U.S. Supreme Court Issues 'Standard Fire Insurance' Opinion: Stipulations Limiting Damages No Longer Insure Against Removal

The Supreme Court issued its much-anticipated opinion today in Standard Fire Insurance Co. v. Knowles, 568 U.S. __ (2013), holding unanimously that a class action plaintiff cannot avoid removal to federal court under the Class Action Fairness Act of 2005 ("CAFA") by stipulating, prior to certification of the class, that he or she will not seek damages that exceed $5 million in total.

Under CAFA, defendants can remove a case to federal court if the aggregated amount in controversy exceeds $5 million and if there is minimal diversity between the parties. Shortly after CAFA's enactment, the plaintiffs' bar employed a strategy of avoiding CAFA jurisdiction by alleging in the complaint that the plaintiff and the class stipulate that they will not seek to recover total damages that exceed $5 million. This strategy was successful in the Eighth and Ninth Circuits, which held that such stipulations are effective in avoiding CAFA jurisdiction.1 The Fifth, Seventh, and Tenth Circuits, on the other hand, determined that such stipulations are not binding, particularly if the defendant is able to establish that the actual amount in controversy, absent the stipulation, exceeds $5 million.2 As a result, the plaintiffs' bar flocked to the Eighth and Ninth Circuits, where many defendants have subsequently found themselves defending against class actions without any hope of removal. Until now.

Standard Fire involves a putative class action filed by the plaintiff, Greg Knowles, in Arkansas state court on behalf of a class of Arkansas policyholders. Knowles alleged that Standard Fire unlawfully failed to include a general contract fee when it made certain homeowner's insurance loss payments. With respect to the relief sought, he alleged in his complaint that the "plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars." He also attached an affidavit in which he stipulated that he "will not at any time during this case ... seek damages for the class ... in excess of $5,000,000 in the aggregate." Standard Fire removed the case to federal court under CAFA. The district court remanded the case back to state court, finding that the stipulation controlled even though the total amount in controversy would exceed the $5 million threshold.

The Supreme Court disagreed, holding that "a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified."...