March 19 (Bloomberg) -- The U.S. Supreme Court put new constraints on class-action lawsuits, siding with a Travelers Cos. unit and undercutting what companies say is a favorite tactic used by trial lawyers to steer cases to friendly courts.
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.
The high court today unanimously said that type of “stipulation” isn’t grounds for forcing a case into state court, where plaintiffs often fare better. Writing for the court, Justice Stephen Breyer said those stipulations have limited impact because they aren’t binding on other potential plaintiffs.
Allowing the tactic would “exalt form over substance,” Breyer wrote. “It would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations.”
The ruling focused on the 2005 Class Action Fairness Act, which put curbs on group litigation, largely by funneling more cases into federal court.
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.
The lead plaintiff in the case is Greg Knowles, whose home was damaged in a 2010 hailstorm.
The high court case came 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 said.
The case is Standard Fire v. Knowles, 11-1450.
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