United States: Preserving The Class Action Fairness Act – Supreme Court’s Standard Fire Decision

Last Updated: April 15 2013
Article by Paula W. Render and Jeffrey A. LeVee

On March 19, 2013, the U.S. Supreme Court held in Standard Fire Ins. Co. v. Knowles that named plaintiffs in class actions could not, before class certification, avoid going to federal court by stipulating to a cap on damages. Although Standard Fire was not an antitrust case, the decision will uniquely impact antitrust class action cases because the removal of state law claims to federal court for coordinated proceedings in a single court is critical to an antitrust defendant's ability to avoid duplicative damage awards and to reduce the notoriously high costs of antitrust discovery.

Background

The Court in Standard Fire considered the application of the Class Action Fairness Act of 2005 (CAFA). CAFA gives the federal courts jurisdiction over class action lawsuits in which there is minimal diversity between the parties and the matter in controversy exceeds $5 million. To remain in state court, the plaintiff, on behalf of the proposed class, stipulated that he sought damages of less than $5 million. The defendants removed the case to federal district court under CAFA.  In determining to send the case back to the state, the federal court determined that, although in the absence of the stipulated cap on damages the plaintiff class could have sought damages over $5 million, the stipulation meant that the CAFA threshold could not be met. The Supreme Court agreed to hear the defendants' appeal of the remand order because of conflicting decisions among the circuit courts.

In a unanimous decision, the Court decided that a named plaintiff's stipulation to seek less than the $5 million CAFA threshold on behalf of a proposed class of plaintiffs could not defeat federal jurisdiction. In the Court's view, the stipulation was not binding on the proposed class:  the names plaintiff could not bind the rest of the class with his promise before the class was certified. Standard Fire thus reaffirms an earlier CAFA decision holding that a plaintiff class representative could not bind the rights of absent class members before class certification. The Court also observed that allowing such stipulations to evade jurisdiction would undercut CAFA's goal of having federal courts consider interstate cases of national importance. For example, the plaintiff's position would allow plaintiffs to subdivide a $100 million class action worth into 21 separate state actions.

Importance of Standard Fire for antitrust class actions

Some background helps put the significance of this decision in context. Antitrust claims arising out of alleged price-fixing or other conduct affecting a marketplace with multiple distribution levels may be brought by (a) so-called direct purchasers (the entities who bought directly from the alleged antitrust violators), (b) indirect purchasers (generally, consumers/end users), (c) intermediate indirect purchasers (entities at levels in the distribution chain between direct purchasers and consumers), and (d) so-called "opt-outs," generally large direct or indirect purchasers pursuing their claims on their own instead of as part of a class.

Prior to 1977, the federal courts struggled with how to apportion damages among these classes of plaintiffs, based on how much the group was overcharged by the defendants and how much of that overcharge was passed on at each level of the distribution chain. In 1977, the U.S. Supreme Court in Illinois Brick v. Illinois addressed this difficulty. Determining that properly apportioning damages was too difficult, the Court simply barred recovery under federal antitrust laws to any party but a direct purchaser. In response, some state legislatures enacted so-called "Illinois Brick repealer statutes," which permit indirect purchaser suits under their state antitrust laws.  These repealer statutes allowed indirect purchaser plaintiffs to bring antitrust class actions under state law in spite of Illinois Brick, but in state courts.

Pre-CAFA, antitrust defendants in class actions faced an expensive battle on multiple fronts. State antitrust class actions were brought in the state whose Illinois Brick repealer statute was being invoked. This could result in dozens of lawsuits, all arising from and seeking damages for the same alleged antitrust violation, each having to be litigated by defendants in each state with an Illinois Brick repealer statute as well as in federal court. One prominent example of this came in the wake of the DOJ's successful antitrust case against Microsoft. After the U.S. prevailed on its Sherman Act claims in 1999, indirect purchasers of Microsoft software brought suit in more than a dozen different states. Microsoft had to defend each of these state law claims, including 14 different class certification decisions. Although each of the 11 indirect purchaser class actions that were certified by a state court settled before going to a jury, there would have been 11 different juries or judges determining the appropriate amount of damages to be received by the indirect purchaser plaintiffs bringing the claims. In the pre-CAFA era, the likelihood that defendants would pay damages for a single overcharge to multiple claimants was high. Even in the cases that settled, the prospect of numerous expensive court fights likely prompted defendants to offer higher settlements to avoid protracted litigation in state courts across the country.

CAFA enabled defendants to remove antitrust cases from states courts to federal courts, from which the cases could then be transferred to a single multidistrict litigation for coordinated pretrial proceedings. The decision in Standard Fire further ensures this coordination, which leads to the two benefits especially important to antitrust defendants. First, with a single judge hearing the cases in a coordinated manner, the threat of duplicative recoveries by the various classes is diminished, and even though defendants most frequently settle with classes that obtain certification, those settlements are likely to be lower given that the class plaintiffs know they will have to prove their overcharges and damages in the same case, before the same judge and likely the same jury, as the other classes. Even though cases coordinated for pretrial proceedings should theoretically go back to the originating district court for trial, as a practical matter this rarely occurs; and in any event the coordination of proceedings such as expert discovery would nevertheless reduce the risk of duplicative recovery. Second, the parties do not need to litigate the same issues in numerous fora, and the risk that multiple judges will allow wide-ranging, but different, discovery is reduced – a particular concern in antitrust cases where discovery is especially broad and expensive.

The plaintiff in Standard Fire attempted with his stipulation to roll back CAFA in a case that would have otherwise qualified for removal to federal court.  The Standard Fire decision removes one potential crack in the CAFA dam by preventing plaintiffs from staying out of federal court simply by limiting the class's damages, and preserves the uniformity and cost savings afforded by CAFA. These benefits are magnified when applied to class actions brought under the antitrust laws.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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