Opinion analysis: Precertification stipulations to limit class damages are not binding

Debra Lyn Bassett is the Justice Marshall F. McComb Professor of Law at Southwestern Law School.

In another victory for class action defendants (or, depending on your perspective, another slam against class action plaintiffs), yesterday’s Standard Fire Insurance Co. v. Knowles decision unanimously concluded that class counsel cannot avoid removal through a precertification stipulation purporting to limit damages to less than the federal jurisdictional amount.

As I explained in my preview of the case, Knowles filed a class action complaint in Arkansas state court alleging that Standard Fire underpaid homeowners’ property loss claims by refusing to pay general contractor fees.  The complaint limited the class definition to Arkansas residents, alleged only Arkansas state-law claims, and stipulated that the class would seek less than $5 million in damages.  Standard Fire removed the suit to federal court on the basis of the Class Action Fairness Act (CAFA), which authorizes removal when, among other things, the aggregated amount in controversy exceeds $5 million.  Relying on Knowles’s stipulation, the federal district court remanded the case back to state court, and the Eighth Circuit declined to hear Standard Fire’s appeal.

In an unusually direct and concise opinion authored by Justice Breyer, the Supreme Court described its rationale as “a simple one:  Stipulations must be binding.”  Acknowledging that such a stipulation would be binding in non-class litigation, the Court nevertheless characterized the same stipulation in a class action as being “contingent” because a class representative cannot legally bind unnamed class members until the class is certified.  Noting that “[f]or jurisdictional purposes, our inquiry is limited to examining the case ‘as of the time it was filed in state court,’” and relying on its prior decision in Smith v. Bayer Corp. for the proposition that a class representative cannot bind unnamed class members until the class has been certified, the Court reasoned that at the time of filing, the class had not been certified and thus Knowles’s stipulation could not bind absent class members.  Accordingly, the Court held that only Knowles himself was bound by his stipulation.

In concluding that Knowles’s stipulation was contingent, the Court observed that “the state court might certify the class . . . on the condition that the stipulation be excised”; that “a court might find that Knowles is an inadequate representative due to the artificial cap he purports to impose on the class’ recovery”; or that “another class member could intervene [without stipulating to limit damages].”  Thus, the Court concluded, the federal district court must ignore the (nonbinding) stipulation and aggregate the claims of the individual class members. 

Although the Court’s ultimate holding is clear – i.e., precertification damages stipulations cannot bind unnamed class members – some potential for additional questions could arise due to the Court’s discussion of contingencies in the context of the circumstances under which class members can be bound.  “Contingent” and “binding,” of course, are two distinct concepts:  “contingent” means to be dependent on some uncertain future event; “binding” means to place under a legal obligation.  The Court began its discussion of the contingent nature of Knowles’s stipulation by noting that federal jurisdiction cannot be based on contingent future events; for example, federal jurisdiction cannot be premised on the possibility that the plaintiff might amend the complaint to add a federal claim and thereby create arising-under jurisdiction.  If the Court merely intended to emphasize that point – that contingent future events cannot serve as the basis for federal jurisdiction – Standard Fire may still have potential problems in establishing federal jurisdiction, despite prevailing on the stipulation issue.

The Court concluded that the federal district court must aggregate the individual class members’ claims to determine whether the amount in controversy is satisfied.  But by Standard Fire’s own calculations, the individual class members’ aggregated claims total only $3,054,961 – nearly $2 million less than the federal jurisdictional amount.  The only way that Standard Fire was able to reach CAFA’s $5 million jurisdictional threshold to justify removal was by positing that class counsel might ultimately be awarded attorney’s fees of forty percent.  Pursuant to yesterday’s decision, the district court cannot rely on Knowles’s stipulation limiting damages.  However, the possibility that class counsel could ultimately receive an attorney’s fees award as large as forty percent would arguably seem to be a “contingent future event” that cannot serve as the basis for asserting federal jurisdiction (unless, perhaps, a certain percentage award has become routine in that particular jurisdiction).  Indeed, studies (here and here, for example) suggest that the possibility of an attorney’s fee award of forty percent is much more speculative than the possibilities offered by the Court in support of its contingency argument against Knowles.  

The use of attorney’s fees to achieve the requisite amount in controversy leads to another observation.  Knowles’s stipulation addressed only class members’ claims; the Court expressly declined to consider whether class counsel could limit the amount in controversy by stipulating to a limit on attorney’s fees.  Such a stipulation by class counsel provides an example of the potential for additional questions that could result from the Court’s discussion of contingencies in the context of whether class members may be bound.  At first glance, it would appear that a stipulation by class counsel to limit her attorney’s fees would be binding, analogous to the Court’s conclusion that Knowles’s stipulation bound Knowles himself.  But the Court’s discussion of contingencies may complicate that conclusion.  After all, courts do not officially appoint class counsel until the time of class certification, and courts are not required to appoint the lawyer who filed the class action complaint.  Thus a court conceivably could appoint a different lawyer as class counsel – one who did not wish to limit his or her attorney’s fee award.  This leads one to wonder whether yesterday’s opinion could be read as suggesting that courts should disregard such stipulations because class counsel could be substituted at some future point.

The Court may have concisely swatted away the easy and convenient practice of stipulating to a damages ceiling to avoid removal, but its decision ultimately may have raised more questions than it answered.