Plaintiffs’ lawyers in proposed class actions cannot avoid federal courts by promising to seek less than $5 million in damages, according to a unanimous U.S. Supreme Court on Tuesday.

"Our reason is a simple one," wrote Justice Stephen Breyer in Standard Fire Insurance v. Knowles. "Stipulations must be binding."

A plaintiff who files a proposed class action, he added, "cannot legally bind members of the proposed class before the class is certified."

The case was closely watched by the nation’s business community because of its potential implications for removals of class actions in state courts to what are generally viewed as more business-friendly federal courts.

The issue of the effect of the stipulation arose in a proposed class action brought in Arkansas state court by Greg Knowles against Standard Fire.

Knowles claimed that when the company made certain homeowner’s insurance loss payments, it unlawfully failed to include a general contractor fee.

He sought to certify a class of "hundreds, and possibly thousands" of Arkansas policyholders and he included an affidavit stipulating that he would not seek damages for the class in excess of $5 million.

Standard Fire removed the case to federal district court by relying on the $5 million amount-in-controversy threshold for federal jurisdiction in the Class Action Fairness Act (CAFA).

The trial judge found that the matter in controversy was slightly more than $5 million, but because of the stipulation, the judge sent the case back to state court.

The U.S. Court of Appeals for the Eighth Circuit declined to hear the company’s appeal.

Breyer explained that because Knowles’ precertification stipulation bound no one but himself, he had not reduced the value of the absent class members’ claims.

Theodore Boutrous Jr. of Gibson, Dunn & Crutcher, who argued the case for Standard Fire, said in a statement that the decision "enforces the clear terms of the Class Action Fairness Act to ensure that class-action plaintiffs cannot manipulate the system by slicing and dicing claims in order to defeat federal jurisdiction, and it will prevent the state-court class-action abuses that Congress intended to prohibit."

Not surprisingly, class-action defense lawyers agreed.

John Beisner, co-head of the mass torts and insurance litigation group at Skadden, Arps, Slate, Meagher & Flom, said, "Today’s ruling soundly rejects the trick of attorneys unilaterally stipulating to limited damages in an effort to avoid federal jurisdiction over class actions.

"[T]he Court recognizes that in enacting the Class Action Fairness Act, Congress intended that in most instances, federal courts, not state court, will handle class actions with interstate implications," he continued.

And Archis Parasharami, co-chairman of Mayer Brown’s consumer litigation and class-action practice, said, "The Court correctly recognized that a named plaintiff in a class action cannot, prior to class certification, place artificial limits on the claims of absent class members.

"Indeed, the Court noted that to do so might make the class representative an ‘inadequate’ one. Given the Court’s unanimous recognition of CAFA’s purposes, hopefully federal district courts and the courts of appeal will take a closer look at other efforts by plaintiffs to perform similar end runs around CAFA," he added.

Knowles’ high court counsel, David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, had argued that many of the arguments made by Standard Fire and its supporters were "offensive ad hominem attacks, plain and simple."

A stipulation made in good faith and enforceable under state law, he contended, was controlling on the amount-in-controversy issue. •