September 19, 2013 Articles

Class Action Ethics in Standard Fire v. Knowles

The exception can prevent a federal court from exercising jurisdiction over a class action case.

By Catha Worthman

For those interested in the debates over the future of class actions, Standard Fire v. Knowles, 133 S. Ct. 1345 (Mar. 19, 2013), is worth a closer look than may be apparent on first reading. Although on the surface it is a narrow, technical decision about the Class Action Fairness Act (CAFA), examining Standard Fire in more depth sheds light on ongoing disputes concerning class action ethics. As Theodore Boutrous, Jr., the attorney for defendant Standard Fire Insurance Company, said in oral argument, the case “really goes to a fundamental issue of what a class action is.”

Standard Fire’s holding is narrow and unexceptional: A unanimous Court held that plaintiffs cannot stipulate around the jurisdictional amount-in-controversy provision in CAFA, 28 U.S.C. § 1332(d). Beyond this holding, however, deeper issues are at play. These issues involve competing beliefs about fairness in forum selection and pleading, including the extent to which plaintiffs can act as “masters” of their complaint, weighed against defendants’ interests in the procedural protections of federal court (or protecting against the choice of too favorable a forum for plaintiffs).

Standard Fire also reveals judicial mistrust about the relationship of class action plaintiffs and lawyers to the people and causes they seek to represent, and doubt about how effectively class action law protects both absent class members and defendants. Whatever the merits of such concerns, they are worth examining further because they will play out in forthcoming cases and policy debates. Of particular importance for class action litigation is how Standard Fire will be read to affect the ability of named plaintiffs to shape class action litigation, especially before class certification.

Standard Fire was the first Supreme Court case interpreting CAFA, and it focused on CAFA’s amount-in-controversy provision. As most readers of this newsletter likely know, where other jurisdictional requirements are also met, CAFA provides for federal court jurisdiction over putative class actions with more than $5 million in controversy, measured in the aggregate, exclusive of interest and costs. 28 U.S.C. § 1332(d)(2), (6).

Before Standard Fire, disagreement was brewing over whether plaintiffs in proposed class actions could stipulate to an amount in controversy less than the jurisdictional threshold and thereby stipulate their way out of federal court. The Eighth Circuit was the only court to have squarely approved such a stipulation, in Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012). Dicta in decisions of other circuits could, at least arguably, be read to have supported this practice, including in the Third, Sixth, Seventh, Ninth, and Eleventh Circuits. Meanwhile, the Fifth Circuit, in an unpublished case, had disapproved it.

Most courts to consider the effect of stipulations on the amount in controversy, whether trending for or against, nonetheless raised concerns about ethics. For example, in Back Doctors Ltd. v. Metropolitan Property & Casualty Insurance Co., 637 F.3d 827, 830 (7th Cir. 2011), the Seventh Circuit cautioned that a would-be class action plaintiff owes a fiduciary duty to the class and that “[a] representative can’t throw away what could be a major component of the class’s recovery.” Nonetheless, Back Doctors stated that the plaintiff could have filed a binding stipulation or affidavit that he was not seeking punitive damages, and thus could have reduced the amount in controversy to below the jurisdictional threshold. Id. at 831.

Rolwing discussed the fiduciary duty issue raised in Back Doctors but upheld a remand to state court when the plaintiff proffered a stipulation that he would not accept more than $5 million on behalf of himself or the class. The Eighth Circuit concluded that judicial estoppel would make the stipulation binding and therefore effective to limit jurisdiction. As the court observed, “such stipulations have long been effective in the non-CAFA context.” 666 F.3d at 1072.

Rolwing did recognize some potential problems with the stipulation, including that a class representative who disclaims a full recovery might later be deemed an inadequate representative or that a court might find counsel inadequate. But the Eighth Circuit said such issues could be addressed at a later time should they actually arise, at class certification, and pointed out that the case could then be removed because CAFA does away with the traditional one-year bar on removal. Id. at 1073 n.2.

As it was bound to do, the Western District of Arkansas followed Rolwing in Knowles v. Standard Fire, and held that an affidavit attached to the complaint prevented federal jurisdiction because that affidavit provided that the plaintiff, Mr. Knowles, “will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate.” 133 S. Ct. at 1347. The Eighth Circuit declined to hear the defendant’s interlocutory appeal, and the Supreme Court granted certiorari.

The Standard Fire Decision
Abrogating Rolwing and reversing the Eighth Circuit, the Supreme Court in Standard Fire held that Knowles’s stipulation could not determine the amount in controversy under CAFA. The simple reason: A putative class representative cannot offer a stipulation that is actually binding on proposed class members. 133 S. Ct. at 1348–49. Knowles’s stipulation “does not speak for those he purports to represent.” Id. Thus, the plaintiff in a proposed class action is in a fundamentally different position than the individual plaintiff in a traditional diversity case, whose right to limit the amount in controversy has long been accepted. Id. at 1350 (citing St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 294 (1938)).

Underlying the Court’s holding are some principles about named plaintiffs and their relationships to absent class members. These principles are reflected first in the Court’s citation to Smith v. Bayer, 131 S. Ct. 2368, 2380 (2011), for the basic proposition that an absent class member is not a party to the litigation before the class is certified, and thus cannot be bound by the class action prior to class certification. Standard Fire, 133 S. Ct. at 1349–50.

This reasoning alone could have been enough to resolve the case, but the Court went further, again based on its articulation of the relationship between the proposed class representative and absent class members. The Court speculated that “a state court might certify the class and permit the case to proceed, but only on the condition that the stipulation be excised.” Id. at 1349. Similarly, the Court speculated that a court could find Knowles to be an inadequate representative or that another class member could seek to intervene who would not impose an “artificial cap” on the potential recovery. Id. That is, it was material that, by disclaiming the full potential recovery, the named plaintiff’s interests might not align with the interests of the proposed class members.

Finally, in resolving the counterargument that only the complaint before the court was relevant to jurisdiction and that possible future developments in the case should be disregarded, the Court looked to the purpose of CAFA, which it summarized as “ensuring ‘Federal court consideration of interstate cases of national importance.’” Id. at 1350 (quoting 29 U.S.C. § 1132(b)(2), 119 Stat. 5). In so doing, the Court reasoned that it would thwart the purposes of CAFA to allow plaintiffs to use stipulations to divide a $100 million action into multiple state-court actions, all just under $5 million each. In light of such a possibility (which the Court did not say existed in the case before it), the Court held that nonbinding stipulations by individual plaintiffs should be ignored in determining the amount in controversy in proposed class actions.

Behind the Supreme Court’s Reasoning in Standard Fire
What the Court did not hold sheds further light on its underlying reasoning. The Court could have held that the stipulation was binding only as to the individual named plaintiff but was still applicable to determining jurisdiction at the time of removal. The Court could then have held that adequacy of representation or the possibility of intervention could be addressed at a later time—and only if such issues actually arose. But the Court made a unanimous choice favoring federal court litigation of proposed class actions, arguably based on two major principles: (1) that the named plaintiff’s strategic litigation choices could not bind absent class members, in part because of concerns about the nature of such representation; and (2) that implementing CAFA meant preventing too-obvious forum shopping by plaintiffs.

A drumbeat of concern for absent class members was expressed throughout the defendant’s briefing in Standard Fire, as well as at oral argument. Questions on protection for absent class members were posed not just by the more liberal members of the Court (Justices Sotomayor and Ginsburg) but also by Justices Alito and Roberts. The answer to their concerns could have been that due process, state-law equivalents to Rule 23, and Rule 11 provide a means to ensure that their interests are protected.

Arguments made by Public Citizen in an amicus brief as well as by plaintiff’s counsel would have supported the Court in resolving its concerns about representation of absent class members. As Public Citizen pointed out, state-law equivalents to Rule 23 provide for adequacy determinations that are meant to ensure that the interests of the class representative and class counsel are aligned with those of the proposed class. Furthermore, even before the class is certified, the fiduciary duties of the proposed representatives require them to pursue the interests of the class, on pain of non-certification or replacement. As Judge Bybee observed, writing for the Ninth Circuit in Lowdermilk v. U.S. Bank National Ass’n, 479 F.3d 994, 999 n.5 (9th Cir. 2007), “[i]n the context of a putative class action, each side has a profound disincentive to avoid such stipulations [limiting the amount in controversy]. The Plaintiff may undermine her case for serving as class representative by pleading a lesser amount in controversy.” (And it is worth keeping in mind, as Public Citizen argued, that pleading a particular limit on the amount in controversy would not always violate the proposed class representative’s fiduciary duty, as there may be other reasons to proceed in state court.) The Court did not, however, take the line of reasoning that could have been supported by trusting the existing class action legal regime.

Another animating concern is also evident in Standard Fire: limiting strategic forum shopping by plaintiffs’ counsel. As Justices Scalia, Roberts, and Breyer posed to the counsel for the plaintiff, maybe it would be beneficial to plaintiffs and the counsel to be in state court, and they would in fact recover more. Justice Breyer asked whether that could result in “$30 or $40 or $50 million cases being tried in whatever counties Congress liked the least.”

Plaintiffs’ counsel pushed back against this forum-shopping concern with the argument that plaintiffs are the “masters of their complaint”—also a theme in briefing and at oral argument. Justice Kagan was especially active in questioning on this topic, pointing out that

the idea of master of the complaint is inherent in every class litigation because there could be no class actions, there could be no definition of anything, of the claims, of the amount of damages, of the number of defendants, of the amount of time unless the plaintiff, the named plaintiff, had some ability to define the claim.

The only mention of the “master of the complaint” rule in the Standard Fire opinion itself pertains to individual plaintiffs, whom the Court reaffirmed are indeed “masters of their complaints” and free to plead less than the amount required for federal jurisdiction. 133 S. Ct. at 1350. But, as discussed below, the extent to which a plaintiff in a proposed class action can shape the complaint is an issue that nonetheless looms large following Standard Fire.

Conclusion and Further Issues
Several questions remain after Standard Fire and revolve around plaintiffs’ abilities to shape claims on behalf of a class. The issues as framed by some counsel in post-Standard Fire litigation have the potential to reshape class litigation entirely—including whether a court should defer to a class plaintiff’s decision to plead some claims but not others, to disclaim damages and seek only injunctive relief, to make estimates or predictions about the amount in controversy, to choose defendants to sue or not sue, and to otherwise shape the scope of the potential class, to name a few.

Relatedly, questions remain about the nature of the jurisdictional burden under CAFA, where defendants seek to challenge allegations in the complaint estimating the amount in controversy. In some jurisdictions, including the Ninth and the Third circuits, the removing party bears the burden of proving to a legal certainty that the jurisdictional minimum is met if the complaint explicitly disclaims recovery above $5 million and the allegations are made in good faith. Some defendants have challenged whether that approach survives Standard Fire.

So far as a Westlaw search reveals, the vast majority of courts have, to date, read Standard Fire as being limited to stipulations and have not agreed with arguments that the decision should be read broadly. In Scimone v. Carnival Corp., 720 F.3d. 876 (11th Cir. 2013), for example, the defendant argued that after Standard Fire a plaintiff could not divide up its mass action into complaints brought by fewer than 100 individuals. The Eleventh Circuit held that Standard Fire “cannot be read to suggest that all sections of CAFA strip plaintiffs of their traditional role as masters of their complaint.” Id. at *9. Likewise, in Deaver v. BBVA Compass Consulting & Benefits, Inc., 2013 WL 2156280, at *7 (N.D. Cal. May 17, 2013), the Northern District of California concluded that “Standard Fire does not forbid a plaintiff from intentionally limiting the claims brought in order to avoid federal jurisdiction.”

As a legal precedent, I would argue that these courts have correctly read Standard Fire as the narrow, technical decision it is, and that Standard Fire left untouched the traditional rules that give plaintiffs in proposed class actions the ability to shape their complaint through pleading. Pushed to extremes, the arguments that defense counsel are making would undermine the very existence of class actions. As Justice Kagan’s question at oral argument illustrates, a named plaintiff—before or after class certification—must be able to bind absent class members to some extent, to define the claims, the damages, defendants, the scope of the class, and generally to frame the litigation.

Defense counsel will continue to press arguments that Standard Fire changes the nature of class action pleading and practice, however. At least one court has held that Standard Fire requires “an assessment of the entire complaint . . . to determine whether [plaintiffs are attempting to avoid federal jurisdiction] by not pursuing the entire amount in damages to which the putative class is entitled.” Quintana v. Claire’s Stores, Inc., 2013 WL 1736671, at *4 n.35 (N.D. Cal. Apr. 22, 2013).

As Standard Fire demonstrates, there is no doubt that ethical—even political—judgments will inform the resolution of open issues about class actions as they continue to move through the federal courts, even when they do not surface explicitly in the opinions. Do judges trust Rule 23 and its state-law equivalents to ensure that basic fairness is provided to all parties, including absent class members and defendants? In any one individual case, counsel may lack the ability to influence underlying beliefs that shape the answers to the more narrow legal questions presented, but being attuned to them should be useful in crafting arguments and making litigation decisions. Keywords: litigation, class actions, derivative suits, amount in controversy, master of the complaint, Federal Rule of Civil Procedure 23, forum shopping

Catha Worthman – September 19, 2013