Argument recap: Manipulation versus “master of the complaint”

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

Neither side had an easy time in yesterday’s oral argument in Standard Fire Insurance Co. v. Knowles, a case addressing whether a class action can avoid removal to federal court by stipulating to limit damages below the jurisdictional amount.  Indeed, the Justices’ questioning reflected concerns with both parties’ positions.

Theodore Boutros, representing the petitioner Standard Fire, came out of the starting gate asserting that Congress, through the Class Action Fairness Act (CAFA), had intended “to protect defendants … against the kind of state court class action abuses that are occurring in Miller County, Arkansas.”  However, Boutros quickly shifted away from the largely legislative-intent-type arguments set forth in Standard Fire’s briefs and instead characterized its arguments as rooted in CAFA’s statutory language.  Specifically, Boutros argued that because CAFA refers to “individual” and “claims,” rather than referring to the amount sought by the class representative, a stipulation is ineffective to limit class damages.

Boutros didn’t get far before the Justices began interjecting questions.  Chief Justice Roberts was first, inquiring whether Boutros would assert the same objection if the issue involved the substantive claims rather than the amount.  Suppose, he asked, the class potentially could raise two different claims, one worth $4.9 million and the other worth $10 million—would the same objection apply if the class only pleaded the $4.9 million claim?  Boutros’s response was  “not necessarily,” and he indicated that in this case Standard Fire was challenging only the amount.  However, the Chief Justice described Standard Fire’s position as “a bit of a slippery slope,” noting that Standard Fire’s brief had included arguments to the effect that class counsel had improperly failed to assert claims for the full statute of limitations period.  Justice Kagan returned to this same point on two subsequent occasions, at one point noting that there are “a thousand ways” in which a plaintiff constructs a case, including deciding which defendants to sue, which claims to bring, and whether to seek damages, injunctive relief, or both – all of which have an effect on the amount sought.  So, she asked, do we stop all of these, too?  On a second occasion, Justice Kagan expressed concern that although this case purportedly addressed only stipulations limiting damages, future cases might attempt to push into other areas, such as challenging the named plaintiff’s ability to define the claims and to name the defendants.

When Boutros at one point referred to “traditional” diversity jurisdiction, Justice Scalia interjected that “you surely don’t want us to apply the rules of the traditional diversity statute to this case,” because those rules permit the waiver of damages.  Boutros agreed, but noted that a case involving a single plaintiff is very different from one seeking to represent numerous class members.

Justice Sotomayor questioned why the class certification process wouldn’t  provide the necessary protection for the class, noting that if a stipulation was grossly unfair, the judge would refuse to certify the class and/or class members would elect to opt out.  Boutros replied that CAFA reflected Congress’s concern that state courts weren’t providing appropriate protections, and noted that class certification requirements varied between the federal and state courts.  Justice Kagan took a different tack, detailing the impediments to removal that Congress eliminated in CAFA, but observing that “here’s one thing it didn’t eliminate.  It didn’t eliminate the St. Paul master-of-your-complaint rule.”  Justice Kagan also pointedly observed that although Standard Fire relied heavily on the Court’s 2011 Smith v. Bayer decision, “Smith v. Bayer does not have much to do with this case.”

Justice Breyer returned to Boutros’s attempt to rely on CAFA’s statutory language, but sounded unconvinced.  Noting that the basic language in the traditional diversity statute and in CAFA were virtually identical, Justice Breyer inquired why, if a binding stipulation can be filed in a traditional diversity action, a binding stipulation would not also be binding in a CAFA action.  Boutros redirected Justice Breyer, noting that the Justice was comparing language from Section 1332(d)(2), but that the language upon which Standard Fire wished to rely was in Section 1332(d)(6), which provides that “[i]n any class action, the claims of the individual class members shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $5,000,000.”  Still sounding unconvinced, Justice Breyer observed that the “shall be aggregated” language in CAFA was intended to abrogate Zahn v. International Paper Co., a prior U.S. Supreme Court decision that had required each class member to be able to satisfy the jurisdictional amount individually.  Boutros asserted that if the only purpose was to abrogate Zahn, Congress simply could have passed a statute saying precisely that, but Justice Breyer dismissed such an approach as rare, observing that Congress instead typically passes a statute saying the opposite of what a case held.  Justice Kagan, following up on this point, characterized the insurer as relying on language that reflected an “anti-Zahn position, not an anti-St. Paul provision.”

Boutros obtained a brief reprieve when Justice Alito asked whether Standard Fire’s position essentially advocated the approach under recently amended Section 1446(c)(2), which contains language suggesting that a removing defendant may offer proof that the amount exceeds the jurisdictional threshold.  Boutros agreed with Justice Alito’s characterization, and asserted that courts may look behind the complaint at the “actual facts” under circumstances when class counsel is thwarting and manipulating jurisdiction.  However, more intense questioning soon resumed, with Justice Ginsburg observing that Standard Fire’s concern appeared to be with the fact that a state court would be determining both the adequacy of representation and whether the stipulation binds all the class members, whereas if a federal court were making those determinations, “I think you wouldn’t be here.”  Chief Justice Roberts noted that Boutros was assuming it was bad to limit class members’ claims, “but maybe it’s a good thing.”

Representing Greg Knowles, David Frederick faced the same kind of rapid-fire intensive questioning as Boutros.  Questions from Chief Justice Roberts, Justice Breyer, and Justice Alito focused on concerns that class counsel could abuse stipulations by dividing class actions in an artificial manner to avoid federal jurisdiction.  Chief Justice Roberts used an example of pursuing a class action on behalf of individuals whose last names began with the letters A through K, leaving L-Z to pursue a separate class action.  Justice Breyer similarly expressed concern that the master-of-the-complaint argument created a loophole in which class counsel could, for example, take a $25 million class action and divide it into six class actions through the use of stipulations.  Justice Alito returned to the newly amended removal statute, stating that if the general removal statute now permits looking behind what an individual demands, it would be “perverse” if a class representative could enter a stipulation purporting to bind class members.

Justice Ginsburg inquired whether Knowles’s brief had essentially conceded that the stipulation could not bind absent class members.  Frederick clarified that whoever was covered by the class action lawsuit would be bound by the stipulation, but that the specific class members would not be known until the certification hearing.

Justice Breyer observed that CAFA’s text seemed to favor Knowles, but noted that CAFA’s purpose “seems to strongly cut the other way.”  Significantly, Justice Breyer suggested a compromise position – that the statutory language could be interpreted as meaning to aggregate “the real value of the real amounts that the class is likely to have.”

When Boutros returned to the podium for rebuttal, he emphasized the perils of lengthy discovery, which prompted Justice Kagan to observe that CAFA’s provisions didn’t address discovery issues.  Boutros disagreed, arguing that CAFA authorizes “swift removal,” which would provide defendants with federal court discovery protections.

Nearly all of the Justices participated in the questioning, with Chief Justice Roberts, Justice Kagan, Justice Alito, and Justice Breyer the most active participants.  But the best line came from Justice Kagan who, toward the end of the rebuttal argument, observed that “you really are asking us to blow up the whole world.”