Argument in the first U.S. Supreme Court case reviewing the Class Action Fairness Act of 2005 (“CAFA”) was held on January 7th - The Standard Fire Insurance Co. v. Knowles (S.Ct. No. 1450). We previously discussed the Knowles case in our series on the Supreme Court’s review of CAFA after the Court granted certiorari to review the case straight from the U.S. District Court for the Western District of Arkansas (see part 1, part 2, and part 3). At the heart of Knowles is a fight against the notion that class action plaintiffs have the power as “masters of the complaint” to manipulate the amount in controversy in order to evade federal jurisdiction. In passing CAFA, Congress intended to rectify abuses of the class action process by State and local courts, including demonstrated biases against out-of-state defendants. See 190 P.L. 2, § 2(a)(4), (b). CAFA provides a mechanism by which a defendant in a state class action may remove the case to federal court - if there is minimal diversity among the parties, 100 or more plaintiffs in the class, and the matter in controversy exceeds $5,000,000, exclusive of interest and costs, the case may be removed. But can federal jurisdiction be thwarted by a plaintiff simply filing a stipulation along with his complaint which states that he will not seek aggregate damages for the class in excess of $5 million (including attorney’s fees and costs) even though the actual amount of potential class damages is more? The District Court in Knowles and the Eighth Circuit Court of Appeals in another case have said “yes” because plaintiffs are the masters of the complaint. To the contrary, the Knowles defendant has urged that a plaintiff is not the master of absent putative class members prior to class certification and cannot bind them via a stipulation to limit damages at the time of filing his complaint. So, will class action plaintiffs secure standing as masters of their complaints or be chastised as master manipulators for attempting to evade federal jurisdiction under CAFA using these stipulations? Based on the Court’s questioning during the argument, the defendant seemed to be facing a high hurdle in trying to sell the master manipulator point of view.
The Knowles defendant relied heavily on the recent Supreme Court decision Smith v. Bayer Corp., 131 S. Ct. 2368 (2011) for the fundamental proposition that putative class members are not parties to the litigation prior to class certification and therefore cannot be bound by actions in the litigation prior to class certification, including this stipulation. Yet, Justice Kagan responded that “[b]efore the certification has happened, they can do whatever they want. They can bring their own claim for $6 million. And that's why Smith v. Bayer, which you so happily rely on, does not have much to do with this case.” Justice Kagan later reiterated that:
[T]he idea of master of the complaint is inherent in every class litigation because there could be no class action, there could be no definition of anything, of the claims, of the amount of damages, of the number of defendants, of the amount of time unless the plaintiff, the named plaintiff, had some ability to define the claim. And this is just one aspect of that larger power.
The defendant argued that, with respect to the amount in controversy, the Supreme Court “has never held in a class action or otherwise that that's something that's subject to the well pleaded complaint rule or the master of the complaint doctrine,” but rather “in the Hertz case and in the McNutt case, which it cites, said the Court should look past what the pleadings say.” Justice Kagan’s response: “Okay. Then you really are asking us to blow up the whole world.”
But, is the Knowles defendant truly asking the Court to declare that CAFA brings an end to the world as we know it? The defendant urged that it is simply asking the Court to do what it has always done to determine the actual amount in controversy:
We are asking the Court to apply the same rules on this score that the Court has always applied, that when the complaint claims one amount, the defendant can bring forth proof that it's a larger amount, that it exceeds the amount in controversy and the Court looks at the competent proof, that's the language the Court used in the Hertz case, to determine the actual amount in controversy, not some jerry-rigged amount the plaintiffs came up with.
The defendant has likened these stipulations to the fraudulent joinder of non-diverse parties used by plaintiffs to avoid removal, which is a device that has been rejected by courts. It remains to be seen whether these class action plaintiffs will bear the title Masters of the Complaint or Master Manipulators.
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