Wednesday, March 20, 2013

US Supreme Court Rules on Class Action Fairness Act

By Tim Dulaney, PhD and Tim Husson, PhD

Yesterday, Justice Breyer delivered the unanimous US Supreme Court decision (PDF) in the matter of "The Standard Fire Insurance Co. v. Greg Knowles."  The decision could be significant for investors involved in securities class action suits, which often involve specific claims as to the total damage suffered by class members.  In particular, it will likely mean that more of those cases will be handled by federal rather than state courts.

The case revolved around a particular section of the Class Action Fairness Act (CAFA) of 2005 (PDF) that states "[t]he district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs".   The purpose of this act was to "restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction."

The respondent Knowles made a stipulation to the Arkansas state court that a proposed class action against Standard Fire Insurance Company would seek less than $5 million in damages.  The important point here is the time of the stipulation (which is binding for the party that makes it).  The class was in the pre-certification stage and "a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified".  Since Knowles could not have known what the total damages would be prior to class certification, this stipulation essentially ties the hands of members of a class that hadn't yet been defined.  In fact, the District Court subsequently "found that [the] resulting sum would have exceeded $5 million but for the stipulation".

The decision will likely make it harder for plaintiffs to use state courts over federal courts by subdividing classes into smaller portions that meet the CAFA jurisdictional threshold.  Traditionally, some state courts have been more favorable to certain types of complaints than federal courts, allowing a certain degree of flexibility in choosing a venue for a particular claim; indeed, this variability was a motivation for the CAFA in the first place.  The new ruling will likely limit that flexibility, meaning potential class action claims must meet the potentially higher standards of federal courts.

Law360 has had extensive coverage of this ruling.  They note that "[t]he case came with high stakes for defendants that prefer to see class actions play out in federal court."  On the other hand, they point out that this decision will likely lead to plaintiff claims that are not artificially capped to remain in state courts, and that potential class members may also benefit from having their potential damage claims reduced by plaintiffs' lawyers making decisions based solely upon jurisdictional outcomes.

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