In Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013), the Supreme Court unanimously held that a stipulation filed with a class action complaint stating that damages will be limited to under $5 million must be ignored and thus cannot be used to avoid federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA). While the Court did not specifically address what standard of proof applies to the amount in controversy in a CAFA case, the Court may have changed the law on what the burden of proof is regarding CAFA’s $5 million jurisdictional minimum, making it considerably easier for defendants to establish that the jurisdictional threshold has been met, regardless of a plaintiff’s attempt to plead below it.
CAFA provides federal jurisdiction over certain class actions where the amount in controversy exceeds $5 million. See 28 U.S.C. §§ 1332(d)(2), (5)). To determine the amount in controversy, CAFA provides that “claims of the individual class members shall be aggregated.” Id. at § 1332(d)(6).
In the Ninth and Third Circuits, where a class action plaintiff pleads damages of less than $5 million, a removing defendant must prove to a “legal certainty” that CAFA’s amount in controversy is satisfied. Lowdermilk v. U.S. Bank, Nat’l. Ass’n., 479 F.3d 994, 996, 999 (9th Cir. 2007); Morgan v. Gay, 471 F.3d 469, 474 (3d Cir. 2006). The same burden applies where a defendant challenges an allegation of damages in excess of the jurisdictional minimum, in which case the amount in controversy is “presumptively satisfied” unless it appears to a “legal certainty” that the plaintiff’s class action complaint seeks less. Plainly, this standard “sets a high bar” for defendants. 479 F.3d at 1000. In Lowdermilk, for example, the Court rejected the defendant’s projections of the value of the plaintiff’s claim for late payment of wages because the defendant did not specify how many employees used in those projections were hourly employees. Hourly employees, however, were the only employees that might have qualified as class members.
The Ninth Circuit imposed the “legal certainty” standard based primarily on two basic principles. One, federal courts “strictly construe [their] jurisdiction.” Id. at 998. Two, the plaintiff is the “master of her complaint and can plead to avoid federal jurisdiction.” Id. at 998–99 (internal quotation marks and citations omitted). The court did not address, however, as the Supreme Court did in Knowles, whether the plaintiff’s pleading below CAFA’s threshold could bind absent class members or ultimately lead to the denial of class certification if the aggregate value of some absent class members’ claims pushes the amount in controversy over $5 million.
The Supreme Court’s consideration of both these issues in Knowles, in a context hard to materially distinguish from the circumstances in Lowdermilk, seems to abrogate the Ninth and Third Circuit’s “legal certainty” standard. The “stipulation” in Knowles was really just a pleading of damages less than CAFA’s jurisdictional amount, just like in Lowdermilk. As the Supreme Court noted, “the complaint says that the ‘Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.’” 185 L. Ed. 2d at 442. “On the basis of evidence presented by” defendant, the District Court found that that the amount in controversy would, “in the absence of the stipulation, have fallen just above the $5 million threshold.” Id. at 443. However, based on the stipulation, the District Court remanded the case to state court.
The issue before the Supreme Court was “whether the stipulation makes a critical difference” where the amount in controversy might exceed CAFA’s threshold but for the stipulation; the Court held that it does not. Id. The “reason is a simple one: Stipulations must be binding.” Id. As the Court recognized, however, the stipulation proffered by Knowles did “not speak for those he purports to represent . . . [b]ecause a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Id. at 444 (citations omitted). Thus, “[b]ecause his precertification stipulation does not bind anyone but himself, Knowles has not reduced the value of the putative class members’ claims.” Id. “The Federal District Court, therefore, wrongly concluded that Knowles’ precertification stipulation could overcome its finding that the CAFA jurisdictional threshold had been met.” Id.
Knowles acknowledged that, were the action to remain pending in state court, the court could eventually insist upon modifying the stipulation to allow class members to obtain more than $5 million in the aggregate, thereby effectively amending the complaint, but argued that CAFA only permits federal courts to review the existing complaint on file, and not some modified or amended complaint “that might eventually emerge.” Id. at 445. The Supreme Court did “not agree that CAFA forbids the federal court to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process.” Id. In effect, the Court confirmed district courts’ authority—if not obligation—to consider the possibility that the aggregate value of absent class members’ claims will exceed $5 million. “To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’” Id. (citation omitted).
Because stipulations must be binding and a class action plaintiff cannot bind the class before certification, the District Court should not have considered the stipulation. “[T]o ignore a nonbinding stipulation does no more than require the federal judge to do what she must do in cases without a stipulation and what [CAFA] requires, namely ‘aggregat[e]’ the ‘claims of the individual class members.’” Id. (citation omitted).
It is difficult to see any substantive distinction between a “complaint [that] says . . . the ‘Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars’” (Knowles, 185 L. Ed. 2d at 442) and a complaint in which “the plaintiff has pled damages less that [CAFA’s] jurisdictional amount.” Lowdermilk, 479 F.3d at 996. A contrary argument would seem only to “exalt form over substance.” 185 L. Ed. 2d at 445. Moreover, although individual plaintiffs are “the masters of their complaints” who may stipulate to amounts in controversy below the jurisdictional threshold, “the key characteristic about those stipulations is that they are legally binding on all plaintiffs.” Id. “That essential feature is missing” in precertification class actions. Id. at 446. Thus, for the same reasons the Supreme Court reversed the remand order in Knowles, district courts should ignore class action plaintiffs’ prayers for damages of less than $5 million when doing what CAFA requires—aggregating the claims of individual class members to determine if there is federal jurisdiction.
That leaves the issue of what standard of proof applies to a defendant seeking to remove under CAFA, or where a defendant that would prefer to be in state court challenges a plaintiff’s federal pleading of more than $5 million in controversy. Knowles and Lowdermilk suggest an answer. Knowles requires district courts to “ignore” a complaint’s “stipulations” to seek less than CAFA’s minimum when aggregating class members’ claims as the statute requires. Thus, in substance, such a complaint is akin to one that does not plead the amount in controversy. In the Ninth Circuit, “when the plaintiff fails to plead a specific amount of damages, the defendant seeking removal must prove by a preponderance of the evidence that the amount in controversy requirement has been met.” Lowdermilk, 478 F.3d at 998, citing Abrego Abrego v. Dow Chemical Co., 443 F.3d 676, 683 (9th Cir. 2006) (internal quotation marks omitted). That burden applies where “the court is forced to look beyond the complaint to determine whether the suit meets the jurisdictional requirements.” 478 F.3d at 998. Other circuits apply different standards. See, e.g., Brill v. Countrywide Home Loans, Inc., 427 F.3d 446, 449 (7th Cir. 2005) (proponent must show “reasonable probability” of reaching CAFA threshold).
Thus, although not explicitly addressed, the Supreme Court’s opinion in Knowles appears to lessen significantly the burden of proof carried by defendants seeking to remove under CAFA and, for the same reasons, the burden on a defendant challenging a plaintiff’s attempt to plead $5 million or more to obtain federal jurisdiction. The “master of the complaint” rationale no longer supports class action plaintiffs’ attempt to plead under CAFA on behalf of an uncertified (and therefore unbound) class. Such pleadings or “stipulations” should be ignored under Knowles. Future cases may specify which burden applies, but the “legal certainty” requirement appears to have run its course in favor of the more fitting preponderance standard. “Under the preponderance standard, ‘[t]he jurisdictional fact . . . is not whether the damages are greater than the requisite amount, but whether a fact finder might legally conclude that they are.’” Bell v. Hershey Co., 557 F.3d 953, 959 (8th Cir. 2009) (citation omitted). If, as the Supreme Court authorized, district courts can consider the “possibility” that the aggregate value of a putative class action will exceed $5 million, and the preponderance standard applies where a complaint fails to plead the amount of damages, raising the bar higher than preponderance standard to determine whether CAFA’s jurisdictional threshold has been met does not make sense.
Keywords: litigation, class actions, derivative suits, burden of proof, CAFA, Standard Fire Ins. Co. v. Knowles