Supreme Court shoots down a popular class action litigation tactic

A recent decision may close a loophole in the Class Action Fairness Act

Since its inception in 2005, the Class Action Fairness Act (CAFA) has allowed class action defendants to transfer cases involving more than $5 million from plaintiff-friendly state court to federal court, which traditionally offers greater protection to corporate defendants. But for years, the plaintiffs bar has creatively evaded federal jurisdiction by taking advantage of one of CAFA’s loopholes.

“After CAFA was enacted, class action plaintiffs could still stay out of federal court by filing a stipulation stating that the class wouldn’t accept aggregate damages of more than the jurisdictional amount of $5 million,” says Ogletree Deakins Shareholder Patrick Curran.

The court reached this conclusion by applying its decision in Smith v. Bayer Corp., a 2011 ruling in which it held that a proposed class action can’t bind nonparties to the class action. The court reasoned that because Knowles had made his damages cap stipulation prior to certification, his stipulation couldn’t bind the class. “Knowles lacked the authority to concede the amount-in-controversy issue for absent class members,” Justice Stephen Breyer wrote for the court. 

The court also held that CAFA doesn’t forbid a federal court from considering the possibility that a nonbinding stipulation may not survive the class certification process. “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,” Breyer wrote. 

Ashley Post

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