Standard Fire Insurance Co. v. Knowles

After suffering property damage in a 2010 hailstorm, Greg Knowles filed a class action lawsuit in Miller County, Arkansas, against the Standard Fire Insurance Company ("Standard Fire") for failure to pay a contractor's retention fee. Standard Fire tried to remove the case to federal court under the Class Action Fairness Act of 2005 (“CAFA”), alleging that the amount in controversy exceeded $5,000,000. Pursuant to CAFA, a federal court has jurisdiction over a class action only if the amount in controversy exceeds $5,000,000. The district court remanded the case to state court because Knowles's complaint stipulated that he would not seek more than $5,000,000 in damages for the class. Standard Fire argues that Knowles cannot defeat removal under CAFA by using a stipulation because it would bind absent class members before class certification and before Knowles could be declared an adequate class representative. Knowles argues that as master of his complaint, he is free to limit his claims, and that class members are not adversely affected by the stipulation. The Supreme Court will determine whether a named plaintiff in a class action, before being declared an adequate class representative, can limit the entire class's claims to $5,000,000 in damages in order to defeat an attempt to remove the case to federal court.

Questions as Framed for the Court by the Parties 

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a “stipulation” that attempts to limit the damages he “seeks” for the absent putative class members to less than the $5,000,000 threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the “stipulation,” exceeds $5,000,000, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?

Issue

Whether a named plaintiff in a class action lawsuit can defeat a defendant’s attempt to remove the action to federal court, by stipulating for the named plaintiff and absent potential class members that the class will not seek damages above the $5,000,000 threshold for federal jurisdiction, even where the defendant establishes that the amount in controversy exceeds $5,000,000?

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Facts

In April 2011, Greg Knowles filed a class action in the Circuit Court of Miller County, Arkansas, against the Standard Fire Insurance Company (“Standard Fire”). See Knowles v. Standard Fire Insurance Co., Case No. 4:11-CV-04044, 2011 BL 309519, *1 (W.D. Ark. Dec. 2, 2011). Knowles claimed that Standard Fire breached its homeowners insurance policy by underpaying Knowles on his property damage claim caused by a 2010 hailstorm. Id. Knowles argued that Standard Fire failed to pay for a retention fee known as “general contractors' overhead and profit (“GCOP”),” thereby forcing Knowles to incur the fee. Id. The GCOP fee is an extra 20% typically assessed by contractors for repairs on damaged property.Id. Knowles alleged that he and potentially thousands of others across Arkansas were not fully reimbursed by Standard Fire for the GCOP fee. Id.

In May 2011, Standard Fire removed the case to federal district court. Knowles, at *1. Standard Fire argued that removal was proper under the Class Action Fairness Act of 2005 (“CAFA”), which gives a federal district court jurisdiction over a class action if there is diversity of citizenship and the total amount in controversy exceeds $5,000,000. Id. at *1-2. Knowles asked the court to remand the case back to state court because in his original complaint Knowles had stipulated that he would not seek more than $5,000,000 in damages for the proposed class. Id. at *2. Thus, Knowles claimed that the second CAFA requirement was not satisfied. Id. Moreover, Knowles claimed that as “master of his complaint,” he had the right to seek less than he was potentially entitled to in order to keep the case in state court. Id.

In December 2011, the district court sent the case back to state court. Knowles, at *1. The court concluded that Standard Fire satisfied its burden, by showing through a preponderance of the evidence, that the amount in controversy exceeded $5,000,000. Id. at *3. However, the court further found that Knowles satisfied his burden of proving to a legal certainty that his claim fell below the $5,000,000 CAFA threshold. Id. at *4. The court explained that a stipulation of the amount in controversy can defeat removal if it is clear, legally binding, and made in good faith. Id.

The court also rejected Standard Fire's argument that without court approval, Knowles had no right to limit the potential recovery for the class. Knowles, at *6. The court explained that if potential class members felt too restricted by Knowles' limitations, they could opt out of the class and pursue other remedies. Id.

The Eighth Circuit denied Standard Fire's petition to appeal. See Knowles v. Standard Fire Insurance Co., Case No. 4:11-CV-04044, 2011 WL 6013024 (W.D. Ark. Dec. 2, 2011). Standard Fire petitioned for rehearing, and while that petition was pending, the Eighth Circuit decided Rolwing v. Nestle Holdings, Inc., affirming another federal court's decision to send a class action back to state court based on a stipulation similar to Knowles's. Brief for Petitioner, Standard Fire Insurance Co. at 17-18; see also Brief for Respondent, Greg Knowles at 10. The Eighth Circuit subsequently denied Standard Fire's petition for rehearing. Brief for Petitioner, at 18; Brief for Respondent, at 10.

On August 31, 2012, the Supreme Court granted certiorari to determine whether, in a class action, a named plaintiff's stipulation that he will not seek more than $5,000,000 is binding on the absent class members, thus defeating a defendant's attempt to remove the case to federal court under CAFA. See Knowles v. Standard Fire Insurance Co., cert. granted, 11-1450, 2012 WL 1966025 (U.S. Aug. 31, 2012). 

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Discussion

Here, the Supreme Court will decide whether a named plaintiff in a class action can defeat a defendant’s attempt to remove the case to federal court, by stipulating that the amount in controversy is less than the $5,000,000 threshold required by Class Action Fairness Act of 2005 (“CAFA”) to give a federal court jurisdiction over a class action. The Standard Fire Insurance Company ("Standard Fire") argues that CAFA was meant to expand federal courts’ jurisdiction over class actions, and that allowing Knowles’ stipulation to defeat removal would unfairly bind absent class members. Brief for Petitioner, Standard Fire Insurance Co. at 24-25, 51-53. Knowles claims that Congress did not intend for cases like this to be in federal court, and that absent class members are not adversely affected by a stipulation. Brief for Respondent, Greg Knowles at 35, 36-37.

Abusive Class Action Litigation

Standard Fire argues that allowing Knowles to use a stipulation to defeat removal would circumvent CAFA’s purpose. See Brief for Petitioner, Standard Fire Insurance Co. at 24-25. Standard Fire claims that CAFA was meant to curb abusive class action in state courts by expanding federal courts’ jurisdiction over class actions. Id. Before CAFA, Standard Fire asserts that plaintiffs’ lawyers targeted state courts such as Miller County, Arkansas, known to be hostile to out-of-state defendants. Id. at 26. Various States claim that such “magnet courts” were known for easily granting class certification and “rubber-stamping” settlements. Brief of Amici Curiae Alabama and Seventeen Other States, in Support of Petitioner at 14.  The States contend that class certification is important because it often allows a plaintiff to aggregate the class’s claims and create leverage to coerce a defendant into settlement. See id. at 13. Here, the States warn that if the Court allows Knowles’s stipulation to defeat removal, “there will be a race to file class actions in . . . ‘magnet’ jurisdictions across the country.” Id. at 30.

Knowles argues that Standard Fire caricatures the Arkansas courts to persuade the Court to bend the meaning of CAFA. Brief for Respondent, Greg Knowles at 43.  Further, the Arkansas Trial Lawyers Association ("ATLA") claims that Standard Fire distorts the image of the Miller County Circuit Court by merely relying on unsubstantiated news articles and anecdotes. Brief of Amicus Curiae Arkansas Trial Lawyers Association, in Support of Respondent at 5-6.  Knowles contends that state courts are free to follow their own procedural rules as long as they satisfy due process requirements. Brief for Respondent at 43-44. In Arkansas, Knowles asserts that the courts use a different rule for class certification, but do not give blank checks for class actions. Id. at 44-45. Knowles claims that the Arkansas’ “certify now, decertify later” approach is fair because it allows courts to certify classes earlier, but also permits splitting and decertifying later if individualized issues arise. Id. at 44. Knowles also argues that his is not the type of case that Congress intended to be in federal court. Id. at 35. Citing CAFA’s legislative history, Knowles contends that Congress was concerned about lawyers exploiting the rules to keep “nationwide or multistate” class actions in state courts. Id. However, Knowles claims that this case is neither nationwide nor multistate, nor does it involve enormous damages imposing settlement pressure on Standard Fire. Id.  

Protecting the Rights of Class Members

Standard Fire argues that allowing Knowles’ stipulation to defeat removal would unfairly impact the rights of absent class members. See Brief for Petitioner, at 51-53. Standard Fire asserts that before a class action can bind absent class members, (1) a court must certify the proposed class, (2) absent class members must have notice of the litigation, and (3) a court must determine that the named plaintiff adequately represents their best interests. Id. at 52-53. Without these protections, the States argue that a self-interested plaintiff or class counsel may compromise absent class members’ rights. See Brief of Alabama et al., at 13. The Center for Class Action Fairness ("CCAF") notes that before CAFA, Congress recognized that class actions often harmed absent class members because lawyers would receive large fees and class members would receive minimal awards. Brief of Amicus Curiae Center for Class Action Fairness in Support of Petitioner at 8. 

Knowles responds that absent class members’ rights are not adversely affected when a court considers an amount-in-controversy stipulation to determine a jurisdictional fact. See Brief for Respondent, at 36-37. Knowles claims that such jurisdictional determinations are not merit decisions. Id. at 37. Thus, Knowles asserts that a court’s decision on an issue such as the $5,000,000 CAFA threshold does not resolve absent class members’ claims. Id. at 36-37. Moreover, Knowles argues that he could not have “diminished” the rights of absent class members because class counsel cannot make decisions that bind absent class members until after class certification. Id. at 37-38.

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Analysis

Under the Class Action Fairness Act of 2005 (“CAFA”), a class action defendant may remove a suit from state to federal court when specific requirements are met, including when the amount in controversy exceeds $5,000,000. See 28 U.S.C. § 1332(d)(2). Here, the Standard Fire Insurance Company (“Standard Fire”) argues that the class action filed by Greg Knowles should be removable to federal court because the class’s claims exceed the $5,000,000 threshold under CAFA when the claims are aggregated. See Brief for Petitioner, The Standard Fire Insurance Company (“Standard Fire”) at 11. Knowles counters that the class action must continue in state court because he, as the named plaintiff, determines the content of the class’s complaint at the pleading stage, including the amount of the class’s aggregated claims. See Brief for Respondent, Greg Knowles at 2. Because Knowles stipulated to rejecting the class’s right to damages above $5,000,000 (the “Stipulation”), Knowles denies that his class action suit is removable under CAFA. See id. at 1-2.

Competing Textual and Legislative Interpretations of CAFA

Standard Fire asserts that when the District Court for the Western District of Arkansas remanded the class action to state court, it did so against the textual meaning of CAFA. See Brief for Petitioner at 12. Standard Fire points to the plain language of CAFA, arguing that § 1332(d) provides a method to calculating the amount in controversy through aggregating the class members’ claims. See id. at 19-20. Under Standard Fire’s interpretation of CAFA, a “claim” refers not to the amount actually sought in recovery by an individual class member, but instead to each member’s total right to recovery based on the case-specific facts and allegations. See id. at 23-24. Standard Fire notes that when it presented the district court with a calculation of aggregate value, Knowles did not object and the court found the calculation to show claims in excess of $5,000,000. See id. at 21. Accordingly, Standard Fire asserts that the district court established the controlling and irrefutable fact that the aggregated class claims meet the $5,000,000 CAFA threshold, which cannot be evaded by any means, including Knowles’s Stipulation. See id.

In response, Knowles contends that the district court’s remand was proper because it acknowledges the well-established rule that a plaintiff is “master” of his complaint, meaning that he may avoid removal to federal court by seeking to recover less than the jurisdictional amount. See Brief for Respondent at 19, 30. Knowles points out that one such way to avoid removal is by entering into a stipulation to ensure that the amount in controversy does not reach the $5,000,000 threshold. See id. at 17. Knowles criticizes Standard Fire for reading § 1332(d)(6) and “claims” in a manner that eliminates the plaintiff-as-master rule. See id. at 30. Instead, Knowles insists that legislators would need to make a clear statement before courts could interpret CAFA to override a plaintiff’s established right to avoid federal diversity jurisdiction. See id. In contrast to Standard Fire’s reading of “claims” as maximum potential recovery for an individual class member, Knowles defines them as values determined by the class definition and allegations made in the plaintiff’s complaint. See id. at 32. Accordingly, Knowles contends that the complaint and attached Stipulation do not meet the $5,000,000 threshold required for removal to federal court. See id. at 34.

Standard Fire further alleges that remanding the class action contradicts the legislative purpose of CAFA. See Brief for Petitioner at 12. According to Standard Fire, Congress enacted CAFA to expand the circumstances in which class actions may be litigated in federal court. See id. at 17-18, 28-29. Before CAFA, state courts were too ready to certify class actions, which unjustly disadvantaged out-of-state defendants. See id. In Standard Fire’s view, to find that Knowles has not met the $5,000,000 threshold would deprive Standard Fire of the federal forum that Congress meant to offer to out-of-state defendants in class action lawsuits. See id. at 29.

Knowles rebuts Standard Fire’s argument, asserting instead that allowing removal to federal court would undermine CAFA’s purpose by placing costly, time-intensive burdens on courts seeking to determine amount-in-controversy calculations. See Brief for Respondent at 24. Knowles asserts that if courts cannot rely on complaints and stipulations to determine the amount in controversy, they must undergo preliminary fact-specific inquiries that contravene CAFA’s intention to simplify questions of federal diversity jurisdiction. See id. at 24-25. Knowles emphasizes that CAFA must retain its administrative simplicity, which requires allowing his class action to proceed on remand to state court. See id. at 22-23.

Enforceability of Stipulation

Standard Fire argues that fundamental principles of class action and due process prevent Knowles from using the Stipulation to evade removal under CAFA. See Brief for Petitioner at 30. Standard Fire cites Smith v. Bayer Corp. to support its assertion that, prior to certification of a class action, proposed class members cannot be bound because they have not had the opportunity to assert their individual interests or access adequate representation in the litigation. See id.; see also Smith v. Bayer Corp., 131 S. Ct. 2368, 2381 n.11 (2011). As Standard Fire further reasons, non-named class members are bound by the outcome of a proceeding only after a court certifies a class. See Brief for Petitioner at 31. Standard Fire asserts that a class representative such as Knowles may not use a stipulation before class certification to limit the entire class’s recovery. See id. at 35. Because Knowles lacks authority over other potential class members, he cannot diminish or limit their individual claims against Standard Fire. See id. at 33.

In contrast, Knowles upholds the enforceability of the Stipulation. See Brief for Respondent at 28, 36, 41, 55. As a preliminary issue, Knowles notes that Congress expressly supported the courts’ consideration of jurisdictional stipulations, acknowledging their use in class representatives’ complaints as a means to avoid federal diversity jurisdiction. See id. at 28; see also S. Rep. No. 109-14, at 44 (2005). Moreover, Knowles asserts that the Stipulation does not offend due process or class action principles because the amount-in-controversy issue to which the Stipulation applies is a preliminary decision about jurisdiction, rather than a decision on the merits of the case. See Brief for Respondent at 37. Because, as Knowles notes, the court makes a jurisdictional decision without considering the merits of the class members’ claims, the proceeding has not deprived absent class members of their due process right to be heard. See id. Further, Knowles argues, the Stipulation does not manipulate the judicial process against Standard Fire. See id. at 41. Knowles notes that it protects Standard Fire because it limits the amount for which it may be liable to the class and because if the class attempted in the future to amend its Stipulation and seek more than $5,000,000, Standard Fire would have the opportunity at that time to seek removal to a federal court. See id. at 41.

Knowles concedes that even if the Supreme Court accepts Standard Fire’s calculation of the amount in controversy, which the district court found to exceed $5,000,000, the Stipulation is enforceable to the extent that it limits attorney’s fees and keeps the amount in controversy below the $5,000,000 CAFA threshold for federal jurisdiction. See Brief for Respondent at 55. Knowles objects to Standard Fire’s “entirely speculative” projection of an award of attorney’s fees of 40% of the class’s recovery. See id. at 56-57. Knowles asserts that if the Stipulation were to limit the percentage recovery for class action counsel, there would be no harm to individual class members, but the amount in controversy would still remain below the CAFA threshold. See id. at 57.

In response, Standard Fire criticizes Knowles for introducing this new challenge to Standard Fire’s calculation of amount in controversy. See Brief for Petitioner at 36. According to Standard Fire, Knowles never argued in the district court for an alternative method of calculation, nor did Knowles challenge the district court’s factual finding in the court of appeals or in opposition to Standard Fire’s petition for certiorari. See id. at 20-21. Standard Fire maintains that the original calculation of amount in controversy, deemed by the district court to exceed $5,000,000, is an irrefutable fact. See id. at 21.

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Conclusion

The Supreme Court will determine whether under the Class Action Fairness Act of 2005 (“CAFA”) representative plaintiffs may bind potential class members and avoid defendants’ attempts to remove the actions to federal courts when the representatives stipulate that they will not seek more than $5,000,000 in damages. After Greg Knowles filed a class action lawsuit against his insurance company, the Standard Fire Insurance Company (“Standard Fire”), in an Arkansas state court, the insurance company tried to remove the case to federal court because by the company’s calculations, the class sought aggregate damages in excess of $5,000,000. The federal court remanded the case to state court because Knowles’s stipulation on behalf of the entire class limited their damages to $5,000,000, an amount insufficient to create federal diversity jurisdiction. The parties dispute the method for calculating the total amount of potential recovery for all members of the class and the enforceability of the stipulation. Standard Fire advocates against the stipulation, arguing that it misinterprets CAFA, unfairly disadvantages out-of-state defendants by requiring them to litigate in unfriendly state courts without the option of removal to federal courts, and unconstitutionally binds potential class members without giving them an opportunity to assert their individual interests. In contrast, Knowles seeks to uphold the stipulation under a conflicting reading of CAFA that emphasizes principles of administrative efficiency and letting a plaintiff be the “master” of his complaint.

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