Edward S. Sledge, IV & Christopher S. Randolph, Jr., Setting the Edges: Defending Against Plaintiff End Runs Around CAFA, 80 Def. Couns. J. 178 (April 2013).

In this article, Edward S. Sledge, IV, a shareholder at Maynard, Cooper & Gale, P.C. in Birmingham, Alabama, discusses the abusive practice that has allowed plaintiffs’ attorneys to evade CAFA jurisdiction.

The author begins the article by describing the state of class action litigation before CAFA came into force.  During that time, class action filings were concentrated in a few plaintiff-friendly venues, and plaintiffs’ attorneys typically sought “drive-by” certifications, whereby ex parte certification orders were issued on the same day or shortly after the filing of the class action complaint.  The defendants often spent millions of dollars complying with massive discovery requests, likely to cause bankruptcy.  Because of the possibility of bankruptcy, the defendants faced an unpleasant choice after certification, either settle meritless claims for large sums or risk trial.  Yet, when all was said and done, class members did not necessarily benefit from large class action settlements, and were often left with a release of their claims in exchange for a small share of a settlement that may have had little value after accounting for attorney fees and costs.

The author then highlights the objectives of CAFA.  CAFA aims to ensure that large class actions are litigated in a federal forum where procedural rules require greater consideration of the interests of defendants and unnamed plaintiffs.  Before CAFA was enacted, class action lawyers misused the jurisdictional threshold to keep their cases out of federal court and often included stipulations in complaints limiting the amount in controversy to less than the jurisdictional minimum.  Thus, by enacting CAFA, Congress sought to curtail this practice by requiring aggregation of the claims of putative class members in determining the amount in controversy.  CAFA extended federal jurisdiction to class actions where this aggregate value exceeds $5 million and minimal diversity exists.

The author noted that plaintiffs’ attorneys continued to dodge federal jurisdiction through other strategies, such as statements in or attached to complaints that purportedly stipulate that the named plaintiff will not seek more than $5 million for the class.  Federal courts have held that damage stipulations were effective to escape federal jurisdiction, reasoning that a plaintiff can disclaim the right to recover certain damages and that judicial estoppel or state procedural rules would bar a plaintiff from amending the stipulation once back in state court.  Federal courts have also reasoned that the amount in controversy in a class action may be limited to the amount stated in an ad damnum clause, regardless of whether a sworn stipulation was also filed.

State legislatures also facilitated skirting CAFA such that in 2011, Arkansas enacted a statute that provides that a statement of damages in a complaint is binding on the plaintiff with respect to the amount in controversy until the statement of damages is amended.  Also, some states have lax certification standards that allow certification of classes that could never be certified in federal court.  Further, the defendants in some state courts must also continue to spend millions of dollars to comply with discovery requests broader than those normally allowed in federal court, and most state courts maintain broad discretion to impose draconian sanctions for noncompliance with those discovery requests.  Despite statements purporting to limit the amount in controversy to $5 million, the plaintiffs are free to demand settlements several times that amount knowing that the costs of complying with discovery may run into the tens of millions of dollars.

The author also states that reliance on state rules of judicial estoppel and state rules regarding the effect of ad damnum clauses affects allowing state procedural rules to dictate whether federal jurisdiction exists.  State procedural rules are inapplicable in federal court, and State rules that limit recovery to the amount stated in an ad damnum clause are inconsistent with Rule 54(c).  Also, since rules on judicial estoppel, stipulations, and the effect of ad damnum clauses vary from state to state, reliance on state rules would necessarily lead to the inconsistent application of the federal removal statute–an outcome federal courts have sought to avoid.

The author opines that even assuming arguendo that a stipulation or ad damnum clause may limit the amount in controversy outside the class action context, such purported limitations would be irrelevant in the jurisdictional analysis in a class action removed under CAFA for several reasons.  First, a stipulation does not effect the valuation of the claims of the unnamed members of a putative class because it cannot bind persons who are not yet parties to a case.  A stipulation could only limit the amount in controversy if it could bind the unnamed members of the class at the time of removal, which would be prior to certification.  Since the Supreme Court has explained that an uncertified class action cannot bind proposed class members, the named plaintiff in a class action cannot waive the rights of the unnamed members of a putative class to certain relief.

Second, CAFA bars consideration of any purported waiver of relief by a named plaintiff.  Federal courts are directed to look at the aggregate value of the individual claims, not the amount that could be awarded to a certified class.  Thus, it is irrelevant whether a class action ultimately certified in state court would include only those plaintiffs who agreed to a damages stipulation.  A federal court must look at the aggregate value of the claims of both the plaintiffs who may ultimately choose to opt out and the plaintiffs who choose to be bound by a damages stipulation.

Third, a named plaintiff’s obligations to the unnamed class members bar his waiver of the damages available to class members.  He has a fiduciary duty to his fellow class members and cannot throw away what could be a major component of the class’s recovery.

The plaintiffs’ efforts to evade federal jurisdiction through damage stipulations undermine the purpose of CAFA and the jurisdictional gamesmanship that Congress sought to end.  As such, the author opines that the Supreme Court is positioned to end plaintiffs’ end runs around CAFA.

The Supreme Court granted certiorari in Standard Fire Insurance Co. v. Knowles to determine whether a named plaintiff may defeat a defendant’s right of removal under CAFA by stipulating that he will seek no more than $5 million for the putative class when the amount in controversy, absent the stipulation, would exceed $5 million.  The author states that Knowles has the potential to end an abusive evasion of CAFA which would also be the Supreme Court’s first discussion of the calculation of the amount in controversy under CAFA and its first meaningful discussion of the effect of damage stipulations since dicta penned in February 1938, prior to the effective date of the Federal Rules of Civil Procedure.  In Knowles, the Supreme Court held that the stipulation in a case that the class would seek less than $5 million in damages, which was intended to establish the amount in controversy, does not defeat federal jurisdiction under the CAFA.