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Class-action limits weighed as top court hears claims 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 Tuesday in Washington, the justices generally voiced support for a Travelers Cos. 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 by the prospect of millions of dollars in litigation costs. Those contentions drew support from across the court’s ideological spectrum Wednesday.

“This is just a loophole that swallows up all of Congress’s statute,” Justice Stephen Breyer said.

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. (NYSE: 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, Va.

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 contends 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.

Lawyers representing those suing Standard Fire say Congress didn’t intend to preclude plaintiffs’ lawyers from limiting the scope of their cases in order to stay in state court.

They drew their strongest support Wednesday 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 did not in fact address.”

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

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