Gaming Removal Under the Class Action Fairness Act: Can a Plaintiff Stipulate to Less than the Requisite Amount in Controversy to Evade Removal?

4 Preview of Supreme Court Cases 147 (January 7, 2013)

U of Texas Law, Public Law Research Paper No. 278

6 Pages Posted: 27 Jan 2013

Date Written: January 7, 2013

Abstract

The Class Action Fairness Act of 2005 created a new provision enabling the removal of state class actions into federal courts, requiring that the class action involve damages in excess of $5 million. The Court in Standard Fire Insurance Co. v. Knowles will decide whether a state class representative may stipulate to damages less than $5 million in order to avoid removal into federal court.

The Standard Fire appeal raises the issue whether a state court class representative in his complaint may stipulate that he is seeking less than $5 million in damages on behalf of himself and the class, in order to avoid removal of the state class action to federal court under the Class Action Fairness Act of 2005.

Against the backdrop of the legislative purposes of CAFA, the Standard Fire appeal raises fundamental issues concerning how ― and to what extent ― the new CAFA provisions for diversity class actions have changed or modified principles relating to removal of state class actions into federal court. Thus, the Standard Fire appeal asks whether CAFA has altered principles relating to pleading and removal that apply in ordinary, non-class diversity cases.

In ordinary, non-class cases a plaintiff who files an action in state court may evade a defendant’s attempt to remove the case to federal court by pleading allegations that do not satisfy the requirements for diversity jurisdiction. Thus, a plaintiff may successfully defeat removal by naming a non-diverse defendant to the lawsuit, or by pleading damages below the $75,000 threshold for federal jurisdiction. As long as a plaintiff has pleaded in good faith and has not fraudulently joined parties to defeat diversity jurisdiction, courts repeatedly have recognized that a plaintiff is “the master of his own complaint” and may allege parties, claims, or remedies to ensure that the litigation will remain in state court.

Standard Fire contends that CAFA changed the amount-in-controversy rule for federal class actions, and that the Defendant satisfied its burden to demonstrate that federal court jurisdiction was satisfied because as of the time of removal, the aggregated claims of the individual members of the putative class exceeded $ 5 million. Standard Fire argues that the traditional diversity provision instructs courts to assess the amount-in-controversy based on the “matter in controversy,” but CAFA’s diversity requirement explicitly directs that the claims of individual class members “shall be aggregated” to determine whether the $5 million threshold is satisfied. In this context, “claim” refers to each individual class member’s right to recovery under the operative facts in the complaint, and not the amount sought in recovery of that right.

In recent years the Court has manifested an increasing interest in federal class action litigation, and the Standard Fire case is the fourth class action appeal on the Court’s docket this Term. The Standard Fire appeal is significant because it presents the Court with its first opportunity to interpret several statutory provisions of CAFA since its enactment in 2005.

In addition to the narrow CAFA statutory construction problems, the Standard Fire appeal also deals with larger issues of the allocation of class litigation between state and federal courts, and the underlying purposes of CAFA to address class action litigation abuse.

Beginning in the mid-1990s, many federal courts began articulating progressively more stringent requirements for class litigation, including more rigorous analysis of class certification requirements and settlements. In reaction to this perceived hostile federal environment, many class action attorneys abandoned federal courts for more congenial state court forums. Thus, for more than a decade, class litigation shifted to favorable state court jurisdictions, where corporate defendants often found themselves subject to more lax state class action rules, standards, and judicial orders. As a consequence, corporate defendants often capitulated to so-called “settlement blackmail,” by settling class litigation rather than be subjected to a jury trial on class claims. In light of egregious class action abuses, corporate defendants compiled lists of notorious plaintiff-favoring state “judicial hellholes.”

The shift of class action litigation to state courts, accompanied with the perceived and real abuses of class litigation in selected forums, inspired efforts by the defense and corporate bars to redress the balance between federal and state adjudication of class litigation. To this end, Congress enacted the Class Action Fairness Act in 2005 ― after eight years of legislative initiatives ― which was intended to address various problems inspired by abusive state class litigation. The major CAFA reforms created a special diversity jurisdiction for federal class actions, loosened requirements for establishing federal court jurisdiction, and enacted a special removal provision for state class actions into federal courts. However, CAFA also carved out certain limited exceptions to federal court jurisdiction for purely local state controversies.

The Standard Fire appeal essentially presents the Court with a narrow statutory construction problem fraught with significant policy concerns. It asks the Court to determine whether a state court plaintiff may defeat removal of a state class action by simply stipulating to an amount-in-controversy below the federal jurisdictional amount. In an ordinary non-class lawsuit, a plaintiff may do this, provided the allegation of damages below the jurisdictional threshold is not made in bad faith. The question before the Court is whether CAFA has changed this rule for CAFA class actions.

If the Court upholds the district court’s remand order, then state court class action plaintiffs will have an approved mechanism by which to defeat removal of their class actions to federal court. Standard Fire and its amici contend that this result will undermine the central purpose of CAFA, which was to provide a federal forum for defendants sued in state court forums especially renowned for various class action abuses.

The appeal presents an interesting ideological dilemma for certain members of the Court. The Court’s conservative wing ― consistent with an alignment with corporate interests ― has manifested sensitivity to potential class action abuse. Justices so disposed are most likely to sympathize with CAFA’s legislative purposes. On the other hand, these same conservative and dedicated textualists are the Justices also most likely to resist reliance on legislative history to illuminate statutory interpretations.

Therefore, it will be interesting to see the extent to which the Court resolves the Standard Fire appeal based purely on a textual construction of CAFA’s amount-in-controversy requirement, and shorn of any reference to CAFA’s legislative history.

Keywords: Class Action Fairness Act, Supreme Court, removal jurisdiction, amount in controversy, Standard Fire v. Knowles, master of complaint, gaming the system

Suggested Citation

Mullenix, Linda S., Gaming Removal Under the Class Action Fairness Act: Can a Plaintiff Stipulate to Less than the Requisite Amount in Controversy to Evade Removal? (January 7, 2013). 4 Preview of Supreme Court Cases 147 (January 7, 2013); U of Texas Law, Public Law Research Paper No. 278. Available at SSRN: https://ssrn.com/abstract=2207689

Linda S. Mullenix (Contact Author)

University of Texas School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1375 (Phone)

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