Supreme Court considers limiting class-action lawsuits

By Michelle Keahey, East Texas Bureau | Jan 14, 2013

WASHINGTON (Legal Newsline) — The Supreme Court on Monday considered efforts by lawyers to place monetary limits on class actions in an effort to keep the class actions in “hellhole” or plaintiff-friendly jurisdictions.

The central argument is whether plaintiff lawyers can provide a legally binding stipulation that prevents the plaintiff, and the class of unnamed people they hope to represent, from receiving more than $5 million, the requisite amount of monies necessary for federal court jurisdiction.

Under the Class Action Fairness Act of 2005, a class action that is asking for $5 million or more belongs in federal court.

In the case heard Monday, Standard Fire Insurance Co. v. Knowles, the plaintiff Greg Knowles filed a stipulation with the complaint stating he would not seek more than $5 million.

Knowles filed the original lawsuit on April 13, 2011, in the Circuit Court of Miller County in Arkansas against Standard Fire Insurance Co. The lawsuit claims that Standard Fire breached its contract by systematically underpaying claims of loss or property damage made under a homeowner’s insurance policy.

Specifically, plaintiff Knowles claims that the insurance company did not pay for general contractors’ overhead and profit charges associated with damage to his home caused by hail on March 10, 2010.

Although in Arkansas the lawsuit could include class members with claims going back for five years, lawyers decided to limit potential class members as those with claims going back for only two years throughout the state of Arkansas.

In addition to this limit on class members, Knowles filed a stipulation stating that he would not seek more than $5 million and waived his right to certain damages.

Defendant Standard Fire removed the case to federal court in May 2011, arguing that plaintiff fraudulently defined the purported class in an effort to avoid federal court jurisdiction. However, the case was remanded back to state court based on the plaintiff’s stipulation to limit his recovery to under $75,000 and limit unnamed class members’ recovery to under $5 million.

Justice Stephen Breyer pointed out that this use of a stipulation was a procedural loophole and it “swallows up” the Congressional intent of the Class Action Fairness Act.

Breyer and Chief Justice John G. Roberts Jr. made comments to Knowles’ lawyer David Frederick on ways lawyers are breaking up class actions by filing the same lawsuit in different localities, each seeking less than $5 million.

“All that is required is a few extra pieces of paper that will soon become standardized, and a lot of postage stamps,” Justice Breyer said.

Frederick argued that the move was strategic and returned to the argument that Knowles would not seek $5 million. If Knowles was deemed an unfit class representative at class certification, Standard Fire could remove the case to federal court at that time, he argued.

Standard Fire’s lawyers argued that class certification is not likely to occur in Judge Kirk Johnson’s Miller County Circuit Court and that the stipulation was not binding on absent class members.

Justice Elena Kagan agreed and clarified, “It’s binding if the class is certified and a case proceeds to judgment. It’s not binding on absent class members prior to certification and prior to judgment.”

Roberts asked Standard Fire’s lawyer Theodore Boutrous why state court was bad and why it was bad for the claims to be limited.

Roberts stated, “Well, you’re assuming that it’s a bad thing for the class members to have their claims limited. But it may well by a good thing for them to have their claims limited if that gets them into what would reasonably be regarded as a more sympathetic forum.”

Standard Fire avoided Roberts’ comments and pointed out that it was undisputed that the claims exceeded $5 million.

The Justices agreed the case was worth a lot of money and noted that it could be beneficial for the state court.

Justice Antonion Scalia stated, “The state court could find, and I suspect this state court would find, that it’s worth the money to be in state court.”

Toward the end of the arguments, Chief Justice Roberts seemed to agree, noting that if the case went to trial it would be worth “a lot more than $5 million.”

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