WASHINGTON — The Supreme Court struggled on Monday to determine whether plaintiffs’ class-action lawyers can avoid having their cases heard in federal court by stipulating that they will seek less than the $5 million threshold set in a 2005 federal law.
The justices have in recent years generally been sympathetic to efforts to address what business groups say are abuses in class-action litigation. The 2005 law, the Class Action Fairness Act, was a significant overhaul meant to allow big class actions to be moved out of state courts thought to be hostile to corporate defendants.
But the Supreme Court’s task was made difficult, Justice Stephen G. Breyer said, because the words of the law pointed in one direction and its apparent purpose in the other.
The law allows defendants in class actions to have the cases transferred — removed, in legal jargon — to federal court as long as the proposed class has more than 100 members, at least one of them is from a different state than a defendant and the amount at stake is more than $5 million.
But that left lots of room for gamesmanship, Justice Breyer said. For instance, he said, a plaintiff’s lawyer might say that “what we’re going to do is we will divide our $25 million class action into six subsidiary actions and proceed exactly the same merry way.”
The “words in the statute do favor that,” Justice Breyer said. “But the purpose seems to strongly cut the other way.”
Other justices said the court should not impose a requirement that Congress had not adopted in so many words. The general rule in ordinary litigations is that plaintiffs may frame their complaints as they wish and agree to take less money than they might otherwise be due in order to stay in state court.
Justice Elena Kagan said the usual rules should govern in class actions unless Congress says otherwise.
“Congress was concerned about many things, and it did many things,” Justice Kagan said of the 2005 law, listing several changes. “Here’s one thing it didn’t eliminate. It didn’t eliminate” the rule that plaintiffs can decide how to pursue their cases.
“He gets to decide which claims to bring,” she said of a hypothetical plaintiff. “He gets to decide how many years’ worth to ask for. He gets to decide which defendants to sue.”
The case before the justices involved the Standard Fire Insurance Company, which is based in Connecticut. A proposed class action filed in Arkansas contended that the company had failed to make full reimbursements for property damage claims there by excluding fees charged by general contractors. The case was filed in Miller County, Ark., where courts, according to the company, are notorious for coercing large settlements from out-of-state defendants.
Eager to stay in Miller County, the plaintiffs’ lawyers stipulated that they would limit to $5 million the amount sought by the lead plaintiff and the class he sought to represent. They also confined their claims to a two-year period although the statute of limitations was five years.
A lawyer for the company, Theodore J. Boutrous Jr., said a single class-action plaintiff should not be allowed to sign away money that might be owed to other members of the class.
Justice Ruth Bader Ginsburg appeared to agree. “The statute itself is silent” about the central issue in the case, Standard Fire Insurance Company v. Knowles, No. 11-1450, she said. “However, the individual — the named plaintiff — who has said, ‘I’m not going to seek more than the $5 million,’ cannot speak for the members of the class who are absent.”
But Justice Sonia Sotomayor said that question of whether the named plaintiff was an adequate class representative could be addressed when the state court eventually decided whether to certify the class.
Mr. Boutrous said that approach would be “cold comfort” as it would not protect the company in the meantime from “the problems and abuses that Congress was concerned about.”
Chief Justice John G. Roberts Jr. suggested that there must be limits to the choices made by class-action lawyers. He asked David C. Frederick, a lawyer for the plaintiff, whether a lawyer might divide up his clients alphabetically.
“I want to represent the class of people with these claims and these claims, whose names begin with A to K,” such a lawyer might say, the chief justice said. “It turns out that’s $4 million. And in the next county, at the same time, he files a case saying, I’d like to represent these people whose names begin L to Z. In each of those cases, it’s $4 million. I take it you don’t have any objection to that?”
Mr. Frederick said “that kind of legal strategy is perfectly appropriate.”
Justice Breyer appeared troubled. “If so,” he said, “this is just a loophole because it swallows up all of Congress’s statute.”