount in controversy exceeds $5 million to trigger CAFA. Standard Fire effectively overrules Lowdermilk. In doing so, it gives California employers new opportunities to remove appropriate cases to federal court, thereby enhancing their ability to defeat certification and stop wage/hour class actions in their tracks.