While this week’s docket at the Supreme Court is getting the headlines, it was a decision from the Court last week that had the LexBlog Network buzzing. In a case where an LXBN member represented the plaintiff, the highest court in the land unanimously decided to close an oft-used loophole in the Class Action Fairness Act. There may not have been lines of people waiting to get in for Standard Fire Insurance Co. v. Knowles days before the oral arguments were scheduled, but like class actions, the implications of this decision are wide and reach beyond the facts of the case.

From wage and hour litigation to controversies in privacy law, closing this CAFA loophole has the potential to drastically change how lawyers attack the law to produce the best results for their clients. When the Court heard oral arguments in January, the focus was rightly on the CAFA, and how the Justices’ ruling would change the law. After the verdict was handed down, the focus shifted, as lawyers involved in class actions around the country realized that their job just became a little more difficult.

As Sean Wajert points out on his blog, Mass Tort Defense, Standard Fire v. Knowles isn’t the only class action where a loophole in the CAFA has played a central role:

“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.”

In this case, that loophole was the $5 million threshold for federal jurisdiction. In an effort to keep the case in state court, the named plaintiff, Greg Knowles, filled the class action with the stipulation that the class would seek no more than $5 million in damages. The rationale behind avoiding federal court was simple, as Deborah Renner explained on Baker Hostetler’s Class Action Lawsuit Defense:

“CAFA was enacted, in part, to ensure that class actions were filed in federal court unless they met a limited number of exceptions, thus avoiding often pro-plaintiff state courts.  Notably, plaintiff inKnowles wanted to avoid removal to federal court from Arkansas state court.  Arkansas does not adhere to the “rigorous analysis” of class certification criteria demanded by the federal courts.”

Knowles attempted this knowing full well that the damages would undoubtedly exceed $5 million were it nor for the stipulation expressly limiting the amount in controversy. After hearing the case, the Court ruled against Knowles in a 9-0 vote. Archis Parasharami and Brian Wong laid out the Court’s decision on Mayer Brown’s Class Defense blog:

“Today, the Supreme Court held that such stipulations do not destroy federal jurisdiction under CAFA when the defendant has presented evidence that, but for the stipulation, the amount in controversy would exceed $5 million. The Court’s reasoning was, in its words, “simple”: To be effective, “[s]tipulations must be binding,” but “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.” Therefore, a nonbinding stipulation must be ignored when assessing the amount in controversy under CAFA.”

In closing this loophole, the Court effectively strengthened the CAFA, which, as many LXBN members were quick to say, could have a lasting effect on how class actions are handled across a number of industries. Barry Miller, a partner in the Labor & Employment Department at Seyfarth Shaw noted on The Wage & Hour Litigation Blog that not only was this a victory for defendants in wage and hour litigation, but that the Court’s unanimous decision also provided some insight into how the Justices’ view similar “maneuvers” by plaintiffs in class action litigation:

“This ruling has significant implications for wage and hour litigation because CAFA jurisdiction is often at issue when plaintiffs bring claims under state wage laws to avoid the federal courts or to seek enhanced damages.  The Supreme Court’s ruling makes clear that class action plaintiffs and their attorneys cannot avoid federal court through an artificial (and possibly temporary) limitation on the damages sought in theircomplaints.  There may be a broader and more subtle message in the Supreme Court’s ruling, as well.

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The Supreme Court has not yet addressed all of the means by which plaintiffs might seek to avoid CAFA, but the Justices’ unanimous opinion in Knowles might suggest that they have limited tolerance for such maneuvers.”

Along with the potential impact on wage and hour litigation, the Court’s decision overturned an important Ninth Circuit precedent, and could change the outcome of a privacy case in the Eighth Circuit. The lawyers at Hunton & Williams broke down that case as they analyzed the Court’s ruling on the firm’s blog, Hunton Employment & Labor Perspectives:

“The Knowles decision has had an immediate impact on class action cases in the Eighth Circuit.  Just hours after the opinion was released, the court in Dalton v. Aldi, Inc., Case No. 4:13-cv-00249-JCH (E.D. Mo. Mar. 19, 2013), a privacy case involving flash cookies, sua sponte denied the plaintiff’s motion to remand.  The Dalton case is one of a number of recently filed putative class action cases brought in Missouri alleging damages from the purported use of Flash cookies on the defendants’ respective websites. “

Towards the end of that post, it was mentioned that this decision may not be all roses for defendants in large class actions. With plaintiffs unable to steer litigation to the jurisdiction of their choice, there’s no reason to limit the amount the class can recover. However, as Kirk Jenkins made clear in his post on Sedgwick’s The Appellate Strategist, this is clearly a win for defendants:

“Although some observers have wondered (subscription req.) in the forty-eight hours since Knowles came down whether the decision will ultimately result in larger damages claims in future class complaints given that we now know that limiting stipulations are ineffective to manipulate jurisdiction, but the concern seems misplaced. After all, much of the discussion in Knowles turned on the significant number of ways in which such a stipulation could be evaded once jurisdiction was settled, so believing that such a stipulation was the last word on possible exposure seems unjustified. I agree with others (subscription req.) who regard Knowles as a significant and unqualified win for the defense bar.”

Jenkins wasn’t alone in his assertion. Joining him was Andrew Trask, author of McGuire Woods’s Class Action Counter Measures. But for Trask, this victory came in the form of a crystallizing view of what a class is, something that also looks to be aiding defendants:

 “Knowles, combined with a few other cases, like Bayer and Shady Grove, shows that the Supreme Court is slowly coming to a coherent vision of what a class action is. That vision is helpful for defendants, less so for current plaintiffs. The Supreme Court is envisioning the class action as a procedural aggregation device, rather than a corporate deterrent or a trust-like entity. This is good news for defendants, who have traditionally argued that the class action is a rule-based joinder device that should not confer any special treatment onto the named plaintiff.”

Fortunately, attorneys are quick to adapt to the constantly shifting landscape that is the law. The defense may hold some valuable cards, but that advantage won’t last forever.

To read more analysis concerning Standard Fire v. Knowles, be sure to check out our tagged page on the subject where LXBN members have provided coverage since the Supreme Court granted certiorari.

Photo Credit: NCinDC, Flickr