Standard Fire Insurance Co. v. Knowles: How Will Case Affect Class Action

In Standard Fire Insurance Co. v. Knowles, the Supreme Court unanimously held that plaintiffs in class action lawsuits cannot avoid federal court jurisdiction by limiting damages to an amount less than the $5 million threshold provided by the Class Action Fairness Act. While many defense attorneys consider the decision to be a victory for corporate defendants, the decision could ultimately lead to larger damage awards and settlements for plaintiffs in class action lawsuits.

The plaintiff sought to certify a class of "hundreds, and possibly thousands" of similarly damaged policyholders.

The Class Action Fairness Act gives federal courts original jurisdiction over class actions where the amount in controversy is greater than $5 million. Under this law, if a plaintiff brings a class action lawsuit in state court and the potential damages are greater than $5 million, the defendant may have the case removed from state court and re-filed in federal court. In many states, corporate defendants generally prefer federal courts to state courts, because federal courts have stricter rules regarding class action lawsuits.

In Standard Fire Insurance, the plaintiff filed a proposed class action lawsuit in Arkansas state court against Standard Fire Insurance claiming that the insurance company unlawfully failed to reimburse policyholders for general contractor fees. The plaintiff sought to certify a class of "hundreds, and possibly thousands" of similarly damaged policyholders. To prevent the insurance company from having the case removed to federal court, the plaintiff filed a stipulation with the court stating that, on behalf of the entire class, he would not seek damages in excess of $5 million. The insurance company sought to have the case removed to federal court, on the grounds that the plaintiff artificially limited damages on behalf of the entire class in order to avoid the exclusive jurisdiction granted to federal courts under the Class Action Fairness Act.

In a unanimous decision, the United States Supreme Court held that a plaintiff who files a class action lawsuit cannot legally bind members of the proposed class before the class has been certified by the court. The court noted that although the plaintiff could have used a stipulation to limit the amount of damages the he alone is seeking, he can not impose this limit on all future class members before the class has been certified by the court. To do so would impermissibly deny other plaintiffs their legal right to recover full compensation for their injuries.

On the one hand, the Supreme Court's decision may be considered a win for corporate defendants in class action cases because plaintiffs cannot elect to bring lawsuits in state courts when the potential damages may exceed $5 million dollars. In addition, the ruling puts an end to the practice of dividing large class action lawsuits into multiple, smaller class actions to avoid federal court jurisdiction. On the other hand, the decision could lead to larger damage awards to plaintiffs in class action cases, because the decision removes any incentive for plaintiffs to use stipulations to artificially limit damages in order to keep a case in state court.