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Class-Action Limits Weighed as Court Hears Claim of Abuse

The U.S. Supreme Court weighed new constraints on class-action lawsuits, reviewing a case from an Arkansas county that companies say is rife with abusive litigation tactics and plaintiff-friendly local judges.

Hearing arguments today in Washington, the justices generally voiced support for a Travelers Cos. (TRV) unit battling a suit over homeowners-insurance claims.

The case turns on a tactic used by plaintiffs’ attorneys to ensure that cases are handled by state judges, rather than in the federal courts that tend to give businesses a more favorable reception. Under the disputed approach, lawyers agree not to seek more than $5 million -- the threshold that sends class- action suits to federal court under a 2005 U.S. law.

Businesses say those promises mean little because plaintiffs’ lawyers can still extract much larger settlements from companies threatened with millions of dollars in litigation costs. Several justices today also said lawyers might file a series of related class actions, each worth just under $5 million on behalf of a subset of the potential plaintiffs.

“If so, this is just a loophole that swallows up all of Congress’s statute,” Justice Stephen Breyer said. “All that is required is a few extra pieces of paper that will soon become standardized and a lot of postage stamps.”

The Supreme Court has proven receptive to past accusations of abuse of the litigation system. In 2011 the court rejected an effort to sue Wal-Mart Stores Inc. (WMT) for discrimination on behalf of potentially 1 million female workers.

Miller County

The high court case comes from Miller County, in Arkansas’s southwestern corner. The county is a “magnet jurisdiction,” where trial lawyers have “dragooned scores of out-of-state corporations into settling cases for vast sums bearing no meaningful relationship to their merits,” according to a court filing by five insurance companies and the Manufactured Housing Institute, an industry trade group based in Arlington, Virginia.

A group representing Arkansas plaintiffs’ lawyers called that characterization a “myth.” Since 2000, only 28 class- action cases have been filed in Miller County, the Arkansas Trial Lawyers Association says.

“When the thin surface of their accusations is scratched, a different story is revealed,” the group said.

Travelers’s Standard Fire Insurance unit is accused of failing to fully reimburse losses by refusing to pay for the cost of hiring general contractors. The lawyers suing the company said they would cap the damages they seek, including attorneys’ fees, at the $5 million threshold.

2005 Law

Standard Fire says that so-called stipulation is barred under the 2005 law, known as the Class Action Fairness Act. The law put curbs on group litigation, largely by funneling more cases into federal court.

Standard Fire’s lawyer, Theodore Boutrous, said plaintiffs’ lawyers were “slicing and dicing the classes up into pieces in order to thwart jurisdiction.”

Lawyers pressing the suit say Congress didn’t preclude plaintiffs’ attorneys from limiting the scope of their cases in order to stay in state court. The lead plaintiff in the case is Greg Knowles, whose home was damaged in a 2010 hailstorm.

Congress intended to leave “legal judgments and strategies” in the hands of the plaintiffs, said David Frederick, Knowles’s Supreme Court lawyer.

‘Jerry-Rigged’

Frederick drew his strongest support today from Justice Elena Kagan, who repeatedly said Congress didn’t seek to bar stipulations that limit damages. She said business advocates were seeking a “jerry-rigged solution to get at a problem Congress in fact did not address.”

Chief Justice John Roberts asked Frederick whether lawyers could file two $4 million suits, one on behalf of people whose names start with letters from A through K, and a second one for those from L to Z. He said Frederick’s position would give plaintiffs “extraordinary leverage.”

At the same time, Roberts said Boutrous’s stance put defense lawyers in an unusual spot.

“You’re at the position of arguing that, you know, they are seeking less than $5 million, but we’re responsible for a lot more damage than that,” Roberts said.

The case, which the court will decide by June, is Standard Fire v. Knowles, 11-1450.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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