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Supreme Court weighs limits on class-action tactics

Security guards walk the steps of the Supreme Court before Justice Elena Kagan's investiture ceremony in Washington, October 1, 2010. REUTER
Security guards walk the steps of the Supreme Court before Justice Elena Kagan's investiture ceremony in Washington, October 1, 2010. REUTER

By Jonathan Stempel

WASHINGTON (Reuters) - The Supreme Court on Monday weighed whether to impose new limits on class-action lawsuits, as it reviewed whether a homeowner's lawsuit against his insurer belonged in a state court considered friendly to plaintiffs.

During oral argument, several justices suggested that they saw problems in the plaintiff's effort to keep his case in a Miller County, Arkansas, state court known among some insurers as something of a "magnet" for class-action cases.

Greg Knowles, whose house had sustained hail damage, in his lawsuit accused Travelers Cos' Standard Fire Insurance Co unit of refusing to pay for the cost of hiring general contractors.

He signed a stipulation to cap damages for class members at $5 million, the threshold at which the Class Action Fairness Act lets companies move class-action lawsuits to federal court.

But some justices suggested that such stipulations were the kind of tactic that Congress sought to stop with the 2005 law.

"The amount that's demanded seems to be totally meaningless," Justice Samuel Alito said. "The $5 million just means nothing."

Chief Justice John Roberts suggested that Knowles' approach could let two adjacent state county courts hear two $4 million lawsuits for people with names from A to K and from L to Z, rather than push the entire $8 million case to federal court.

"I take it you don't have any objection to that?" he asked David Frederick, a lawyer for Knowles.

Monday's argument is the fourth class-action appeal of the court's current term, and it came before a court that in recent cases involving Wal-Mart Stores Inc and other defendants made it harder to pursue class-action litigation.

SLICING AND DICING

Knowles had limited his case to state law claims by Arkansas residents and sought to include potential class members his lawyer did not represent.

The 8th U.S. Circuit Court of Appeals in St. Louis upheld the stipulation to limit the size of his case. But Standard Fire argued that this improperly let Knowles bind potential class members without court approval.

Theodore Boutrous, a lawyer for the Hartford, Connecticut-based insurer, said Congress adopted CAFA out of concern about plaintiffs' "abuses and manipulations" of amounts being sought and wanted to protect defendants and absent class members.

"What has happened here is the plaintiff's lawyers, in addition to these stipulations, they're slicing and dicing the classes up into pieces to thwart jurisdiction," he said.

Frederick countered that a plaintiff, as "master" of his lawsuit, could pursue his own strategies, and decide in good faith that his case was worth no more than $5 million.

But Justice Stephen Breyer suggested it would be a "loophole" that "swallows up all of Congress' statute" for a plaintiff to define his case narrowly, and for his lawyers to bring several small cases rather than one large case.

Justice Antonin Scalia, meanwhile, suggested that state courts would be unwilling to cede jurisdiction even if other potential plaintiffs were being short-changed.

"The state court could find, and I suspect this state court would find, that it's worth the money to be in state court," he said.

A decision is expected by the end of June.

The case is Standard Fire Insurance Co v. Knowles, U.S. Supreme Court, No. 11-1450.

(Reporting by Jonathan Stempel)

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