Standard Fire: Supreme Court Re-affirms Basic Principles and Leaves Questions Unanswered

April 3, 2013

Supreme Court B&WThe holding of the Supreme Court’s succinct, unanimous opinion in Standard Fire Insurance Co. v. Knowles is clear:  a putative class representative cannot avoid removal to federal court under the Class Action Fairness Act (CAFA) by stipulating to seek only damages below CAFA’s $5,000,000 minimum amount in controversy threshold.  In making its narrow holding based on fundamental principles, however, the Court left significant practical questions for lower courts to determine.

Mr. Knowles Alleges His Insurance Company Shorted Him

Greg Knowles’ Arkansas home was damaged during a 2010 hail storm.  He made a claim for repairs under his homeowner’s insurance policy and his insurance company refused to pay for the general contractor’s fees for performing the repairs. Mr. Knowles filed suit in state court on behalf of himself and his fellow Arkansans, alleging the insurance company acted fraudulently and breached their agreement.  Mr. Knowles stipulated that he would not seek damages over $5,000,000, thereby purporting to keep the classes’ claims below the minimum CAFA jurisdictional threshold.

The insurance company removed the case to federal court, arguing that the stipulation was ineffective for avoiding removal under CAFA. The district court agreed with Knowles. The Eight Circuit declined to hear the insurance company’s appeal.  The Supreme Court granted certiorari.

The Supreme Court Weighs in Unanimously

In a short opinion by Justice Breyer, the Supreme Court reversed the district court’s ruling. The Court’s reasoning was direct: a stipulation must be binding to be effective; Knowles lacked authority to bind the yet-uncertified class; therefore, Knowles’ stipulation was ineffective to avoid the CAFA jurisdictional threshold.

Takeaways from Standard Fire

Although it’s too early to determine whether lower courts will read too much or too little into Standard Fire, three early takeaways are apparent.

First, the Court re-affirmed the fundamental principle that a plaintiff is the master of his/her complaint.  The Court noted that an individual plaintiff could stipulate to a lesser amount than otherwise available to avoid federal jurisdiction (“If [a plaintiff] does not desire to try his case in the federal court he may resort to the expedient of suing for less than the jurisdictional amount, and . . . the defendant cannot remove.” St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 294 (1938)).  Although the mechanism would be different post-Standard Fire – a stipulation from the named plaintiff is apparently alone insufficientthe underlying principle that a plaintiff might properly decide to litigate claims in state court is arguably no less applicable to removal under CAFA than under the general individual-case diversity statute. The Court did not disparage a plaintiff’s legitimate right to choose among available venues.

Second, the Court cited CAFA’s explicit statement that the class definition controls the inquiry into the amount in controversy (amount in controversy includes the aggregate of class members who ‘”fall within the definition of the proposed or certified class”).  Despite the hyperbolic rhetoric by some supporting the insurance company’s position that clever class definitions would undermine CAFA’s intent, the Court implicitly endorsed the notion that the aggregation analysis is confined by the class definition.  Standard Fire provides no basis for courts to remake proposed class definitions.

Third, the Court gave little guidance to lower courts regarding how in practice to determine the amount in controversy.  For example, the Court did not address whether the defendant, as the party invoking federal jurisdiction, must establish the amount in controversy by a preponderance of the evidence, to a “legal certainty,” or to some other potentially applicable standard.  Moreover, the Court explicitly refrained from addressing whether a lower court should consider, and what weight to give, a stipulation by counsel not to seek attorneys fees, if attorneys fees would cause the aggregate claims to exceed the jurisdiction threshold.  These are only a few of the questions that will likely continue to arise post-Standard Fire.

Standard Fire re-affirmed basic pleading and jurisdictional principles, but left unanswered questions that might prove significant for class action practitioners and courts.