Wednesday, March 27, 2013

FYI: US Sup Ct Rules Named Plaintiff Cannot Stipulate to Under $5MM in Controversy to Avoid CAFA

In a unanimous decision vacating the district court's judgment, the U.S. Supreme Court recently held that a pre-class-certification stipulation that the amount in controversy was under $5 million could only bind the named plaintiff but not the proposed class members.


In so doing, the Court ruled that, because the plaintiff's stipulation could not legally bind the absent members of the proposed class prior to class certification for purposes of federal jurisdiction under the Class Action Fairness Act, the stipulation did not reduce the value of any of the putative member's claims, which, in the aggregate, could exceed CAFA's $5 million jurisdictional threshold.


A copy of the opinion is available at:


A plaintiff ("Named Plaintiff") filed a proposed class-action lawsuit in Arkansas state court against an insurance company ("Insurer"), claiming that the Insurer had unlawfully failed to include certain contractor fees with its payments to homeowners who had allegedly suffered losses under their insurance policies.  In seeking to certify a class of "possibly thousands" of similarly harmed Arkansas policyholders, Named Plaintiff stated in the complaint that the "Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars." 


Insurer removed the case to federal district court pursuant to the federal Class Action Fairness Act ("CAFA"), but Named Plaintiff sought remand on grounds that the federal court lacked jurisdiction because of the stipulation that the amount in controversy was under $5 million.  


Giving effect to the stipulation as to the proposed class as a whole, the district court determined that, in the absence of the stipulation, the amount in controversy would have exceeded CAFA's $5 million threshold for federal court jurisdiction.   Nevertheless, in light of Named Plaintiff's stipulation, the lower court concluded that the amount in controversy fell below CAFA's threshold and thus ordered the case remanded to state court.


Insurer appealed the remand order, but the Eighth Circuit declined to hear the appeal.  Accordingly, Insurer petitioned the Supreme Court for a writ of certiorari, which the Supreme Court granted in light of a conflict among the federal circuits.


As you may recall, CAFA confers federal jurisdiction over a civil "class action" if:  (1) the class has more than 100 members; (2) the parties are minimally diverse; and, (3) the "matter in controversy exceeds the sum or value of $5,000,0000."  28 U.S.C. §§1332(d)(2), (5)(B).  


In addition, CAFA includes as "class members" those "persons (named or unnamed) who fall within the definition of the proposed or certified class" and provides that to "determine whether the matter in controversy" exceeds $5 million, "the claims of the individual class members shall be aggregated"  Id. §1332(d)(1)(D),(6).


Noting that CAFA essentially instructs the federal district court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the proposed class, and to determine whether the resulting sum exceeds the $5 million CAFA jurisdictional requirement, the Supreme Court observed that the district court's conclusion that it lacked jurisdiction in this case was based solely on Named Plaintiff's stipulation as to the amount in controversy. 


Disagreeing with the district court, the Supreme Court concluded that the stipulation in this case was of no effect as to the proposed class members, because the stipulation simply was not binding as to them.  Specifically, referencing a treatise on evidence and a number of its prior opinions, the Court explained that a stipulation, being binding and conclusive, requires an "express waiver" by a party and that, as of the time the case was filed in state court, Named Plaintiff lacked the authority to concede the amount-in-controversy issue for the absent proposed class members prior to class certification.  See, e.g., Smith v. Bayer Corp., 564 U.S. ___, ___(2011)(ruling that a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified and stating, "[n]either a proposed class action nor a rejected class action may bind nonparties")


Accordingly, the Court further explained that, because Named Plaintiff could not legally bind members of the proposed class prior to class certification, Named Plaintiff's stipulation related only to Named Plaintiff himself and that Named Plaintiff could therefore not use the stipulation to reduce the value of the putative class members' claims.


In so ruling, the Supreme Court concluded, contrary to Named Plaintiff's assertion, that the amount to which Named Plaintiff stipulated was in effect contingent.  Citing several potential scenarios, the Court noted the possibility that future events could alter the course of this class action lawsuit such that the stipulation might not survive the class certification process.   The Court stressed that this potential outcome would not, however, create a "new" case, but would allow for the creation of many "just-below-the-$5-million state-court actions simply by including nonbinding stipulations."  This result, the Court observed, would be a clear conflict with CAFA's objective of ensuring "Federal court consideration of interstate cases of national importance."  See § 2(b)(2), 119 Stat. 5.


Thus, determining that the district court should have ignored Named Plaintiff's stipulation in aggregating the claims of the proposed class members, the Supreme Court vacated the district court's judgment and remanded the case for further proceedings.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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