Here is one to watch, especially for our readers with a class action practice. The U.S. Supreme Court granted certiorari last week in a case raising the issue whether class plaintiffs may stipulate to a damages amount below the jurisdictional threshold of the Class Action Fairness Act to avoid removal of the case to federal court. See Standard Fire Insurance Co. v. Knowles, No. 11-1450, U.S., certiorari granted 8/31/12).

Since the Act was passed in 2005, as surely as one end of a balloon expands when you squeeze the other end, litigants have reacted to the Congressional effort to expand federal jurisdiction over class actions by seeking exceptions and loopholes to keep the cases in state court.  This case will be the first time the Supreme Court considers a case arising under CAFA, and one of those creative efforts to avoid its reach.

Readers will recall that CAFA allows for removal of class actions in which just minimal diversity exists and the amount in controversy exceeds $5 million. A number of class plaintiffs have attempted to defeat the defendant’s removal under the Class Action Fairness Act by filing a stipulation that purports to limit the damages sought to less than the $5 million threshold for federal jurisdiction.  A key question is whether that stipulation can be binding on absent class members, and thus possibly impact federal jurisdiction, when the Court recently reaffirmed that in a putative class action “the mere proposal of a class … could not bind persons who were not parties.” Smith v. Bayer Corp., 131 S. Ct. 2368, 2382 (2011).  In light of that holding, the question presented in this case is:

When a named plaintiff attempts to defeat a defendant’s right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a “stipulation” that attempts to limit the damages he “seeks” for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the “stipulation,” exceeds $5 million, is the “stipulation” binding on absent class members so as to destroy federal jurisdiction?

The facts of the case involve a putative class action in Arkansas state court alleging that defendant Standard Fire Insurance Co. breached homeowners insurance policies by failing to fully  reimburse losses.  Standard Fire attempted to remove the case under CAFA but the federal district court remanded the case pursuant to the stipulation that plaintiffs would not seek damages above $5 million.   The Eighth Circuit denied Standard Fire’s petition to appeal the remand order. Defendant then petitioned the Supreme Court for certiorari.  The U.S. Chamber of Commerce weighed in with an amicus brief in favor of the petition.

The petition argued that putative class members are not bound by such actions taken by the named plaintiffs before class certification. Such a limitation, if effective at the time suit is filed, would violate the due process rights of the proposed class members.  The Chamber echoed that district courts must conduct a meaningful analysis to determine with legal certainty whether the stipulation will truly limit the ability of absent class members to recover no more than the stipulated amount, and whether the stipulation is consistent with due process. If allowed to stand, the lower court’s decision could result in an enormous CAFA loophole allowing plaintiffs to drag businesses into class action-friendly state court systems.  Plaintiff argued that the petition was premature because the issue could be considered at the class certification stage within the adequacy of representation prong.

Definitely one to watch.