In a unanimous decision penned by Justice Stephen Breyer, the United States Supreme Court last week closed a loophole in the Class Action Fairness Act (“CAFA”) that had been used by plaintiffs’ lawyers to avoid removal of class actions to federal court. Specifically, the Court held that plaintiffs in class actions cannot stipulate to a recovery of less than $5 million in order to avoid meeting CAFA’s amount-in-controversy requirement.

Under CAFA, enacted in 2005, federal courts have original jurisdiction over class actions in which, among other things, the aggregated value of the claims of individual class members exceeds $5 million. CAFA jurisdiction is typically invoked by defendants to remove to federal court class actions filed by plaintiffs in state courts. State courts are preferred by plaintiffs’ lawyers because the requirements for class certification are typically easier to satisfy, and many state courts are also more willing to subject defendants to costly and wide-ranging discovery prior to certification.

In order to preserve the tactical advantages of state court, plaintiffs’ lawyers would frequently stipulate to a recovery just under the CAFA threshold (i.e. $4,999,999.99) – thereby making their claims CAFA-proof. This strategy had been used in many workplace class actions – especially wage and hour cases – to turn the tables on employers and force them to litigate in more plaintiff-friendly state court jurisdictions.

In Standard Fire Insurance Co. v. Knowles, Case No. 11-1450, the Supreme Court leveled the playing field, holding that such stipulations to avoid removal under CAFA are invalid. The case originated when plaintiff Greg Knowles brought a proposed class action in Arkansas state court against Standard Fire Insurance Company based on the company’s alleged underpayment on homeowner’s insurance claims. In the complaint and an attached affidavit, Knowles stipulated that he would seek total aggregate damages of less than $5 million on behalf of himself and the class members. Standard Fire removed the case to federal district court under CAFA, but the district court remanded the case back to state court based on the stipulation. The Eighth Circuit declined to hear the appeal. The Supreme Court took up the case and reversed.

The Court’s holding that Knowles’ stipulation could not defeat removal under CAFA was based on the simple principle that a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. The Court acknowledged that Knowles could very well limit his own recovery via a stipulation, but held that he could not speak for the absent class members in the precertification stage. The Court also justified its holding as necessary to prevent an end-run around Congress’s intent to ensure “Federal court consideration of interstate cases of national importance,” noting that upholding such stipulations would “have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations.”

The Court’s holding in Standard Fire belongs squarely in the win column for employers. The decision puts a solid set of teeth back into CAFA’s removal power and closes a loophole that had long been the bane of employers and other class action targets.

Jared Klaus