New England Biz Law Update
The U.S. Supreme Court’s first ruling addressing the Class Action Fairness Act is the latest bit of good news from Washington for the class action defense bar.
The justices’ unanimous holding in Standard Fire Insurance Co. v. Knowles that plaintiffs cannot avoid litigating in federal court under the eight-year-old law by simply promising not to seek more than the jurisdictional limit of $5 million closes an important loophole, according to defense attorneys.
“I think this was a very good ruling and an important one for defendants who face class actions in state courts, especially those magnet state court jurisdictions which have been traditionally hostile to out-of-state defendants,” said Archis A. Parasharami, a partner in the Washington office of Mayer Brown.
But members of the plaintiffs’ bar say the ruling, while not unexpected, could have negative consequences for those seeking to vindicate their rights and stop unlawful consumer policies, civil rights violations and unfair employment practices by large companies.
“It will have the biggest impact in places like Austin, Texas, which is a fairly progressive, worker-friendly town surrounded by a [federal court] jurisdiction that is a lot more conservative,” said Bryan Schwartz, an employment attorney and principal at Bryan Schwartz Law in Oakland, Calif. “If they have to go to federal court, it will affect their likelihood of recovery.”
Avoiding carved-up classes
According to defense lawyers, the main policy reason for passing CAFA in 2005 was to address efforts by plaintiffs’ attorneys to fashion class action claims to be litigated in so-called “judicial hellholes” — state court jurisdictions known to be generous to plaintiffs, such as California, West Virginia, parts of New York state, Baltimore and Madison County, Ill.
In Knowles, the lead plaintiff in a putative class sought to remain in Arkansas state court by filing a stipulation that he and the class would seek less than $5 million in damages.
But in an opinion authored by Justice Stephen G. Breyer, the court ruled that a plaintiff cannot limit value of an amount in controversy in a way that ties the hands of absent class members.
Allowing stipulations in such cases, the court said, would also encourage plaintiffs to carve up large class actions into bite-sized pieces of less than $5 million to get around CAFA’s jurisdictional requirements.
“It would … have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations; such an outcome would squarely conflict with the statute’s objective,” Breyer wrote.
Parasharami said that part of the opinion should “send a broader message to federal courts to pay attention to potential shenanigans that plaintiffs’ lawyers may try to use to stay out of federal court.”
Schwartz said that reasoning goes against the effect of other Supreme Court class actions rulings, such as Wal-Mart Stores Inc. v. Dukes, which make it harder for larger classes to be certified.
The ultimate goal of most potential class action defendants, Schwartz said, is to chop up potential class claims as small as possible — an objective evidenced by the broad use of arbitration agreements that bar classwide dispute resolution.
“What they are really asking for [with arbitration agreements] is for us to file thousands of individual actions,” he said. “They may regret getting what they asked for.”
In Knowles, the plaintiff had argued that allowing stipulations as to the value of the amount in controversy would be judicially expedient and avoid the need to conduct a mini-trial over valuation before the class is even certified.
But while defense attorneys acknowledge that value determinations may take up some time at the outset, they say courts are perfectly able to handle such inquiries.
“I think it’s fairly easy to look at the class definition, the nature of the claims, and you may need some facts supporting the plaintiffs’ claim that the case won’t be over $5 million,” Parasharami said. “Then the defendant has to come up with some evidence to remove the case.”
Schwartz said that will put defense attorneys in the unusual position of arguing that the defendant’s alleged actions caused more damage than alleged.
“On the one hand, they want to tell anyone who will listen that the case is worthless,” he said. “But for this limited purpose [of] jurisdiction, they’ll want to say, ‘Wait, this case is really valuable.’”
