A February 2, 2012 decision by the Eighth Circuit upheld the use of stipulations by the named plaintiff and plaintiff’s counsel attempting to limit the amount in controversy to below the $5 million threshold for federal jurisdiction under the Class Action Fairness Act (CAFA).  This is the first court of appeals opinion squarely addressing this important issue.  If followed by other circuits, this decision potentially allows any plaintiffs’ attorney to avoid federal jurisdiction in any class action, no matter how large the amount in controversy would otherwise be, simply by using stipulations following the form used in this case.  CAFA potentially becomes avoidable essentially at will.  Such stipulations might make little difference to a defendant if the state’s class action law closely follows federal law, the state courts are accustomed to handling complex commercial disputes and discovery rulings are reasonable and appealable.  However, the plaintiffs’ bar is more likely to employ these stipulations in state courts that have looser class certification standards, plaintiff-friendly courts and limited (or non-existent) appellate review of discovery rulings preceding certification.  In those jurisdictions, defendants can be pressured to settle by the larger costs of litigation and greater likelihood of class certification.

In Rolwing v. Nestle Holdings, Inc., No. 11-3445, 2012 WL 301030 (8th Cir. Feb. 2, 2012) (available at Eighth Circuit website), a proposed class action was filed arising out of a merger between Nestle and Ralston Purina Company.  The plaintiff contended that payments to Ralston Purina shareholders for their shares were made six days late, and thus, under the interest rate established in a Missouri statute, over $13 million was owed to the shareholders.  The complaint, however, included allegations and two stipulations attempting to limit the amount in controversy to below $5 million, as follows:

Rolwing’s complaint included a prayer for relief requesting “judgment against defendant in an amount that is fair and reasonable in excess of $25,000, but not to exceed $4,999,999.”  The prayer stated further:  “Plaintiff and the class do not seek –and will not accept – any recovery of damages (in the form of statutory interest) and any other relief, in total, in excess of $4,999,999.”   . . . Rolwing also included two stipulations with his complaint: one stating that as named plaintiff and putative class representative he would not seek or accept any recovery in excess of $4,999,999 on his own behalf or on behalf of the class, and a second signed by his counsel stating that no attorneys’ fees would be sought or accepted other than on a contingency basis out of the maximum recovery of $4,999,999 provided for by the other stipulation.

Id. at *1 (emphasis in original). 

The Eighth Circuit initially found that Nestle had established that the actual amount in controversy exceeded $5 million, and thus, “for a remand to be justified, Rolwing must show that it is legally certain that recovery in this case cannot exceed $5 million.”  Id. at *2.  The court stated that “[s]tipulations of this sort, when filed contemporaneously with a plaintiff’s complaint and not after removal, have long been recognized as a method of defeating federal jurisdiction in the non-CAFA context.”  Id.   The court did not address whether this should be extended to CAFA or what Congress intended in that regard.  The court concluded that the stipulations were enforceable under  Missouri law of judicial estoppel, reasoning as follows:

Under Missouri law, “[t]he doctrine of judicial estoppel provides that ‘[w]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’ “ Taylor v. State, 254 S.W.3d 856, 858 (Mo.2008) (second alteration in original) (quoting Zedner v. United States, 547 U.S. 489, 504, 126 S.Ct. 1976, 164 L.Ed.2d 749 (2006)). According to this rule, by defeating removal through asserting the position that he will not accept more than $4,999,999 in damages on behalf of the class he is seeking to represent, Rolwing is estopped from later accepting damages that exceed that amount. Similarly, by taking the position that he would only accept fees on a contingency basis out of damages not exceeding $4,999,999, Rolwing’s counsel is estopped from accepting any other fee award.

Id. at *3 (emphasis added).

A few observations:

  • The Eighth Circuit here seemed to assume that pre-CAFA law allowing stipulations that the amount in controversy in an individual case was below $75,000 should be extended to apply to class actions under CAFA.  Doesn’t resolving that issue depend on:  (1) whether class action law allows a named plaintiff to stipulate to damages on behalf of proposed class members pre-certification; (2) whether such a stipulation is binding pre-certification; and (3) what Congress intended in enacting CAFA?  None of these issues were addressed in this decision.
  • The law on judicial estoppel varies somewhat from state to state, as well as the law regarding the enforceability of these types of stipulations, so the application of this opinion in cases arising from other jurisdictions may vary. 
  • It seems somewhat inconsistent with principles of federalism for federal jurisdiction to depend on the vagaries of state law, although to some extent state law informs the determination of the amount in controversy under diversity jurisdiction.  Should state law be allowed to completely control whether federal courts have jurisdiction under CAFA?
  • If this decision is not consistent with Congressional intent, should CAFA be amended to correct it?