by Michael Kun

In 2005, Congress passed the Class Action Fairness Act (“CAFA”) to ensure that large, interstate class actions could be heard in federal courts.  Under CAFA, federal courts have been given original jurisdiction over those class actions in which at least one party is diverse and the amount in controversy exceeds $5 million once all of the putative class members’ claims have been aggregated.

Likely before CAFA had even gone into effect, some plaintiffs’ lawyers devised a strategy to try to escape federal jurisdiction under CAFA – stipulating that they would seek less than $5 million to stay under the statute’s amount-in-controversy threshold.  Some courts rejected those stipulations, concluding that a plaintiff and his counsel could not stipulate to anything on behalf of a class they had not been authorized to represent, with some courts even suggesting that plaintiffs’ counsel might want to call their malpractice carriers if they stipulated to limit the recovery of persons they did not represent.  But other federal courts accepted the stipulations that the plaintiff would seek less than $5 million and remanded the cases to state courts.

The U.S. Supreme Court has now effectively put an end to this oft-used scheme to avoid federal jurisdiction.  In Standard Fire Ins. Co. v. Knowles, the Supreme Court unanimously held that plaintiffs could not escape federal CAFA jurisdiction by agreeing to seek less than $5 million.  Like some lower courts had done, the Supreme Court concluded that a named plaintiff for had no power to speak on behalf of a proposed class that had not been certified.  And, without such power, the proposed stipulation could not be enforced.

The Court further explained that to hold otherwise would invite gamesmanship, giving the example of a $100 million class action that should be heard in federal court under CAFA being divided into 21 separate class actions wherein the plaintiff stipulated in each to seek less than $5 million.  Such gamesmanship would defeat the purpose of CAFA.

The decision is a victory for employers in the wage-hour class actions that have become so prevalent across the country, ensuring that many of them will proceed in federal courts after all.  To the extent that some commentators are suggesting that this is a negative development for employers because plaintiffs will now be disincentivized to concede that damages be capped at $5 million, those persons are missing an important fact: such a pre-certification stipulation could never be enforced precisely because the plaintiffs and their counsel could not stipulate on behalf of persons they did not then represent.