[Senate Report 109-14]
[From the U.S. Government Publishing Office]
Calendar No. 1
109th Congress Report
SENATE
1st Session 109-14
======================================================================
THE CLASS ACTION FAIRNESS ACT OF 2005
_______
February 28, 2005.--Ordered to be printed
_______
Mr. Specter, from the Committee on the Judiciary, submitted the
following
R E P O R T
together with
ADDITIONAL AND MINORITY VIEWS
[To accompany S. 5]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (S. 5) to amend title 28, United States Code, to allow the
application of the principles of federal diversity jurisdiction
to interstate class actions, having considered the same,
reports favorably thereon, without amendments, do pass.
CONTENTS
Page
I. Legislative History..............................................1
II. Votes of the Committee...........................................3
III. Purposes.........................................................4
IV. Background and Need for the Legislation..........................6
V. How It Works: S. 5 and Changes in Existing Law..................27
VI. Section-by-Section Analysis.....................................29
VII. Critics Contentions and Rebuttals...............................51
VIII.Congressional Budget Office Cost Estimate.......................76
IX. Regulatory Impact Statement.....................................78
X. Additional Views................................................79
XI. Minority Views..................................................82
XII. Changes in Existing Law.........................................96
I. Legislative History
The Senate began consideration of the Class Action Fairness
Act in the 105th Congress when the Senate Judiciary
Subcommittee on Administrative Oversight and the Courts
convened a hearing on October 30, 1997. John H. Church, Jr.,
John C. Coffee, Jr., Lewis H. Goldfarb, Paul V. Niemeyer,
Martha Preston, and Brian Wolfman testified at the hearing on
issues such as unfair class settlements, attorneys' fees, and
state court abuses. On September 28, 1998, the Subcommittee on
Administrative Oversight and the Courts approved S. 2083, the
``Class Action Fairness Act of 1997,'' introduced by Senators
Charles Grassley (R-IA) and Herb Kohl (D-WI), with an amendment
in the nature of a substitute. No further action was taken on
S. 2083 in the 105th Congress.
On February 3, 1999, S. 353, ``The Class Action Fairness
Act of 1999,'' was introduced in the 106th Congress by Senators
Charles Grassley (R-IA), Herb Kohl (R-WI), and Strom Thurmond
(R-SC). S. 353 was referred to the Senate Committee on the
Judiciary. On May 4, 1999, the Judiciary Subcommittee on
Administrative Oversight and the Courts held a legislative
hearing (S. Hrg. 106-465) on the bill, and received testimony
from Eleanor D. Acheson, John H. Beisner, Richard A. Daynard,
E. Donald Elliot, John P. Frank, and Stephan G. Morrison.
On June 29, 2000, the Judiciary Committee approved S. 353
with an amendment in the nature of a substitute, offered by
Chairman Orrin G. Hatch (R-UT), Senators Charles Grassley and
Herb Kohl, by a rollcall vote of 11 years and 7 nays. S. 353
was then ordered favorably by the Committee without additional
amendment.
The Senate continued consideration of the Class Action
Fairness Act in the 107th Congress when Senator Charles
Grassley (R-IA), introduced S. 1712 on November 15, 2001 with
Senators Kohl (D-WI), Hatch (R-UT), Carper (D-DE), Thurmond (R-
SC), Chafee (R-RI), and Specter (R-PA). While S. 1712 contained
similar provisions from its predecessor bills, S. 1712 included
some new provisions. On July 30, 2002, the Senate Judiciary
Committee, which was then chaired by Senator Leahy (D-VT), held
a hearing to discuss class actions generally, during which S.
1712 was discussed at length by Committee members. The
Committee received testimony from Paul Bland, Thomas Henderson,
former Solicitor General Walter E. Dellinger III, (Insurance)
Commissioner Laurence Mirel, Shaneen Wahl and Hilda Bankston.
No further action was taken on S. 1712 during the 107th
Congress.
On February 4, 2003, Senator Charles Grassley (R-IA)
introduced S. 274, the ``Class Action Fairness Act of 2003.''
Senators Herb Kohl (D-WI), Orrin Hatch (R-UT), Thomas Carper
(D-DE), Arlen Specter (R-PA), Lincoln Chafee (R-RI), and Zell
Miller (D-GA) joined the bill as original cosponsors. On April
11, 2003, the Judiciary Committee reported S. 274 favorably,
with amendments, after two days of mark-up. On October 17,
2003, Senator Grassley introduced S. 1751, the ``Class Action
Fairness Act of 2003,'' a compromise version of the bill, with
Senators Alexander (R-TN), Allen (R-VA), Carper (D-DE), Chafee
(R-RI), Cornyn (R-TX), Hagel (R-NE), Hatch (R-UT), Kohl (D-WI),
Lugar (R-ID), Miller (D-GA), Specter (R-PA), Sununu (R-NH) and
Voinovich (R-OH). Pursuant to Rule XXIV of the Standing Rules
of the Senate, a Motion to Proceed to consideration of S. 1751
was filed. On October 23, 2003, the Senate failed to invoke
cloture by a vote of 59-39. Senators Grassley, Kohl, Hatch and
Carper then negotiated key provisions of the bill with Senators
Landrieu (D-LA), Schumer (D-NY), and Dodd (D-CT). The
compromise bill, S. 2062, the ``Class Action Fairness Act of
2004,'' was introduced on February 10, 2004 by Senators
Grassley, the original sponsor, and Senators Kohl (D-WI), Hatch
(R-UT), Carper (D-DE), Chafee (R-RI), Collins (R-ME), Dodd (R-
CT), Hagel (R-NE), Landrieu (D-LA), Lugar (R-ID), Miller (D-
GA), Schumer (D-NY) Specter (R-PA) and Voinovich (R-OH) as
cosponsors. Pursuant to Rule XXIV of the Standing Rules of the
Senate, a Motion to Proceed to consideration of S. 2062 was
filed on July 7,2004. Senator Frist (R-TN) promptly filled the
amendment tree and filed a cloture motion. On July 8, 2004, the
Senate failed to invoke cloture by a vote of 44-43.
On January 25, 2005, Senators Charles Grassley (R-IA), Herb
Kohl (D-WI), and Orrin Hatch (R-UT) introduced S. 5, the
``Class Action Fairness Act of 2005.'' Senators Alexander (R-
TN), Carper (D-DE), Chaffee (R-RI), Collins (R-ME), DeMint (R-
SC), DeWine (R-OH), Dodd (D-CT), Ensign (R-NV), Feinstein (D-
CA), Frist (R-TN), Hagel (R-NE), Kyl (R-AZ), Landrieu (D-LA),
Lieberman (D-CT), Lincoln (D-AR), Lott (R-MS), Lugar (R-IN),
Martinez (R-FL), McConnell (R-KY), Santorum (R-PA), Schumer (D-
NY), Sessions (R-PA), Snowe (R-ME), Sununu (R-NH), Thune (R-
SD), Vitter (R-LA), and Voinovich (R-OH) joined as cosponsors
to the bill. On February 3, 2005, the Senate Judiciary
Committee reported S. 5 favorably, without amendments.
II. Vote on the Committee
Pursuant to paragraph 7 of rule XXVI of the Standing Rules
of the Senate, each Committee is to announce the result of
rollcall votes taken in any meeting of the Committee on any
measure of amendment. The Senate Judiciary Committee, with a
quorum present, met on February 3, 2005 to mark up S. 5. The
Committee rejected one amendment. The following rollcall votes
occurred on S. 5.
A Leahy amendment that would provide for an increase of
federal judges' salaries in the amount of 16.5% of their
current salaries (rounded to the nearest $100).
YEAS NAYS
Leahy Hatch
Kennedy (Proxy) Grassley
Biden Kyl
Feingold DeWine
Durbin Sessions
Graham
Cornyn
Brownback
Coburn
Kohl
Feinstein
Schumer
Specter
Motion to report favorably S. 5. The motion was approved by
13 yays to 5 nays.
YEAS NAYS
Hatch Leahy
Grassley Kennedy (Proxy)
Kyl Biden
DeWine Feingold
Sessions
Graham
Cornyn
Brownback
Coburn
Kohl
Feinstein
Schumer
Specter Durbin
III. Purposes
By now, there should be little debate about the numerous
problems with our current class action system. A mounting stack
of evidence reviewed by the Committee demonstrates that abuses
are undermining the rights of both plaintiffs and defendants.
One key reason for these problems is that most class actions
are currently adjudicated in state courts, where the governing
rules are applied inconsistently (frequently in a manner that
contravenes basic fairness and due process considerations) and
where there is often inadequate supervision over litigation
procedures and proposed settlements. The problem of
inconsistent and inadequate judicial involvement is exacerbated
in class actions because the lawyers who bring the lawsuits
effectively control the litigation; their clients--the injured
class members--typically are not consulted about what they wish
to achieve in the litigation and how they wish it to proceed.
In short, the clients are marginally relevant at best. This
stands in stark contrast to the designed purpose of class
actions. Class actions were designed to provide a mechanism by
which persons, whose injuries are not large enough to make
pursuing their individual claims in the court system cost
efficient, are able to bind together with persons suffering the
same harm and seek redress for their injuries. As such, class
actions are a valuable tool in our jurisprudential system.
However, they are only beneficial when the class members are
kept a priority throughout the process.
To make matters worse, current law enables lawyers to
``game'' the procedural rules and keep nationwide or multi-
state class actions in state courts whose judges have
reputations for readily certifying classes and approving
settlements without regard to class member interests. In this
environment, consumers are the big losers: In too many cases,
state court judges are readily approving class action
settlements that offer little--if any--meaningful recovery to
the class members and simply transfer money from corporations
to class counsel. Often, the settlement notices in such cases
are so confusing that the plaintiff class members do not
understand what--if anything--the settlement offers or how they
can opt out of it. Multiple class action cases purporting to
assert the same claims on behalf of the same people often
proceed simultaneously in different state courts, causing
judicial inefficiencies and promoting collusive activity.
Finally, many state courts freely issue rulings in class action
cases that have nationwide ramifications, sometimes overturning
well-established laws and policies of other jurisdictions.
The Class Action Fairness Act of 2005 is a modest, balanced
step that would address some of the most egregious problems in
class action practice. The Committee emphasizes, however, that
the Act is not intended to be a ``panacea'' that will correct
all class action abuses.
The Act has three key components.
First, S. 5 includes a consumer class action bill of
rights, with multiple components. One element prohibits federal
courts from approving coupon or ``net loss'' settlements
without making written findings that such settlements benefit
the class members. Another element specifies the methods for
calculating attorneys' fees in class settlements in which
coupons constitute all or part of the relief afforded to
claimants to ensure that such fee awards are consistent with
the benefits afforded class members or the amount of real work
that the class counsel have performed in connection with the
litigation. Yet another element of the bill of rights provides
an additional mechanism to safeguard plaintiff class members'
rights by requiring that notice of class action settlements be
sent to appropriate state and federal officials, so that they
may voice concerns if they believe that the class action
settlement is not in the best interest of their citizens.
Second, S. 5 corrects a flaw in the current diversity
jurisdiction statute (28 U.S.C. Sec. 1332) that prevents most
interstate class actions from being adjudicated in federal
courts. One of the primary historical reasons for diversity
jurisdiction ``is the reassurance of fairness and competence
that a federal court can supply to an out-of-state defendant
facing suit in state court.'' \1\ Because interstate class
actions typically involve more people, more money, and more
interstate commerce ramifications than any other type of
lawsuit, the Committee firmly believes that such cases properly
belong in federal court. To that end, this bill (a) amends
section 1332 to allow federal courts to hear more interstate
class actions on a diversity jurisdiction basis, and (b)
modifies the federal removal statutes to ensure that qualifying
interstate class actions initially brought in state courts may
be heard by federal courts if any of the defendants so desire.
Thus, S. 5 makes it harder for plaintiffs' counsel to ``game
the system'' by trying to defeat diversity jurisdiction,
creates efficiencies in the judicial system by allowing
overlapping and ``copycat'' cases to be consolidated in a
single federal court, places the determination of more
interstate class action lawsuits in the proper forum--the
federal courts.
---------------------------------------------------------------------------
\1\ Davis v. Carl Cannon Chevrolet-Olds, Inc. 182. F.3d 792, 797
(11th Cir. 1999).
---------------------------------------------------------------------------
Third, S. 5 directs the Judicial Conference of the United
States to conduct a review of class action settlements and
attorneys' fees and to present Congress with recommendations
for ensuring that attorneys' fees are determined in a fair and
reasonable way. This provision will help address the problem of
excessive attorneys' fees and will facilitate legislative
oversight of the Judicial Conference's efforts in this area.
IV. Background and Need for Legislation
As set forth in Article III of the Constitution,\2\ the
Framers established diversity jurisdiction to ensure fairness
for all parties in litigation involving persons from multiple
jurisdictions, particularly cases in which defendants from one
state are sued in the local courts of another state. Interstate
class actions which often involve millions of parties from
numerous states--present the precise concerns that diversity
jurisdiction was designed to prevent: frequently in such cases,
there appears to be state court provincialism against out-of-
state defendants or a judicial failure to recognize the
interests of other states in the litigation. Yet, because of a
technical glitch in the diversity jurisdiction statute (28
U.S.C. Sec. 1332), such cases are usually excluded from federal
court. This glitch is not surprising given that class actions
as we now know them did not exist when the statute's concept
was crafted in the late 1700s.
---------------------------------------------------------------------------
\2\ In the words of Article III, ``[t]he judicial power shall
extend to * * * controversies in between citizens of different
states.''
---------------------------------------------------------------------------
This Committee believes that the current diversity and
removal standards as applied in interstate class actions have
facilitated a parade of abuses, and are thwarting the
underlying purpose ofthe constitutional requirement of
diversity jurisdiction. S. 5 addresses these concerns by
establishing ``balanced diversity'' a rule allowing a larger
number of class actions into federal courts, while continuing
to preserve primary state court jurisdiction over primarily
local matters.
A. A Brief History of Class Actions
Although class actions have some roots in common law, the
general concept was first codified in 1849, when several states
adopted the Field Code.\3\ To successfully plead and prosecute
class actions, the Field Code merely required that numerous
parties demonstrate a common interest in law or fact.
---------------------------------------------------------------------------
\3\ See Newberg on Class Actions 3d Sec. Sec. 13-14 to 13-17
(1997).
---------------------------------------------------------------------------
Rule 23 of the Federal Rules of Civil Procedure, the rule
governing federal court class actions, was initially adopted in
1938.\4\ However, the concept of class actions that are a
familiar part of today's legal landscape did not arise until
1966, when Rule 23 was substantially amended to expand the
availability of the device. Under Rule 23, a class action can
be brought in federal court if (1) the class is so numerous
that joinder of all members is impracticable; (2) there are
questions of law or fact common to the class; (3) the claims or
defenses of the representative parties are typical of those of
the class; and (4) the representative parties will fairly and
adequately protect the interests of the class. In addition, a
proponent must show that the proposed class meets one of three
additional requirements set forth in Rule 23(b). For example,
for a Rule 23(b)(3) damages class actions to be certified, a
proponent must show that ``the questions of law or fact common
to the members of the class predominate over any questions
affecting only individual members, and that a class action is
superior to other available methods for the fair and efficient
adjudication of the controversy.'' \5\
---------------------------------------------------------------------------
\4\ For a more comprehensive history of Rule 23 see e.g., The Class
Action Fairness Act of 1999: Hearings on S. 353 Before the Subcomm. on
Administrative Oversight and the Courts of the Senate Comm. of the
Judiciary, 106th Cong. (1999) (hereinafter ``Hearings on S. 353''),
Prepared Statement of John P. Frank.
\5\ Fed. R. Civ. P. 23(b)(3). Alternatively for a Rule 23(b)(1)
class, the class proponent must show that the prosecution of separate
actions by or against individual members of the class would create a
risk of either (i) inconsistent or varying adjudication which would
establish incompatible standards of conduct for the party opposing the
class or (ii) adjudications which, as a practical matter, would be
dispositive of the interests of the other members not parties to the
adjudications or which would substantially impair or impede their
ability to protect their ability to protect their interests. To obtain
certification of a Rule 23(b)(2) class, the proponent is required to
show that the party opposing the class has acted or refused to act on
grounds generally applicable to the class, thereby making appropriate
final injunctive relief or corresponding declaratory relief with
respect to the class as a whole.
---------------------------------------------------------------------------
As originally envisioned, class action lawsuits were to be
primarily a tool for civil rights litigants seeking injunctions
in discrimination cases.\6\ Prof. John P. Frank, a member of
the 1966 Advisory Committee on Civil Rules that proposed
amending Rule 23 to its current form, testified that those who
wrote the new class action rule thought it would rarely (if
ever) apply to product liability or mass torts cases.\7\ In the
1980s, however, some plaintiffs' lawyers successfully persuaded
judges to expand class actions to the area of mass torts.\8\
These courts began to expand the types of claims they were
willing to certify as class actions because they feared that
the large number of individual mass tort cases could slow or
stop the judicial system.\9\ Thus, class actions have evolved
from their original primary purpose--to counter civil rights
abuses--and have become a common tool for plaintiffs' attorneys
bringing personal injury or product liability claims. Yet,
while the landscape of class actions has changed dramatically,
the procedural rules regarding which courts can hear class
actions, and, consequently, which procedural law will apply to
such cases, generally have remained the same since 1966.
---------------------------------------------------------------------------
\6\ See Hearings on S. 353, Prepared Statement of John P. Frank
(``If there was a single, undoubted goal of the committee, the
energizing force which motivated the whole rule, it was the firm
determination to create a class action system which could deal with
civil rights and, explicitly, segregation.'').
\7\ Administrative Office of the U.S. Courts, Working Papers of the
Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule
23 (Vol. 2) (``Advisory Committee Working Papers''), at 260 (1997).
Prof. Frank passed away late in 2002. The only surviving member of the
1966 Advisory Committee--Hon. William T. Coleman, Jr.--has testified to
a similar effect Id. (Vol. 3), 11/22/96 Public Hearing Tr. at 204 (``I
assure you that what the courts have done with respect to Rule 23(b)(3)
is far beyond what we * * * ever intended. To the extent that there's
difficulty [with class actions, it] is not because of anything that was
drafted in 1966, but [because] of how the rule has been handled since
that time.'').
\8\ See John C. Coffee, Jr., Class Wars: The Dilemma of the Mass
Tort Class Action, 95 Colum. L. Rev. 1343, 1358 (1995).
\9\ Id. at 1356-58, 1363-64.
---------------------------------------------------------------------------
B. Federal Diversity Jurisdiction and Removal Provisions
1. The Basics of Diversity Jurisdiction
The Constitution extends federal court jurisdiction to
cases of a distinctly federal character--for instance, cases
raising issues under the Constitution or federal statutes, or
cases involving the federal government as a party--and
generally leaves to state courts the adjudication of local
questions arising under state law. However, the Constitution
specifically extends federal jurisdiction to encompass one
category of cases involving issues of state law: ``diversity''
cases, or suits ``between Citizens of different States.'' \10\
---------------------------------------------------------------------------
\10\ U.S. Const. art. III, sec. 2.
---------------------------------------------------------------------------
According to the Framers, the primary purpose of diversity
jurisdiction was to protect citizens in one state from the
injustice that might result if they were forced to litigate in
out-of-state courts.\11\ Quoting James Madison, Judge Henry
Friendly explained that diversity jurisdiction is essential to
a strong union because it ``may happen that a strong prejudice
may arise in some state against the citizens of others, who may
have claims against them.'' \12\ Justice Frankfurter expressed
a similar understanding of Madison's concerns: ``It was
believed that, consciously or otherwise, the courts of a state
may favor their own citizens. Bias against outsiders may become
embedded in a judgment of the state court and yet not be
sufficiently apparent to be made the basis of a federal
claim.'' \13\
---------------------------------------------------------------------------
\11\ See Pease v. Peck, 59 U.S. (18 How) 518, 520 (1856) (``The
theory upon which jurisdiction is conferred on the court of the United
States, in controversies between citizens of different States, has its
foundation in the supposition that, possibly, the State tribunal might
not be impartial between their own citizens and foreigners.''); see
also Martin v. Hunter's Lessee, 14 U.S. (1 Wheat) 304, 347 (1816); Bank
of the United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87 (1809);
Barrow S.S. Co. v. Kane, 170 U.S. 100, 111 (1898) (``The object of the
provisions of the constitution and statutes of the United States in
conferring upon the circuit courts of the United States jurisdiction of
controversies between citizens of different States of the Union * * *
was to secure a tribunal presumed to be more impartial than a court of
the state in which one litigant resides.''); The Federalist No. 80, at
537-38 (Alexander Hamilton) (Jacob E. Cooke, ed. 1961) (``In order to
[ensure] the inviolable maintenance of that equality of privileges and
immunities to which citizens of the union will be entitled, the
national judiciary ought to preside in all cases in which one state or
its citizens are opposed to another state or its citizens. To secure
the full effect of so fundamental a provision against all evasion and
subterfuge, it is necessary that its construction should be committed
to that tribunal which, having no local attachments, will be likely to
be impartial between the different states and their citizens, and
which, owing its official existence to the union, will never be likely
to feel any bias inauspicious to the principles on which it is
founded.'')
\12\ H. J. Friendly, The Historic Basis of Diversity Jurisdiction,
41 Harv. L. Rev. 483, 492-93 (1928).
\13\ Burford v. Sun Oil Co., 319 U.S. 315, 326 (1943) (Frankfurter,
J., dissenting).
---------------------------------------------------------------------------
In addition to protecting individual litigants, diversity
jurisdiction has two other important purposes. In testimony
several years ago before the Subcommittee on Administrative
Oversight and the Courts, Prof. E. Donald Elliott of the Yale
Law School expressed the view that diversity jurisdiction was
designed not only to protect against actual discrimination, but
also ``to shore up confidence in the judicial system by
preventing even the appearance of discrimination in favor of
local residents.'' \14\ In addition, several legal scholars
have noted that the Framers were concerned that state courts
might discriminate against interstate businesses and commercial
activities, and thus viewed diversity jurisdiction as a means
of ensuring the protection of interstate commerce.\15\ As
former Acting Solicitor General Walter Dellinger testified
before the Committee, ``diversity jurisdiction has served to
guarantee that parties of different state citizenship have a
means of resolving their legal differences on a level playing
field in a manner that nurtures interstate commerce.'' \16\
Both of these concerns--judicial integrity and interstate
commerce--are strongly implicated by class actions.
---------------------------------------------------------------------------
\14\ Hearings on S. 353, Prepared Statement of E. Donald Elliott;
see also, Adrienne J. Marsh, Diversity Jurisdiction: Scapegoat of
Overcrowded Federal Courts, 48 Brooklyn L. Rev. 197, 201 (1989).
\15\ See generally John P. Frank, Historical Bases of the Federal
Judicial System, 13 Law & Contemp. Probs. 3, 22-28 (1948); Friendly,
supra n. 12.
\16\ See Class Action Litigation: Hearing on Class Actions Before
the Senate Comm. on the Judiciary, 107th Cong. (2002) (hereinafter
``Hearing on Class Actions''), Prepared Statement of Walter E.
Dellinger, III.
---------------------------------------------------------------------------
Over the years since the First Congress enacted provisions
in the Judiciary Act of 1789 setting forth the parameters of
federal diversity jurisdiction, two statutory limitations on
that jurisdiction have been constants. The first is the
``amount in controversy'' requirement (currently $75,000),
which Congress enacted in order to ensure that federal
diversity jurisdiction extends only to non-trivial state-law
cases.\17\ The second is the ``complete diversity''
requirement, a rule that federal jurisdiction lies only when
all plaintiffs are diverse as to all defendants.\18\ It is
important to recognize that these procedural limitations
regarding interstate class actions were policy decisions, not
constitutional ones. In fact, the U.S. Supreme Court has
repeatedly acknowledged that the complete diversity and minimum
amount-in-controversy requirements are political decisions not
mandated by the Constitution.\19\ Indeed, as Prof. Dellinger
noted in testimony before this Committee, class action
legislation expanding federal jurisdiction over class actions
``would fulfill the intentions of the Framers because the
rationales that underlie the diversity jurisdiction concept
apply with equal--if not greater--force to interstate class
actions.'' \20\ It is therefore the prerogative of Congress to
modify these technical requirements as it deems appropriate.
---------------------------------------------------------------------------
\17\ See 28 U.S.C. Sec. 1332(a).
\18\ See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806).
\19\ See, e.g., Newman-Green Inc. v. Alfonzo-Larrain, 490 U.S. 826,
829 n.1 (1989) (noting that ``[t]he complete diversity requirement is
based on the diversity statute, not Article III of the
Constitution.''); Owen Equip. & Co. v. Kroger, 437 U.S. 365, 373 n. 13
(1978) (to the same effect).
\20\ See Hearing on Class Actions, Prepared Statement of Walter E.
Dellinger, III.
---------------------------------------------------------------------------
2. Removal: How Diversity Cases Arrive in Federal Court
The concept of ``removing'' cases from state courts to
federal courts is based largely on the same core premise as
diversity jursidiction--i.e., that an out-of-state defendant in
a state court proceeding should have access to an even-handed
federal forum.\21\ The general removal statute, 28 U.S.C.
Sec. 1441(a), provides that any civil action brought in a state
court may be removed by the defendant(s) to federal court if
the claim could have originally been brought in federal court.
In other words, so long as a federal district court could
exercise original jurisdiction over a claim, a defendant may
remove the case to federal court.
---------------------------------------------------------------------------
\21\ See David P. Currie, Federal Jurisdiction 140 (3d ed. 1990).
---------------------------------------------------------------------------
Section 1446(b) of Title 28 outlines the procedure for
removal. Under this provision, a defendant must file papers
seeking removal to federal court within 30 days after receiving
a copy of the initial pleading (or service of summons if a
pleading has been filed in court and is not required to be
served on the defendant). If the original complaint was not
removable (or if it could not be determined from the face of
the complaint that it was removable), but the plaintiff
subsequently amends the pleadings in such a way that removal
becomes proper, then the notice of removal must be filed within
30 days of receipt by the defendant of ``a copy of an amended
pleading, motion, order, or other paper from which it may first
be ascertained that the case [is removable].'' \22\ The
Committee notes that the purpose of this provision is to
prevent plaintiffs from evading federal jurisdiction by hiding
the true nature of their case. Thus, the Committee favors the
broad interpretation of ``other paper'' adopted by some courts
to include deposition transcripts, discovery responses,
settlement offers and other documents or occurrences that
reveal the removability of a case.\23\
---------------------------------------------------------------------------
\22\ 28 U.S.C. Sec. 1446(b).
\23\ A broad interpretation of ``other paper'' is ``consistent with
the purpose of the removal statute to encourage prompt resort to
federal court when a defendant first learns that the plaintiff is
alleging a federal claim * * * [and] discourages disingenuous pleading
by plaintiffs in state court to avoid removal.'' Addo v. Globe Life &
Accident Ins. Co., 230 F.3d 759, 762 (5th Cir. 2000) (holding a post-
complaint settlement letter qualifies as ``other paper'' under 28
U.S.C. 1446(b)). See also S.W.S. Erectors v. Infax, Inc., 72 F.3d 489,
494 (5th Cir. 1996) (holding that deposition testimony qualifies as
``other paper'' under 28 U.S.C. 1446(b)).
---------------------------------------------------------------------------
C. How Diversity Jurisdiction and Removal Statutes Are Abused
The current rules governing federal jurisdiction have the
unintended consequence of keeping most class actions out of
federal court, even though most class actions are precisely the
type of case for which diversity jurisdiction was created.\24\
In addition, current law enables plaintiffs' lawyers who prefer
to litigate in state courts to easily ``game the system'' and
avoid removal of large interstate class actions to federal
court.
---------------------------------------------------------------------------
\24\ See generally, Victor E. Schwartz, Mark A. Behrens & Leah
Lorber, Federal Courts Should Decide Interstate Class Actions: A Call
for Federal Class Action Diversity Jurisdiction Reform, 37 Harv. J.
Legis. 485 (Summer 2000).
---------------------------------------------------------------------------
This gaming problem exists for two reasons. The first is
the ``complete diversity'' requirement. Although the Supreme
Court has held that only the named plaintiffs' citizenship
should be considered for purposes of determining if the parties
to a class action are diverse, the ``complete'' diversity rule
still mandates that all named plaintiffs must be citizens of
different states from all the defendants.\25\ In interstate
class actions, plaintiffs' counsel frequently and purposely
evade federal jurisdiction by adding named plaintiffs or
defendants simply based on their state of citizenship in order
to defeat complete diversity. One witness at the Committee's
2002 hearing on class actions testified that her drug store was
named as a defendant in ``hundreds of lawsuits'' so that ``the
lawyers could keep the case in a place known for its lawsuit-
friendly environment.'' \26\ If all it takes to keep a class
action in state court is to name one local retailer, it is no
surprise that few interstate class actions meet the complete
diversity requirement.
---------------------------------------------------------------------------
\25\ See Snyder v. Harris, 394 U.S. 332 (1969).
\26\ See Hearing on Class Actions, Prepared Statement of Hilda
Bankston.
---------------------------------------------------------------------------
The second problem is created by the amount-in-controversy
requirement. In interpreting 28 U.S.C. Sec. 1332(a), some
federal courts of appeals, relying on a 1974 Supreme Court
decision,\27\ have held that the amount-in-controversy
requirement is normally met in class actions only if each of
the proposed class members individually seeks damages in excess
of the statutory minimum.\28\ That means federal courts can
often only hear class actions in which each potential class
member claims damages in excess of $75,000.\29\ The Committee
believes that requiring each plaintiff to reach the $75,000
mark makes little sense in the class action context. After all,
class actions frequently involve tens of millions of dollars
even though each individual plaintiff's claims are far less
than that. Moreover, class action lawyers typically misuse the
jurisdictional threshold to keep their cases out of federal
court. For example, class action complaints often include a
provision stating that no class member will seek more than
$75,000 in relief, even though they can simply amend their
complaints after the removal to seek more relief and even
though the class action seeks millions of dollars in the
aggregate. Under current law, that is frequently enough to keep
a major class action in state court.
---------------------------------------------------------------------------
\27\ See Zahn v. International Paper Co., 414 U.S. 291 (1973).
\28\ See Trimble v. Asarco, Inc., 232 F.3d 946 (8th Cir. 2000);
Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214 (3d Cir.
1999); Leonhardt v. Western Sugar Co., 160 F.3d 631 (10th Cir. 1998).
\29\ Other federal courts of appeals have held that for a class
action to be heard in federal court only one or more named plaintiffs
must have claims exceeding $75,000. See, e.g., Rosmer v. Pfizer, Inc.,
263 F.3d 110 (4th Cir. 2001); Gibson v. Chrysler Corp., 261 F. 3d 927
(9th Cir. 2001); Stromberg Metal Works Inc. v. Press Mechanical Inc.,
77 F.3d 928 (7th Cir. 2000); In re Abbott Labs., Inc., 51 F.3d 524 (5th
Cir. 1995), aff'd by an equally divided Court, 529 U.S. 333 (2000);
Allapattah Servs. v. Exxon Corp., 333 F.3d 1248 (11th Cir. 2003), cert.
granted, 125 S. Ct. 317 (2004). In the view of these courts, the value
of the claims of the other class members is irrelevant--they are deemed
to be part of the class as a matter of supplemental jurisdiction. The
Committee stresses, however, that even in those Circuits following this
rule, relatively few class actions find their way into federal court
because plaintiffs offer named plaintiffs who do not have $75,000
claims or name a non-diverse plaintiff or defendant in order to prevent
removal of the case to federal court.
---------------------------------------------------------------------------
This leads to the nonsensical result under which a citizen
can bring a ``federal case'' by claiming $75,001 in damages for
a simple slip-and-fall case against a party from another state,
while a class action involving 25 million people living in all
fifty states and alleging claims against a manufacturer that
are collectively worth $15 billion must usually be heard in
state court (because each individual class member's claim is
for less than $75,000). Put another way, under the current
jurisdictional rules, federal courts can assert diversity
jurisdiction over a typical state law claim arising out of an
auto accident between a driver from one state and a driver from
another, or a typical trespass claim involving a trespasser
from one state and a property owner from another, but they
cannot assert jurisdiction over claims encompassing large-
scale, interstate class actions involving thousands of
plaintiffs from multiple states, defendants from many states,
the laws of several states, and hundreds of millions of
dollars--cases that have obvious and significant implications
for the national economy.
There is a growing chorus of authoritative sources
declaring that something is badly amiss with the manner in
which federal diversity jurisdictional requirements are applied
to class actions:
The leading federal civil procedure law treatise
has noted: ``The traditional principles [regarding federal
diversity jurisdiction over class actions] have evolved
haphazardly and with little reasoning. They serve no apparent
purpose.'' \30\
---------------------------------------------------------------------------
\30\ 14B Charles A. Wright, et al., Federal Practice and Procedure
Sec. 3704, at 127 (3d ed. 1998).
---------------------------------------------------------------------------
In a recent Minnesota state appellate court
decision upholding a grant of class certification, a concurring
judge noted that the nationwide class action before it was a
``poster child for national class action reform. We have here a
Minnesota [state] district court, applying a New Jersey
consumer fraud statute to a nationwide class of plaintiffs,
with few of those plaintiffs residing in New Jersey. And, it is
probably a fair assumption that the legislative authors of the
New Jersey consumer protection scheme did not have in mind
midwestern farmers purchasing agricultural chemicals as the
protected class * * * This is not a recipe for uniformity or
consistency, it is fair neither to claimants nor defendants and
it is long past time for national policy makers to address
class action procedures.\31\
---------------------------------------------------------------------------
\31\ Peterson v. BASF Corp., 657 N.W.2d 853, 875 (Minn. Ct. App.
2003), aff'd, 675 N.W. 2d 57 (Minn. 2004).
---------------------------------------------------------------------------
The U.S. Court of Appeals for the Eleventh Circuit
apologized for sending an interstate class action back to state
court, noting that ``an important historical justification for
diversity jurisdiction is the reassurance of fairness and
competence that a federal court can supply to an out-of-state
defendant facing suit in state court.'' Observing that the out-
of-state defendant in that case was confronting ``a state court
system [prone to] produce[] gigantic awards against out-of-
state corporate defendants,'' the court stated that ``[o]ne
would think that this case is exactly what those who espouse
the historical justification for [diversity jurisdiction] would
have in mind * * *'' \32\
---------------------------------------------------------------------------
\32\ Davis v. Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 797 (11th
Cir. 1999).
---------------------------------------------------------------------------
In that same case, Judge John Nangle, the former
chairman of the Judicial Panel for Multidistrict Litigation,
concurred: ``Plaintiffs' attorneys are increasingly filing
nationwide class actions in various state courts, carefully
crafting language * * * to avoid * * * the federal courts.
Existing federal precedent * * * [permits] this practice * * *,
although most of these cases * * * will be disposed of through
`coupon' or `paper' settlements * * * virtually always
accompanied by munificent grants of or requests for attorneys'
fees for class counsel * * * [T]his judge is of the opinion
that the present [jurisdictional rules] do[] not accommodate
the reality of modern class litigation and settlements.'' \33\
---------------------------------------------------------------------------
\33\ Id. at 798.
---------------------------------------------------------------------------
In another case, Judge Anthony Scirica (formerly the chair
of the Judicial Conference's Standing Committee on Rules and
Procedure and now the Chief Judge of the U.S. Court of Appeals
for the Third Circuit) observed that although ``national
(interstate) class actions are the paradigm for federal
diversity jurisdiction because * * * they implicate interstate
commerce, foreclose discrimination by a local state, and tend
to guard against any bias against interstate enterprises, * * *
the current jurisdictional statutes [put] such class actions *
* * beyond the reach of the federal courts.'' \34\
---------------------------------------------------------------------------
\34\ In re Prudential Ins. Co. America Sales Practice Litig., 148
F.3d 283, 305 (3d Cir. 1998).
---------------------------------------------------------------------------
And even though the Judicial Conference of the
United States has historically opposed any expansion of federal
jurisdiction over class actions, the Conference has more
recently signaled a significant shift in position. In a March
26, 2003 letter to the Committee,\35\ the Conference
acknowledged ``current problems with class action litigation.''
\36\ Further, in that letter, the Conference for the first time
``recognize[d] that the use of [expanded] diversity
jurisdiction may be appropriate to the maintenance of
significant multi-state class action litigation in the federal
courts.'' \37\
---------------------------------------------------------------------------
\35\ Letter to then Chairman Orrin G. Hatch, Comm. on the
Judiciary, U.S. Senate, from Leonidas Ralph Mecham, Secretary, Judicial
Conference of the United States (dated March 26, 2003).
\36\ Id. at 2.
\37\ Id.
---------------------------------------------------------------------------
The Committee notes that several congressional hearing
witnesses (including former Carter Administration Attorney
General Griffin Bell and Clinton Administration Solicitor
General Walter E. Dellinger) and other legal experts agree that
if Congress were to draft an entirely new federal diversity
jurisdiction statute and start over in deciding which cases
should be subject to federal diversity jurisdiction Congress
likely would conclude that interstate class actions are among
the cases that most warrant access to the federal courts
because they involve the most people, put the most money in
controversy, and have the greatest implications for interstate
commerce.\38\ As Prof. Dellinger noted in his testimony before
this Committee, ``the rationales that underlie the diversity
jurisdiction concept apply with equal--if not greater--force to
interstate class actions.'' \39\
---------------------------------------------------------------------------
\38\ See generally Hearing on Class Actions; Hearings on S. 353;
Hearing on H.R. 1875.
\39\ See Hearing on Class Actions, Prepared Statement of Walter E.
Dellinger III.
---------------------------------------------------------------------------
D. Other Abuses of the Class Action Rules
The ability of plaintiffs' lawyers to evade federal
diversity jurisdiction has helped spur a dramatic increase in
the number of class actions litigated in state courts--an
increase that is stretching the resources of the state court
systems. In testimony to the Subcommittee on Administrative
Oversight and the Courts, Prof. E. Donald Elliott pointed out
that the flood of class actions in our state courts is too well
documented to warrant significant discussion, much less
debate.\40\ According to studies, federal class action filings
over the past ten years have increased by more than 300
percent. At the same time, class action filings in state courts
have grown more than three times faster--by more than 1,000
percent.\41\
---------------------------------------------------------------------------
\40\ Hearings on S. 353, Prepared Statement of E. Donald Elliott.
\41\ See Analysis: Class Action Litigation--A Federalist Society
Survey, Class Action Watch at 5 (Vol. 1, No. 1 1998); Deborah Hensler,
et al., Preliminary Results of the RAND Study of Class Action
Litigation 15 (May 15, 1997); see also Advisory Committee Working
Papers (Vol. 1) at ix-x (May 1, 1997) (memorandum of Judge Paul V.
Niemeyer to members of the Advisory Committee on Civil Rules).
---------------------------------------------------------------------------
Notably, many of these cases are being filed in improbable
jurisdictions. A study conducted in three venues with
reputations as hotbeds for class action activity found
exponential increases in the numbers of class actions filed in
recent years. For example, in the Circuit Court of Madison
County, Illinois, a mostly rural county that covers 725 square
miles and is home to less than one percent of the U.S.
population, the number of class actions filed annually grew
from 2 in 1998 to 39 in 2000--an increase of 3,650 percent.\42\
A follow-up study found that the number of class actions filed
in the county continued to grow dramatically in 2001 and
2002.\43\ And in 2003, class action filings there catapulted to
106, up more than 5,000 percent since 1998.\44\ According to
the president of the Illinois Trial Lawyers Association (an
association representing plaintiffs' lawyers), the reason for
the 2003 jump in filings was an effort to beat this
legislation; plaintiffs' lawyers were ``playing it safe'' and
rushing to get suits filed in case the legislation was enacted
in 2004.\45\ The same studies also found that most of the class
actions brought in Madison County and other magnet courts had
little--if anything--to do with the venues where they were
brought.\46\
---------------------------------------------------------------------------
\42\ See John H. Beisner and Jessica Davidson Miller, They're
Making A Federal Case Out Of It * * * In State Court, 25 Harv. J. L. &
Pub. Pol'y 1 (2001) (``Federal Case'').
\43\ See John H. Beisner and Jessica Davidson Miller, Class Action
Magnet Courts: The Allure Intensifies, 4 BNA Class Action Litig. R. 58
(Jan. 24, 2003).
\44\ Trisha L. Howard, Class Actions Set Record Last Year In
Madison County/ Possible Change In Law Prompted Rush In Filing, St.
Louis Post Dispatch, Jan. 11, 2004.
\45\ Id.
\46\ See generally Federal Case.
---------------------------------------------------------------------------
The reason for this dramatic increase in state court class
actions cannot be found in variations in class action rules;
after all, the rules governing the decision whether cases may
proceed as class actions are basically the same in federal and
state courts--and of course, they are the same within states,
i.e., the same in ``magnet'' jurisdictions such as Madison
County and St. Clair County, Illinois, as they are in more
easily accessible jurisdictions such as Cook County, Illinois.
In fact, thirty-six states have adopted the basic federal class
action rule (Rule 23), sometimes with minor revisions. Of the
remaining states, most have rules that are guided by federal
court class action policy and contain similar requirements.
(Two states, Mississippi and West Virginia, do not have rules
or statutes authorizing class actions.) Thus, there are no wide
variations between federal and state court class action
policies.
The Committee finds, however, that one reason for the
dramatic explosion of class actions in state courts is that
some state court judges are less careful than their federal
court counterparts about applying the procedural requirements
that govern class actions. In particular, many state court
judges are lax about following the strict requirements of Rule
23 (or the state's parallel governing rule), which are intended
to protect the due process rights of both unnamed class members
and defendants. In contrast, federal courts generally
scrutinize proposed settlements much more carefully and pay
closer attention to the procedural requirements for certifying
a matter for class treatment.\47\
---------------------------------------------------------------------------
\47\ See Hearings on S. 353, Oral Statement of Senator Charles E.
Grassley.
---------------------------------------------------------------------------
Another problem is that a large number of state courts lack
the necessary resources to supervise proposed class settlements
properly.\48\ Many state judges do not have law clerks, and the
explosion of state court class actions has simply overwhelmed
their dockets. Not surprisingly, abuses are much more likely to
occur when state court judges are unable to give class action
cases and settlements the attention they need. Federal judges,
in contrast, have access to magistrates and can appoint special
masters when they are faced with complex litigation like class
actions. Moreover, the average state court judge is assigned
1,568 new cases each year, compared to federal judges, who are
assigned, on average, fewer than 500.\49\
---------------------------------------------------------------------------
\48\ See Hearings on S. 353, Prepared Statement of Stephen G.
Morrison (``I think it is clear that the explosion of class action
filings can only be attributed to the fact that certain members of the
plaintiffs' bar have discovered that some of our state courts can be a
fertile playing field for class litigation.'').
\49\ Compare B. Ostrom, et al., Examining the Work of State Courts
12 (Court Statistics Project 2003) (``Examining the Work of State
Courts''), with Administrative Office of U.S. Courts, 2003 Federal
Court Management Statistics (2004) (``Federal Court Management'').
---------------------------------------------------------------------------
The lack of a federal forum for most interstate class
actions and the inconsistent administration of class actions in
state courts have led to several forms of abuse. First,
lawyers, not plaintiffs, may benefit most from settlements.
Second, corporate defendants are forced to settle frivolous
claims to avoid expensive litigation, thus driving up consumer
prices. Third, constitutional due process rights are often
ignored in class actions. Fourth, expensive and predatory copy-
cat cases force defendants to litigate the same case in
multiple jurisdictions, driving up consumer costs.
1. Lawyers receive disproportionate shares of settlements
The first such abuse involves settlements in which the
attorneys receive excessive attorneys' fees with little or no
recovery for the class members themselves. In the now infamous
Bank of Boston class action settlement,\50\ or example, the
defendant bank was accused of over-collecting escrow monies
from homeowners and profiting from the interest. The
settlement, approved by an Alabama state court, awarded up to
$8.76 each to individual class members, while the class counsel
got more than $8.5 million in fees. To make matters worse, the
fees were simply debited directly from individual class
members' escrow accounts leaving many of them worse off than
they were before the suit. In testimony before the Subcommittee
on Administrative Oversight and the Courts, class member Martha
Preston recounted how she received $4 from the settlement, but
was charged a mysterious $80 ``miscellaneous deduction,'' which
she later learned was an expense used to pay the class lawyers'
$8.5 million settlement fee. Ms. Preston expressed her
disbelief over how ``people who were supposed to be my lawyers,
representing my interests, took my money and got away with
it.'' \51\
---------------------------------------------------------------------------
\50\ Kamilewicz v. Bank of Boston, 92 F.3d 506 (7th Cir. 1996).
\51\ Class Action Lawsuits: Examining Victim Compensation and
Attorneys' Fees: Hearings Before the Subcomm. on Administrative
Oversight and the Courts of the Senate Comm. of the Judiciary, 105th
Cong. (1997), Prepared Statement of Martha Preston.
---------------------------------------------------------------------------
A few years ago, the National Law Journal reported on
another similarly troubling state court case:
When 75-year-old Olga Heaven received some legal
papers in the mail a few weeks ago, she asked her
daughter, a lawyer, to look them over. A good thing,
too. If Ms. Heaven had misunderstood the notice or
simply thrown it away, her daughter says, she might
have been required to sell her house and property as
part of a recent class action settlement. * * * Ms.
Heaven [was] one of 60 class action plantiff
homeowners--many of them unwitting parties to the
litigation--who received a notice that a property
damage suit against a local oil refinery had settled. *
* * The unusual deal requires settling plaintiffs to
sell their homes to [the defendant refinery owner] for
two times their tax-assessed value. In addition, the
plaintiffs are required to withdraw from the lawsuit *
* * and release any property damage or personal injury
claims against [the defendant], which was accused of
polluting the area. The settlement was set up [as] a
so-called opt-out class, meaning that homeowners would
be included in the deal [and required to sell their
homes] unless they sent in responses to the notice
within 30 days. * * * The total payout by [the
defendant] could be as much as $1.1 million.
Plaintiffs' lawyers could earn as much as $200,000,
depending on how many plaintiffs participate in the
deal.\52\
---------------------------------------------------------------------------
\52\ Kansas Case In Class By Itself, National Law Journal, Mar. 15,
1999. This settlement ultimately did not proceed, but only because the
attorney daughter of one of the settlement class members happened to
read her mother's mail, as noted in the article.
---------------------------------------------------------------------------
Through several hearings over the past several years, the
Committee has become aware of numerous class action settlements
approved by state courts in which most--if not all--of the
monetary benefits went to the class counsel, rather than the
class members those attorneys were supposed to be representing.
These settlements include many so-called ``coupon settlements''
in which class members receive nothing more than promotional
coupons to purchase more products from the defendants. For
example:
A recent lawsuit involved customers who had
Firestone tires that were among those that the National Highway
Traffic Safety Administration investigated or recalled, but who
did not suffer any personal injury or property damage. After a
federal appeals court rejected class certification, plaintiffs'
counsel and Firestone negotiated a settlement, which has now
been approved by a Texas state court. Under the settlement, the
company has agreed to redesign certain tires (a move already
underway irrespective of the suit) and to develop a three-year
consumer education and awareness camp, but the members of the
class received nothing. The lawyers will receive $19
million.\53\
---------------------------------------------------------------------------
\53\ Shields et al. v. Bridgestone/Firestone Inc. et al. (No. E-
0167637, Jefferson County, Texas, 2003); Miles Moor, BFS Settles
Nationwide Class Action Suit; Tire Maker to Modify Certain Models,
Launch Education Program, Rubber & Plastics News, August 4, 2003.
---------------------------------------------------------------------------
In another state court class action settlement, in
which a cruise line was accused of collecting ``port charges''
that exceeded the amount actually paid by the defendant. Under
the terms of the settlement, the class members received $30 to
$40 discounts from another cruise line on its two- and three-
night cruises out of Port Canaveral, Florida because Premier
was no longer in business.\54\ In other words, a company that
had not even been sued and had absolutely no risk of liability
agreed to offer coupons--no doubt because they recognize that
such coupons are a promotional opportunity and not a penalty.
Attorney for the plaintiffs received $887,000 in fees, costs,
and expenses.\55\
---------------------------------------------------------------------------
\54\ Premier Cruise Lines, (No. 96-06932 CA-FN, Fla. Cir. Ct.,
Brevard County, Florida, 2003); The Law Offices of Douglas Bowdoin, for
Plaintiffs, and Todd Pittenger of Lowndes, Drosdick, Doster, Kantor &
Reed, P.A., for Defendant, Announce a Proposed Class Action Settlement,
Business Wire, Inc., July 2, 2003.
\55\ Premier Cruise Line Reaches Settlement, Mealey's Litigation
Report: Class Actions, July 17, 2003.
---------------------------------------------------------------------------
Microsoft has settled antitrust class actions in
ten states in which plaintiffs alleged that Microsoft used its
monopoly to gouge consumers. Based on the terms of the
settlement, consumers who bought Microsoft software will
receive a $5 to $10 voucher good for future purchases of
particular computer hardware or software products. To receive
the voucher, consumers must download a form from
www.microsoftproductsettlement.com/kansas and then mail it in.
To redeem the voucher, consumers must mail in the voucher, a
photocopy of an original receipt, and an original UPC code.
Half of the unclaimed settlement money will be used to donate
Microsoft products to schools. A federal judge rejected a
similar settlement in part on the ground that the school
donations were intended to inflict further injury on Apple.
Attorneys in these cases have sought hundreds of millions of
dollars in fees.\56\
---------------------------------------------------------------------------
\56\ In Re Microsoft Litigation Settlement (No. 99 CV 17089,
Johnson County, Kansas, 2003); Dan Voorhis, Here's How to Claim Your
Share of Microsoft Settlement, The Wichita Eagle, December 28, 2003.
---------------------------------------------------------------------------
Consumers in a state court class action alleged
that the beer goblets served at a Chicago restaurant chain were
misrepresented to be 12 ounces, when they held only 10.6
ounces. In settlement, the company will give away 50,000
coupons for $1 off every subsequent $5 purchase at its 22
Chicago-area restaurants.\57\ All cash from the settlement goes
to the lawyers.
---------------------------------------------------------------------------
\57\ Ross and Lambert v. Portillo's Restaurant Group, Inc. (00 Ch
13612, Circuit Court of Cook County, Illinois, Chancery Division,
2003); Judge Approves Portillo's Class Action Settlement Over
Mislabeled Beer, PR Newswire, Nov. 26, 2003.
---------------------------------------------------------------------------
To settle a state court class action alleging
deceptive pricing practices on certain products, KB Toys agreed
to hold a sale.\58\ Under the settlement agreement, the toy
retailer offered a 30 percent discount on selected products
between October 8 and October 14, 2003. According to an
independent analyst, ``KB Toys will benefit from the
settlement,'' because ``they're driving traffic.'' \59\ The
attorneys benefited too: they received all the cash--fees and
costs of $1 million.\60\
---------------------------------------------------------------------------
\58\ DeGradi v. KB Holdings, Inc. (No. 02 CH 15838, Circuit Court
of Cook County, Illinois, Chancery Division, 2003).
\59\ Betty Lin-Fisher, Shoppers Win In Suit; Customers Get a Jump
on Holidays, Akron Beacon Journal, Oct. 14, 2003.
\60\ Stephanie Zimmerman, KB Toys Settles Lawsuit Over ``Low''
Prices By Offering Discount, Chicago Sun-Times, Oct. 11,2003.
---------------------------------------------------------------------------
In a recent class action where consumers alleged
that a company was selling cribs that were unsafe for use by
infants, the class members received either a crib repair kit or
a coupon for $55 which could be used toward the future purchase
of a Dorel Juvenile Group Product.\61\ Of course, the coupon is
only valuable for consumers who plan to have another baby and
still trust the company.
---------------------------------------------------------------------------
\61\ Dorel Juvenile Group, Inc. (2003); Dorel Juvenile Group
Settles Class Action Lawsuit, PR Newswire, Oct. 6, 2003.
---------------------------------------------------------------------------
Another recent suit involved allegations that
Poland Spring water does not really come from a spring deep in
the woods of Maine. The settlement calls for discounts or free
water to Poland Spring customers over five years and
contributions of $2.75 million to charities. In addition, the
named plaintiff will receive $12,000. Plaintiffs' lawyers
received $1.35 million.\62\
---------------------------------------------------------------------------
\62\ Ramsey v. Nestle Waters North America, Inc. d/b/a Poland
Spring Water Co. (No. 03 CHK 817, Kane County, Illinois, 2003); Edward
D. Murphy, et al., Conflict and Change; Maine's Employment and Price
Levels Remained Stable Last Year, but its Economy Experienced Plenty of
Turmoil, Portland Press Herald, January 4, 2004; see also
www.noticeclass.com/springwatersettlement/LongFormNoticev2.pdf
---------------------------------------------------------------------------
Plaintiffs alleged that GameStop Corp.
misrepresented some of the video games it was selling as new,
when they had actually been previously purchased and
returned.\63\ Under the settlement, GameStop agreed to post
notices in stores stating: ``All software for video game
consoles may have been used and returned in accordance with
(the store's) return policy.'' Further, anyone who bought a
game from particular stores on specified dates, and can produce
their receipt, will receive a coupon for 5 percent off the
price of any one game. In other words, customers would receive
$1.25 off a $25 dollar game--as long as they kept receipts. The
coupon can be redeemed at retail locations, but not on the
defendant's website.\64\ Lawyers for the plaintiffs were paid
$125,000 in fees and costs.\65\
---------------------------------------------------------------------------
\63\ Chavez v. GameStop Corp. (No. CGC-02-406658, San Francisco
Superior Court, California, 2003).
\64\ Big Class Action: Settlements and Verdicts: Consumer Goods,
available at http://www.bigclassaction.com/settlements/consumer.html.
\65\ http://www.gamestop.com/gs/help/classaction.asp.
---------------------------------------------------------------------------
Plaintiffs alleged that Register.com delayed in
switching purchased domains over to their customers and
continued to display the company's ``Coming Soon'' page which
promotes the company and its advertisers. Under the settlement,
class members receive coupons to use with Register.com
(assuming they ever plan to register one of the company's
domains again). The lawyers for the class get $642,500.\66\
---------------------------------------------------------------------------
\66\ Zurakov v. Register.com. Inc. (No. 2301, N.Y. Sup. Ct., App.
Div., 2003); Tom Perrotta Panel Revives Case Over Domain Name Registry,
Internet Newsletter, May 14, 2003.
---------------------------------------------------------------------------
In a case involving customers who alleged that
they were charged excessive late fees by Blockbuster, the class
members received $1 off coupons for rentals--at the same time,
their attorneys divided up a $9.25 million fee award. Experts
have predicted that at most, only 20 percent of the class
members will redeem the coupons. The settlement allows
Blockbuster to continue its practice of charging customers for
a new rental period when they return a tape late.\67\ In this
settlement approved by a Texas state court, only the lawyers
got cash.
---------------------------------------------------------------------------
\67\ Scott v. Blockbuster Inc. (No. DI62-535, Jefferson County,
Texas, 2001); Judge OKs Blockbuster Plan On Fees, Associated Press,
Jan. 11, 2002.
---------------------------------------------------------------------------
To settle an Illinois state court class action in
which it was accused of improperly including asbestos in its
crayons, a manufacturer agreed to issue class members 75-cent
coupons toward the purchase of new crayons. The attorneys got
$600,000 in fees.
In another recent case, Food Lion settled a state
court class action filed by a consumer group by offering 28-
cent coupons to customers who held an MVP discount card between
1995 and 1998. The plaintiff class alleged that Food Lion
charged too much sales tax on discounted products purchased
with the discount card.\68\ Only the lawyers got money.
---------------------------------------------------------------------------
\68\ Attention Shoppers: Food Lion Rebate Due, Greensboro News &
Record, Feb. 25, 2002.
---------------------------------------------------------------------------
A manufacturer offered consumers who bought a
dozen Pinnacle golf balls free golf gloves. When the
manufacturer ran out of the golf gloves and substituted a set
of three free golf balls, it was hit with a class action. The
settlement provided that the manufacturer would send each class
member three more free golf balls. Meanwhile, by order of a
state court, the attorneys who brought the lawsuit received
$100,000 in fees and the persons who served as class
representatives each received $2,500.\69\
---------------------------------------------------------------------------
\69\ Enough Already With the Lawsuits, Kansas City Star, July 10,
1999.
---------------------------------------------------------------------------
Under the settlement in this state court case,
which resulted from allegations regarding changes in the
American Airlines frequent flyer program, members of the
program received vouchers good for $25 to $75 off the price of
future travel, or a similarly valued reduction in the number of
miles required for an award. American also agreed to pay the
lawyers up to $25 million in fees. One news article about the
settlement quoted travel experts saying that ``the practical
value of those discounts will be modest,'' and ``American could
end up generating enough extra revenue to more than offset the
cost of the offer.'' \70\
---------------------------------------------------------------------------
\70\ American Airlines Settles Lawsuits Over Frequent Flier
Program, Fort Worth Star-Telegram, June 22, 2000.
---------------------------------------------------------------------------
A class action alleged that certain ``zip drives''
contained a defect that sometimes caused the failure of the
drives or the zip disks. The plaintiffs' attorneys received
$4.7 million in fees, while the estimated 28 million purchasers
of an Iomega Zip drive between 1995 and March 19, 2001 received
coupons for rebate of between $5 and $40 on future purchases of
Iomega products. In addition, the settlement called for the
defendant to donate $1 million of its products to schools.\71\
Virtually all of the cash paid in this state court-approved
settlement went to lawyers.
---------------------------------------------------------------------------
\71\ Rinaldi v. Iomega Corp. (No. 98C-09-064-RRC, Delaware); Utah-
Based Tech Company Settles Lawsuit With Rebate Offer, Standard-
Examiner, Apr. 14, 2001.
---------------------------------------------------------------------------
In a suit involving port charges, a sea cruise
line agreed to give vouchers for a future cruise worth $25 to
$55 off a future cruise to 4.5 million people who sailed on its
cruises between April 19, 1992 and June 4, 1997. The vouchers
can be used for a future cruise or redeemed for cash at 15
percent or 20 percent of face value.\72\ In this state court
class action settlement, only the lawyers received cash
payments.
---------------------------------------------------------------------------
\72\ Carnival Cruise Settles Lawsuit, Florida Today, Mar. 16, 2001.
---------------------------------------------------------------------------
In a case alleging flawed television sets, Thomson
Consumer Electronics agreed to reimburse customers who had
receipts documenting repairs, to provide $50 rebates on the
purchase of future products for consumers who did not repair
their problems or did not have receipts, and to provide $25
rebates on future products to consumers who did not experience
a problem. Under the terms of the settlement approved by an
Illinois state court, the lawyers reportedly received $22
million in fees and costs.\73\ According to news reports, more
than 2,640 people opted out of the settlement; some said they
opted out because the form was complicated and others said they
opted out because the attorneys' fees were so high.\74\
---------------------------------------------------------------------------
\73\ Thomson Antes Up $100 Million Settlement, Mar. 12, 2001.
\74\ Baird v. Thomson Consumer Electronics, Inc. (No. 00-L-00761,
Madison County, Illinois); 2,640 Television Owners Tune Out Class
Action Suit, Belleville (Ill.) News-Democrat, Aug. 19, 2001.
---------------------------------------------------------------------------
In the settlement of a state court class action
involving allegations of overly aggressive fees and rates by a
Minnesota credit card company, class members received discount
coupons with a retail value of $19.95, an $8 dollar donation in
their name to the Boys and Girls Clubs of America and the right
to apply for a 9.9 percent interest credit card and to join a
promotional travel discount club. They also had the potential
to receive between $10 and $70 in cash. The company agreed to
change its practices, and the lawyers received $5.6 million in
fees.\75\
---------------------------------------------------------------------------
\75\ Fischl v. Direct Merchants Credit Card Bank, N.A. (CT 00-
007129, Hennepin County, Minnesota); Soft Firm: Too Often, The SF Law
Firm Of Lieff, Cabraser, Heimann & Bernstein Strikes Settlements That
Give The Firm Millions Of Dollars In Legal Fees--And Its Class Action
Clients Too Little, SF Weekly, May 29, 2002.
---------------------------------------------------------------------------
In one state court class action involving faulty
pipes, lawyers for a group of Alabama plaintiffs received more
than $38.4 million in fees, and lawyers for a class of
Tennessee plaintiffs received $45 million, or the equivalent of
about $2,000 an hour. In contrast, the homeowners only received
8 percent rebates toward new plumbing--and to get those
rebates, they had to first prove that they had suffered leaks
and then go out and buy a new system.\76\ The money in the
settlement flowed primarily to class counsel.
---------------------------------------------------------------------------
\76\ See Richard B. Schmitt, Leaky System: Suits Over Plastic Pipe
Finally Bring Relief, Especially for Lawyers, Wall St. J., Nov. 20,
1995, at A1.
---------------------------------------------------------------------------
In March 1995, a computer manufacturer settled
multiple state court class actions alleging a chip flaw that
would arise only once in 27,000 years for the average
spreadsheet user. It essentially agreed to do what it was
already doing: offer free replacements, maintain service
centers, operate toll-free phone numbers, and provide
diagnostic computer programs. Meanwhile, counsel received $4.27
million in fees.\77\
---------------------------------------------------------------------------
\77\ See The (San Francisco) Recorder, Jan. 4, 1996.
---------------------------------------------------------------------------
In a group of state court class actions settled in
2002, class members alleging that they were not fully advised
of ``energy surcharges'' applied when they checked into hotels
during California's electricity crisis were given $10
coupons.\78\ Only the lawyers are receiving cash.
---------------------------------------------------------------------------
\78\ Hotel Chains Settle Class-Action Suit Over Energy Surcharges,
San Diego Union-Tribune, July 4, 2002.
---------------------------------------------------------------------------
In another case, an Illinois state court approved
a coupon settlement of a class action filed against
Southwestern Bell Mobile Systems, Inc., alleging that the
company failed to fully disclose the fact that it rounded up
customer calls to the next minute. Under the state court
settlement, the class members received $15 vouchers toward
Cellular One products, while the lawyers took home more than $1
million in fees.\79\
---------------------------------------------------------------------------
\79\ See Michelle Singletary, Coupon Settlements Fall Short, Wash.
Post, Sept. 12, 1999, at H01. For more examples of coupon settlements,
see Hearings on S. 353, Prepared Testimony of Stephan G. Morrison.
---------------------------------------------------------------------------
In a state court class action alleging that Coca-
Cola improperly added sweeteners to apple juice, defendant
agreed to distribute 50-cent coupons toward the purchase of
apple juice. Meanwhile, class counsel received $1.5
million.\80\
---------------------------------------------------------------------------
\80\ Lawyers Get $1.5 Million, Clients Get 50 Cents Off, Fulton
County Daily Report, Nov. 21, 1997.
---------------------------------------------------------------------------
The Chicago Tribune reported that in a state court
class action against a record company to recover the prices
paid for albums by the group Milli Vanilli (that contained the
voices of other performers), class members were given a
settlement of $1 to $3 each. The Illinois state court awarded
the lawyers $675,000, but the lawyers turned around and
petitioned the court for an increase to $1.9 million.
In a state court action alleging that General
Mills treated oats with a nonapproved-pesticide, class members
were offered coupons; the attorneys received $1.75 million.\81\
---------------------------------------------------------------------------
\81\ Cereal Plan Called Soggy, National Law Journal, May 22, 1995.
---------------------------------------------------------------------------
In a settlement of a state court class action
against Packard Bell alleging a product defect, class members
were offered a six-month extended service contract for which
they were each required to pay $25. Only the lawyers got cash.
To settle a state court class action alleging
collusion to fix cellular phone prices, wireless phone service
providers agreed to provide coupons and discounts to customers
in several California counties.\82\ The lawyers, however,
received cash.
---------------------------------------------------------------------------
\82\ Cellular Carriers Settle Price-Fixing Allegations, Seattle
Times, July 26, 1997.
---------------------------------------------------------------------------
In a settlement of a similar state court antitrust
class action involving cellular service in a different area,
coupons and small service credits were offered. But counsel
obtained agreement to be paid up to $9.5 million.\83\ Virtually
all the cash paid in the settlement went to lawyers.
---------------------------------------------------------------------------
\83\ Judge OK's Plan For Class Members, The Recorder, Feb. 24,
1998.
---------------------------------------------------------------------------
In another case, class action plaintiffs alleged
that discount stores overstated the value of software bundles
that came with computers. In a class settlement approved by a
state court, consumers received coupons worth the lesser of a
7% or $25 discount off the future purchases of products from
defendants' stores. The attorneys received $890,000 in
fees.\84\
---------------------------------------------------------------------------
\84\ Los Angeles Times, June 8, 1998, at D3.
---------------------------------------------------------------------------
2. Judicial blackmail forces settlement of frivolous cases
A second common abuse in state court class actions
is the use of the class device as ``judicial blackmail'' in
cases that border on frivolous. Because class actions are such
a powerful tool, they can give a class attorney unbounded
leverage, particularly in jurisdictions that are considered
plaintiff-friendly. Such leverage can essentially force
corporate defendants to pay ransom to class attorneys by
settling--rather than litigating--frivolous lawsuits. This is a
particularly alarming abuse because the class action device is
intended to be a procedural tool and not a mechanism that
affects the substantive outcome of a lawsuit. Nonetheless,
state court judges often are inclined to certify cases for
class action treatment not because they believe a class trial
would be more efficient than an individual trial, but because
they believe class certification will simply induce the
defendant to settle the case without trial.\85\ As Judge
Richard Posner of the U.S. Court of Appeals for the Seventh
Circuit has explained, ``certification of a class action, even
one lacking merit, forces defendants to stake their companies
on the outcome of a single jury trial, or be forced by fear of
the risk of bankruptcy to settle even if they have no legal
liability. * * * [Defendants] may not wish to roll these dice.
That is putting it mildly. They will be under intense pressure
to settle.'' \86\ Hence, when plaintiffs seek hundreds of
millions of dollars in damages, basic economics can force a
corporation to settle the suit, even if it is meritless and has
only a five percent chance of success.
---------------------------------------------------------------------------
\85\ See E. Donald Elliott Managerial Judging and the Evolution of
Procedure, 53 U. Chi. I. Rev. 306, 323-24 (1986).
\86\ In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293,1299 (7th Cir.
1995). See also Blair v. Equifax Check Servs. Inc., 181 F.3d 832, 834
(7th Cir. 1999) (``a grant of class status can put considerable
pressure on the defendant to settle, even when the plaintiffs
probability of success on the merits is slight'').
---------------------------------------------------------------------------
Not surprisingly, the ability to exercise unbounded
leverage over a defendant corporation and the lure of huge
attorneys' fees have led to the filing of many frivolous class
actions.
As District of Columbia Insurance Commissioner Lawrence
Mirel has testified before the Committee, insurance companies
are often forced to settle lawsuits even though the challenged
actions were fully in accordance with state law--or encouraged
by state policies.\87\ For example, two automobile insurance
companies, worried about mounting legal expenses and negative
publicity, settled a lawsuit over a long-standing industry-wide
practice of rounding insurance premiums up to the nearest
dollar for nearly $36 million, even though the premiums were
calculated according to specific instructions from the Texas
Department of Insurance.\88\
---------------------------------------------------------------------------
\87\ See Hearing on Class Actions, Statement of Lawrence Mirel.
\88\ Id.
---------------------------------------------------------------------------
Other brow-raising examples of frivolous suits are common.
One such case was brought against Ford Motor Company in New
York state court by the Milberg Weiss firm, one of the better
known plaintiffs' class action firms in the country. The case
involved an inadvertent mistake made by Ford--it had put a
slightly overstated price on the window stickers on certain
vehicles. As soon as Ford discovered the mistake, the company
began sending letters to the affected customers apologizing for
the error and enclosing checks that more than compensated them.
Nonetheless, fully knowing that this refund program was already
well underway, the Milberg Weiss law firm filed a class action
lawsuit charging that Ford had committed fraud. Even worse, it
asked the court immediately to enjoin Ford from continuing its
refund efforts--presumably so that the lawyers could get a cut
of the refund money. In this case, the court properly dismissed
the action; nonetheless, Ford was required to waste time and
corporate resources on a lawsuit that clearly served no
legitimate purpose.\89\
---------------------------------------------------------------------------
\89\ See Faden-Bayes Corp. v. Ford Motor Co., Index No. 97-601076
(N.Y. Sup. Ct. County of New York) (filed Feb. 28, 1997).
---------------------------------------------------------------------------
3. Current class action rules can ignore due process rights
A third type of class action abuse occurs when state courts
ignore the due process rights of out-of-state defendants by
denying them the opportunity to contest the plaintiffs' claims
against them. One witness who testified before the Subcommittee
on Administrative Oversight and the Courts blamed this
phenomenon on a ``laissez faire'' attitude of some state
courts.\90\ The most egregious examples of this are the so-
called ``drive-by class certification'' cases, in which a class
is certified before the defendant has a chance to respond to
the complaint, or in some cases, has even received the
complaint. In one lawsuit filed against an auto manufacturer in
a Tennessee state court, for example, the complaint was filed
on July 10, 1996. Plaintiffs filed several inches of documents
with their complaint. Amazingly, by the time the court closed
that same day, the judge had entered a nine-page order granting
certification of a nationwide class of 23 million members. The
defendant was not even notified about the lawsuit before the
certification and thus had no opportunity to tell its side of
the story.\91\ And upon checking, the defendant discovered that
a group of record companies had the same experience with the
same judge in an antitrust class action filed several days
earlier.\92\ Similar1y, in one of the cases to develop out of
the Firestone tire controversy, a Tennessee state court
certified a nationwide class just four days after the
defendants were served with the complaint (and obviously
without benefit of any input from defendants).\93\ And in
another case, a Kentucky state court ordered injunctive relief
in favor of the class before the defendant was even notified of
the lawsuit.\94\
---------------------------------------------------------------------------
\90\ See Hearings on S. 353, Prepared Statement of John H. Beisner.
\91\ Hearings on S. 353, Prepared Statement of Stephen G. Morrison.
\92\ Id.
\93\ See Order of National Class Certification, Davison v.
Bridgestone/Firestone, Inc., Case No. 00C2298 (Eighth Cir. Ct., 20th
Jud. Dist., Nashville, Tenn.) (dated Aug. 18, 2000).
\94\ See Order, Farkas v. Bridgestone/Firestone, Inc., Case No. 00-
CI-5263 (Cir. Ct., Jefferson County, KY) (dated Aug. 18, 2000).
---------------------------------------------------------------------------
4. Some magnet state courts easily certify national class
actions
A fourth type of class action abuse that is prevalent in
state courts in some localities is the ``I never met a class
action I didn't like'' approach to class certification.\95\
Some state courts with this permissive attitude have even
certified classes that federal courts had already found
uncertifiable. In one case, for example, a state court judge
certified a nationwide class of persons who claimed that the
house siding they had purchased was defective. Later, a federal
district court judge presented with the same case rejected any
prospect of certifying a class in that manner, finding that
affording class treatment in that case would clearly violate
the due process rights of the defendants and the purported
class members.\96\
---------------------------------------------------------------------------
\95\ See Hearings on S. 353, Prepared Statement of Stephen
Morrison.
\96\ Compare Naef v. Masonite Corp., No. CV-94-4033 (Cir. Court,
Mobile County, Alabama), with In re Masonite Hardboard Siding Prods.
Litig., 170 F.R.D. 417, 424 (E.D. La. 1997).
---------------------------------------------------------------------------
Another example of this phenomenon is a spate of class
actions against automobile manufacturers alleging that the
paint on 20-year-old vehicles was discoloring or peeling.
Federal and state courts across the country, including the
Texas Supreme Court, have consistently rejected attempts to
certify classes in these cases, recognizing that each
claimant's facts vary such that a jury would have to consider
separately the claims of each of the thousands of class
members.\97\ Most recently, on August 14, 2003, the Texas Court
of Appeals rejected a proposed class, finding that a class
trial would give a jury ``the unmanageable task of separately
examining numerous paint systems, assessing their different
failure rates and making separate determinations about which
combination of processes, if any, is defective.'' \98\
Astoundingly, just one month after the most recent Texas court
ruling, a Madison County, Illinois judge certified an even
broader, more complex nationwide class asserting identical
paint claims against Ford regarding vehicles in service for
almost 25 years.\99\
---------------------------------------------------------------------------
\97\ See, e.g., In re Ford Motor Co. Vehicle Paint Litig., 182
F.R.D. 214 (E.D. La. 1998); Sanneman v. Chrysler Corp, 191 F.R.D. 441
(E.D. Pa. 2000); Ford Motor Co. v. Sheldon, 22 S.W. 3d 444 (Tex. 2000);
Schurk v. DaimlerChrysler Corp., No. 97-2-04113-9 (Wash. Sup. Ct., Feb.
24, 2000).
\98\ See Ford Motor Co. v. Sheldon, 113 S.W. 3d 839 (Tex. App.
2003).
\99\ Phillips v. Ford Motor Co., No. 99-L-1041 (Cir. Ct., Madison
County, Illinois Sept. 15, 2003).
---------------------------------------------------------------------------
5. Copy cat class actions clog the courts and permit forum
shopping
Yet another common abuse is the filing of ``copy cat''
class actions (i.e., duplicative class actions asserting
similar claims on behalf of essentially the same people).
Sometimes these duplicative actions are filed by lawyers who
hope to wrest the potentially lucrative lead role away from the
original lawyers. In other instances, the ``copy cat'' class
actions are blatant forum shopping--the original class lawyers
file similar class actions before different courts in an effort
to find a receptive judge who will rapidly certify a class.
When these similar, overlapping class actions are filed in
State courts of different jurisdictions, there is no way to
consolidate or coordinate the cases. The ``competing'' class
actions must be litigated separately in an uncoordinated,
redundant fashion because there is no state court mechanism for
consolidating state court cases. The result is enormous waste--
multiple judges of different courts must spend considerable
time adjudicating precisely the same claims asserted on behalf
of precisely the same people.\100\ As a result, state courts
and class counsel may ``compete'' to control the cases, often
harming all the parties involved. In contrast, when overlapping
cases are pending in different federal courts, they can be
consolidated under one single judge to promote judicial
efficiency and ensure consistent treatment of the legal issues
involved.
---------------------------------------------------------------------------
\100\ For example, in the litigation concerning Firestone tires,
approximately 100 virtually identical class actions seeking to
represent the same purported class members were filed in courts all
over the country. And in the recently publicized HMO cases, multiple
overlapping class actions were filed against each of the major health
insurance companies. No less than 17 class actions have been filed
against Humana, most of which assert similar allegations and claims on
behalf of similarly defined nationwide classes. In the Humana
situation, the federal cases were consolidated for pretrial proceedings
before a single judge. See In re Humana Inc. Managed Care Litig., 2000
U.S. Dist. LEXIS 5099 (J.P.M.L. Apr. 13, 2000). There is no parallel
methodology for consolidating state court class actions. In the 12
months ending September 30, 2002, over 7,000 cases were centralized for
pretrial proceedings through the MDL process. See http://
www.uscourts.gov/judbus2002/tables/s19sep02.pdf.
---------------------------------------------------------------------------
E. National Class Actions Belong in Federal Court Under Traditional
Notions of Federalism
Many of the abuses taking place in state courts are
magnified by the growing trend among plaintiffs' attorneys to
bring huge class actions on behalf of hundreds of thousands or
even millions of consumers. These cases, which generally
involve overly broad claims, put any class members with real
injuries at risk. The incentive for class lawyers to gather the
largest class possible is clear: why sue on behalf of just
1,000 people when you can sue for 1 million claimants and
increase your intake? The problem with such broad claims,
however, is that the entire lawsuit proceeds on a lowest common
denominator basis. As a result, persons with legitimate
injuries will be lumped in with the ``average,'' often
meritless claims and will not be given individual attention for
their grievances.\101\
---------------------------------------------------------------------------
\101\ See Hearings on S. 353, Prepared Statement of John H.
Beisner.
---------------------------------------------------------------------------
The effect of class action abuses in state courts is being
exacerbated by the trend toward ``nationwide'' class actions,
which invite one state court to dictate to 49 others what their
laws should be on a particular issue, thereby undermining basic
federalism principles.\102\ A recent study found that 77
percent of class actions brought in 2001 in a rural Illinois
county known for its heavy class action docket sought to
certify nationwide classes.\103\ These cases challenged matters
as diverse as MTBE in wells; telephone billing practices;
chicken processing procedures; and insurance reimbursement
policies. Clearly, a system that allows state court judges to
dictate national policy on these and numerous other issues from
the local courthouse steps is contrary to the intent of the
Framers when they crafted our system of federalism. In one
case, for example, plaintiffs filed suit in an Alabama county
court on behalf of more than 20 million people alleging that
the design of federally mandated airbags is faulty.\104\ From
the standpoint of federalism, this suit defies logic. Why
should an Alabama state court tell 20 million people in all 50
states what kind of airbags they can have in their cars?
---------------------------------------------------------------------------
\102\ See Hearings on S. 353, Prepared Statement of John H.
Beisner.
\103\ See John H. Beisner, and Jessica Davidson Miller, Class
Action Magnet Courts: The Allure Intensifies, 4 BNA Class Action Litig.
R. 58 (Jan. 24, 2003).
\104\ See Smith v. General Motors Corp., et al., Civ. A. No. 97-39
(Cir. Ct. Coosa County, AL).
---------------------------------------------------------------------------
The most egregious of such cases are those in which one
state court issues nationwide rulings that actually contradict
the laws of other states. This problem is particularly
prevalent in insurance cases, which are being filed in
increasingly greater number. As District of Columbia Insurance
Commissioner Lawrence Mirel has testified before this
Committee, class actions ``frequently go[] around or simply
ignore[] the role of state regulators.'' \105\
---------------------------------------------------------------------------
\105\ See Hearing on Class Actions, Prepared Statement of Lawrence
Mirel.
---------------------------------------------------------------------------
One case reported in the New York Times, for example,
involved a longstanding practice of the State Farm Insurance
Companies (shared by other insurers) of using non-original
equipment manufacturer (OEM) parts to repair cars.\106\ The
practice was fully disclosed to policyholders, and the majority
of states expressly permit insurers to specify non-OEM parts.
Indeed, two states, Hawaii and Massachusetts, actually require
the specification of non-OEM parts. Nonetheless, plaintiffs
brought suit in Illinois state court claiming that all non-OEM
parts used by policyholders were inferior to OEM parts, and
that State Farm had breached its contractual obligation to
policyholders and committed fraud each time it specified such
parts. Even though the plaintiffs eventually dropped their
claim that all non-OEM parts were inferior, and conceded that
this could only be determined on a part-by-part basis, the
trial court still permitted the jury to reach a group judgment
on the class action. The court was not even deterred by the
fact that the plaintiffs in the class came from states
throughout the nation with widely varying laws regarding the
use of non-OEM parts, including the two states--Hawaii and
Massachusetts--that strongly embraced the very practice
condemned by plaintiffs.\107\ Indeed, in affirming a $1.3
billion verdict against State Farm in this case, an Illinois
state appellate court acknowledged that it had disregarded
``state insurance commissioners [w]ho testified that the laws
of many of our sister states permit and in some cases * * *
[even] encourage'' usage of non-OEM parts.\108\
---------------------------------------------------------------------------
\106\ Suit Against Auto Insurer Could Affect Nearly All Drivers,
N.Y. Times, Sept. 27, 1998, at 29.
\107\ See Snider v. State Farm Mutual Automobile Insurance Co.,
Cir. Ct. for Williamson City, IL, Docket No. 97-L-114 (1999).
\108\ Avery v. State Farm Mut. Auto. Ins. Co., 746 N.E.2d 1242,
1254 (Ill. Ct. App. 2001).
---------------------------------------------------------------------------
The State Farm case is not unique. This state court
interference with the laws of other jurisdictions is becoming
disturbingly common. For example:
An appellate court in Illinois recently affirmed
the certification of a class consisting of Illinois residents
and residents of 16 other states. The plaintiffs alleged the
defendant telecommunications company had collected, on behalf
of municipalities, taxes from customers located in
unincorporated areas in violation of the Illinois consumer
protection law. The court noted that because ``50-state class
actions are not uncommon in Illinois'' it was not problematic
that ``the laws of 17 states are potentially implicated here.''
\109\ Similarly, a year earlier another Illinois appellate
court affirmed the certification of a nationwide class of
consumers alleging violations of the same Illinois law with no
regard for the laws of the other states involved.\110\
---------------------------------------------------------------------------
\109\ PJ's Concrete Pumping Serv. v. Nextel W. Corp., 803 N.E.2d
1020, 1030 (Ill. Ct. App. 2004), appeal denied, 813 NE.2d 223 (Ill.
2004), cert. denied, 125 S. Ct. 410 (2004).
\110\ Clark v. TAP Pharm. Prods., Inc., 798 N.E.2d 123 (Ill. Ct.
App. 2003).
---------------------------------------------------------------------------
The Supreme Court of Oklahoma recently affirmed
the certification of a nationwide product liability class
action, applying the laws of a single state to transactions
that occurred in all 50 states.\111\ Thus, in this case, a
state court has decided effectively to override whatever policy
determinations another state's legislature or courts may have
made on warranty or product liability policy to protect their
own residents.
---------------------------------------------------------------------------
\111\ Ysbrand v. DaimlerChrysler Corp., 81 P.3d 618 (Okla. 2003).
---------------------------------------------------------------------------
Another recent class action filed in Oklahoma
involved allegations that the defendants failed to account for
slop oil in monthly accountings rendered to certain oil
producers. The lawsuit sounded in tort and contract, involved
``millions of dollars,'' and transactions that occurred in
``more than twenty states.'' \112\ The Supreme Court of
Oklahoma affirmed the certification of a nationwide class,
ignoring the fact that the case would require resolution of the
laws of twenty states.
---------------------------------------------------------------------------
\112\ Black Hawk Oil Co. v. Exxon Corp., 1998 Okla. LEXIS 82 (Okla.
1998).
---------------------------------------------------------------------------
The Minnesota Court of Appeals and the Minnesota Supreme
Court recently affirmed a nationwide class action, applying the
laws of a single state to transactions that occurred in many
different jurisdictions (and virtually none of which occurred
in the state whose laws were applied) \113\ One judge who
decided the case openly acknowledged that the court was
engaging in the ``false federalism'' that has become part of
the state court class action game.\114\
---------------------------------------------------------------------------
\113\ Peterson v. BASF Corp., 657 N.W. 2d 853 (Minn. Ct. App.
2003), affd., 675 N.W. 2d 57 (Minn. 2004).
\114\ Id. at 875.
---------------------------------------------------------------------------
A few years ago, a state trial court in Minnesota approved
for class treatment a case involving millions of claimants from
44 states that would have had the effect of dictating the
commercial codes of all those states.\115\ The specific issue
in the case was whether individuals have a state law right to
recover interest on refundable deposits paid to secure an
automobile lease. In certifying a class in that case, the court
adopted an understanding of Minnesota's version of the Uniform
Commercial Code that was contrary to the interpretation of
every other state to have considered the issue under their own
versions of the UCC. And by certifying the class, the court
decided that its unprecedented interpretation of the UCC would
bind the remaining 43 states that had yet to decide the
question (even though the ``Uniform Commercial Code is not
uniform'' and is interpreted differently in different states
\116\). In essence, the action of the Minnesota court proposed
to dictate the interpretation of 43 other states' UCC
provisions even though the other states might well have reached
a different conclusion in applying their own state's laws.
---------------------------------------------------------------------------
\115\ Rosen v. PRIMUS Automotive Fin. Servs., Inc., No. CT 98-2733
(Minn. D. Ct., 4th Jud. Dist., May 4, 1999).
\116\ Walsh v. Ford Motor Co., 807 F.2d 1000, 1016-17 (D.C. Cir.
1986).
---------------------------------------------------------------------------
The sentiment reflected in these cases flies in the face of
basic federalism principles by embracing the view that other
states should abide by a deciding court's law whenever it
decides that its own laws are preferable to other states'
contrary policy choices. Indeed, such examples of judicial
usurpation, in which one state's courts try to dictate its laws
to 49 other jurisdictions, have been duly criticized by some
congressional witnesses as ``false federalism.'' \117\
Moreover, they have posed serious problems for the courts of
other states. For example, the Vermont Supreme Court recently
nullified the settlement in the Bank of Boston case, holding
that the Alabama court that approved the settlement failed to
provide due process to the Vermont class members in that case,
who ended up paying $30,000 in attorneys' fees.\118\ In
contrast, a Connecticut court recently found that a woman who
had been part of an Alabama class action settlement on roofing
shingles could not have her day in court because she was bound
by the settlement she knew nothing about.\119\
---------------------------------------------------------------------------
\117\ See Interstate Class Action Jurisdiction Act of 1999: Hearing
on H.R. 1875 Before the House Comm. on the Judiciary, 106th Cong.
(1999) (hereinafter ``Hearing on H.R. 1875), Prepared Statement of
Walter E. Dellinger III.
\118\ See State of Vermont v. Homeside Lending, Inc. and Bank
Boston Corporation, 826 A.2d 997 (Vt. 2003).
\119\ Rigat v. GAF Materials Corp., 2002 Conn. Super. LEXIS 272
(Conn. Super. Jan 25, 2002).
---------------------------------------------------------------------------
Given the range and severity of class action abuse, it is
not surprising that defendants find it necessary to remove
actions against them to a federal forum--a forum where the
threat of prejudice is significantly lower. Under current law,
however, plaintiffs' lawyers can easily manipulate their
pleadings to ensure that their cases remain at the state level.
As noted above, the two most common tactics employed by
plaintiffs' attorneys in order to guarantee a state court
tribunal are: adding parties to destroy diversity and shaving
off parties with claims for more than $75,000. It is not rare
to see complaints in which plaintiffs sue several major
corporations and then add one local supplier or dealer as a
defendant merely to defeat diversity.\120\ Other complaints
seek $74,999 in damages on behalf of each plaintiff or
explicitly exclude from the proposed class anybody who has
suffered $75,000 or more in damages.\121\
---------------------------------------------------------------------------
\120\ See Hearings on S. 353, Prepared Statement of Stephen G.
Morrison.
\121\ Id.
---------------------------------------------------------------------------
The Committee believes that the federal courts are the
appropriate forum to decide most interstate class actions
because these cases usually involve large amounts of money and
many plaintiffs, and have significant implications for
interstate commerce and national policy. By enabling federal
courts to hear more class actions, this bill will help minimize
the class action abuses taking place in state courts and ensure
that these cases can be litigated in a proper forum.
V. How S. 5 Works
S. 5 is a modest attempt to address a number of the
problems and abuses in the current class action system. First,
S. 5 implements a consumer bill of rights that requires greater
scrutiny of both coupon and net loss settlements, regulates
attorneys' fee awards in coupon settlements, prohibits extra
compensation to class members who are geographically located
near the court, and requires notice of proposed class
settlements to appropriate state and federal officials.
Second, S. 5 includes a narrowly-tailored expansion of
federal diversity jurisdiction to ensure that class actions
that are truly interstate in character can be heard in federal
court. S. 5 also includes modest amendments to current removal
provisions that will make it harder for counsel to ``game the
system'' and keep class actions in state court by naming local
defendants who are not real parties to the controversy or by
amending their pleadings after the deadline for removal. These
provisions will create efficiencies in the judicial system by
enabling overlapping and ``copycat'' cases to be consolidated
in a single federal court, rather than proceeding
simultaneously in numerous state courts under the current
system.
At the same time, however, S. 5 leaves in state court: (1)
class actions in which all the plaintiffs and defendants are
residents of the same state; (2) class actions with fewer than
100 plaintiffs; (3) class actions involving less than $5
million; (4) class actions in which a state government entity
is the primary defendant; (5) class actions brought against a
company in its home state, in which
2/3 or more of the class members are also residents; and (6)
class actions involving certain local controversies.
Finally, S. 5 addresses the problem of unfair settlements
and excessive attorneys' fees by directing the Judicial
Conference of the United States to conduct a review of class
action settlements and attorneys' fees and to present Congress
with recommendations to improve the system.
CONSUMER BILL OF RIGHTS
S. 5 requires greater scrutiny of coupon settlements; such
settlements are prohibited absent written findings by the court
that they benefit the class members. In addition, S. 5
regulates attorneys' fees in class settlements in which coupons
constitute all or part of the remedy provided to class members.
S. 5 also prohibits extra compensation to members of a class
simply because they live closer to the court. These provisions
are intended to prevent some of the more abusive class action
settlement practices that came to the Committee's attention
during hearings on class action abuses.
S. 5 would also amend the class action rules by requiring
that class counsel serve appropriate state and federal
officials with notice of a proposed settlement. This notice
must occur no later than 10 days after the proposed settlement
is filed in federal court.
The notice to the appropriate officials would include: (1)
A copy of the complaint and amended complaints, unless those
materials are available through the Internet and the notice
includes directions on how to access the materials on-line; (2)
notice of any scheduled judicial hearing in the class action;
(3) proposed or final notification to class members of the
right to be excluded from the class; (4) any proposed or final
class action settlement; (5) any settlement made between class
counsel and defendants' counsel; (6) any final judgment or
notice of dismissal; and (7) the names of the class members who
reside in each respective state and the proportionate claims of
such members. The designated officials would then have at least
90 days to review the proposed settlement before the court
gives final settlement approval.
Nothing in this section creates an affirmative duty for
either the state or federal officials to take any action in
response to a class action settlement. Moreover, nothing in
this section expands the current authority of the state or
federal officials.
DIVERSITY JURISDICTION AND REMOVAL
S. 5 would amend the diversity jurisdiction and removal
statutes applicable to larger interstate class actions by
modifying 28 U.S.C. 1332 to incorporate the concept of balanced
diversity. The bill grants the federal courts original
jurisdiction to hear interstate class action cases where (a)
any member of the proposed class is a citizen of a different
state from any defendant; and (b) the amount in controversy
exceeds $5 million (aggregating claims of all purported class
members, exclusive of interest and costs).
The bill, however, includes several provisions ensuring
that where appropriate, state courts can adjudicate certain
class actions that have a truly local focus. The first is the
``Home State'' exception. Under this provision, if two-thirds
or more of the class members are from the defendant's home
state, the case would not be subject to federal jurisdiction.
Conversely, class actions filed in the home state of the
primary defendant would automatically be subject to federal
jurisdiction (assuming the other prerequisites are met) if less
than one-third of the proposed class members are citizens of
that state. For cases brought in a defendant's home state in
which between one-third and two-thirds of the class members
were citizens of that state, federal jurisdiction would also
exist; however, a federal judge would have the discretion, in
the interests of justice, to decline to exercise that
jurisdiction based on consideration of six factors designed to
help assess whether the claims at issue are indeed local in
nature.
In addition, S. 5 contains a ``Local Controversy
Exception'' intended to ensure that state courts can continue
to adjudicate truly local controversies in which some of the
defendants are out-of-state corporations. In order to fall
within the Local Controversy Exception, a class action must
meet the following four criteria: (1) The class must be
primarily local, meaning that more than two-thirds of class
members must be residents of the state in which the action was
filed; (2) at least one real defendant (whose alleged conduct
is central to the class's claims and from whom the class seeks
significant relief) must also be local; (3) the ``principal
injuries'' caused by the defendants'' conduct must have
occurred in the state where the suit was brought; and (4) no
other similar class actions have been filed against any of the
defendants (by the same or other proposed classes) in the
preceding three years. If all of these four criteria are
satisfied, the case will not be subject to federal jurisdiction
under the bill.
S. 5 also excludes from its federal jurisdiction grant: (1)
Class actions involving fewer than 100 plaintiff class members;
(2) class actions in which the primary defendants are states,
state officials, or other governmental entities against whom
the district court may be foreclosed from ordering relief; (3)
any securities class actions covered by the Securities
Litigation Reform Act; and (4) corporate governance cases.
In order to enable more class actions to be removed to
federal court, S. 5 would also create three new rules regarding
the removal of class actions filed in state court. First, any
defendant would be able to remove a class action to federal
court without the consent of any other defendant. Second, any
defendant would be able to remove a class action to federal
court, even if that defendant is a citizen of the state in
which the action was brought. And third, the current ban on
removal of a class action to federal court after one year would
be eliminated, although the current requirement that removal
occur within 30 days of notice of grounds for removal would be
retained.
REPORT ON CLASS ACTION SETTLEMENTS
S. 5 would direct the Judicial Conference of the United
States, with the assistance of the Federal Judicial Center and
Administrative Office of the United States Courts, to prepare a
report on class action settlements to be transmitted to the
House and Senate Judiciary Committees. The report will include
(1) recommendations on best practices to ensure the fairness of
settlements for class members and to ensure the appropriateness
of attorneys' fees and expenses, and (2) a discussion of any
actions taken or planned by the Judicial Conference to
implement the report recommendations.
VI. Section-by-Section Analysis
Section 1.--Section 1 establishes the ``Class Action
Fairness Act of 2005'' as the short title of the bill.
Section 2.--Section 2 sets forth findings and purposes. The
Committee is concerned that there have been abuses of the class
action device over the last decade that have hurt consumers,
adversely affected interstate commerce, and undermined public
respect for our judicial system. In particular, the Committee
is concerned about class actions that do little to benefit--and
sometimes actually harm--the class members who are supposed to
be the beneficiaries of such cases, while enriching their
lawyers. The Committee is also concerned that this problem is
exacerbated by confusing notices that make it difficult for
class members to understand and effectively exercise their
rights. Taken together, the Committee believes that such abuses
hurt consumers by resulting in higher prices and less
innovation, and that they undermine the principles of diversity
jurisdiction, which were established by the Framers to promote
interstate commerce.
The purposes of the Act are therefore to assure fair and
prompt recoveries for class members with legitimate claims; to
restore the intent of the Framers by expanding federal
jurisdiction over interstate class actions; and to benefit
society by encouraging innovation and lowering consumer prices.
Section 3.--Section 3 sets forth a ``Consumer Class Action
Bill of Rights'' to help ensure that class actions do not hurt
their intended beneficiaries. This section is intended to
address a number of common abuses that were discussed by
witnesses at class action hearings and have been reported on in
the press--and to encourage greater judicial scrutiny of
proposed class action settlements.
New section 28 U.S.C. 1711 defines the term ``class
action'' to include representative actions filed in federal
district court under Rule 23 of the Federal Rules of Civil
Procedure, as well as actions filed under similar rules in
state courts that have been removed to federal court. It also
defines the following terms: class counsel, class members,
plaintiff class action and proposed settlement.
New section 28 U.S.C. 1712 is aimed at situations in which
plaintiffs' lawyers negotiate settlements under which class
members receive nothing but essentially valueless coupons,
while the class counsel receive substantial attorneys' fees.
For example, in a recent settlement of a class action against a
video rental chain, customers received coupons toward video
rentals and purchases, while the plaintiffs' class counsel were
paid $9.25 million in fees and expenses. One commentator
observed that ``the real winners in the settlement are the
lawyers who sued the company,'' who will be paid ``in cash, not
coupons.'' \122\
---------------------------------------------------------------------------
\122\ Scott v. Blockbuster Inc., (No, DI62-535, Jefferson County,
Texas, 2001); Judge OKs Blockbuster Plan On Fees, Associated Press,
Jan. 11, 2002.
---------------------------------------------------------------------------
In order to address such inequities, Section 1712(a) states
that in class action settlements in which it is proposed that
an attorney fee award be based solely on the purported value of
the coupons awarded to class members, the fee award should be
based on the demonstrated value of coupons actually redeemed by
the class members. Thus, if a settlement agreement promises the
issuance of $5 million in coupons to the putative class
members, but only
1/5 of potential class members actually redeem the coupons at
issue, then the lawyer's contingency fee should be based on a
recovery of $1 million--not a recovery of $5 million.
In some cases, the proponents of a class settlement
involving coupons may decline to propose that attorney's fees
be based on the value of the coupon-based relief provided by
the settlement. Instead, the settlement proponents may propose
that counsel fees be based upon the amount of time class
counsel reasonably expended working on the action. Section
1712(b) confirms the appropriateness of determining attorneys'
fees on this basis in connection with a settlement based in
part on coupon relief. As is stated on its face, nothing in
this section should be construed to prohibit using the
``lodestar with multiplier'' method of calculating attorney's
fees. By the same token, nothing in this section expands the
authorization for the use of a multiplier; a multiplier may be
used only to the extent authorized by existing law.
In some class action settlements, the terms may be a
combination of coupon relief, plus some form of equitable
relief, including an injunction. In such circumstances, the
settlement may also include fees for obtaining the equitable
relief. Thus, if a proposed settlement provides for both
coupons and equitable relief, then the portion of the award
that is a contingent fee based on the value of the coupons must
be calculated based on the value of redeemed coupons, and the
portion not based on the value of the coupons should be based
on the time spent by class counsel on the case.
The Committee wishes to make clear that nothing in Section
1712 is intended to change current law regarding the
circumstances under which an award of attorneys' fees is
appropriate. In particular, the Committee stresses that this
section is not intended to change in any respect current law
governing the circumstances under which fee shifting is
permitted in cases that are resolved through full litigation
(that is, cases that are not settled). Moreover, the Committee
wishes to make clear that it does not intend to change current
law in any respect regarding the circumstances under which the
parties may justifiably agree to fee awards in connection with
settlements. Section 1712 is intended solely to regulate the
manner in which fees otherwise authorized by existing law
should be calculated.
Section 1712( d) allows a court to hear expert testimony
from a witness on the actual value of redeemed coupons to
assist the court in determining the proper contingent fee. This
provision addresses the situation where the actual value of the
coupons differs from their face value. For example, a coupon
for $250 off a vehicle purchase may not really be worth $250.
Section 1712(e) provides that a federal judge may not
approve a coupon settlement without first conducting a hearing
and determining that the settlement terms are fair, reasonable,
and adequate for class members. In making that determination,
the judge should consider, among other things, the real
monetary value and likely utilization rate of the coupons
provided by the settlement. The section further provides that a
federal court may, in its discretion, require that a proposed
settlement provide for the distribution of a portion of the
value of unclaimed coupons to a charitable organization or
governmental entity; however, any such distribution shall not
be used as the basis for the award of any attorneys' fees. So,
for example, if a proposed settlement provided for the
distribution of one million $1 coupons, but only 250,000 were
claimed and used, the federal court supervising the settlement
could require that 500,000 of the unclaimed coupons be made
available to the U.S. Army for distribution to enlisted
personnel serving in the military. However, in determining an
appropriate fee award for class counsel, counsel would be able
to rely only on the value of the 250,000 coupons actually
redeemed by class members. The fee award could not be based on
the value of the 250,000 unused coupons or the 500,000 coupons
that might be used by military personnel.
The Committee wishes to make clear that it does not intend
to forbid all non-cash settlements. Such settlements may be
appropriate where they provide real benefits to consumer class
members (e.g., where coupons entitle class members to receive
something of actual value free of charge) or where the claims
being resolved appear to be of marginal merit. However, where
such settlements are used, the fairness of the settlement
should be seriously questioned by the reviewing court where the
attorneys' fees demand is disproportionate to the level of
tangible, non-speculative benefit to the class members. In
adopting this provision, it is the intent of the Committee to
incorporate that line of recent federal court precedents in
which proposed settlements have been wholly or partially
rejected because the compensation proposed to be paid to the
class counsel was disproportionate to the real benefits to be
provided to class members.\123\
---------------------------------------------------------------------------
\123\ See, e.g., Cope v. Duggins, 2001 WL 333102 (E.D. La. 2001)
(rejecting proposed class settlement because attorneys' fees were
disproportionate to class benefits); Schwartz v. Dallas Cowboys
Football Club, Ltd., 157 F. Supp. 2d 561 (E.D. Pa. 2001) (same);
Sheppard v. Consolidated Edison Co., 2000 WL 33313540 (E.D.N.Y. 2000)
(same); Polar Int'l Brokerage Corp. v. Reeve, 187 F.R.D. 108 (S.D.N.Y.
1999) (same).
---------------------------------------------------------------------------
New section 28 U.S.C. 1713 prohibits federal courts from
approving a proposed settlement under which class members would
be required to pay class counsel a sum of money that results in
a net loss (as occurred in the Bank of Boston case, discussed
above), unless the court makes a written finding that
nonmonetary benefits to the class members substantially
outweigh the monetary loss.
New section 28 U.S.C. 1714 prohibits federal courts from
approving proposed settlements that provide for payment of
greater sums to certain class members based on where they
reside. The Committee wishes to emphasize that this provision
is intended solely to prohibit circumstances in which the
preferential payments have no legitimate legal basis. For
example, it may be perfectly appropriate for a settlement of an
environmental class action to differentiate settlement payment
amounts based on a claimant's proximity to an alleged chemical
spill, if it appears that those persons in closer proximity
have suffered greater injury. This provision is not intended to
affect such a determination. But where putative class members'
claims are legally and factually indistinguishable, it is
inappropriate to give one class member extra settlement
benefits merely because he or she resides in (or closer to) the
county where the court sits.
New section 28 U.S.C. 1715 sets forth requirements for
notification to appropriate federal and state officials of
proposed class action settlements. New section 1715 is designed
to ensure that a responsible state and/or federal official
receives information about proposed class action settlements
and is in a position to react if the settlement appears unfair
to some or all class members or inconsistent with applicable
regulatory policies. Section 1715 requires each defendant,
within 10 days after a proposed class action settlement is
filed in federal court, to provide notice of the proposed
settlement to: (1) the U.S. Attorney General (or for banks and
thrifts, the entity with primary regulatory or supervisory
responsibility over the defendant); and (2) the state official
that has primary regulatory or supervisory responsibility over
the defendant or who licenses or otherwise authorizes the
defendant to conduct business in the state (or for state
depository institutions, the state bank supervisor in the state
in which the defendant is incorporated or chartered). If there
is no state official that meets the requirements set forth in
the Act, notice must be provided to the state attorney general.
The notice must include: (1) a copy of the complaint and
attached materials; (2) the date and time of any scheduled
judicial hearing; (3) proposed or final notification to the
class members; (4) the proposed settlement; (5) any other
agreement between class counsel and the defendant; (6) any
final judgment or notice of dismissal; (7) the names of class
members who reside in each state and their proportional share
of the settlement, or if that is not feasible, a reasonable
estimate of the number of class members in the state and their
share of the settlement; and (8) any written judicial opinion
related to the proposed settlement. A federal court cannot
issue a final order approving a settlement until 90 days after
the appropriate federal and state officials are served. If the
defendants do not comply with this provision, a class member
can refuse to comply with--or be bound by--the settlement
agreement.
The Act also clarifies that it should not be construed to
impose any obligations, duties or responsibilities on the
federal and state officials who receive notice of a class
action settlement pursuant to this provision. Thus, federal and
state officials will be notified about proposed settlements and
have an opportunity to get involved if they think it is
appropriate but will not be required to do so.
Abusive class action settlements in which plaintiffs
receive promotional coupons or other nominal damages while
class counsel receive large fees are all too commonplace. The
risk of such abusive practices is particularly pronounced in
the class action context because these suits often involve
numerous plaintiffs, each of whom has only a small financial
stake in the litigation. As a result, few (if any) plaintiffs
closely monitor the progress of the case or settlement
negotiations, and these cases become ``clientless litigation,''
in which the plaintiff attorneys and the defendants have
``powerful financial incentives'' to settle the ``litigation as
early and as cheaply as possible, with the least publicity.''
\124\ These financial incentives create inequitable outcomes.
``For class counsel, the rewards are fees disproportionate to
the effort they actually invested in the case.* * * For
society, however, there are substantial costs: lost
opportunities for deterrence (if class counsel settled too
quickly and too cheaply), wasted resources (if defendants
settled simply to get rid of the lawsuit at an attractive
price, rather than because the case was meritorious), and--over
the long run--increasing amounts of frivolous litigation as the
attraction of such lawsuits becomes apparent to an ever-
increasing number of plaintiff lawyers.'' \125\
---------------------------------------------------------------------------
\124\ Deborah Hensler, et al., Class Action Dilemmas, Pursuing
Public Goals for Private Gain (``Class Action Dilemmas''), at 10 (1999)
(executive summary).
\125\ Id.
---------------------------------------------------------------------------
New 28 U.S.C. 1715 requires defendants to provide notice of
proposed settlements to the appropriate federal official and to
the appropriate state official of each state in which a class
member resides. Under new section 1715(a), the appropriate
federal official is the Attorney General of the United States,
or in the case of depository institutions and other banks, the
person who has primary federal regulatory supervisory
responsibility over the defendant if some or all of the matters
at issue in the litigation are subject to regulation or
supervision by that person. Thus, for example, if a national
bank were sued over its lending practices, notice would have to
be provided to the Comptroller of the Currency. If it were sued
in a nationwide lawsuit regarding the food in its cafeterias,
notice would be provided to the Attorney General.
Under new section 28 U.S.C. 1715(a), the appropriate state
official is defined as the person in the state who has primary
regulatory or supervisory responsibility with respect to the
defendant or licenses the defendant, if some or all of the
matters alleged in the class action are subject to regulation
by that person. If no such regulatory or licensing authority
exists, or the matters are not subject to regulation by that
person, then notice should be given to the state attorney
general. Thus, for example, in a case against an insurance
company involving insurance practices, such as how premiums are
calculated, notice would be required to the state insurance
commissioner in each state where the company is licensed and
where class members reside. If some class members reside in
states where the company does not do business and therefore is
not subject to regulation, then notice would be given to those
states' attorneys general. Similarly, if the company at issue
were a toy manufacturer, which is not licensed by a particular
regulatory body, then notice would have to be given to the
state attorney general of each state where plaintiffs reside.
New section 1715(c) clarifies that in the case of federal
depository institutions and other non-state depository
institutions, the notice requirements are satisfied by
notifying the person who has primary Federal regulatory or
supervisory responsibility with respect to the defendant, if
some or all of the matters alleged in the class action are
subject to regulation or supervision by that person. No notice
is required to state officials in these circumstances. Thus,
for example, if a national bank were sued over its depository
or lending practices, notice would have to be given to the
Comptroller of the Currency, who has regulatory authority over
the institution. However, no notice would be required to state
officials.
With regard to state depository institutions, the notice
requirements are satisfied by notifying the state banking
supervisor in the state where the defendant is incorporated, if
some or all of the matters alleged in the class action are
subject to regulation or supervision by that person, and upon
the appropriate federal official. Thus, no notice is required
to state officials in other states even if some class members
reside in those states.
This provision is intended to combat the ``clientless
litigation'' problem by adding a layer of independent oversight
to prohibit inequitable settlements. Under Section 1715(b),
class counsel must provide the notice within 10 days after the
proposed settlement is filed in court. Such notice must
include, according to 28 U.S.C. 1715(b)(1)(8): a copy of the
complaint; any scheduled judicial hearings; any final judgment
or notice of settlement; any proposed or final notice to the
class; and the names of class members who reside in each state,
if feasible. The notice would also include any written judicial
decision related to settlement, a final judgment, or notice of
dismissal. If disagreement arises over the feasibility of
providing the names of class members and their proportional
share of the proposed settlement under 28 U.S.C. 1715(b), it is
the intent of the Committee that class counsel bear the burden
of proving that it is not feasible to provide any of this
required information.
Once the appropriate state and federal officials have
received notice under 28 U.S.C. 1715(b), they would then have
at least 90 days to review the proposed settlement and decide
what (if any) action to take to protect the interests of the
plaintiff class. The state and federal officials are not
required to take any affirmative action once they receive the
proposed settlement according to new section 28 U.S.C. 1715(f);
nor does this section expand their current authority in any
respect.
Section 28 U.S.C. 1715(e)(1) instructs that in cases where
the appropriate state and federal officials are not provided
notice of the potential settlement, plaintiffs can choose not
be bound by that settlement. The Committee wishes to make clear
that this provision is intended to address situations in which
defendants have simply defaulted on their notification
obligations under this provision; it is not intended to allow
settlement class members to walk away from an approved
settlement based on a technical noncompliance (e.g.,
notification of the wrong person, failure of the official to
receive notice that was sent), particularly where good faith
efforts to comply occurred. In particular, the Committee wishes
to note that where the appropriate officials received
notification of a proposed settlement from at least one
defendant, section 1715(e) should not be operative. New
subsection 1715(e)(2) specifically states that a class member
may not refuse to comply with a settlement if the notice was
directed to the appropriate federal official and to the state
attorney general or the primary licensing authority. This
provision reflects the overall intent of section 1715 that a
settlement should not be undermined because of a defendant's
innocent error about which federal or state official should
have received the required notice in a particular case.
The Committee believes that notifying appropriate state and
federal officials of proposed class action settlements will
provide a check against inequitable settlements in these cases.
Notice will also deter collusion between class counsel and
defendants to craft settlements that do not benefit the injured
parties.
Section 4.--Section 4 amends 28 U.S.C. Sec. 1332 to re-
designate current subsection 1332(d) as subsection (e) and
create a new subsection 1332(d).
The definitional provisions of Section 4--as reflected in
the new section 1332(d)(1)--are self-explanatory. However, the
Committee notes that as with the other elements of section
1332(d), the overall intent of these provisions is to strongly
favor the exercise of federal diversity jurisdiction over class
actions with interstate ramifications. In that regard, the
Committee further notes that the definition of ``class action''
is to be interpreted liberally. Its application should not be
confined solely to lawsuits that are labeled ``class actions''
by the named plaintiff or the state rulemaking authority.
Generally speaking, lawsuits that resemble a purported class
action should be considered class actions for the purpose of
applying these provisions.
The new subsection 1332(d)(2) gives the federal courts
original jurisdiction over class action lawsuits in which the
matter in controversy exceeds the sum or value of $5,000,000,
exclusive of interest and costs, and either (a) any member of a
class of plaintiffs is a citizen of a different state from any
defendant; (b) any member of a class of plaintiffs is a foreign
state or a citizen or subject of a foreign state and any
defendant is a citizen of a state; or (c) any member of a class
of plaintiffs is a citizen of a state and any defendant is a
foreign state or a citizen or subject of a foreign state.
The Committee notes that for purposes of the citizenship
element of this analysis, S. 5 does not alter current law
regarding how the citizenship of a person is determined,
including the provisions of 28 U.S.C. Sec. 1332(c) specifying
that ``a corporation shall be deemed to be a citizen of any
State by which it has been incorporated and of the State where
it has its principal place of business.''
While the core concept of the bill is that class actions
filed against defendants outside their home state are subject
to federal jurisdiction if citizens from different states are
on opposing sides and more than $5 million is at issue, new
subsections 1332(d)(3) and (d)(4)(B) address the jurisdictional
principles that will apply to class actions filed against a
defendant in its home state, dividing such cases into three
categories.
First, for cases in which two-thirds or more of the members
of the plaintiff class and the primary defendants are citizens
of the state in which the suit was filed, subsection
1332(d)(4)(B) states that federal jurisdiction will not be
extended by S. 5. Such cases will remain in state courts under
the terms of S. 5, since virtually all of the parties in such
cases (both plaintiffs and defendants) would be local, and
local interests therefore presumably would predominate.
Second, cases in which more than two-thirds of the members
of the plaintiff class or one or more of the primary defendants
are not citizens of the state in which the action was filed
will be subject to federal jurisdiction, pursuant to the
provisions of subsection 1332(d)(2). Federal courts should be
able to hear such lawsuits because they have a predominantly
interstate component--they affect people in many jurisdictions,
and the laws of many states may be at issue.
Finally, there is a middle category of class actions in
which more than one-third but fewer than two-thirds of the
members of the plaintiff class and the primary defendants are
all citizens of the state in which the action was filed. In
such cases, the numbers alone may not always confirm that the
litigation is more fairly characterized as predominantly
interstate in character. New subsection 1332(d)(3) therefore
gives federal courts discretion, in the ``interests of
justice,'' to decline to exercise jurisdiction over such cases
based on the consideration of six factors:
Whether the claims asserted are of ``significant
national or interstate interest''.--If a case presents issues
of national or interstate significance, that argues in favor of
the matter being handled in federal court. For example, if a
nationally distributed pharmaceutical product is alleged to
have caused injurious side-effects and class actions on the
subject are filed, those cases presumably should be heard in
federal court because of the nationwide ramifications of the
dispute and the probable interface with federal drug laws (even
if claims are not directly filed under such laws). Under this
factor, the federal court should inquire whether the case does
present issues of national or interstate significance of this
sort. If such issues are identified, that point favors the
exercise of federal jurisdiction. If such issues are not
identified and the matter appears to be more of a local (or
intrastate) controversy, that point would tip in favor of
allowing a state court to handle the matter.
Whether the claims asserted will be governed by
laws other than those of the forum state.--As noted previously,
the Committee believes that one of the significant problems
posed by multi-state state court class actions is the tendency
of some state courts to be less than respectful of the laws of
other jurisdictions, applying the law of one state to an entire
nationwide controversy and thereby ignoring the distinct,
varying state laws that should apply to various claims included
in the class depending on where they arose. Under this factor,
if the federal court determines that multiple state laws will
apply to aspects of the class action, that determination would
favor having the matter heard in the federal court system,
which has a record of being more respectful of the laws of the
various states in the class action context. Conversely, if the
court concludes that the laws of the state in which the action
was filed will apply to the entire controversy, that factor
will favor allowing the state court to handle the matter.
Whether the class action has been pleaded in a
manner that seeks to avoid federal jurisdiction.--The purpose
of this inquiry is to determine whether the plaintiffs have
proposed a ``natural'' class--a class that encompasses all of
the people and claims that one would expect to include in a
class action, as opposed to proposing a class that appears to
be gerrymandered solely to avoid federal jurisdiction by
leaving out certain potential class members or claims. If the
federal court concludes evasive pleading is involved, that
factor would favor the exercise of federal jurisdiction. On the
other hand, if the class definition and claims appear to follow
a ``natural'' pattern, that consideration would favor allowing
the matter to be handled by a state court.
Whether there is a ``distinct'' nexus between: (a)
the forum where the action was brought, and (b) the class
members, the alleged harm, or the defendants.--This factor is
intended to take account of a major concern that led to this
legislation--the filing of lawsuits in out-of-the-way
``magnet'' state courts that have no real relationship to the
controversy at hand. Thus, for example, if the majority of
proposed class members and the defendant reside in the county
where the suit is brought, the court might find distinct nexus
exists. The key to this factor is the notion of there being a
distinct nexus. If the selected forum's nexus to the
controversy is shared by many other forums (e.g., some
allegedly injured parties live in the locality, just as
allegedly injured parties live in many other localities), the
nexus is not distinct, and this factor would in that
circumstance weigh heavily in favor of the exercise of federal
jurisdiction over the matter.
Whether the number of citizens of the forum state
in the proposed plaintiff class(es) is substantially larger
than the number of citizens from any other state, and the
citizenship of the other members of the proposed class(es) is
dispersed among a substantial number of states.--This factor is
intended to look at the geographic distribution of class
members in an effort to gauge the forum state's interest in
handling the litigation. To be subject to this inquiry, between
one-third and two-thirds of the class members are citizens of
the state in which the class action was filed and all of the
primary defendants are also citizens of that state. If all of
the other class members (that is, the class members who do not
reside in the state where the action was filed) are widely
dispersed among many other states (e.g., no other state
accounted for more than five percent of the class members),
that point would suggest that the interests of the forum state
in litigating the controversy are preeminent (versus the
interests of any other state). The Committee intends that such
a conclusion would favor allowing the state court in which the
action was originally filed to handle the litigation. However,
if a court finds that the citizenship of the other class
members is not widely dispersed, the opposite balance would be
indicated. A federal forum would be favored in such a case
because several states other than the forum state would have a
strong interest in the controversy.
Whether one or more class actions asserting the
same or similar claims on behalf of the same or other persons
have been filed in the last three years.--The purpose of this
factor is efficiency and fairness: to determine whether a
matter should be subject to federal jurisdiction so that it can
be coordinated with other overlapping or parallel class
actions. If other class actions on the same subject have been
(or are likely to be) filed elsewhere, the Committee intends
that this consideration would strongly favor the exercise of
federal jurisdiction so that the claims of all proposed classes
could be handled efficiently on a coordinated basis pursuant to
the federal courts' multidistrict litigation process as
established by 28 U.S.C. Sec. 1407. Under that process, it is
likely that all class actions filed on an issue will be handled
by a single tribunal that will, in any event, be facing the
challenge of interpreting the varying state laws and assessing
how they should be applied to the purported class claims. Thus,
allowing a case to remain in federal court so that it may
become part of that coordinated multi district litigation
proceeding makes good sense. On the other hand, if other courts
are unlikely to have to undertake the burden of handling the
class claims and the state court appears positioned to handle
the case in a manner that is respectful of state law
variations, that consideration would favor remand of the matter
to state court.
It is the Committee's intention that this factor be
interpreted liberally and that plaintiffs not be able to plead
around it with creative legal theories. If a plaintiff brings a
product liability suit alleging consumer fraud or unjust
enrichment, and another suit was previously brought against
some of the same defendants alleging negligence with regard to
the same product, this factor would favor the exercise of
federal jurisdiction over the later-filed claim.
The following examples are intended to be illustrative of
how these factors would work.
If a California state court class action were
filed against a California pharmaceutical drug company on
behalf of a proposed class of 60% California residents and 40%
Nevada residents alleging harmful side effects attributable to
a drug sold nationwide, it would make sense to leave the matter
in federal court. The state laws that would apply in all of
these cases would vary depending on where the drug was
prescribed and purchased, such that allowing a single court to
sort out such issues and handle the balance of the litigation
would make sense both from an efficiency and federalism
standpoint. These concerns would be even greater and the
arguments for asserting jurisdiction stronger if another class
action alleging similar side-effects has been filed in the last
three years.
On the other hand, if a checking account fee
disclosure class action were filed in a Nevada state court
against a Nevada bank located in a border city and the class
consisted of 65% Nevada residents and 35% California residents
(who crossed the border to conduct transactions in the Nevada
bank), it might make sense to allow that matter to proceed in
state court. It is likely that Nevada banking law would apply
to all claims (even those of the California residents), since
all of the transactions occurred in Nevada. And there is less
likelihood that multiple actions will be filed around the
country on the same subject, so as to give rise to a
coordinating federal multidistrict litigation proceeding. Thus,
the federalism concerns would be substantially diminished.
In sum, the Committee intends that these factors would
permit a federal court, in its discretion, to allow a class
action asserting primarily local claims under local law for
what is primarily a local group of claimants to proceed in
state court, particularly where the action has not been pleaded
manipulatively to avoid federal jurisdiction and the case is
not likely to become an ``orphan'' that cannot be coordinated
with similar class actions that are or, in the future, may be
pending in federal court.
New subsection 1332(d)(4)(A) is the ``Local Controversy
Exception'' to the foregoing provisions that otherwise expand
federal diversity jurisdiction over class actions. This
subsection requires that federal diversity jurisdiction over a
class action under the foregoing provisions be declined if the
proponents of that view clearly demonstrate that each and every
of the following criteria are satisfied in the case at issue:
(1) more than \2/3\ of class members are citizens of forum
state; (2) there is at least one in-state defendant from whom
significant relief is sought by members of the class and whose
conduct forms a significant basis of plaintiffs' claims; (3)
the principal injuries resulting from the alleged conduct, or
related conduct, of each defendant were incurred in the state
where the action was originally filed; and (4) no other class
action asserting the same or similar factual allegations
against any of the defendants on behalf of the same or other
persons has been filed during the preceding three years.
This provision is intended to respond to concerns that
class actions with a truly local focus should not be moved to
federal court under this legislation because state courts have
a strong interest in adjudicating such disputes. At the same
time, this is a narrow exception that was carefully drafted to
ensure that it does not become a jurisdictional loophole. Thus,
the Committee wishes to stress that in assessing whether each
of these criteria is satisfied by a particular case, a federal
court should bear in mind that the purpose of each of these
criteria is to identify a truly local controversy--a
controversy that uniquely affects a particular locality to the
exclusion of all others.
The first criterion--that greater than two-thirds
of all class members in the aggregate are citizens of the State
in which the action was originally filed--is a critical inquiry
for determining whether the matter is a local controversy. The
proponents of applying the exception thus must demonstrate that
a supermajority of the class members are local in the sense
that they all reside in the forum state.
Under the second criterion, there must be at least
one real local defendant. By that, the Committee intends that
the local defendant must be a primary focus of the plaintiffs'
claims--not just a peripheral defendant. The defendant must be
a target from whom significant relief is sought by the class
(as opposed to just a subset of the class membership), as well
as being a defendant whose alleged conduct forms a significant
basis for the claims asserted by the class. For example, in a
consumer fraud case alleging that an insurance company
incorporated and based in another state misrepresented its
policies, a local agent of the company named as a defendant
presumably would not fit this criteria. He or she probably
would have had contact with only some of the purported class
members and thus would not be a person from whom significant
relief would be sought by the plaintiff class viewed as a
whole. Obviously, from a relief standpoint, the real demand of
the full class in terms of seeking significant relief would be
on the insurance company itself. Similarly, the agent
presumably would not be a person whose alleged conduct forms a
significant basis for the claims asserted. At most, that agent
would have been an isolated role player in the alleged scheme
implemented by the insurance company.\126\ In this instance,
the real target in this action (both in terms of relief and
alleged conduct) is the insurance company, and if that company
is not local, this criterion would not be met.
---------------------------------------------------------------------------
\126\ The Committee wishes to stress that the presence of
conspiracy allegations should not alter this inquiry. For example, if
in the hypothetical discussed here, the class alleges that the agent
conspired with the insurance company with respect to the alleged
scheme, it theoretically would expose the agent to potential liability
to the entire class. But that would not change the relatively minor
role that the agent played in the overall misconduct that is alleged
and would not change the fact that the agent is not the real target of
the litigation, which is the inquiry contemplated by this criterion.
---------------------------------------------------------------------------
The third criterion is that the principal injuries
resulting from the actions of all the defendants must have
occurred in the state where the suit was filed. By this
criterion, the Committee means that all or almost all of the
damage caused by defendants' alleged conduct occurred in the
state where the suit was brought. The purpose of this criterion
is to ensure that this exception is used only where the impact
of the misconduct alleged by the purported class is localized.
For example, a class action in which local residents seek
compensation for property damage resulting from a chemical leak
at a manufacturing plant in that community would fit this
criterion, provided that the property damage was limited to
residents in the vicinity of the plant. However, if the
defendants engaged in conduct that could be alleged to have
injured consumers throughout the country or broadly throughout
several states, the case would not qualify for this exception,
even if it were brought only as a single-state class action.
The fourth and final criterion is that no other
class action involving similar allegations has been filed
against any of the defendants over the last three years on
behalf of the same or other persons. In other words, if a
controversy results in the filing of multiple class actions, it
is a strong signal that those cases may not be of the variety
that this exception is intended to address. As such, it is a
test for assessing whether a controversy is localized. The
Committee wishes to stress that another purpose of this
criterion is to ensure that overlapping or competing class
actions or class actions making similar factual allegations
against the same defendant that would benefit from coordination
are not excluded from federal court by the Local Controversy
Exception and thus placed beyond the coordinating authority of
the Judicial Panel on Multidistrict Litigation. The Committee
also wishes to stress that the inquiry under this criterion
should not be whether identical (or nearly identical) class
actions have been filed. The inquiry is whether similar factual
allegations have been made against the defendant in multiple
class actions, regardless of whether the same causes of actions
were asserted or whether the purported plaintiff classes were
the same (or even overlapped in significant respects).
The following two examples are intended to illustrate how
the Committee intends this provision to work:
A class action is brought in Florida state court
against a Florida funeral home regarding alleged wrongdoing in
burial practices. Nearly all the plaintiffs live in Florida
(about 90 percent). The suit is brought against the cemetery, a
Florida corporation, and an out-of-state parent company that
was involved in supervising the cemetery. No other class action
suits have been filed against the cemetery. This is precisely
the type of case for which the Local Controversy Exception was
developed. Although there is one out-of-state defendant (the
parent company), the controversy is at its core a local one,
and the Florida state court where it was brought has a strong
interest in resolving the dispute. Thus, this case would remain
in state court.
A class action is brought in Florida against an
out-of-state automobile manufacturer and a few in-state
dealers, alleging that a certain vehicle model is unsafe
because of an allegedly defective transmission. The vehicle
model was sold in all fifty states but the class action is only
brought on behalf of Floridians. This case would not fall
within the Local Controversy Exception for two reasons. First,
the automobile dealers are not defendants whose alleged conduct
forms a significant basis of the claims or from whom
significant relief is sought by the class. Even if the
plaintiffs are truly seeking relief from the dealers, that
relief is just small change compared to what they are seeking
from the manufacturer. Moreover, the main allegation is that
the vehicles were defective. In product liability cases, the
conduct of a retailer such as an automobile dealer does not
form a significant basis for the claims of the class members.
Second, the case falls outside the Local Controversy Exception
because the ``principal injuries resulting from the alleged
conduct,''--i.e., selling a vehicle with a defective
transmission--were incurred in all fifty states. The fact that
the suit was brought as a single-state class action does not
mean that the principal injuries were local. In other words,
this provision looks at where the principal injuries were
suffered by everyone who was affected by the alleged conduct--
not just where the proposed class members were injured. Thus,
any defendant could remove this case to federal court.
New subsection 1332(d)(5)(A) and (B) specify, respectively,
that S. 5 does not extend federal diversity jurisdiction to
class actions in which (a) the primary defendants are states,
state officials, or other governmental entities against whom
the district court may be foreclosed from ordering relief
(``state action'' cases) or (b) the number of members of all
proposed plaintiff classes in the aggregate is fewer than 100
class members (``limited scope'' cases). The purpose of the
``state action'' cases provision is to prevent states, state
officials, or other governmental entities from dodging
legitimate claims by removing class actions to federal court
and then arguing that the federal courts are constitutionally
prohibited from granting the requested relief. This provision
will ensure that cases in which such entities are the primary
targets will be heard in state courts that do not face the same
constitutional impediments to granting relief. The ``limited
scope'' cases provision is intended to allow class actions with
relatively few claimants to remain in state courts.\127\
---------------------------------------------------------------------------
\127\ Under federal law, a purported class action may involve as
few as 21 class members. See, e.g., Cox v. American Cast Iron Pipe Co.,
784 F.2d 1546, 1553 (l1th Cir. 1986) (noting that classes encompassing
fewer than 21 persons normally are not subject to class certification);
Tietz v. Bowen, 695 F. Supp. 441,445 (C.D. Cal. 1987) (certifying class
with 27 class members).
---------------------------------------------------------------------------
Federal courts should proceed cautiously before declining
federal jurisdiction under the subsection 1332(d)(5)(A) ``state
action'' case exception, and do so only when it is clear that
the primary defendants are indeed states, state officials, or
other governmental entities against whom the ``court may be
foreclosed from ordering relief.'' In making such a finding,
courts should apply the guidance regarding the term ``primary
defendants'' discussed below. The Committee wishes to stress
that this provision should not become a subterfuge for avoiding
federal jurisdiction. In particular, plaintiffs should not be
permitted to name state entities as defendants as a mechanism
to avoid federal jurisdiction over class actions that largely
target non-governmental defendants. Similarly, the subsection
1332(d)(5)(B) exception for ``limited scope'' cases (actions in
which there are fewer than 100 class members) should also be
interpreted narrowly. For example, in cases in which it is
unclear whether ``the number of members of all proposed
plaintiff classes in the aggregate is less than 100,'' a
federal court should err in favor of exercising jurisdiction
over the matter.
Pursuant to new subsection 1332(d)(6), the claims of the
individual class members in any class action shall be
aggregated to determine whether the amount in controversy
exceeds the sum or value of $5,000,000 (exclusive of interest
and costs). The Committee intends this subsection to be
interpreted expansively. If a purported class action is removed
pursuant to these jurisdictional provisions, the named
plaintiff(s) should bear the burden of demonstrating that the
removal was improvident (i.e., that the applicable
jurisdictional requirements are not satisfied). And if a
federal court is uncertain about whether ``all matters in
controversy'' in a purported class action ``do not in the
aggregate exceed the sum or value of $5,000,000,'' the court
should err in favor of exercising jurisdiction over the case.
By the same token, the Committee intends that a matter be
subject to federal jurisdiction under this provision if the
value of the matter in litigation exceeds $5,000,000 either
from the viewpoint of the plaintiff or the viewpoint of the
defendant, and regardless of the type of relief sought (e.g.,
damages, injunctive relief, or declaratory relief). The
Committee is aware that some courts, especially in the class
action context, have declined to exercise federal jurisdiction
over cases on the ground that the amount in controversy in
those cases exceeded the jurisdictional threshold only when
assessed from the viewpoint of the defendant. For example, a
class action seeking an injunction that would require a
defendant to restructure its business in some fundamental way
might ``cost'' a defendant well in excess of $75,000 under
current law, but might have substantially less ``value'' to a
class of plaintiffs. Some courts have held that jurisdiction
does not exist in this scenario under present law, because they
have reasoned that assessing the amount in controversy from the
defendant's perspective was tantamount to aggregating damages.
Because S. 5 explicitly allows aggregation for purposes of
determining the amount in controversy in class actions, that
concern is no longer relevant.
The Committee also notes that in assessing the
jurisdictional amount in declaratory relief cases, the federal
court should include in its assessment the value of all relief
and benefits that would logically flow from the granting of the
declaratory relief sought by the claimants. For example, a
declaration that a defendant's conduct is unlawful or
fraudulent will carry certain consequences, such as the need to
cease and desist from that conduct, that will often ``cost''
the defendant in excess of $5,000,000. Or a declaration that a
standardized product sold throughout the nation is
``defective'' might well put a case over the $5,000,000
threshold, even if the class complaint did not affirmatively
seek a determination that each class member was injured by the
product.
Overall, new section 1332(d) is intended to expand
substantially federal court jurisdiction over class actions.
Its provisions should be read broadly, with a strong preference
that interstate class actions should be heard in a federal
court if properly removed by any defendant.
As noted above, it is the intent of the Committee that the
named plaintiff(s) should bear the burden of demonstrating that
a case should be remanded to state court (e.g., the burden of
demonstrating that more than two-thirds of the proposed class
members are citizens of the forum state). Allocating the burden
in this manner is important to ensure that the named plaintiffs
will not be able to evade federal jurisdiction with vague class
definitions or other efforts to obscure the citizenship of
class members. The law is clear that, once a federal court
properly has jurisdiction over a case removed to federal court,
subsequent events generally cannot ``oust'' the federal court
of jurisdiction.\128\ While plaintiffs undoubtedly possess some
power to seek to avoid federal jurisdiction by defining a
proposed class in particular ways, they lose that power once a
defendant has properly removed a class action to federal court.
---------------------------------------------------------------------------
\128\ See, e.g., St. Paul Mercury Indem. Co. v. Red Cab Co., 303
U.S. 283, 293 (1938).
---------------------------------------------------------------------------
For purposes of class actions that are subject to
subsections 1332(d)(3) and (d)(5)(A), the Committee intends
that ``primary defendents'' be interpreted to reach those
defendants who are the real ``targets'' of the lawsuit--i.e.,
the defendants that would be expected to incur most of the loss
if liability is found. Thus, the term ``primary defendants''
should include any person who has substantial exposure to
significant portions of the proposed class in the action,
particularly any defendant that is allegedly liable to the vast
majority of the members of the proposed classes (as opposed to
simply a few individual class members).
It is the Committee's intention with regard to each of
these exceptions that the party opposing federal jurisdiction
shall have the burden of demonstrating the applicability of an
exemption. Thus, if a plaintiff seeks to have a class action
remanded under section 1332(d)(4)(A) on the ground that the
primary defendants and two-thirds or more of the class members
are citizens of the home state, that plaintiff shall have the
burden of demonstrating that these criteria are met by the
lawsuit. Similarly, if a plaintiff seeks to have a purported
class action remanded for lack of federal diversity
jurisdiction under subsection 1332(d)(5)(B) (``limited scope''
class actions), that plaintiff should have the burden of
demonstrating that ``all matters in controversy'' do not ``in
the aggregate exceed the sum or value of $5,000,000, exclusive
of interest and costs'' or that ``the number of all proposed
plaintiff classes in the aggregate is less than 100.''
The Committee understands that in assessing the various
criteria established in all these new jurisdictional
provisions, a federal court may have to engage in some fact-
finding, not unlike what is necessitated by the existing
jurisdictional statutes. The Committee further understands that
in some instances, limited discovery may be necessary to make
these determinations. However, the Committee cautions that
these jurisdictional determinations should be made largely on
the basis of readily available information. Allowing
substantial, burdensome discovery on jurisdictional issues
would be contrary to the intent of these provisions to
encourage the exercise of federal jurisdiction over class
actions. For example, in assessing the citizenship of the
various members of a proposed class, it would in most cases be
improper for the named plaintiffs to request that the defendant
produce a list of all class members (or detailed information
that would allow the construction of such a list), in many
instances a massive, burdensome undertaking that will not be
necessary unless a proposed class is certified. Less burdensome
means (e.g., factual stipulations) should be used in creating a
record upon which the jurisdictional determinations can be
made.
New subsection 1332(d)(7) clarifies that the citizenship of
members of proposed classes would be determined as of the date
the action was filed. Thus, questions about whether two-thirds
of the members of a proposed class were citizens of a
particular state would be determined as of that date. The only
exception is where the original complaint does not indicate the
existence of federal jurisdiction and plaintiffs later serve
paper (particularly an amended complaint) that creates such
citizenship or makes it evident. Then, consistent with the
approach in existing section 1446(b), the ``snapshot'' of class
membership citizenship is taken as of the date on which that
new paper is served.
New subsection 1332(d)(8) clarifies that the diversity
jurisdiction provisions of this section shall apply to any
class action before or after the entry of a class certification
order by the court. The purpose of this provision is to confirm
that both pre- and post-certification class actions shall be
subject to the jurisdictional and removal provisions of S. 5.
The Committee wishes to make clear that this provision is not
intended to alter the deadlines for removal in the current
Judicial Code or as are established by this legislation. This
section is merely intended to indicate that the status of a
class action (certified or uncertified) should not affect the
removability of a case as otherwise permitted by the applicable
removal statutes.
Pursuant to new subsection 1332(d)(9), the Act excepts from
new subsection 1332(d)(2)'s grant of original jurisdiction
those class actions that solely involve claims that relate to
matters of corporate governance arising out of state law. The
purpose of this provision is to avoid disturbing in any way the
federal vs. state court jurisdictional lines already drawn in
the securities litigation class action context by the enactment
of the Securities Litigation Uniform Standards Act of 1998
(P.L. 105-353).
The Committee intends that this exemption be narrowly
construed. By corporate governance litigation, the Committee
means only litigation based solely on (a) state statutory law
regulating the organization and governance of business
enterprises such as corporations, partnerships, limited
partnerships, limited liability companies, limited liability
partnerships, and business trusts; (b) state common law
regarding the duties owed between and among owners and managers
of business enterprises; and (c) the rights arising out of the
terms of the securities issued by business enterprises.
This exemption would apply to a class action relating to a
corporate governance claim filed in the court of any state.
Consequently, it would apply to a corporate governance class
action regardless of the forum in which it may be filed, and
regardless of whether the law to be applied is that of the
State in which the claim is filed.
For purposes of this exemption, the phrase ``the internal
affairs or governance of a corporation or other form of
business enterprise'' is intended to refer to the internal
affairs doctrine defined by the U.S. Supreme Court as ``matters
peculiar to the relationships among or between the corporation
and its current officers, directors and shareholders. * * *''
\129\ The phrase ``other form of business enterprise'' is
intended to include forms of business entities other than
corporations, including, but not limited to, limited liability
companies, limited liability partnerships, business trusts,
partnerships and limited partnerships.
---------------------------------------------------------------------------
\129\ Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). See also
Draper v. Paul N. Gardner Defined Plan Trust, 625 A.2d 859, 865-66
(Del. 1993); McDermott, Inc. v. Lewis, 531 A.2d 206, 214-15 (Del.
1987); Ellis v. Mutual Life Ins. Co., 187 So. 434 (Ala. 1939);
Amberjack Ltd. Inc. v. Thompson, 1997 WL 613676 (Tenn. App. 1997);
NAACP v. Golding, 679 A.2d 554,559 (Ct. App. Md. 1996); Hart v. General
Motors Corp., 517 N.Y.S.2d 490, 493 (App. Div. 1987).
---------------------------------------------------------------------------
The subsection 1332(d)(9) exemption to new section 1332( d)
jurisdiction is also intended to cover disputes over the
meaning of the terms of a security, which is generally spelled
out in some formative document of the business enterprise, such
as a certificate of incorporation or a certificate of
designations. The reference to the Securities Act of 1933
contained in new subsection 1332(d)(8)(A) is for definitional
purposes only. Since that law contains an already well-defined
concept of a ``security,'' this provision simply imports the
definition contained in the Securities Act.
New subsection 1332(d)(10) provides that for purposes of
this new section and section 1453 of title 28, an
unincorporated association shall be deemed to be a citizen of a
state where it has its principal place of business and the
state under whose laws it is organized. This provision is added
to ensure that unincorporated associations receive the same
treatment as corporations for purposes of diversity
jurisdiction. The U.S. Supreme Court has held that ``[f]or
purposes of diversity jurisdiction, the citizenship of an
unincorporated association is the citizenship of the individual
members of the association.'' \130\ This rule ``has been
frequently criticized because often * * * an unincorporated
association is, as a practical matter, indistinguishable from a
corporation in the same business.'' \131\ Some insurance
companies, for example, are ``inter-insurance exchanges'' or
``reciprocal insurance associations.'' For that reason, federal
courts have treated them as unincorporated associations for
diversity jurisdiction purposes. Since such companies are
nationwide companies, they are deemed to be citizens of any
state in which they have insured customers.\132\ Consequently,
these companies can never be completely or even minimally
diverse in any case. It makes no sense to treat an
unincorporated insurance company differently from, say, an
incorporated manufacturer for purposes of diversity
jurisdiction. New subsection 1332(d)(10) corrects this anomaly.
---------------------------------------------------------------------------
\130\ United Steelworkers of America v. R.H. Bouligny, Inc., 382
U.S. 145 (1965).
\131\ See, e.g., 14 A.L.R. Fed. 849 (2004) (noting dissatisfaction
with the prevailing rule and citing one leading authority that
commented that ``many unincorporated associations bear functional
resemblances to corporations * * * [and] the diversity citizenship
status of such associations [i]s `anomalous' in view of the fictional
citizenship accorded to corporations and in view of the fact that many
states treat these associations as juridical entities, and has
emphatically called upon Congress to provide that where unincorporated
associations have entity status under state law, they should be treated
analogously to corporations for purposes of diversity jurisdiction'').
\132\ See Tuck v. United Services Automobile Ass'n, 859 F.2d 842
(10th Cir. 1988); Baer v. United Services Automobile Ass'n, 503 F.2d
393 (2d Cir. 1974); Truck Insurance Exchange v. The Dow Chemical Co.,
331 F. Supp. 323 (W.D. Mo. 1971).
---------------------------------------------------------------------------
New subsection 1332(d)(11) expands federal jurisdiction
over mass actions--suits that are brought on behalf of numerous
named plaintiffs who claim that their suits present common
questions of law or fact that should be tried together even
though they do not seek class certification status. Mass action
cases function very much like class actions and are subject to
many of the same abuses.
Under subsection 1332(d)(11), any civil action in which 100
or more named parties seek to try their claims for monetary
relief together will be treated as a class action for
jurisdictional purposes. Thus, if such a civil action met the
other diversity jurisdictional prerequisites set forth for
class actions in this legislation, that civil action would be
subject to federal jurisdiction, subject to several exceptions.
A mass action meeting the other applicable federal diversity
jurisdiction criteria would not be eligible for federal
jurisdiction if any of the following criteria are satisfied by
the action:
All the claims asserted in the action arise out of
an event or occurrence in the state where the suit is filed and
the injuries were incurred in that state and contiguous states
(e.g., a toxic spill case);
The defendants (not the plaintiffs) sought to join
the claims;
The claims are asserted on behalf of the general
public (and not on behalf of individual claimants or members of
a purported class) pursuant to a state statute specifically
authorizing such an action; or
The claims have been consolidated or coordinated
solely for pretrial purposes.
Subsection 1332(d)(11)(B)(i) includes a statement
indicating that jurisdiction exists only over those plaintiffs
whose claims in a mass action satisfy the jurisdictional amount
requirements under section 1332(a). The Committee notes that
the intent of this proviso is as follows. If a mass action
satisfies the criteria set forth in the section (that is, it
involves the monetary relief claims of 100 or more persons that
are proposed to be tried jointly on the ground that the claims
involve common questions of law or fact and it meets the tests
for federal diversity jurisdiction otherwise established by the
legislation), it may be removed to a federal court, which is
authorized to exercise jurisdiction over the action. Under the
proviso, however, it is the Committee's intent that any claims
that are included in the mass action that standing alone do not
satisfy the jurisdictional amount requirements of Section
1332(a) (currently $75,000), would be remanded to state court.
Subsequent remands of individual claims not meeting the section
1332 jurisdictional amount requirement may take the action
below the 100-plaintiff jurisdictional threshold or the $5
million aggregated jurisdictional amount requirement. However,
so long as the mass action met the various jurisdictional
requirements at the time of removal, it is the Committee's view
that those subsequent remands should not extinguish federal
diversity jurisdictional over the action.
Under subsections 1332(d)(11)(C) and (D), respectively, a
mass action removed to a federal court under this provision may
not be transferred to another federal court under the MDL
statute (28 U.S.C. Sec. 1407) unless a majority of the
plaintiffs request such a transfer, and the statute of
limitations for any claims that are part of a mass action will
be tolled while the mass action is pending in federal court.
The Committee find that mass actions are simply class
actions in disguise. They involve a lot of people who want
their claims adjudicated together and they often result in the
same abuses as class actions. In fact, sometimes the abuses are
even worse because the lawyers seek to join claims that have
little to do with each other and confuse a jury into awarding
millions of dollars to individuals who have suffered no real
injury.
For these reasons, it is the Committee's intent that the
exceptions to this provision be interpreted strictly by federal
courts. The first exception would apply only to a truly local
single event with no substantial interstate effects. The
purpose of this exception was to allow cases involving
environmental torts such as a chemical spill to remain in state
court if both the event and the injuries were truly local, even
though there are some out-of-state defendants. By contrast,
this exception would not apply to a product liability or
insurance case. The sale of a product to different people does
not qualify as an event. And the alleged injuries in such a
case would be spread out over more than one state (or
contiguous states)--even if all the plaintiffs in the
particular case come from one state.
The third exception addresses a very narrow situation,
specifically a law like the California Unfair Competition Law,
which allows individuals to bring a suit on behalf of the
general public. Such a suit would not qualify as a mass action.
However, the vast majority of cases brought under other states'
consumer fraud laws, which do not have a parallel provision,
could qualify as removable mass actions.
The final exception would apply to claims that are
consolidated or coordinated solely for pretrial proceedings. If
a number of individually filed cases are consolidated solely
for pretrial proceedings--and not for trial--those cases have
not truly been merged in a way that makes them mass actions
warranting removal to federal court. On the other hand, if
those same cases are consolidated exclusively for trial, or for
pretrial and trial purposes, and the result is that 100 or more
persons' claims will be tried jointly, those cases have been
sufficiently merged to warrant removal of such a mass action to
federal court.
In addition, this provision is in no way intended to
abrogate 28 U.S.C. 1367 or to narrow current jurisdictional
rules in any way. Thus, if a federal court believed it to be
appropriate, the court could apply supplemental jurisdiction in
the mass action context as well.
The following example is intended to illustrate how this
provision would work.
Two hundred people jointly file a mass action in
West Virginia against a Pennsylvania drug manufacturer and also
name a local drugstore. Three of them assert claims for $1
million each, and the rest assert claims of $20,000. The
federal court would have jurisdiction over the mass action
because there are more than 100 plaintiffs, there is minimal
diversity, the total amount in controversy exceeds $5 million
and a product liability case does not qualify for the ``local''
occurrence exception in the provision. The Committee then
intends for the judge to consider closely which claims meet the
$75,000 minimum, noting that plaintiffs often seek to minimize
what they are seeking in a complaint so they can stay in state
court. For example, sometimes plaintiffs leave their claim for
punitive damages off the original complaint to make it seem
like their claims are smaller than they really are. It is the
Committee's expectation that a federal judge would read a
complaint very carefully, and only remand claims that clearly
do not meet the amount-in-controversy threshold. If it is
likely that a plaintiff is going to turn around in a month and
add a claim for punitive damages, the federal court should
obviously assert jurisdiction over that individual's claims.
Section 5.--Section 5 establishes the procedures for
removal of interstate class actions over which the federal
court is granted original jurisdiction in new section 1332(d).
The general removal provisions currently contained in
Chapter 89 of Title 28 would continue to apply to class
actions, except where they are inconsistent with the provisions
of the Act. For example, like other removed actions, matters
removable under this bill may be removed only ``to the district
court of the United States for the district and division
embracing the place where such action is pending.'' \133\
However, the general requirement contained in section 1441(b)
that an action be removable only if none of the defendants is a
citizen of the state in which the action is brought would not
apply to the removal of class actions under the jurisdictional
provisions of section 1332(d). Imposing such a restriction on
removal of class actions would subvert the intent of the Act
because it would essentially allow a plaintiff to defeat
removal jurisdiction by suing both in-state and out-of-state
defendants. Such a restriction on removal of class actions
would perpetuate the current ``complete diversity'' rule for
class actions that new section 1332(d) rejects. The Act does
not, however, disturb the general rule that a case can only be
removed to the district court of the United States for the
district and division embracing the place where the action is
pending.\134\ In addition, the Act does not change the
application of the Erie Doctrine, which requires federal courts
to apply the substantive law dictated by applicable choice-of-
law principles in actions arising under diversity
jurisdiction.\135\
---------------------------------------------------------------------------
\133\ See 28 U.S.C. Sec. 1441(a).
\134\ Id.
\135\ See Erie Railroad Co. v. Thompkins, 304 U.S. 64 (1938).
---------------------------------------------------------------------------
New subsection 1453(b) provides that removal may occur
without the consent of any other defendant. This revision to
the removal rules will prevent a plaintiffs' attorney from
recruiting a ``friendly'' defendant (e.g., a local retailer)
who could refuse to join in a removal to federal court and
thereby thwart the legitimate efforts of the primary corporate
defendant to seek a federal forum in which to litigate the
pending claims. By this provision, it is the Committee's intent
to overrule caselaw developed by the federal courts requiring
the consent of all parties,\136\ to the extent that such
precedents might be applied to class actions subject to the
expanded jurisdictional and removal provisions of S. 5.
---------------------------------------------------------------------------
\136\ See e.g., Hewitt v. City of Stanton, 798 F.2d 1230 (9th Cir.
1986); Mitchell v. Kentucky-American Water Co., 178 F.R.D. 140, 142
(E.D. Ky. 1997).
---------------------------------------------------------------------------
New subsection 1453(c) provides that an order remanding a
class action to state court is reviewable by appeal at the
discretion of the reviewing court. The purpose of this
provision is to develop a body of appellate law interpreting
the legislation without unduly delaying the litigation of class
actions. As a general matter, appellate review of orders
remanding cases to state court is not permitted, as specified
by 28 U.S.C. 1447(d). New subsection 1453(c) provides
discretionary appellate review of remand orders under this
legislation but also imposes time limits. Specifically, parties
must file a notice of appeal within seven days after entry of a
remand order. In addition, the appeals court must issue a final
decision on appeal within 60 days. However, the parties may
agree to give the court more time, and the court may, on its
own, avail itself of one ten-day extension.
The Committee notes that the current prohibition on remand
order review was added to section 1447 after the federal
diversity jurisdictional statutes and the related removal
statutes had been subject to appellate review for many years
and were the subject of considerable appellate level
interpretive law. The Committee believes it is important to
create a similar body of clear and consistent guidance for
district courts that will be interpreting this legislation and
would particularly encourage appellate courts to review cases
that raise jurisdictional issues likely to arise in future
cases.
In order to be consistent with the exceptions to federal
diversity jurisdiction granted under new section 1332(d), new
subsection 1453(d) provides that the class action removal
provisions shall not apply to claims involving covered
securities or corporate governance litigation. In addition,
claims concerning a covered security, as defined in section
16(f)(3) of the Securities Act of 1933 or section 28(f)(5)(E)
of the Securities Exchange Act of 1934, are excepted from the
class action removal rule as well. These are essentially claims
against the officers of a corporation for a precipitous drop in
the value of its stock, based on fraud. Because Congress has
previously enacted legislation governing the adjudication of
these claims,\137\ it is the Committee's intent not to disturb
the carefully crafted framework for litigating in this context.
Thus, claims involving covered securities are excluded from the
new section 1332(b) jurisdiction. The parameters of this
subsection are intended to be conterminous with new subsection
1332(d)(9).
---------------------------------------------------------------------------
\137\ See Public Law 104-67, the ``Private Securities Litigation
Reform Act of 1995,'' and Public Law 105-353, the ``Securities
Litigation Uniform Standards Act of 1998.''
---------------------------------------------------------------------------
Section 5 also amends Section 1446(b) to clarify that the
provisions in that section prohibiting the removal of cases
more than one year after their commencement do not apply to
class actions. Thus, removals taken under these revised
provisions for class actions may be taken more than one year
after commencement of the action at issue. This change is
intended to prevent attorneys from engaging in the type of
gaming that occurs under the current class action system. In
the most extreme example, a plaintiffs' attorney could file
suit under current law against a friendly defendant, triggering
the start of the one-year limitation after which removal may
not be sought under any condition. One year and one day after
filing suit, the plaintiff's attorney could then serve an
amended complaint on an additional defendant, at which time it
would be too late for that new defendant to remove the case to
federal court--regardless of whether diversity jurisdiction
exists and irrespective of the practical merits of the case.
The same unfair result would also occur if plaintiffs' counsel
dismisses non-diverse parties or increases the amount of
damages being pled after the one-year deadline. By allowing
class actions to be removed at any time when changes are made
to the pleadings that bring the case within section 1332(d)'s
requirements for federal jurisdiction, this provision will
ensure that such fraudulent pleading practices can no longer be
used to thwart federal jurisdiction. It is not the intention of
the Committee to change section 1446(b)'s requirements that an
action must be removed within thirty days of being served with
the initial pleading or thirty days after receipt of an amended
pleading, motion, order or other paper from which it may be
ascertained that the case is one which is or has become
removable.
Section 6.--Section 6 directs the Judicial Conference of
the United States, with the assistance of the Director of the
Federal Judicial Center and the Director of the Administrative
Office of the United States Courts, to prepare and transmit to
the Committees on the Judiciary of the Senate and House of
Representatives a report on class action settlements. The
report shall contain recommendations on the best practices that
courts can use to ensure that proposed class action settlements
are fair to the class members that these settlements are
supposed to benefit. In addition, the report shall contain
recommendations on the best practices that courts can use to
ensure that fees and expenses awarded to attorneys in
connection with a class action settlement appropriately reflect
the extent to which counsel obtained full redress for the
injuries alleged in the complaint, and the time, expense and
risk devoted to the litigation. Finally, the report shall
identify the actions that the Judicial Conference has taken and
intends to take toward having the federal judiciary implement
the recommendations in the report.
Section 6 contains a provision stating that nothing in the
Act shall be construed to alter the authority of the federal
courts to supervise the award of attorneys' fees. It is the
Committee's intent not to disrupt the federal courts' broad
discretion to approve attorneys' fees based on fairness
determinations, notwithstanding contractual arrangements
between attorneys and their clients.
Section 7.--Section 7 provides that the enactments of the
Judicial Conference recommendations shall take effect on the
date of enactment of this Act or on December 1, 2003 (as
specified in that order), whichever occurs first. This
provision is a relic from an earlier version of this
legislation and is of no effect since the recommendations have
already been enacted.
Section 8.--Section 8 clarifies that nothing in the bill
restricts the authority of the Judicial Conference and Supreme
Court to implement new rules relating to class actions. Section
8 is intended to ensure that the bill not be interpreted as
restricting in any way the ongoing efforts of the federal
Judicial Conference's Advisory Committee on Civil Rules and
Standing Committee on Rules and Procedure to promulgate
improved rules governing class actions.
Section 9.--Section 9 provides that the amendments made by
the Act shall apply to any civil action commenced on or after
the date of enactment.
VII. Critics Contentions and Rebuttals
Critics' Contention No. 1: S. 5 would transfer nearly every class
action from state to federal court and would add to the
overwhelming workload faced by our federal courts.
Response:
During Committee debate on previous versions of this bill,
the most frequently expressed concern was that its
jurisdictional provisions would overload the federal judiciary.
That argument, however, ignores three key facts. First, the
bill will not move most class actions to federal court. Second,
many state courts, where the critics apparently would like to
confine all interstate class actions, are more burdened than
the federal courts, and are less equipped to deal with complex
cases like class actions. Indeed, many state courts have
comparatively crushing caseloads. Third, federal courts can
handle duplicative class actions more efficiently through
multidistrict litigation proceedings.
First, a recent study debunked the myth promoted by some of
the bill's critics that S. 5 will move nearly all class actions
to federal court.\138\ The study looked at the only six states
that had data readily available on on-line databases and found
that more than 50 percent of the class actions for which there
were rulings during a five-year period would not be removable
to federal court under the Class Action Fairness Act.\139\ By
contrast, the study found that in Madison County, Illinois,
more than 85 percent of the cases would be removable to federal
court under the bill.\140\ Put simply, the study found that The
Class Action Fairness Act is a narrowly tailored bill that will
not overwhelm the federal judiciary. Rather, the bill leaves
most legitimately local disputes in state court, while ensuring
that large, interstate class actions like those typically
brought in Madison and St. Clair counties and other magnet
courts can be heard in federal court.
---------------------------------------------------------------------------
\138\ John H. Beisner & Jessica Davidson Miller, There will be no
Exodus: An Empirical Study of S. 2062's Effects on Class Actions,
Mealey's Tort Reform Update (April 2004).
\139\ Id. at 16.
\140\ Id. at 20.
---------------------------------------------------------------------------
Second, contrary to critics' contentions, the average state
court judge is assigned three times as many cases as his or her
federal counterparts. State court judges are assigned (on
average) 1,568 new cases each year.\141\ For example, in
California, the average judge was assigned 1,546 cases in 2003.
In Florida, the average was 2,206. In New Jersey, the average
was 2,810 cases. And in Texas, it was 1,701 cases. In contrast,
each federal court judge was assigned an average of just 483
new cases during the twelve-month period ending September 30,
2003.\142\
---------------------------------------------------------------------------
\141\ Examining the Work of State Courts at 12.
\142\ See Federal Court Management.
---------------------------------------------------------------------------
Critics of the bill also ignore the fact that many state
courts are tribunals of general jurisdiction--they hear all
sorts of cases, including divorce matters, custody disputes,
name change petitions, traffic violations, small claims
contract disputes, minor misdemeanors, and major felonies.
Thus, when a class action is filed before those courts, it
diminishes the court's ability to provide a broad array of very
basic legal services for the local community. The judges
presiding over those state courts have far fewer resources for
dealing with huge, complex cases, like class actions.
Federal court judges usually have two or three law clerks;
state court judges often have none. And federal court judges
usually can delegate aspects of their cases (e.g., discovery
issues) to magistrate judges or special masters; state court
judges typically lack such resources.
Third, critics also overlook the fact that even if both
court systems were similarly burdened, federal courts could
still deal with class actions more efficiently for two reasons.
First, federal courts can coordinate ``copy cat'' or
overlapping class actions. The record before the Committee
indicates that it is not uncommon to see twenty, thirty, or
even 100 class actions filed on the same subject matter.
Sometimes, competing lawyers file these cases; other times,
they are filed by the same lawyers who are simply forum-
shopping for the most receptive judge. When these similar,
overlapping class actions are filed in state courts of
different jurisdictions, there is no way to consolidate or
coordinate the cases. The result is enormous waste, to say
nothing of the unfairness. Defendants are forced to defend the
same case in many different courts. And class members are
harmed because the various class counsel compete with each
other to achieve the best settlement for the lawyers. In
contrast, if overlapping or similar class actions are filed
against the same defendant in two or more different federal
courts, the multidistrict litigation process (established by 28
U.S.C. Sec. 1407) permits the transfer and consolidation of
those cases to a single judge. The federal court multidistrict
litigation system regularly consolidates multiple overlapping
class actions in this manner, preventing the waste that occurs
in state courts.
Finally, critics who focus on the federal courts' workload
are missing the point--class actions are precisely the kind of
cases that should be heard in federal court. Class actions
usually involve the most people, most money, and most
interstate commerce issues. They also usually involve issues of
nationwide implications. Interstate class actions are certainly
no less deserving of a federal forum than the 2,525 cases heard
in federal court each year to recover a few thousand dollars in
defaulted student loans, or the 17,952 federal personal injury
cases (e.g., single person medical malpractice cases).\143\
Ultimately, regardless of the impact on the federal court
caseload, large interstate class actions belong in federal
court.
---------------------------------------------------------------------------
\143\ See Administrative office of the U.S. Courts, Judicial
Business of the United States Courts 2003 (2004) (``Judicial
Business''), at 129-31.
---------------------------------------------------------------------------
Critics' Contention No. 2: Abuses of class actions exist in both
federal and state courts, and allowing more interstate class
actions to be heard in federal court thus will not solve any
problems.
Response:
At congressional hearings on the subject of class actions,
witness after witness provided compelling evidence that serious
abuses of the class device are occurring primarily in state
courts.\144\
---------------------------------------------------------------------------
\144\ See generally Class Action Lawsuits: Examining Victim
Compensation and Attorneys' Fees, Hearings Before the Subcommittee on
Administrative Oversight and the Courts of the Senate Committee on the
Judiciary, 105th Cong. (1997); Hearings on Mass Torts and Class Actions
Before the Subcommittee on Courts and Intellectual Property of the
House Committee on the Judiciary, 105th Cong. (1998), Hearing on H.R.
1875, The Class Action Jurisdiction Act of 1999 Before the House
Committee on the Judiciary, 106th Cong. (1999).
---------------------------------------------------------------------------
Moreover, several studies also indicate that the class
action abuse problem, particularly with respect to class
settlements, is primarily a state court issue. For example, a
detailed Federal Judicial Center study concluded that ``[i]n
most [class actions handled by federal courts subject to the
study], net monetary distributions to the class exceeded
attorneys' fees by substantial margins.'' \145\ In stark
contrast, an Institute for Civil Justice/RAND study indicated
that in state court consumer class action settlements not
involving personal injuries, class counsel typically walk off
with more money than all of the class members combined.\146\
The ICJ/RAND study offered three compelling rationales for
allowing more interstate class actions to be heard by federal
courts:
---------------------------------------------------------------------------
\145\ Federal Judicial Center, Empirical Study of Class Actions in
Four Federal District Courts 68-69 (1996).
\146\ Class Action Dilemmas, at 19.
---------------------------------------------------------------------------
(1) ``federal judges scrutinize class action allegations
more strictly than state judges, and deny certification in
situations where a state judge might grant it improperly;''
(2) ``state judges may not have adequate resources to
oversee and manage class actions with a national scope;'' and
(3) ``if a single judge is to be charged with deciding what
law will apply in a multi state class action, it is more
appropriate that this take place in federal court than in a
state court.'' \147\
---------------------------------------------------------------------------
\147\ Id. at 28.
---------------------------------------------------------------------------
While some abuses do occur in federal court, the extent to
which they take place in no way even approaches the level of
abuse evidencing itself in state court. Indeed, it is
interesting that while few state court systems have attempted
to address class action abuses, the federal court system, which
has far less of a problem in the first place, has invested
considerable effort in developing new rules reflecting best
practices that courts should follow in handling class
litigation, particularly in the settlement context. Those
revisions, enacted last year,\148\ will dovetail with the
``consumer bill of rights'' provisions in S. 5 to bolster
federal court safeguards in the proper handling of class action
cases.
---------------------------------------------------------------------------
\148\ See Amendments to Federal Procedural Rules, 71 U.S.L.W. 4253,
4254-55 (U.S. Apr. 1, 2003) (Supreme Court order amending rules
pursuant to Rules Enabling Act).
---------------------------------------------------------------------------
Critics' Contention No. 3: To date, the only mechanism that has been
successful in imposing liability on some industries, such as
the tobacco or firearms industries, has been class action
lawsuits. Allowing removal of state class actions to federal
court will destroy the impact that class actions are having on
these socially irresponsible businesses. Therefore, we should
exempt certain industries from the diversity and removal
provisions of S. 5.
Response:
Opponents of S. 5 would prohibit federal courts from
exercising jurisdiction over those class actions brought
against certain industries, including HMOs, tobacco companies,
nursing homes, and firearms manufacturers. In addition,
opponents have suggested that claims arising from state
consumer protection statutes or state environmental protection
laws should be exempt from the bill as well.
However, industry-specific exemptions from federal
jurisdiction make no sense. Like bills of attainder, such
exemptions irrationally single out a specific industry and slam
the federal courthouse door in its face. The proposal to carve
out certain legitimate, yet presently unpopular, industries
contradicts the constitutional purposes of federal diversity
jurisdiction--to allow interstate businesses to have claims
against them heard in federal court under diversity so as to
avoid local biases and to promote and enhance, rather than
hamper, interstate commerce. The notion that certain industries
are less entitled to federal court protection is utterly
inconsistent with the purpose and goals of diversity
jurisdiction. Simply put, there should not be one set of rules
for one category of defendants and another for another group of
defendants.
Moreover, there is no evidence that plaintiffs will be less
successful in litigating their class action claims in federal
court.\149\ Class actions against unpopular corporate
defendants, such as the firearms and tobacco industry have
successfully proceeded in Federal court, and have resulted in
beneficial judgments and settlements for the plaintiff classes.
For example, the class action that is touted as the only real
success the class counsel have had against the firearms
industry \150\ turns out to be a federal court class
action.\151\ Assuming that a case is a meritorious class action
asserting meritorious claims, there is no reason to believe
such a case heard by a federal court would have an outcome
different from a state court case, particularly given that the
federal court normally would apply the same state substantive
law as a state court considering the same case.
---------------------------------------------------------------------------
\149\ Indeed, there is no evidence that plaintiffs' counsel believe
that they must file in state court in order to succeed. Tobacco class
actions prove this point. Of the purported class actions on tobacco
issues initiated in recent years, many were originally filed in federal
courts. Moreover, there is no evidence that classes are more likely to
be certified in state courts. The reality is that the vast majority of
courts--both federal and state courts--that have considered the issue
have denied certification of proposed tobacco classes. The state court
certification denials include: In re Tobacco Cases II, No. JCCP-4042,
slip op. (Md. Ct. App. May 16, 2000); Reed v. Philip Morris, Inc., No.
96-5070, slip op. (D.C. Super. Ct. July 23, 1999); Philip Morris, Inc.
v. Angeletti, No. 961450501 CE212596, slip op. (Md. Ct. App. May 16,
2000); Taylor v. American Tobacco Co., No. 97715975, slip op. (Mich.
Cir. Ct. Jan. 20, 2000); Constentino v. Philip Morris, Inc., No. MID-L-
5135-97, slip op. (N.J. Super. Ct. Oct. 26, 1998); Small v. Lorilard
Tobacco Co., 6791 N.Y.S.2d 593 (App. Div. 1998), aff'd, 698 N.Y.S.2d
615 (1999); and Geizer v. American Tobacco Co., 696 N.Y.S.2d 345
(1999). At least three federal courts have certified tobacco-related
classes: In re Simon II Litig., 212 F. Supp. 2d 57 (E.D.N.Y. 2002)
(certifying nationwide punitive damages class of smokers' claims
against tobacco companies) (appeal pending); Iron Workers Local Union
No. 17 Insurance Fund v. Philip Morris Inc., 182 F.R.D. 523 (N.D. Ohio
1998); Northwest Laborers-Employers Health & Security Trust Fund v.
Philip Morris Inc., 1997 U.S. Dist. LEXIS 21299 (W.D. Wash. Dec. 24,
1997). In addition, a U.S. Magistrate Judge recommended certification
of a class in Oregon Laborers-Employers Health & Welfare Trust Fund v.
Philip Morris, Inc., 188 F.R.D. 365 (D. Or. 1998), but that
recommendation was never acted upon by the district court judge. Three
state courts (two in Florida and one in Louisiana) have certified
tobacco-related classes: R.J. Reynolds Tobacco Co. v. Engle, 672 So.2d
39 (Fla. Ct. App. 1996) (affirming the trial court's certification of
tobacco class); Broin v. Philip Morris Cos., 641 So. 2d 888 (Fla. Ct.
App. 1996) (ordering trial court to certify tobacco class); Scott v.
American Tobacco Co., 725 So. 2d 10 (La. Ct. App. 1998) (affirming
trial court certification of tobacco class). However, a Florida appeals
court has decertified the Engle classe see Liggett Group, Inc. v.
Engle, 853 So. 2d 434 (Fla. Ct. App. 2003), and the matter is under
review by the Florida Supreme Court, see 873 So. 2d 1222 (Fla. 2004).
Thus, the scorecard is basically even; there is no evidence that class
members will be treated differently in state court.
While critics have pointed to the two Florida tobacco class actions
as evidence that state courts will somehow be tougher on the tobacco
industry, there is no real support for this contention. In the first
tobacco class action to reach conclusion after a class was certified
and the matter was tried (Broin, a Florida state court case), the
matter ultimately settled. But the class members received no money at
all. Under the terms of settlement, they obtained only a ``right to
sue'' individually. Meanwhile, the class counsel were awarded $49
million (on the basis of a medical research contribution made by
defendants). Counsel for one of the class members who protested the
settlement reportedly commented: ``It's mind-boggling that a court
would permit this kind of settlement to go ahead. What is the class
getting out of this? Nothing.'' The Legal Intelligencer, Sept. 22,
1999, at 4. The second case, Engle v. R.J. Reynolds Tobacco Co.,
received a lot of publicity because the jury awarded a $145 billion
verdict to the class of Florida smokers. However, as noted above, the
verdict was vacated after an appeals court found that trying the
plaintiffs' claims on a classwide basis was improper. Engle, 853 So. 2d
434 (Fla. Ct. App. 2003), review granted, 873 So. 2d 1222 (Fla 2004).
Moreover, there is no evidence that tobacco cases would be tried
more quickly in state courts. It took six years to get the first
tobacco class action to trial in state court; the second took more than
four years. The average time to trial in federal court civil cases is
shorter.
Finally, it is clear that certain opponents of the bill are trying
to single-out certain unpopular industries, such as the firearms
industry, because they are unpopular. But that is exactly what the
Framers of the Constitution were trying to avoid. They were trying to
ensure a fair, even-handed federal court forum for defendants that may
otherwise be haled into a local court less concerned about protecting
the rights of an out-of-state company.
\150\ 145 Congo Rec. H8577 (Sept. 23, 1999 (floor debate on H.R.
1789) (Rep. Nadler asserting that a ``1995 class action against
Remington Arms * * * settled for $31.5 million * * * [and] led to the
implementation of greater safety protections or owners of shotguns'').
\151\ See Garza v. Sporting Goods Properties, Inc., 1996 U.S. Dist.
LEXIS 2009 (W.D. Tex. Feb. 6, 1996) (approving class settlement).
---------------------------------------------------------------------------
Critics' Contention No. 4: S. 5 should exclude civil rights cases, in
order to ensure that civil rights plaintiffs have maximum
access to our courts.
Response:
Critics who would exclude civil rights cases from the scope
of S. 5 have it backwards.
First, an amendment that would affirmatively exclude civil
rights cases from federal jurisdiction would be contrary to a
long tradition of encouraging the availability of our federal
courts to address civil rights claims. Indeed, Congress has
already enacted several statutes that are intended to ensure
that civil rights cases can be heard in federal courts. For
example, one statute permits removal to federal court of a
broad range of civil rights actions.\152\ And more importantly,
one general jurisdiction statute--28 U.S.C. Sec. 1343--provides
broad federal jurisdiction over a whole host of civil rights
claims (e.g., any action ``for injury to person or property or
because of the deprivation of any right or privilege of a
citizen of the United States,'' any action ``to recover damages
or to secure equitable or other relief under any Act of
Congress providing for the protection of civil rights'').
Indeed, that section provides original federal jurisdiction
over any action ``to redress the deprivation, under color of
any State law, statute, ordinance, regulation, custom or usage,
of any right, privilege, or immunity secured by the
Constitution of the United States or by any Act of Congress
providing for equal rights of citizens.''
---------------------------------------------------------------------------
\152\ 28 U.S.C. Sec. 1443.
---------------------------------------------------------------------------
Second, the assumption of the amendment that federal courts
are clogged and unable to handle civil rights cases has no
basis. Indeed, as discussed above, the federal court workload
issue is overblown, ignoring the burdens that class actions
place on ill equipped state courts. Several of our federal
judicial districts may need additional resources. Wherever that
need has been confirmed, additional resources should be
provided (as they were in 1999 and again in 2002, when new
permanent and temporary federal district court judgeships were
added). But those spot shortages are no excuse for continuing
to deny both consumers and corporations their due process
rights by keeping interstate class actions a state court
monopoly.
Third, federal courts have a long record of certifying
discrimination class actions and approving hefty settlements in
such cases. The most generous racial discrimination class
action settlements in recent years--like the Home Depot gender
discrimination case settlement (which paid class members about
$65 million) and the $192 million Coca-Cola race discrimination
settlement (in which each class member was guaranteed a
recovery of at least $38,000)--were achieved in and approved by
federal courts. These cases stand in stark contrast to the
typical state court class action, in which consumers are lucky
if they get a $5 coupon.
Finally, civil rights litigants have nothing to fear from
federal judges. Federal judges, under Article III of the
Constitution, are appointed for life. One reason the Framers
designed the federal judiciary that way was to protect federal
judges from political pressure and ensure that they would
provide equal treatment to minority groups with less political
power. It is thus no accident that federal courts have issued
decisions like Brown v. Board of Education that, although
unpopular at the time, paved the way for future civil rights
laws like Title VII and Section 1983.
Critics' Contention No. 5: S. 5 would unfairly tilt the playing field
by providing an advantage to defendant corporations at the
expense of consumers.
Response:
This concern mischaracterizes the content and intent of the
bill. S. 5 is court reform--not tort reform. It would simply
allow federal courts to handle more interstate class actions.
It makes no changes in substantive law whatsoever. Critics of
S. 5 erroneously argue that the bill would reverse the ordinary
presumption that a plaintiff chooses his or her own court. Yet,
in this context, there is no such presumption. In fact, the
whole purpose of diversity jurisdiction is to preclude any such
presumption by allowing state-law based claims to be removed
from local courts to federal courts, so as to ensure that all
parties can litigate on a level playing field and thereby
protect interstate commerce interests.\153\
---------------------------------------------------------------------------
\153\ See, e.g., Peaset v. Peck, 59 U.S. (18 How.) 518, 520 (1856).
---------------------------------------------------------------------------
Article III of the Constitution ensures that there will be
a fair, uniform, and efficient forum (a federal court) for
adjudicating interstate commercial disputes, so as to nurture
interstate commerce. Some scholars have persuasively argued
that diversity jurisdiction, of all the powers exercised under
the Constitution, has had the greatest influence in melding the
United States into a single nation, by fostering interstate
commerce, communication and the uninterrupted flow of capital
for investment into various parts of the Union, and sustaining
the public credit and the sanctity of private contracts.\154\
---------------------------------------------------------------------------
\154\ See John J. Parker, The Federal Constitution and Recent
Attacks Upon It, 18 A.B.A. J. 433, 437 (1932).
---------------------------------------------------------------------------
S. 5 promotes these important constitutional norms. The
statutory ``gatekeeper'' for federal diversity jurisdiction--28
U.S.C. Sec. 1332--generally allows federal courts to hear cases
that are large (that is, cases with large ``amounts in
controversy'') and that have interstate implications (that is,
cases involving citizens from multiple jurisdictions). These
requirements were intended to ensure that diversity
jurisdiction is preserved for those cases with significant
interstate and economic impacts. Class actions would normally
satisfy these requirements because they usually involve big
dollar amounts and parties from multiple jurisdictions. Yet,
because section 1332 was enacted prior to the existence of the
modern-day class action, it does not take into account the
unique circumstances presented by class actions. Consequently,
section 1332, as presently drafted, tends to exclude the
overwhelming majority of class actions from federal courts,
while inviting into federal courts much smaller single-
plaintiff cases having few (if any) interstate ramifications.
Such a result is inconsistent with the federal judiciary's
proper jurisdictional role. S. 5 would correct this technical
problem and thereby promote the underlying goals of diversity
jurisdiction.
As former Clinton Administration Acting Solicitor General
Walter Dellinger has testified in congressional hearings, if
Congress were to now re-write the federal diversity
jurisdiction statute, interstate class actions undoubtedly
would be one of the first categories of cases to be included
within the scope of the statute.\155\ This makes plain sense
insofar as class action lawsuits typically involve more people,
more money, and more interstate commerce issues than any other
type of case. S. 5 will simply fix the technical problem in
section 1332 and judicial interpretation of the diversity
requirements that keep most class actions in state court.
---------------------------------------------------------------------------
\155\ See Hearings on H.R. 1875, statement of Walter E. Dellinger.
---------------------------------------------------------------------------
Critics' Contention No. 6: S. 5 will limit the capacity to use class
actions as private attorneys general actions to deter corporate
wrongdoing.
Response:
During past Committee debates, some members have opposed
expanding federal jurisdiction over class actions on the ground
that doing so would limit the use of class actions as private
attorney general actions--as a deterrent to corporate
wrongdoing. As one member stated, the purpose of a class action
is to ``dissuade. It is the same reason that we have treble
damages.'' \156\ In the view of that member, ``the most
important function that class actions serve is to allow private
attorneys general to step forward and hold corporations
accountable for decisions that affect the public safety.''
\157\
---------------------------------------------------------------------------
\156\ See transcript of markup, Senate Judiciary Committee on S.
353, p. 19:2-17 (June 29, 2000) (statement of Joseph R. Biden, Jr.,
U.S. Senate).
\157\ Id.
---------------------------------------------------------------------------
The problem with this argument is that for all of the
reasons discussed above, S. 5 will not limit the legitimate use
of class actions at all. But more fundamentally, there is no
historical basis for the assertion that class actions were
intended to create this private attorney general device.
Although a few courts have over the years referred to the
deterrent effects of class actions, the promulgation history of
the current Rule 23 of the Federal Rules of Civil Procedure
reflects no intent to create a private attorney general device.
In recent years, members of the Advisory Committee on Civil
Rules that developed the current version of the rule have
testified that Rule 23 was not intended to serve that purpose.
In testimony before the Advisory Committee on Civil Rules in
1996, the Hon. William T. Coleman, Jr., specifically denounced
the proposition that ``a purpose of Rule 23 is to hand a
private attorney general's badge to any counsel who wants it.''
\158\ He also stated that
---------------------------------------------------------------------------
\158\ Advisory Committee Working Papers (vol. 4), at 456.
back in 1966, that was not the intended purpose of Rule
23(b)(3). If there is interest in deputizing all
attorneys everywhere to enforce our laws, that's a
matter that should be decided by Congress, not through
the class action provisions in the Federal Rules of
Civil Procedure. The courts' tolerance for this
vigilante-style use of class actions is a root cause of
the abuses that must be correct.\159\
---------------------------------------------------------------------------
\159\ Id.
In congressional testimony several years ago, Prof. John P.
Frank, another 1966 Advisory Committee member, sounded similar
---------------------------------------------------------------------------
sentiments:
What I wish to call to your attention is what I think
is a serious problem here: that the class action rule,
wholly without regard to its original purpose, has
become something of a device for social administration,
which should never have been the product of the rules
at all. These are matters which should be handled by
the Congress and by administrative agencies, and not
attempted efforts to govern various parts of the
economy by lawsuits which give more to the counsel * *
* that they do to those who should benefit from them.
I particularly adopt the statement of the chair of
the [Advisory Committee on Civil Rules] at the present
time, Judge Paul Niemeyer * * * in which he says: ``I
believe that Rule 23 was never intended to be a rule to
enhance enforcement of substantive claims. Such
legitimization should, in my judgment, be effected by
Congress, and congress might well conclude * * * that
it is too anarchical to authorize private attorneys to
self-appoint themselves as enforcers of law without
adequate accountability to the lawmakers or the
public.'' \160\
---------------------------------------------------------------------------
\160\ Mass Torts and Class Action Lawsuits: Hearing before the
Subcom. On Courts and Intellectual Property of the House Committee on
the Judiciary, 105th Cong., 2d Sess. 20-21 (March 5, 1998) (statement
of John P. Frank, Esq.).
Even if the critics were correct that deterrence was an
intended purpose of class actions, that assertion is self-
defeating because, in the Committee's view, the concept of
class actions serving a ``private attorney general'' or other
enforcement purpose is illegal. If the intended purpose of Rule
23 was to empower private attorneys to act as ``attorneys
general,'' the rule plainly bestows substantive rights not
otherwise available under common or statutory law. Interpreted
in this way, the rule runs afoul of the Rules Enabling Act,
\161\ which forbids federal courts from adopting ``rules of
practice and procedure'' that may ``abridge, enlarge or modify
any substantive right.'' To the extent that class actions are
characterized as having a private attorney general purpose,
there are strong arguments that Rule 23 is simply null and
void.\162\
---------------------------------------------------------------------------
\161\ 28 U.S.C. Sec. 2072(b).
\162\ The federal courts have frequently rejected efforts to use
the Federal Rules of Civil Procedure to expand substantive rights. See
e.g., In re Baldwin-United Corp. 770 F.2d 328, 335 (2d Cir. 1985)
(rejecting arguments that Fed. R. Civ. P. 23 could be used as
authorizing issuance of an injunction to protect class members);
Synanon Church v. United States, 557 F. Supp. 1329, 1330 n.2 (D.D.C.
1983) (rejecting argument that Fed. R. Civ. P. 57 creates right to jury
trials in declaratory judgment actions). Cf. Douglas v. NCNB Nat'l
Bank, 979 F.2d 1128, 1130 & n.2 (5th Cir. 1992) (declining to apply
Fed. R. Civ. P. 13(a) where doing so would ``abridge as lender's
substantive rights and enlarge the debtor's substantive rights'').
Similar views have been expressed by state courts. See, e.g.,
Southwestern Refinery Co. v. Bernal, 22 S.W. 3d 425, 432 (Tex. 2000)
(``[C]lass actions do not exist in some sort of alternative universe
outside our normal jurisprudence. Our procedural rules provide
otherwise: the form of an action under the rules must not `enlarge or
diminish any substantive rights or obligations of any parties to any
civil action.' '') (quoting Tex. R. Civ. P. 815).
---------------------------------------------------------------------------
Critics' Contention No.7: S. 5 will result in delays for injured
consumers.
Response:
This criticism stems from baseless concerns about the
federal courts' caseload and the possible impact of this
legislation on the ability of the federal courts to resolve
these cases in a timely manner. However, as noted above, the
average state court judge is assigned three times as many cases
as his or her federal counterparts. Thus, to the extent that
caseloads affect how quickly cases are resolved, the problems
are much worse in state court than in federal court. For all of
the reasons set forth previously, there is no basis for arguing
that S. 5 would overwhelm the federal courts with class action
cases and thereby adversely affect the ability of consumers to
find timely redress for their injuries in federal court.
Notably, the evidence available shows that federal courts
move more quickly than state courts. A study conducted last
year by the Federal Judicial Center found that state courts are
far more likely than federal courts to let class actions linger
without ruling on class certification.\163\ (The study also
found that federal courts certify classes at approximately the
same rate as state courts.) Moreover, the median time for final
disposition of a civil claim filed in federal court is just 9.3
months, and the median time to trial in a civil matter in
federal court is 22.5 months.\164\ There is no evidence that on
average, state courts proceed more quickly, even though most
state court cases are less complicated than federal court
cases.
---------------------------------------------------------------------------
\163\ Federal Judicial Center, The Impact of Amchem and Ortiz on
Choice of a Federal or State Forum in Class Action Litigation: A Report
to the Advisory Committee on Civil Rules Regarding a Case-Based Survey
of Attorneys (April 2004) (2004 Federal Judicial Center Study).
\164\ See Judicial Business.
---------------------------------------------------------------------------
In addition, there is no basis for the claim that the
bill's appeal provision would slow down litigation. To the
contrary, the bill includes strict time limits to ensure that
appeals of remand orders will not meaningfully delay litigation
of class actions.
Finally, as noted above, federal courts can also resolve
duplicative class actions more efficiently by consolidating
them. Plaintiffs' lawyers frequently file copycat class actions
in various state courts around the country, clogging judges'
dockets and forcing judges to duplicate each other's work.
Unlike state courts, federal courts can take advantage of
multi-district consolidation procedures that enable one judge
to consolidate dozens of class actions and resolve them far
more efficiently. This is yet another way in which The Class
Action Fairness Act will speed up justice--not slow it down.
In sum, there simply is no basis to the claims that
consumers will be worse off in federal court, or that the
resolution of class actions will be delayed because of the
federal judiciary's workload.
Critics' Contention No. 8: S. 5 will trample on the rights of states to
manage their legal systems, thus undermining the principles of
federalism that our system of government is built upon.
Response:
While some critics have alleged that this bill will somehow
undermine federalism principles, exactly the opposite is true.
S. 5 has been carefully crafted to correct a problem in the
current system that does not promote traditional concepts of
federalism. In fact, it is the current system and the wave of
state court class actions that has trampled on the rights of
states to manage their legal systems by allowing state court
judges to interpret and apply the laws of multiple
jurisdictions. When state courts preside over class actions
involving claims of residents of more than one state, they
frequently dictate the substantive laws of other states,
sometimes over the protests of those other jurisdictions (as
discussed previously). When that happens, there is little those
other jurisdictions can do, since the judgment of a court in
one state is not reviewable by the state court of another
jurisdiction.
It is far more appropriate for a federal court to interpret
the laws of various states (a task inherent in the
constitutional concept of diversity jurisdiction), than for one
state court to dictate to other states what their laws mean or,
even worse, to impose its own state law on a nationwide case.
Why should a state court judge elected by the several thousand
residents of a small county in Alabama tell New York or
California the meaning of their laws? Why should an Illinois
state court judge interpret decisions by Virginia or Wisconsin
courts? Why should a state court judge be able to overrule
other state laws and policies? Why should state courts be
setting national policy?
S. 5 simply allows more class action cases filed in state
court to be removed to federal court. S. 5 does not change
substantive law--it is, in effect, a procedural provision only.
As such, class action decisions rendered in federal court
should be the same as if they were decided in state court--
under the Erie doctrine, federal courts must apply state
substantive law in diversity cases. Moreover, if federal court
judges are not familiar with state law on a particular issue,
they have the authority to ask a state court to ``certify'' a
question of law e.g., to advise them how a state's laws should
be applied in an uncharted situation. This procedure allows the
federal courts to apply state law appropriately and gives
states the ability to manage their legal systems without
becoming bound by other states' interpretations of their laws.
In short, contrary to critics' contentions, the real harm
to federalism is the status quo--leaving the bulk of class
action cases in state court. Federal courts are the appropriate
forum to decide interstate class actions involving large
amounts of money, many plaintiffs and interstate commerce
disputes, and these matters of interstate comity are more
appropriately handled by federal judges appointed by the
President and confirmed by the Senate. S. 5 simply restores
this proper balance by resolving an anomaly of diversity
jurisdiction. True to the concept of federalism, S. 5
appropriately leaves certain ``intrastate'' class actions in
state court: cases involving small amounts in controversy;
cases with a class of 100 plaintiffs or less; cases involving
plaintiffs, defendants and governing law all from the same
state; cases against states and state officials; and certain
securities and corporate governance cases. As such, S. 5
promotes the concept of federalism and protects the ability of
states to determine their own laws and policies for their
citizens.
Critics' Contention No. 9: S. 5 assumes that federal courts will not
engage in the same ``false federalism'' that state courts are
accused of fostering. There really is no evidence that in the
class action context, federal courts will intrude less on the
states' rights to interpret their own laws than have state
courts.
Response:
A principal purpose of the Class Action Fairness Act is to
correct what former Acting Solicitor General Walter Dellinger
has labeled a wave of ``false federalism.'' As he testified
before the Senate Judiciary Committee last July, the problem is
that ``many state courts faced with interstate class actions
have undertaken to dictate the substantive laws of other states
by applying their own laws to * * * other states, resulting in
a breach of federalism principles. * * * ''
As discussed previously, a prime example of this situation
is the Avery case,\165\ in which defendant State Farm allegedly
breached auto insurance policies nationwide by requiring the
use of less expensive non-original equipment manufacturer parts
(``non-OEM parts'') in repairing accident-damaged vehicles. The
Illinois state court certified a nationwide class, and at
trial, a jury rendered a $1.3 billion verdict against State
Farm.
---------------------------------------------------------------------------
\165\ Avery v. State Farm Mut. Auto Insurance Co., 746 N.E.2d 1242,
1254 (Ill. Ct. App. 2001).
---------------------------------------------------------------------------
The case is noteworthy on the ``false federalism'' issue
because the court applied Illinois consumer protection law to
all class claims in the case. It did so even though Illinois
law on this subject contravened the laws and policies of other
states in which some class members lived--laws and policies
encouraging (or even requiring) insurers to use less expensive,
non-OEM parts in making accident repairs as a means of
containing auto insurance costs. In affirming the verdict, an
Illinois state appellate court acknowledged that it had
disregarded ``state insurance commissioners [who] testified
that the laws in many of our sister states permit and in some
cases * * * [even] encourage'' usage of non-OEM parts.\166\ The
New York Times reported that the decision effectively
``overturn[ed] insurance regulations * * * in New York,
Massachusetts, and Hawaii, among other places'' establishing
``what amounts to a national rule on insurance.'' \167\ As
discussed previously, Avery is not an isolated occurrence.
Numerous state courts have trampled on these federalism
principles, all in an effort to certify classes that should not
be certified.\168\
---------------------------------------------------------------------------
\166\ Id. at 1254.
\167\ See Matthew J. Wald, Suit Against Auto Insurer Could Affect
Nearly All Drivers, N.Y. Times, Sept. 27, 1998, Sec. 1, at 29.
\168\ See, e.g., Ysbrand v. DaimlerChrysler Corp., 81 P. 3d 618
(Okla. 2003) (affirming certification of nationwide product liability
class, applying the law of one state to all claims); Peterson v. BASF
Corp., 657 N.W.2d 853 (Minn. Ct. App. 2003), aff'd, 675 N.W.2d 57
(Minn. 2004) (affirming nationwide consumer protection act case,
applying the law of one state to all claims).
---------------------------------------------------------------------------
A premise of the Class Action Fairness Act is that this
problem can be corrected by expanding federal jurisdiction over
interstate class actions, the theory being that federal courts
will not engage in ``false federalism'' games. But what proof
is there that the federal courts will not similarly botch these
critical choice-of-law issues?
In reality, there is ample evidence that the federal courts
will not engage in the ``false federalism'' that is so rampant
in state court class actions. To start, it should be noted that
the lead federal court--the U.S. Supreme Court--has repeatedly
warned that courts should not attempt to apply the laws of one
state to behaviors that occurred in other jurisdictions:
``Laws have no force of themselves beyond the
jurisdiction of the State which enacts them, and can have
extra-territorial effect only by the comity of the other
States.'' Huntington v. Attrill, 146 U.S. 657,669 (1892).
``[I]t would be impossible to permit the statutes
of [one State] to operate beyond the jurisdiction of that State
* * * without throwing down the constitutional barriers by
which all the States are restricted within the orbits of their
lawful authority and upon the preservation of which the
Government under the Constitution depends.'' New York Life Ins.
Co. v. Head, 234 U.S. 149, 161 (1914).
``A state does not acquire power or supervision
over the internal affairs of another State merely because the
welfare and health of its own citizens may be affected when
they travel to that state.'' Bigelow v. Virginia, 421 U.S. 809,
824 (1975).
States should not apply their own laws to matters
with which they have no significant contact. Phillips Petroleum
Co. v. Shutts, 472 U.S. 797, 821-22 (1985).
And on April 7, 2003, the U.S. Supreme Court again warned state
courts on this issue, striking down one state's effort to apply
its laws to conduct that occurred elsewhere: ``A basic
principle of federalism is that each State may make its own
reasoned judgment about what conduct is permitted or proscribed
within its borders, and each State alone can determine what
measure of punishment, if any, to impose on a defendant who
acts within its jurisdiction.'' State Farm Mut. Auto. Ins. Co.
v. Campbell, 2003 WL 1791206 (U.S. Apr. 7, 2003).
Unlike many state courts, federal courts have consistently
heeded the Supreme Court's admonitions. The record shows that
in the class action context, federal courts have been extremely
respectful of the interests of each state in having its laws
applied (as appropriate) to its own residents, particularly in
recognizing the substantial variations of those laws in the
class action context.
In recent years, numerous federal courts (applying the
choice-of-law doctrines of various jurisdictions) have
considered which laws should apply in proposed nationwide class
actions asserting state law-based claims. Those courts have
consistently concluded that in a nationwide or multi-state
class action, the choice-of-law rules of the state in which the
action was originally filed must be applied.\169\ Further, they
have consistently concluded that those choice-of-law rules must
be applied to ``each plaintiffs claims.'' \170\ Based on those
principles, federal courts have consistently concluded that the
laws of all states where purported class members were
defrauded, injured, or purchased the challenged product or
service must come into play.\171\ And in those very few
instances in which a federal district court has toyed with the
idea of engaging in ``false federalism'' (i.e., applying a
single state's law to all asserted claims), that notion has
been reversed on appeal almost immediately.\172\
---------------------------------------------------------------------------
\169\ See, e.g., In re Bridgestone/Firestone, Inc. Prods. Liab.
Litig., 288 F.3d 1012 (7th Cir. 2002), cert. denied sub nom. Gustafton
v. Bridgestone/Firestone, Inc., 537 U.S. 1105 (2003).
\170\ See, e.g., Georgine v. Amchem Prods., 83 F.3d 610, 627 (3d
Cir. 1996), aff'd sub nom. Amchem Prods. v. Windsor, 521 U.S. 591
(1997).
\171\ See, e.g., Georgine, 83 F.3d at 627; Zinser v. Accufix
Research Inst., Inc., 253 F.3d 1180, 1187-90 (9th Cir. 2001); Zapka v.
Coca-Cola Co., No. 99 CV 8238, 2000 U.S. Dist. LEXIS 16552, at *11-13
(N.D. Ill. Oct. 26, 2000); Fisher v. Bristol-Myers Squibb Co., 181
F.R.D. 365, 369 (N.D. Ill. 1998); Dhamer v. Bristol-Myers Squibb Co.,
183 F.R.D. 520, 532-34 (N.D. Ill. 1998); Jones v. Allercare, Inc., 203
F.R.D. 290, 307 (N.D. Ohio 2001); In re Ford Motor Co. Ignition Switch
Prods. Liab. Litig., 174 F.R.D. 332, 346-54 (D.N.J. 1997); Marascalco
v. Int'l Computerized Orthokeratology Soc'y, Inc., 181 F.R.D. 331, 338-
39 (N.D. Miss. 1998); In re Ford Motor Co. Bronco II Prods. Liab.
Litig., 177 F.R.D. 360, 369-71 (E.D. La. 1997); In re Stucco Litig.,
175 F.R.D. 210, 214, 215-217 (E.D.N.C. 1997); Ilhardt v. A.O. Smith
Corp., 168 F.R.D. 613, 619-20 (S.D. Ohio 1996); Harding v. Tambrands
Inc., 165 F.R.D. 623, 629-30, 631-32 (D. Kan. 1996); Walsh v. Ford
Motor Co., 130 F.R.D. 260, 271-75 (D.D.C. 1990); Feinstein v. Firestone
Tire & Rubber Co., 535 F.Supp. 595, 608 (S.D.N.Y 1982).
\172\ See, e.g., In re Bridgestone/Firestone, Inc., 288 F.3d at
1024; Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 674-75 (7th
Cir. 2001); Spenc v. Glock, GES.m.b.H., 227 F.3d 308, 313-15 (5th Cir.
2000); In re AM. Med. Sys., 75 F.3d 1069, 1085 (6th Cir. 1996); Castano
v. American Tobacco Co.. 84 F.3d 734, 741-43, 739-50 (5th Cir. 1995);
In re Rhome-Poulenc Rorer, Inc., 51 F.3d 1293, 1302 (7th Cir. 1995);
Walsh v. Ford Motor Co., 807 F.2d 1000, 1017-19 (D.C. Cir. 1990).
---------------------------------------------------------------------------
The bottom line is that over the past ten years, the
federal court system has not produced any final decisions--not
even one--applying the law of a single state to all claims in a
nationwide or multi-state class action. And there are hundreds
of federal court decisions (examples of which are set forth
above) flatly rejecting arguments to use such a ``false
federalism'' choice-of-law approach--applying the laws of a
single state to all claims in a multi-state case. That's the
record that confirms that the passage of the Class Action
Fairness Act will end the ``false federalism'' game that is
occurring in the state court class action arena.
Critics' Contention No. 10: S. 5 could deny plaintiff class members any
meaningful ability to recover damages for their injuries.
Response:
In arguing that this bill would hurt consumers,
some opponents have gone so far as to list several state court
class actions which supposedly have served consumers well,
inferring that removal of such cases to federal court is
tantamount to a denial of justice. This argument assumes that
the federal courts are inferior to state courts--that a federal
court cannot arrive at a just outcome. If the cases cited by S.
5's opponents would not have had the same outcome in federal
court as they did in state court, it is because the federal
courts may have been more careful to avoid the abuses of the
system that occur in state courts. The only thing that would be
denied when an interstate class action is removed to federal
court is the plaintiffs' lawyers' ability to strike it rich on
class actions that should not be certified by any court because
they do not meet the requirements of a proper class.
Moreover, the claim that federal courts never certify class
actions is unfounded. A study last year by the Federal Judicial
Center found that federal courts certify classes at
approximately the same rate as state courts. According to the
study, class actions were ``almost equally likely to be
certified'' in the two systems: federal courts certified
classes 22 percent of the time, while state courts certified
classes 20 percent of the time.\173\ The study also found that
consumers fare better in federal court class actions. According
to the report, the average recovery per class member was higher
in federal court: $517 vs. $350.\174\
---------------------------------------------------------------------------
\173\ See 2004 Federal Judicial Center Study.
\174\ Id.
---------------------------------------------------------------------------
In fact, federal courts invented class actions and have led
the way in using the device to redress grievances, particularly
in the civil rights and consumer protection context. Federal
courts certify numerous class actions for a broad range of
claims including securities fraud, antitrust violations, and
discrimination every year.\175\ In addition, many of the cases
in which federal courts certify classes involve state law
claims (even though relatively few state law-based class
actions can make it into federal court under current
jurisdictional law.\176\ For example:
---------------------------------------------------------------------------
\175\ See Responses To Written Questions From Senators Orrin G.
Hatch and Charles E. Grassley to Walter Dellinger, Attachment A (list
of exemplar cases in which federal courts have certified classes since
2001).
\176\ Under current law, a purely state law-based class action
normally can be heard in federal court only if each and every class
members demands at least $75,000 in damages and none of the named
plaintiffs have the same state citizenship of any of the named
defendants. Since at least some class members in nearly all class
actions seek less than $75,000 per class member or sue at least one
non-diverse defendant, there are currently very few class action cases
in federal court that involve exclusively state law claims.
---------------------------------------------------------------------------
Recently a federal court in New York certified a
class of New York residents and a nationwide class of
plaintiffs who alleged that they were overcharged when they
used their credit cards abroad.\177\ Plaintiffs' claims were
based on violations of New York law and common law fraud.
---------------------------------------------------------------------------
\177\ In re Currency Conversion Fee Antitrust Littg., 2004 U.S.
Dist. LEXIS 24134 (S.D.N.Y. Dec. 2, 2004).
---------------------------------------------------------------------------
A federal district court in Massachusetts
certified a class consisting of Massachusetts plaintiffs who
were employed as auto damage appraisers.\178\ The plaintiffs
alleged that they were not properly paid for overtime and
sought recovery under Massachusetts law.
---------------------------------------------------------------------------
\178\ McLaughlin v. Liberty Mut. Ins. Co., 224 F.R.D. 304 (D. Mass.
2004).
---------------------------------------------------------------------------
A federal district court in Texas certified a
product liability class of plaintiffs whose infants had been
administered the drug E-Ferol and alleged that they should have
been warned of the risk of death associated with the drug.\179\
Plaintiffs also alleged that the testing and approval process
for the drug was flawed.
---------------------------------------------------------------------------
\179\ Klein v. O'Neal, Inc. 222 F.R.D. 564 (N.D. Tex. 2004).
---------------------------------------------------------------------------
A federal district court in New York recently
certified a statewide class of plaintiffs alleging violations
of New York's consumer protection law in a case involving
diamond pricing.\180\
---------------------------------------------------------------------------
\180\ Leider v. Ralfe, 2004 U.S. Dist. LEXIS 15345 (S.D.N.Y. 2004).
---------------------------------------------------------------------------
A federal court certified a class of Tennessee
residents who claimed defendants had violated various state
consumer protection laws by failing to properly disclose the
requirements for obtaining benefits under a long-term care
insurance policy.\181\
---------------------------------------------------------------------------
\181\ Bradbery v. John Hancock Mutual Life Insurance Co., 217
F.R.D. 408 (W.D. Tenn. 2003).
---------------------------------------------------------------------------
The federal court in this case certified a class
of commercial lobstermen from New York and Connecticut who
brought claims under various state laws, alleging that the use
of certain insecticides by defendants caused massive lobster
die-off.\182\
---------------------------------------------------------------------------
\182\ Fox v. Cheminova, Inc., 213 F.R.D. 113 (E.D.N.Y. 2003).
---------------------------------------------------------------------------
A federal court recently certified a class of
parking lot customers in Washington state who asserted claims
against a collection agency under federal and state law.\183\
---------------------------------------------------------------------------
\183\ Hansen v. Ticket Track, Inc., 213 F.R.D. 412 (W.D. Wash.
2003).
---------------------------------------------------------------------------
A federal court in Florida certified a class of
consumers who entered into sales contracts with a funeral home.
The class members alleged claims under federal and state
law.\184\
---------------------------------------------------------------------------
\184\ Brown v. Funeral Services of Florida, Inc., 212 F.R.D. 602
(S.D. Fla. 2003).
---------------------------------------------------------------------------
A federal court in Minnesota certified a
nationwide class of plaintiffs who sought medical monitoring
under various state laws for their allegedly defective heart
valves.\185\
---------------------------------------------------------------------------
\185\ In Re St. Jude Medical Inc. Silzone Heart Valves Products
Liability Litigation, 2003 U.S. Dist. LEXIS 5188 (D. Minn. March 27,
2003).
---------------------------------------------------------------------------
A federal court certified a class of Montanans who
alleged that their automobile insurer acted in bad faith.\186\
---------------------------------------------------------------------------
\186\ Burton v. Mountain West Farm Bureau Mutual Insurance Co.,
2003 WL 1740461 (D. Mont. March 31, 2003).
---------------------------------------------------------------------------
In Massachusetts, a federal court certified a six-
state class action on behalf of homeowners who alleged their
heating systems were defective.\187\
---------------------------------------------------------------------------
\187\ Payne v. Goodyear Tire & Rubber Co., 216 F.R.D. 21 (D. Mass.
2003).
---------------------------------------------------------------------------
The federal district court for Rhode Island
certified a nationwide class action brought on behalf of credit
cardholders alleging that Fleet Bank violated federal and state
laws in the manner in which it set payment due dates and posted
payments to credit cards.\188\
---------------------------------------------------------------------------
\188\ Bond v. Fleet Bank (RI) N.A., 2002 U.S. Dist. LEXIS 22324
(D.R.I. October 10, 2002).
---------------------------------------------------------------------------
In Michigan, a federal court certified a
nationwide class of consumer borrowers alleging that Central
Clearing's ``payday loan'' transactions violated federal and
state laws.\189\
---------------------------------------------------------------------------
\189\ Gilkey v. Central Clearing, 202 F.R.D. 515 (E.D. Mich. 2001).
---------------------------------------------------------------------------
A federal district court certified a class of
automobile insurance policy holders in the District of Columbia
alleging violations of federal and state law.\190\
---------------------------------------------------------------------------
\190\ Wells v. Allstate Insurance Company, 210 F.R.D. 1 (D.D.C.
2002).
---------------------------------------------------------------------------
A federal court certified a class of
Pennsylvanians in a case brought on behalf of consumer debt
holders alleging that the defendant sent out false and
deceptive debt collection letters. The complaint alleged
violations of federal and state laws.\191\
---------------------------------------------------------------------------
\191\ Oslan v. Collection Bureau of Hudson Valley, 206 F.R.D. 109
(E.D. Pa. 2002).
---------------------------------------------------------------------------
A federal court certified a class action brought
on behalf of former employees at a Pennsylvania plant, alleging
that Tyson Foods failed to fully pay its employees. The
complaint alleged violations of federal and state laws.\192\
---------------------------------------------------------------------------
\192\ DeAsencio v. Tyson Foods, 2002 U.S. Dist. LEXIS 13038 (E.D.
Pa. July 17, 2002).
---------------------------------------------------------------------------
While opponents of the bill cite cases that allegedly
achieved greater justice in state court than they would have
received if they had been removed to federal court, it is clear
that this is pure speculation. In fact, federal courts have
certified hundreds of cases for class treatment in recent
years, and the rules governing the decision of whether cases
may proceed as class actions are basically the same in federal
and state courts. Further, under the Erie doctrine, federal
courts apply state substantive law in diversity cases.
Consequently, a removed class action should have the same
substantive law applied to it, regardless of whether it is in
federal or state court.
Additionally, strict analysis by courts in deciding whether
a group of plaintiffs can proceed on a class basis should be
encouraged, rather than discouraged. The purpose of the current
requirements in Rule 23 and similar state court class action
rules is to protect the due process rights of both plaintiffs
and defendants. When judges indiscriminately certify class
actions, unnamed plaintiffs lose important legal rights and can
be denied appropriate awards for their injuries, and defendants
become more vulnerable to frivolous and unjustifiably magnified
class actions.
Allowing individual states to certify classes for their own
citizens on particular issues could result in a denial of
relief for the citizens of other states, particularly given the
limited resources available to some defendants to satisfy all
pending claims. For example. some hailed the now reversed
punitive damages verdict in the Engle tobacco class action that
continues to proceed in Florida Supreme Court. There, a Florida
jury awarded $135 billion in punitive damages to a class of
Florida residents. But if that verdict were upheld, citizens of
other states might be denied any relief whatsoever on their
claims against tobacco companies because the Florida residents
(through their single state class action) would have taken all
available money to pay their punitive damages claims. In short,
Florida residents would have been paid billions of dollars in
excess of what they claim for their real personal injury
damages, while residents of all other states would not have
even received what they claim to be owed for the basic personal
injuries that they allege. As one commentator has noted.
This is what fuels the [state court class action]
litigation lottery. If you are the first in line to
demand punitive damages, you may receive awards in the
billions. Injured parties in later [class actions] are
likely to receive less. * * * They may receive nothing
if the first award killed the company or the industry.
None of this makes much sense. There is no reason why
one group of litigants should, solely on the basis of
residency in a particular state, receive the lion's
share of damages to the deprivation of hundreds of
thousands of other injured parties. Moreover, there is
no reason why one state should be able to impose this
result on other states when a problem and its victims
are shared by the nation as a whole.\193\
---------------------------------------------------------------------------
\193\ Jonathan Turley, A Crisis of Faith: Tobacco and the
Madisonian Democracy, 37 Harv. J. on Legis. 433, 475 (2000).
Of course, this situation would not arise if S. 5 were
passed, since all qualifying interstate class actions on a
particular subject could be removed to federal court and
consolidated before a single federal court judge under the
multidistrict litigation mechanism described previously. That
judge would be able to manage the proceeding to ensure that no
group of litigants gained advantage over the others by virtue
of their residency (or any other irrelevant factor).
A large quantity of class actions in state court, like the
Broin tobacco case in Florida, results in millions of dollars
for plaintiffs' counsel but nothing of any value for
plaintiffs. An Institute for Civil Justice/RAND study has
confirmed this pattern, finding that class counsel in state
court consumer class action settlements, typically walk off
with more money than all of the class members combined.\194\
The ICJ/RAND study provides three compelling rationales for
allowing more interstate class actions to be heard by federal
courts: (1) ``federal judges scrutinize class action
allegations more strictly than state judges, and deny
certification in situations where a state judge might grant it
improperly;'' (2) ``state judges may not have adequate
resources to oversee and manage class actions with a national
scope;'' and (3) ``if a single judge is to be charged with
deciding what law will apply in a multistate class action, it
is more appropriate that this take place in federal court than
in a state court.'' \195\ S. 5 would help assure fairer
settlements by allowing the federal courts to review more class
action lawsuits, as well as by providing notice to state
Attorneys General so they can better protect their citizens
against unfair settlement agreements.
---------------------------------------------------------------------------
\194\ See Class Action Dilemmas, at 23.
\195\ Id. at 28.
---------------------------------------------------------------------------
Moreover, in contrast to many state courts, which have
demonstrated a willingness to approve class action settlements
where the bulk (if not all) of the benefits go to the lawyers,
federal courts have certified numerous settlement classes in
cases that involved alleged violations of state law. These
cases typically result in real relief for the class members.
Following are a few examples:
A federal district court in Texas certified a
nationwide settlement class alleging violations of federal
lending law and state consumer protection law.\196\ The court
approved a class settlement in which the defendants agreed to
forgive $52 million in debt incurred by class members and
establish a settlement fund totaling $11 million for monetary
payments to plaintiffs who had repaid their loans. In addition,
the defendants agreed to substantial restrictions on future
lending activities.
---------------------------------------------------------------------------
\196\ Purdie v. Ace Cash Express, Inc., 2003 U.S. Dist. LEXIS 22547
(N.D. Tex. 2003).
---------------------------------------------------------------------------
A federal district court in Ohio approved a
nationwide settlement class in a products liability suit
involving allegedly defective orthopedic implants.\197\ The
settlement fund, which provided for medical monitoring and
research, totaled more than $1 billion.
---------------------------------------------------------------------------
\197\ In Re: Sulzer Hip Prosthesis and Knee Prosthesis Liability
Litigation, 2002 U.S. Dist. LEXIS 21693 (N.D. Ohio 2002).
---------------------------------------------------------------------------
In another case, a federal district court in
Pennsylvania certified a nationwide settlement class of
plaintiffs alleging consumer fraud and personal injuries
related to two prescription diet drugs, fenfluramine and
dexfenfluramine.\198\ The settlement provided $3.75 billion for
personal injury claims, medical monitoring and research. The
class counsel agreed to limit their fees to about 9 percent of
that.
---------------------------------------------------------------------------
\198\ In re Diet Drugs (Fen-Phen), 2000 U.S. Dist. LEXIS 12275
(E.D. Pa. 2000).
---------------------------------------------------------------------------
Critics' Contention No. 11: S. 5 will cause delay and mass confusion
because of (a) the difficulty of assessing compliance with
jurisdictional requirements at the outset and (b) the potential
that class membership and definitions will change over time.
Response
The contention that S. 5 (particularly its differing
treatment of categories of cases when a suit is filed in the
defendant's home state) would complicate and delay the final
resolution of jurisdictional inquiries is absolutely
groundless. In reality, the jurisdictional standards in S. 5
will simplify--not complicate--a court's jurisdictional
inquiries. The critics forget that under the current standards,
many (and possibly most) newly-filed state court class actions
are removed to federal court to test whether the class
counsel's efforts to evade federal jurisdiction have been
successful (even though those removal attempts normally fail
and the cases are remanded to state court). Those inquiries are
often quite complicated and can create significant delays.
For example, as noted previously, counsel often include in
their complaint extraneous parties in order to prevent the
complaint from complying with the current ``complete
diversity'' requirement. Our federal courts have ruled that
those arguably extraneous parties can be ignored in the
jurisdictional analysis if their claims are meritless,\199\ and
quite frequently, the claims of those parties are challenged in
class actions as part of the jurisdictional analysis, requiring
the court to take time to engage in the complicated process of
assessing the merits of their claims. Under current law, this
time-consuming ``fraudulent joinder'' issue arises in many
purported class actions that are removed to federal court.\200\
---------------------------------------------------------------------------
\199\ See, e.g., Whitaker v. American Telecasting, Inc., 261 F.3d
196, 207 (2d Cir. 2001) (```In order to show that naming a non-diverse
defendant is a ``fraudulent joinder'' effected to defeat diversity
[jurisdiction], the defendant must demonstrate, by clear and convincing
evidence, either that there has been outright fraud committed in the
plaintiff's pleadings, or that there is no possibility, based on the
pleadings, that the plaintiff can state a cause of action against the
non-diverse defendant in state court.''') (citations omitted); Morris
v. Princess Cruises, Inc., 236 F.3d 1061,1067 (9th Cir. 2001)
(``Joinder of a non-diverse defendant is deemed fraudulent, and the
defendant's presence in the lawsuit is ignored for purposes of
determining diversity, `[i]f the plaintiff fails to state a cause of
action against a resident defendant, and the failure is obvious
according to the settled rules of the state.''') (citations omitted);
Tillman v. R.J. Reynolds Tobacco, 253 F.3d 1302, 1305 (11th Cir. 2001)
(``it is appropriate for a federal court to dismiss * * * [nondiverse]
defendant and retain diversity jurisdiction if the complaint shows that
there is no possibility that the plaintiff can establish any cause of
action against [the] defendant''); Heritage Bank v. Redcom
Laboratories, Inc., 250 F.3d 319 (5th Cir. 2001) (to similar effect).
\200\ In recent years, many federal courts have been required to
address fraudulent joinder issues in the context of class actions
removed to federal court. See, e.g., Jamison v. Purdue Pharma CO., 251
F. Supp. 1315 (S.D. Miss. 2003) (mass action matter); Hardy v. Ducote,
246 F. Supp. 2d 509 (E.D. La. Jan. 20, 2003) Burns v. Friedli, 241 F.
Supp. 2d 519 (D. Md. 2003); Moore v. Wyeth-Ayerst Labs., 236 F. Supp.
2d 509 (D. Md. 2002); Shields v. Bridgestone/Firestone, Inc., 232 F.
Supp. 2d 715 (E.D. Tex. 2002); Little v. Purdue Pharma, L.P., 227 F.
Supp. 2d 838 (S.D. Ohio 2002) In re Diet Drugs Prods. Liab. Litig., 220
F. Supp. 2d 414 (E.D. Pa. 2002); Doherty v. Aventis Pasteur, Inc., 2002
U.S. Dist. LEXIS 9596 (N.D. Cal. May 15, 2002); Garcia v. Aventis
Pasteur, Inc., 2002 U.S. Dist. LEXIS 15122 (W.D. Wash. Apr. 22, 2002);
Ohler v. Purdue Pharma L.P., 2002 U.S. Dist. LEXIS 2368 (E.D. La. Jan.
22, 2002); Mead v. Aventis Pasteur, Inc., 2002 U.S. Dist. LEXIS 25645
(D. Or. Jan. 7, 2002).
---------------------------------------------------------------------------
Similarly, the process of assessing whether a class action
complies with the current jurisdictional amount requirement is
also often ``an expensive and time consuming process,'' \201\
requiring discovery on the nature and value of the named
plaintiffs' claims. As noted previously, in some federal
Circuits, the jurisdictional amount requirement in a class
action is satisfied by showing that any member of the proposed
class is asserting damages in excess of $75,000, and in other
Circuits, the question is whether each and every member of the
putative class has individually an amount in controversy
exceeding $75,000.'' \202\ Again, this time-consuming issue,
often requiring significant amounts of record review and fact-
finding, is litigated very frequently in the many class actions
that are removed to federal court under current law.\203\
---------------------------------------------------------------------------
\201\ See C.A. Wright, A.R. Miller et aI., Federal Practice and
Procedure Sec. 3707, at 225 (1998).
\202\ Id. Sec. 3705, at 65 (2003 Supp.).
\203\ In recent years, many feral courts have had to resolve
jurisdictional amount issues in resolving motions to remand class
actions. See, e.g., In re Bridgestone/Firestone lnc Tires Prods. Liab.
Litig., 256 F. Supp. 2d 884 (S.D. Ind. 2003); Adans v. Nationwide
Mutual Ins. Co., 2003 U.S. Dist. LEXIS 4973 (N.D. Tex. Mar. 31, 2003);
Kary v. Exxon/Mobil Corp., 2003 U.S. Dist. LEXIS 4599 (D.N.D. Mar. 19,
2003); Faircloth v. National Home Loan Corp., 313 F. Supp. 2d 544
(M.D.N.C. 2003), aff'd, 2004 US. App. LEXIS 1039 (4th Cir. 2004) Carric
v. Sears, Roebuck and Co., 252 F. Supp. 2d 116 (M.D. Pa. 2003); Dash v.
FirstPlus Home Loan Trust, 248 F. Supp. 2d 489(M.D.N.C. Mar. 6, 2003);
Harris v. Physicians Mut. Ins. Co., 240 F. Supp. 3d 715 (N.D. Ohio
2003); Radlo v. Rhone-Poulenc, S.A., 241 F. Supp. 2d 61 (D. Mass.
2002); Shields v. Bridgestone/Fireston, Inc., 232 F. Supp. 2d 715 (E.D.
Tex. 2002); Tremblay v. Philip Morris, Inc., 231 F. Supp. 2d 411
(D.N.H. 2002); Mentzel v. Comcast Cable Communications, 222 F. Supp. 2d
923 (E.D. Mich. 2002); Trapazzo v. Prudential Property & Casualty Ins.
Co., 220 F. Supp. 2d 628 (E.D. Tex. 2002); Perotti v. Black & Decker,
Inc., 205 F. Supp. 2d 813 (N.D. Ohio 2002); Perry v. Hartford Ins. Co.
of the Midwest, 198 F. Supp. 2d 836 (E.D. Tex. 2002); City of
University City, Missouri v. AT&T Wireless Services, Inc., 229 F. Supp.
2d 927 (E.D. Mo. 2002); Mehlenbacher v. Akzo Nobel Salt, Inc., 207 F.
Supp. 2d 71 (W.D.N.Y. 2002); Perry v. Hartford Ins. Co. of the Midwest,
198 F. Supp. 2d 836 (E.D. Tex. 2002); Gavriles v. Verizon Wireless, 194
F. Supp. 2d 674 (E.D. Mich. 2002); Bethea v. St. Paul Guardian Ins.
Co., 2002 U.S. Dist. LEXIS 15780 (E.D. La. Aug. 21, 2002); Nabal v.
BJ's Wholesale Club, Inc., 2002 U.S. Dist. LEXIS 15106 (E.D. Pa. Aug.
1, 2002); Pope v. Independent Order of Foresters, 2002 U.S. Dist. LEXIS
13550 (W.D. Ky. July 23, 2002); Post v. General Motors Corp., 2002 U.S.
Dist. LEXIS 9968 (S.D.N.Y. May 31, 2002); Sylvester v. Daimler Chrysler
Corp., 2002 U.S. Dist. LEXIS 17989 (N.D. Ohio May 30, 2002); Green v.
Party City Corp., 2002 U.S. Dlst. LEXIS 7750 (C.D. Cal. Apr. 9, 2002);
Cigna Healthcare of St Louis Inc., v. Kaiser, 181 F. Supp. 2d 914 (N.D.
Ill. 2002) aff'd and modified in part, 294 F.3d 849 (7th Cir. 2002).
---------------------------------------------------------------------------
In sum, S. 5 will make the resolution of class action
jurisdictional issues easier--not harder. The need to deal with
the bona fides of counsel's efforts to use dubious parties to
avoid diversity will evaporate. In short, it will be much
easier to figure out whether any class member is diverse as to
any defendant (the ``minimal diversity'' inquiry established by
S. 5) than resolving the fraudulent joinder issues regularly
presented under the current rule (``complete diversity'').
Likewise, it will be much easier to determine whether the
amount in controversy presented by a purported class as a whole
(that is, in the aggregate) exceeds $5 million than it is to
assess the value of the claim presented by each and every
individual class member, as is required by the current
diversity jurisdictional statute.
The critics' concerns that events might occur after a
complaint is filed or removed that would either create federal
jurisdiction in a way never intended or would remove federal
jurisdiction in an arbitrary manner are similarly unfounded.
While questions regarding events occurring after a complaint is
filed or removed to federal court will, of course, arise under
S. 5, those same (or, at least, very similar) questions arise
in current practice on jurisdictional issues. Well-established
law exists to resolve these questions, and S. 5 does not
change--or even complicate--the answers to these questions. In
short, the ``rules of the road'' on such issues are already
established, and S. 5 does not change them.
Under existing law (which S. 5 would not change),
``diversity'' of citizenship between the parties must exist
both at the time a complaint is filed and at the time a
complaint is removed to federal court.\204\ For this reason,
the federal court would generally only need to measure the
diversity of the parties at the outset of the litigation. For
example, in a case filed on behalf of a class of California
citizens against a California company, there would be no
minimal diversity when the case was filed--and thus the case
could not be removed simply because one named plaintiff or
class member later moved to Nevada. Similarly, if a class
action against a California company were filed in California
and more than 66% of the class members were California citizens
at the time the case was filed, changes in those class members'
residences would not alter the jurisdictional analysis. In
other words, no court would be required to engage in a
residency play-by-play after the time the complaint was filed.
---------------------------------------------------------------------------
\204\ Coury v. Prot, 85 F.3d 244, 249 (5th Cir. 1996); Kanzelberger
v. Kanzelberger, 782 F.2d 774, 776 (7th Cir. 1986).
---------------------------------------------------------------------------
If, however, the plaintiff in the above example of her or
her own volition filed an amended complaint in state court that
added Nevada plaintiffs (or that brought the percentage of
Nevada plaintiffs above 33% in a suit in the defendant's home
state), jurisdiction would exist at the time that complaint was
filed. Accordingly, as dictated by current law, the defendant
could remove the case to federal court.\205\
---------------------------------------------------------------------------
\205\ See Caterpillar, Inc. v. Lewis, 519 U.S. 61 69 (1996) (``In a
case not originally removable, a defendant who received a pleading or
other paper indicating the postcommencement satisfaction of federal
jurisdictional requirements--for example, by reason of the dismissal of
a nondiverse party--may remove the case to federal court within 30 days
of receiving such information.'').
---------------------------------------------------------------------------
Current law (that S. 5 does not alter) is also clear that,
once a complaint is properly removed to federal court, the
federal court's jurisdiction cannot be ``ousted'' by later
events. Thus, for example, changes in the amount in controversy
after the complaint has been removed would not subject a
lawsuit to be remanded to state court. The Supreme Court
established this principle in St. Paul Mercury Indem. Co. v.
Red Cab Co.,\206\ stating that ``events occurring subsequent to
removal which reduce the amount recoverable, whether beyond the
plaintiff's control or the result of his volition, do not oust
the district court's jurisdiction once it has attached.'' The
same would be true if a case was removed to federal court
because minimal diversity existed at the time and, because of a
later event, minimal diversity was eliminated. This would occur
if, for example, the federal court dismissed the claims of out-
of-state plaintiffs, leaving only the claims of in-state
plaintiffs against an in-state defendant intact. ``It uniformly
has been held that in a suit properly begun in federal court
the change of citizenship does not oust the jurisdiction. The
same rule governs a suit brought in a state court and removed
to federal court.'' \207\
---------------------------------------------------------------------------
\206\ 303 U.S. 283, 293 (1938).
\207\ Id. at 294-95.
---------------------------------------------------------------------------
Sound policy reasons support this rule. If a federal
court's jurisdiction could be ousted by events occurring after
a case was removed, plaintiffs who believed the tide was
turning against them could simply always amend their complaint
months (or even years) into the litigation to require remand to
state court. ``If the plaintiff could, no matter how bona fide
his original claim in the state court, reduce the amount of his
demand to defeat federal jurisdiction the defendant's supposed
statutory right of removal would be subject to the plaintiff's
caprice. The claim, whether well or ill founded in fact, fixes
the right of the defendant to remove, and the plaintiff ought
not to be able to defeat that right and bring the cause back to
the state court at his election.\208\ Similarly, a defendant
prevailing on the merits always shows that the amount in
controversy, at the end of the day, is zero. Thus, if
subsequent events could unravel a federal court's jurisdiction,
a defendant could prevail on the merits, only to have the
federal court conclude that it lacks jurisdiction to enter a
judgment.\209\
---------------------------------------------------------------------------
\208\ Id. at 294.
\209\ Herremans v. Carrera Designs, Inc., 157 F.3d 1118, 1121 (7th
Cir. 1998) (holding that the jurisdictional test is ``not whether the
plaintiff is actually entitled'' to $75,000, ``[o]therwise every
diversity case that a plaintiff lost on the merits would be dismissed
for lack of federal jurisdiction'').
---------------------------------------------------------------------------
It is also clear under existing law that even if a case is
not originally removable, it can become removable because of
subsequent events (other than changes in the citizenship of the
original parties, which, as noted above, do not effect
jurisdiction). Thus, as applied under S. 5, if a plaintiff,
through amendment or otherwise, increased the amount in
controversy, created minimal diversity, or changed the class
definition in a case filed in the defendant's home state to
include more than 33% of out-of-state plaintiffs, a complaint
filed in state court--and previously not subject to federal
jurisdiction--could properly be removed.\210\ Otherwise, the
plaintiff could simply file a complaint not subject to removal
and then later amend it, thereby circumventing federal
jurisdiction. Similarly, if a plaintiff defines a class so as
to allow diverse parties to become members of a class as the
case proceeds, removal may be appropriate if diverse parties
actually enter the class. For example, if a class action is
filed in state court against an Indiana company on behalf of
all persons affected by a chemical spill and it is initially
thought that all class members are Indiana citizens, the case
may become removable later in the litigation if it emerges that
citizens of other states fall within the class definition or
have become members of the class as the effects of the chemical
spill spread. If this were not the rule, major interstate
controversies could evade federal jurisdiction because counsel
filed a class action before the parameters of the controversy
were fully developed. Any alternative rule would allow class
counsel to urge rejection of federal jurisdiction on the
grounds that only non-diverse Indiana citizens were in the
class and then turn around months later and purport to
represent thousands of persons residing outside of Indiana. It
should be noted that class counsel can limit the potential for
removal as the case proceeds by defining the class to encompass
only parties that were injured as of the date on which the
action was filed or only parties who are citizens of a certain
state.
---------------------------------------------------------------------------
\210\ See Caterpillar, Inc., 519 U.S. at 69.
---------------------------------------------------------------------------
Critics' Contention No. 12.: S. 5's provisions expanding federal
jurisdiction over class actions are invalid because they exceed
the jurisdictional authorization of Article III of the
Constitution.
Response:
This concern is groundless. As viewed by many Circuits, a
federal court may exercise diversity jurisdiction over a
purported class action only if none of the plaintiffs named in
the complaint share state citizenship with any defendant. In
other words, no named plaintiff may be a citizen of the same
state as any defendant. This so-called ``complete diversity''
prerequisite for federal jurisdiction is wholly a policy
creation of Congress, establishing a scope of federal diversity
jurisdiction narrower than what is authorized by Article
III.\211\ Broader definitions of diversity jurisdiction would
be wholly consistent with Article III. ``[I]n a variety of
contexts, [federal courts] have concluded that Article III
poses no obstacle to the legislative extension of federal
[diversity] jurisdiction * * * so long as any two adverse
parties are not co-citizens.'' \212\
---------------------------------------------------------------------------
\211\ See Strawbridge v. Curtiss, 3 Cranch 267 (1806) (complete
diversity requirement derives from ``[t]he words of the act of
Congress,'' not the Constitution).
\212\ State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31
(1967) (citing Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 10 n.3 (1951);
Wichita R. & Light Co. v. Pub. Util. Comm'n. 260 U.S. 48 (1922); Barney
v. Latham, 103 U.S. 205, 213 (1881)).
---------------------------------------------------------------------------
Critics suggest that S. 5 is constitutionally suspect
because it would authorize federal jurisdiction over purported
class actions in which there is ``minimal (but not complete)
diversity''--that is, cases in which any member of the
purported class (whether or not explicitly named in the caption
of the complaint) has state citizenship that differs from any
defendant (using the definitions already in 28 U.S.C.
Sec. 1332). Citing no precedents whatsoever, the critics allege
that there is an absolute bar on considering unnamed class
members to be ``parties'' to a purported class action. They
contend that those unnamed persons must be ignored completely
in determining whether the two sides meet the applicable
diversity requirement.
But the premise of this challenge--that unnamed class
members cannot be deemed parties to an action--is flatly
inconsistent with the fact that in a variety of contexts over
the years, federal court have treated unnamed class members as
parties to class actions. For example:
In Zahn v. International Paper Co.,\213\ the U.S.
Supreme Court considered whether federal diversity jurisdiction
existed over a purported Rule 23(b)(3) class that had not been
certified. The district court declined to exercise federal
jurisdiction (or to allow the matter to proceed as a class
action) because even though ``[t]he claim of each of the named
plaintiffs was found to satisfy the * * * jurisdictional
amount,'' ``not every individual owner in the class has
suffered * * * damages in excess of'' the amount-in-controversy
threshold.\214\ The Supreme Court concurred, holding that in
determining whether the amount-in-controversy prerequisite for
diversity jurisdiction is satisfied, a trial court is obliged
to look at whether each purported claimant, even if unnamed,
meets the $75,000 jurisdictional amount requirement.\215\ Thus,
in this respect, the federal courts have for many years treated
unnamed class members as ``parties.''
---------------------------------------------------------------------------
\213\ 414 U.S. 291 (1973).
\214\ Zahn v. International Paper Co., 53 F.R.D. 430 (D. Vt. 1971).
\215\ Zahn v. International Paper Co., 414 U.S. at 301 (``Each
plaintiff in a Rule 23(b)(3) class action must satisfy the
jurisdictional amount, and any plaintiff who does not must be dismissed
from the case--`one plaintiff may not ride in on another's coattails.'
'').
---------------------------------------------------------------------------
Similarly, in Devlin v. Scardelletti,\216\ the
Supreme Court recently held that unnamed class members are
considered ``parties'' for purposes of mounting an appeal.
Thus, Devlin rejects the contention that unnamed class members
cannot be considered ``parties'' to the litigation.
---------------------------------------------------------------------------
\216\ 536 U.S. 1 (2002).
---------------------------------------------------------------------------
Earlier, the Supreme Court ruled that normally,
the filing of a class action immediately tolls the statute of
limitations as to all unnamed class members.\217\ In short, all
unnamed class members are treated as parties--treated as if
they had filed the litigation themselves. Significantly the
American Pipe Court declared that ``the claimed members of the
class stood as parties to the suit until and unless they
received notice thereof and chose not to continue.'') \218\
---------------------------------------------------------------------------
\217\ See, e.g., American Pipe & Construction Co. v. Utah, 414 U.S.
538 (1974).
\218\ Id. at 550 (emphasis added).
---------------------------------------------------------------------------
Along these same lines, many courts have held that
under Fed. R. Civ. P. 23(e), a court must ensure that unnamed
class members' interests are protected if class claims are
dismissed.\219\ In other words, the court is obliged (at least
at some level) to treat the unnamed class members as parties to
the litigation.
---------------------------------------------------------------------------
\219\ See Diaz v. Trust Territory of Pacific Islands, 876 F.2d
1401, 1408 (9th Cir. 1989); Glidden v. Chromalloy American Corp., 808
F.2d 621, 626-28 (7th Cir. 1986).
---------------------------------------------------------------------------
S. 5 proposes that Congress declare unnamed class members
to be ``parties'' to the litigation for purposes of the
``minimal diversity'' jurisdictional requirement. As evidenced
by the foregoing examples, such a congressional determination
about who is a class action ``party'' would be wholly
consistent with long-standing practice. For years, Congress and
the courts have made practical determinations about how various
categories of parties should be treated in assessing compliance
with diversity jurisdiction prerequisites and specifically
about the circumstances in which unnamed class members should
be treated as parties to a lawsuit. The enactment of the
``minimal diversity'' provisions of S. 5 would be merely
another such practical determination a determination that for
purposes of the ``minimal diversity'' jurisdictional inquiry
established by the legislation, unnamed class members (as well
as any named class members) shall be considered ``parties.''
Congress is certainly empowered to establish such a definition
in this instance.
The critics are also wrong to suggest that The Class Action
Fairness Act ``dictate[s] * * * state court [rules of civil]
procedure'' and thus impinges upon the sovereignty of the
state.\220\ Critics quote Prof. Larry Tribe as saying that
``for Congress directly, regulate the procedures used by state
courts in adjudicating state-law tort claims * * * would raise
serious questions under the Tenth Amendment and principles of
Federalism.'' \221\ Of course, when Professor Tribe made that
statement, he was not referring to The Class Action Fairness
Act. That is because The Class Action Fairness Act does not
regulate the procedures ``used by state courts'' at all.
Rather, it simply changes the federal jurisdiction statute to
expand the diversity jurisdiction of federal courts to
encompass more class action.
---------------------------------------------------------------------------
\220\ S. Rep. 108-123, at 77-78 (2002) (Minority views).
\221\ S. Rep. 108-123, at 77-78 (2003) (Minority views).
---------------------------------------------------------------------------
If cases subject to that broader jurisdictional grant are
removed to federal court (or brought there in the first place),
it is of course permissible for Congress to regulate the
procedures by federal courts to resolve such cases. Indeed, if
Congress cannot specify laws and procedures to be used by
federal courts, then all of the federal rules of civil
procedure (which are transmitted to Congress for final
approval) would be unconstitutional.
The critics' contention that The Class Action Fairness Act
``overstep[s] [Congress's] specific constitutional power to
regulate interstate commerce'' \222\ is equally baseless. This
final ``serious'' constitutional argument is another red
herring. In the first place, it is difficult to imagine why The
Class Action Fairness Act--which by its text regulates only
very large interstate class actions involving at least two (and
sometimes up to 50) states--could be unconstitutional when
there is no debate that a $75,001 slip and fall case involving
citizens of only two states can appropriately be heard by a
federal court.
---------------------------------------------------------------------------
\222\ Id.
---------------------------------------------------------------------------
Thus, the critics would have to concede that their view of
the Commerce Clause abolishes all diversity jurisdiction, in
direct contravention of Article III, Supreme Court precedent,
and Congressional authority exercised literally since the year
of our nation's founding.
Even if the critics' attack on the Commerce Clause were not
so obviously misguided given the separate authority Congress
has to regulate federal courts, The Class Action Fairness Act
targets activity with substantial effects on interstate
commerce. It targets only those lawsuits involving parties from
different states, is limited to very large lawsuits involving
at least $5 million, and regulates economic activity (the
transfer of resources through litigation) that collectively has
substantial effects on interstate commerce. As the legislative
history makes abundantly clear, abusive state court class
action practices exact a staggering toll on interstate
commerce. The Class Action Fairness Act is thus not only
constitutional, it is necessary as a matter of public policy.
In sum, the Committee notes that the exercise of this
expanded jurisdiction can be grounded on a Commerce Clause
rationale as well. In that regard, the Committee notes that the
legislation contains findings that the state court class action
abuses identified in the record before the Committee are having
a serious adverse effect on interstate commerce and that the
legislation (particularly its jurisdictional provisions) is
intended to ameliorate those adverse effects.
Critics' Contention No. 13: S. 5 will make it harder for consumers to
bring class action lawsuits against pharmaceutical
manufacturers and should be amended to exclude drug cases.
S. 5 poses no barrier for consumers seeking to bring suits
against pharmaceutical manufacturers. All the bill does is move
certain class actions to federal court. Moreover, an industry-
specific exemption from federal jurisdiction, such as the
carve-out proposed by this critique, makes no sense, since it
irrationally slams the federal courthouse door on one
industry--the very kind of treatment that the Framers sought to
avoid by creating diversity jurisdiction. Such an approach is
ill-advised for several reasons.
First, such an amendment would unfairly single out the
pharmaceutical industry and deny defendants a fair, even-handed
federal court forum. Moreover, this contention is inconsistent
with what the Framers had in mind in establishing diversity
jurisdiction in Article III of the Constitution. They wanted to
allow interstate businesses to have claims against them heard
in federal court so as to avoid local biases. Nowhere in this
concept is the idea that certain industries should be exempted
from this right--i.e., that certain kinds of businesses are
less entitled to federal court protection. In short, such an
exclusion would fly in the face of the Constitution, as well as
the basic purpose of the bill.
Second, the flood of litigation surrounding recent drug
withdrawals demonstrates the need for class action reform.
Under the current system, plaintiffs' lawyers frequently file
hundreds of overlapping class action lawsuits in various state
court jurisdictions around the country. And since we have 50
different state court systems, these cases cannot be
coordinated or consolidated before one judge. As a result, both
sides have to engage in duplicative discovery, the judges end
up duplicating each others' work, and different courts often
reach different decisions on the same pretrial issues. To make
matters worse, the current system encourages plaintiffs'
lawyers to compete against each other--vying to achieve the
first nationwide settlement that will eviscerate the remaining
class actions involving similar claims.
In contrast, when numerous duplicative class actions are
brought in federal court, the federal multi district litigation
(MDL) mechanism allows all the cases to be coordinated for
pretrial proceedings in one federal court. That means all the
parties in all the cases typically set up one document
depository, the court issues consistent rulings on discovery
issues and summary judgment motions, and the court can preside
over settlement negotiations that address the concerns of all
the plaintiffs in all the cases--rather than just strike a deal
with one group of plaintiffs' lawyers. Put simply, MDL
proceedings are fairer, more efficient, and less expensive.
Third, federal courts have demonstrated their effectiveness
in handling nationwide class actions against pharmaceutical
companies. Federal court proceedings have resulted in numerous
pro-consumer settlements in pharmaceutical cases. For example,
the settlement in In re Diet Drugs (Fen-Phen) provided $3.75
billion for personal injury claims, medical monitoring and
research.\223\ Similarly, in In re: Copley Pharmaceutical Inc.,
Albuterol Products Liability Litigation, an MDL court approved
a $150 million settlement for consumers.\224\ And in Bowling v.
Pfizer,, the federal court approved a settlement providing
approximately $200 million in medical monitoring for plaintiffs
who had received allegedly defective heart valves.\225\
---------------------------------------------------------------------------
\223\ In re Diet Drugs (Fen-Phen), 2000 U.S. Dist. LEXIS 12275
(E.D. Pa. 2000).
\224\ In re: Copley Pharmaceutical Inc., Albuterol Products
Liability Litigation, 1 F. Supp. 2d 1407 (D. Wyo. 1998).
\225\ Bowling v. Pfizer Inc., 922 F. Supp. 1261 (S.D. Ohio 1996).
---------------------------------------------------------------------------
Fourth, regulatory decisions regarding which pharmaceutical
drugs are available to the American public should not be
shifted away from the Food and Drug Administration into the
hands of plaintiffs' lawyers, judges and juries. Many class
actions against pharmaceutical manufacturers are filed in spite
of the fact that the FDA has investigated an alleged problem
and concluded that the drug should remain on the market. Class
action lawyers borrow from the factual work undertaken by the
agency and use the class action vehicle as a way to relitigate
the agency's decisions. The authority to decide whether
consumers should have access to pharmaceuticals should remain
with the FDA. And if there are problems with FDA, the solution
is to fix the agency--not to transfer its power to self-
interested class action lawyers.
Finally, the claims of some critics that it is more
difficult to have a class certified in federal court than in
state court have been disproved. As noted previously, a study
by the Federal Judicial Center found that class actions were
``almost equally likely to be certified'' in the two systems:
federal courts certified classes 22 percent of the time, while
state courts certified classes 20 percent of the time.\226\ The
study also debunked another myth often repeated by opponents of
The Class Action Fairness Act--that state courts move more
quickly than federal courts. According to the study, federal
courts are much more speedy in resolving class action issues:
state courts, in contrast, are more likely to let class actions
linger without ruling on class certification. Finally, to the
extent that caseloads affect how quickly cases are resolved,
the problems are much worse in state court than in federal
court. State court judges are assigned (on average) 1,568 new
cases each year.\227\ In contrast, each federal court judge was
assigned an average of just 483 new cases during the twelve-
month period ending September 30, 2003.\228\
---------------------------------------------------------------------------
\226\ See 2004 Federal Judicial Center Study.
\227\ Examining the Work of State Courts at 12-13.
\228\ See Federal Court Management.
---------------------------------------------------------------------------
VIII. CBO Cost Estimate
S. 5 would expand the types of class-action lawsuits that
would be initially heard in federal district courts and would
provide guidelines for the award of attorney's fees in certain
types of settlements. CBO estimates that implementing the bill
would cost the federal district courts about $7 million a year,
subject to appropriation of the necessary funds. Enacting the
bill would not affect direct spending or revenues. S. 5
contains no intergovernmental mandates as defined in the
Unfunded Mandates Reform Act (UMRA) and would impose no costs
on state, local, or tribal governments. S. 5 would impose
private-sector mandates, as defined in UMRA, but CBO estimates
that the direct cost of those mandates would fall below the
annual threshold established by UMRA ($123 million in 2005,
adjusted annually for inflation).
Under S. 5, most class-action lawsuits would be heard in a
federal district court rather than a state court. Therefore,
CBO estimates that the bill would impose additional costs on
the federal district court system. While the number of cases
that would be filed in federal court under this bill is
uncertain, CBO expects that a few hundred additional cases
would be heard in federal court each year. According to the
Administrative Office of the United States Courts, class-action
lawsuits tried in federal court cost the government, on
average, about $23,000. That figure includes salaries and
benefits for clerks, rent, utilities, and associated overhead
expenses but excludes the costs of the salaries and benefits of
judges. CBO estimates that implementing S. 5 would cost about
$7 million annually.
CBO also estimates that enacting this bill could increase
the need for additional district judges. Because the salaries
and benefits of district court judges are considered mandatory,
adding more judges would increase direct spending. However, S.
5 would not--by itself--affect direct spending because separate
legislation would be necessary to authorize an increase in the
number of district judges. In any event, CBO expects that
enacting the bill would not require a significant increase in
the number of federal judges, so that any potential increase in
direct spending from subsequent legislation would probably be
less than $500,000 a year.
S. 5 would require the Judicial Conference of the United
States to transmit a report on class-action settlements to the
Congress no later than one year after the bill's enactment. CBO
estimates that this provision would cost less than $500,000 in
2005.
S. 5 would impose a private-sector mandate by possibly
limiting the size of awards that attorneys could receive in
certain class-action settlements. If a proposed class-action
settlement provides coupons to a class member, the bill would
require the attorneys' fees to be based on the value of the
coupons that are redeemed or on the amount of time reasonably
expended working on the case by class counsel. In current
practice, the attorney's fee is sometimes based on the total
value of the settlement. According to information from industry
representatives and academic studies, settlements with coupons
account only for about 10 percent of all class-action
settlements. Moreover, according to those sources, attorneys'
fees correlate very closely with the amount of time spent on
such cases by class counsel. Therefore, because attorneys' fees
would still be negotiated as part of any settlement, CBO
estimates that the direct cost of the mandate, as measured by
loss of income for attorneys in class-action settlements, would
be small, if any.
In addition, S. 5 would impose a private-sector mandate on
defendants participating in a proposed class-action settlement.
The bill would require defendants to make certain notifications
and disclosures to the appropriate state official of each state
in which a class member resides and the appropriate federal
official within 10 days after a proposed settlement is filed in
court. The bill defines a proposed settlement as an agreement
regarding a class action that is subject to court approval and
would be binding on the class. The required notices and
disclosures would include a copy of the suit, a copy of the
proposed settlement, a statement of class members' rights, and
certain other materials. In effect, the defendants would have
to provide copies of documents and materials related to
information that they usually already possess about the case.
Further, the provision would allow for the use of the Internet
in making such disclosures. Thus, CBO estimates that the costs
of complying with this mandate would be small.
The CBO staff contacts for this estimate are Gregory Waring
(for federal costs), and Paige Piper/Bach (for the private-
sector impact). This estimate was approved by Peter H.
Fontaine, Deputy Assistant Director for Budget Analysis.
IX. Regulatory Impact Statement
In compliance with paragraph 11(b)(1), rule XXVI of the
Standing Rules of the Senate, the Committee, after due
consideration, concludes that S. 5 will not have a significant
regulatory impact.
X. ADDITIONAL VIEWS OF SENATOR PATRICK LEAHY
The circulation and filing of this report occurred after
passage of the legislation for Senate consideration of the
underlying bill. Indeed, it was filed after the House of
Representatives passed this legislation and on the same day
that the President signed the measure into law. Committee
reports, like Committee consideration of measures, are intended
to assist the Senate in its consideration of the matter.
Committees tend to have Members with expertise and experience
that help shape legislation for Senate consideration. In this
case, that did not occur. Instead, at the insistence of the
Republican leadership, this bill was rushed through the
Judiciary Committee and then forced through the Senate without
amendment.
The Republican leadership's timetable was so short that
there was no opportunity to prepare a Committee report before
final passage. There was no time for Senators to review a cost
estimate from the Congressional Budget Office. There was no
evaluation of the regulatory impact of the bill. That this
report is being filed after Senate consideration means that it
did not serve the principal purpose for which Committee reports
are intended.
Several days ago, the Senate had pending before it for a
few days the so-called ``Class Action Fairness Act.'' In
lockstep mode, bill supporters rejected every effort to clarify
or improve the bill. During the few days it was pending, a few
modest amendments were offered to clarify some ambiguous
provisions and to respond to serious concerns raised by the
National Conference of State Legislatures, the National
Association of State Attorneys General, prominent legal
scholars, consumer and environmental groups and civil rights
organizations. All these efforts were rejected. Anyone who
watched the Senate on C-SPAN or reviews the Congressional
Record will see ample evidence that the ``fix was in''. Thus,
despite legitimate concerns acknowledged by some of this
legislation's sponsors and supporters, the bill was not
improved in any regard on its short journey through the Senate.
I am disappointed that the Senate has been reduced to
taking its marching orders on major legislation from corporate
special interests and the White House. The Senate could have
made limited but important improvements to the bill but,
instead, the majority of Senators refused to even consider
minor improvements let alone the major flaws in this
legislation.
This legislation will make it harder for American citizens
to protect themselves against violations of state civil rights,
consumer, health, and environmental protection laws by forcing
these cases out of local state courts. Aside from being
convenient, state courts have experience with the legal and
factual issues involved in these important cases. This bill
will sweep these cases into federal courts and, thereby, erect
new barriers to lawsuits and place new burdens on plaintiffs.
The biggest concern raised by legal scholars and agreed to
by several Senate sponsors of the bill would have addressed the
recent trend in the federal courts not to certify class actions
if multi-state laws are involved. Given this development, what
this bill may result in doing is removing class actions to
federal court where they will likely be dismissed for involving
multiple state laws and where they will not be considered on
the merits because the federal court will choose not to
consider a case involving the laws of the states. Cynics might
even speculate that is what the business groups behind this
purported ``procedural'' change are really seeking, the
dismissal of meritorious cases on procedural grounds by the
federal courts.
Many Senators understand that this bill could deny justice
to consumers and others in class actions who band together to
seek relief in state court. Senator Feinstein and Senator
Bingaman worked together on an amendment to alleviate this
legal Catch-22. It is unfortunate that the wisdom of their
common-sense solution was rejected.
Anyone who reads this bill will notice that despite its
title, it affects more than just class actions. Individual
actions, consolidated by state courts for efficiency purposes,
are not class actions. Despite the fact that a similar
provision was unanimously struck from the bill during the last
Congress, mass actions reappeared in this bill this Congress.
Federalizing these individual cases will no doubt delay, and
possibly deny, justice for victims suffering real injuries.
Senator Durbin's amendment would have clarified the bill's
effect on these cases but it was not adopted.
Prominent civil rights organizations and labor advocates
requested that the bill be modified to acknowledge the fact
that many of our states have their own protective civil rights
and employment laws. Senator Kennedy's amendment to exempt
civil rights and wage and hour cases from this bill was a
sensible solution. I was proud to cosponsor it and regret that
this amendment was also rejected.
This class action legislation has also been criticized by
nearly all of the state Attorneys General in this country. They
expressed a specific concern that S. 5 could limit their
official powers to investigate and bring actions in their state
courts against defendants who have caused harm to their
citizens because in certain instances they file suit as the
class representative for the consumers of their state. Not even
this minor clarification, requested by nearly every state's
highest law enforcement officer, was acceptable to the bill's
supporters as they to adopt Senator Pryor's amendment.
It is disappointing to me that the Senate has refused to
listen to the wise counsel of our state legislatures, our state
law enforcement officers, our state judges and even the views
expressed by our federal judiciary. They serve in the
institutions that we are affecting by enacting this
legislation.
This bill contains language to reduce the delay parties can
experience when a case is removed to federal court by setting a
time limit for appeals of remand orders. However, no measure is
included in the bill that would set a timeline for the district
court to rule on the actual remand motion. This means that
plaintiffs' claims may be removed from state court, just to
languish on the federal docket for years, without any recourse.
Senator Feingold offered a modest amendment to set a reasonable
time limit for the district court to rule on remand orders.
This solution received praise from one of the sponsors of the
legislation, yet the amendment was rejected.
I predict this legislation will be manipulated by well-paid
corporate defense lawyers to create complex, expensive and
lengthy litigation over the criteria and factors in the bill
and whether they apply to a particular case. Unfortunately, one
of the great boons--or more properly boondoggles--of this
legislation, to the extent it does not simply deter meritorious
class actions that would otherwise have been brought by
consumers, is that it will make them more costly, burdensome
and complicated.
The so-called Class Action Fairness Act falls short of the
expectation set by its title. It will leave many injured
parties who have valid claims with no avenue for relief, and
that is anything but fair to the ordinary Americans who look to
us to represent them in the United States Senate.
Patrick Leahy.
XI. MINORITY VIEWS OF SENATORS LEAHY, KENNEDY, BIDEN, FEINGOLD, AND
DURBIN
I. Introduction
We strongly oppose S. 5, the ``Class Action Fairness Act of
2005.'' Although the legislation is described by some of its
proponents as a ``modest bill'' not effecting ``a substantive
change in the law'', in reality it will cause a radical
revision of the class action rules and diversity jurisdiction
requirements. We believe it would bar most state class actions
from being heard in state courts and prevent many nationwide
class actions from being heard in either state or federal
court.
This legislation and previous versions have been opposed by
the federal \1\ and state \2\ judiciaries, as well as, state
legislatures.\3\ S. 5 is also opposed by dozens of civil
rights, consumer, environmental and public interest advocates
\4\ and several state Attorneys General.\5\
---------------------------------------------------------------------------
\1\ See Letter from Ralph Mecham, Secretary, Judicial Conference of
the United States (Mar. 26, 2003) (in 2003, the Conference voted to
oppose the jurisdictional provisions that remain in S. 5 because the
provisions ``would add substantially to the work of the Federal courts
and are inconsistent with principles of Federalism'').
\2\ See Letter from Annice M. Wagner, President, Conference of
Chief Justices (Mar. 28, 2002) (``Absent hard evidence of the inability
of the state judicial systems to hear and decide fairly class actions
brought in state courts, we do not believe that such a procedure is
warranted.'').
\3\ See Letter from Sen. Michael Balboni, Chair, National
Conference of State Legislatures (Feb. 2, 2005) (``The effect of S.5 on
state legislatures is that state laws in the areas of consumer
protection and antitrust which were passed to protect citizens of a
particular state against fraudulent or illegal activities will almost
never be heard in state courts.'').
\4\ See Letters to Committee Members in opposition to similar class
action measures from the AARP, ADA Watch/National Coalition for
Disability Rights, AFL-CIO, Alliance for Healthy Homes, Alliance for
Justice, Alliance for Retired Americans, American Association of People
with Disabilities, American Association of University Women, American
Cancer Society, American Heart Association, American Federation of
Government Employees, American Federation of State, County and
Municipal Employees, American Lung Association, American-Arab Anti-
Discrimination Committee, Americans for Democratic Action, Bazelon
Center for Mental Health Law, Brady Campaign to Prevent Gun Violence,
United with the Million Mom March, Campaign For Tobacco-Free Kids,
Center for Disability and Health, Center for Justice and Democracy,
Center for Responsible Lending, Center for Women Policy Studies, Civil
Justice, Inc., Clean Water Action, Coalition to Stop Gun Violence,
Commission on Social Action of Reform Judaism, Communication Workers of
America, Consumer Federation of America, Consumers for Auto Reliability
and Safety, Consumers Union, Disability Rights Education Fund,
Earthjustice, Education Law Center, Environmental Working Group,
Epilepsy Foundation, Families USA, Federally Employed Women, Friends of
the Earth, Gray Panthers, Greenpeace, Homeowners Against Deficient
Dwellings, Jewish Labor Committee, Lawyers' Committee For Civil Rights
Under Law, Leadership Conference on Civil Rights, Mexican American
Legal Defense and Educational Fund, Mineral Policy Center, NAACP Legal
Defense and Education Fund, National Alliance of Postal and Federal
Employees, National Asian Pacific American Legal Consortium, National
Association for the Advancement of Colored People, National Association
for Equal Opportunity in Higher Education, National Association of
Consumer Advocates, National Association of Consumer Agency
Administrators, National Association of the Deaf, National Association
of Protection and Advocacy Systems, National Bar Association, National
Campaign for Hearing Health, National Center on Poverty Law, National
Coalition on Black Civic Participation, National Committee on Pay
Equity, National Consumer Law Center, National Consumers Coalition,
National Consumers League, National Council of La Raza, National
Employment Lawyers Association, National Fair Housing Alliance,
National Gay and Lesbian Task Force, National Law Center on Homeless &
Poverty, National Legal Aid and Defender Association, National
Organization for Women, National Partnership for Women and Families,
National Resources Defense Council, National Workrights Institute,
National Women's Health Network, National Women's Law Center, North
Carolina Justice Center, NOW Legal Defense Fund, People for the
American Way, Pride at Work, Project Equality, Public Citizen,
Religious Coalition for Reproductive Choice, Sargent Shriver National
Center of Poverty Law, Service Employees International Union, Sierra
Club, Tobacco Control Resource Center, Tobacco Products Liability
Project, UNITE!, United Food and Commercial Workers International
Union, United Policyholders, United Steelworkers of America, USAction,
U.S. Public Interest Research Group, Violence Policy Center, and Women
Employed (May 21, 2004).
\5\ See Letter from Eliot Spitzer, Attorney General New York and
W.A. Drew Edmondson, Attorney General of Oklahoma, on behalf of the
Attorneys General of the States of California, Illinois, Iowa,
Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New
York, Oklahoma, Vermont and West Virginia (Feb. 7, 2005).
---------------------------------------------------------------------------
By providing plaintiffs access to the courts in cases where
a defendant may have caused small injuries to a large number of
persons, class action procedures have traditionally offered a
valuable mechanism for aggregating small claims that otherwise
might not warrant individual litigation. This legislation will
undercut that important principle by making it far more
burdensome, expensive, and time-consuming for groups of injured
persons to obtain access to justice. Thus, it would be more
difficult for citizens to seek redress for violations of civil
rights, employment discrimination, and consumer health, safety
and environmental laws, to name but a few important laws. The
legislation will prevent state courts from considering class
action cases which involve solely violations of state laws,
such as state consumer protection laws.
``The Class Action Fairness Act of 2005'' will force most
state class action cases into federal courts. It will provide
automatically for both original jurisdiction and the removal of
state class action claims to federal court at the request of
either party in cases involving violations of state law if any
member of the plaintiff class and at least one primary
defendant are citizens of different states.\6\
---------------------------------------------------------------------------
\6\ See The Class Action Fairness Act of 2005, S. 5, 109th Cong.
Sec. 4(a)(2) (2005) (adding 28 U.S.C. Sec. 1332(d)(2)). Current law
requires complete diversity before a state law case is eligible for
removal to Federal court, meaning all of the defendants must be
citizens residing in different states than the plaintiffs. See
Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806). In Snyder v.
Harris, 394 U.S. 332 (1969), the Supreme Court held that the court
should only consider the citizenship of named plaintiffs for diversity
purposes, and not the citizenship of absent class members.
---------------------------------------------------------------------------
As part of the expanded diversity jurisdiction, the bill
also provides for the removal of state class actions to federal
court at the request of either party if fewer than one-third of
the plaintiff class members are citizens of a different state
than any primary defendant, even if the primary defendant
conducts substantial business in that state.\7\ The legislation
would allow removal of a class action to federal court in cases
where between one-third and two-thirds of the plaintiffs are
citizens of the same state as the primary defendants.\8\
---------------------------------------------------------------------------
\7\ Senate Bill 5 Sec. 4(a)(2) (adding 28 U.S.C. Sec. 1332(d)(3)).
\8\ Id.
---------------------------------------------------------------------------
Under the legislation, federal courts are directed to
abstain from hearing a class action only where (1) more than
two-thirds of the plaintiffs are citizens of the same state as
at least one of the primary defendants; (2) the principal
injuries occurred in that state; (3) the matters in controversy
are less than $5,000,000 or the membership of the proposed
class is less than 100; or (4) the primary defendants are
states, state officials, or other government entities against
whom the district court may be foreclosed from ordering
relief.\9\
---------------------------------------------------------------------------
\9\ Senate Bill 5 Sec. 4(a)(2) (adding 28 U.S.C. Sec. 1332(d)(4)).
The legislation also excludes securities-related and corporate
governance class actions from coverage and makes a number of other
procedural changes, such as easing the procedural requirements for
removing a class action to Federal court (i.e., permitting removal to
be sought by any plaintiff or defendant and eliminating the one-year
deadline for filing removal actions) and tolling the statute of
limitation periods for dismissed class actions. See Senate Bill 5
Sec. 4(a)(2) (adding 28 U.S.C. Sec. 1332(d)(9)).
---------------------------------------------------------------------------
In the context of the ``Local Controversy Exception'', the
Committee Report erroneously conflates the concepts of
citizenship and residence.\10\ Contrary to the Committee
report, the legislation provides that the touchstone for this
exception is citizenship not residence. This more narrow
exception will no doubt result in many more class actions being
removed to federal court.
---------------------------------------------------------------------------
\10\ See Committee Report at p. 44.
This bill contains a ``Consumer Class Action Bill of
Rights.'' This section includes some safeguards that we agree
will improve class action litigation for all parties, such as
protection against a proposed settlement that would result in a
net loss to a class member and protection against
discrimination based on geographic location.\11\ We also
recognize that improvements were made to the bill in the last
Congress such as: restricting use of coupon settlements;
allowing civil rights and consumer plaintiffs to be compensated
for the particular hardships they endure as a result of
initiating and pursuing litigation as named plaintiffs;
eliminating the notification burden; prohibiting retroactivity
and providing for greater judicial discretion.\12\
---------------------------------------------------------------------------
\11\ Senate Bill 5 Sec. 3.
\12\ Id.
---------------------------------------------------------------------------
We object to the fact that S. 5 is written to favor
corporate defendants at the expense of victims. Before even
considering S. 5, the Committee and the full Senate should have
insisted on receiving objective and comprehensive data
justifying such a dramatic intrusion into state court
prerogatives. Nothing in the way of such information now
exists. Before the Committee considered this bill, a hearing on
class action litigation would have helped the Committee develop
consensus reforms to better serve both defendants and
plaintiffs before the Committee proceeded to a markup on S. 5.
We had hoped that the Committee would undertake a
deliberate and careful review of information from parties
actually involved in class action litigation to provide a
realistic picture of the benefits and problems with class
actions. But, instead, the Committee has simply decided that
the time is now for federalizing nearly all class actions where
most of plaintiffs' claims will take longer and be more
expensive.
We recognize that there are some genuine problems with some
class action litigation that should be addressed by federal
legislation for the benefit of both defendants and plaintiffs.
This legislation, however, is heavily biased in favor of
defendants. Rather than address the system's real failings, S.
5 will make it more difficult for the vast majority of
legitimate, well-intentioned class actions to move forward, by
placing cumbersome restrictions on citizens' rights to seek
redress for their injuries.
In short, we agree with the position of the National
Conference of State Legislatures when they urged us ``to
remember that state policy choices should not be overridden
without a showing of compelling national need. We should await
evidence demonstrating that states have broadly overreached or
are unable to address the problems themselves. There must be
evidence of harm to interests of national scope that require a
federal response, and even with such evidence, federal
preemption should be limited to remedying specific problems
with tailored solutions, something that S. 5 does not do.''
\13\
---------------------------------------------------------------------------
\13\ National Conference of State Legislatures Letter, supra note
3.
---------------------------------------------------------------------------
For these and other reasons set forth herein, we strongly
oppose S. 5.
II. S. 5 Will Hurt Consumers, Victims, and the Environment
Proponents of this legislation claim that S. 5 will protect
consumers while remedying the worst abuses of the class action
system, yet consumer advocates overwhelmingly oppose these
alleged ``reforms.'' \14\
---------------------------------------------------------------------------
\14\ See Letter in Opposition to S. 274 from the Consumer
Federation of America, Consumers Union, and U.S. Public Interest
Research Group (Feb. 5, 2003).
---------------------------------------------------------------------------
A. Federal courts' refusal to certify class actions will leave victims
in limbo
There can be little doubt that S. 5 will have a serious
adverse impact on the ability of consumers and victims to
obtain compensation in cases involving widespread harm. At a
minimum, the legislation will force most state class action
claims into federal courts where it is generally more expensive
for plaintiffs to litigate cases and where defendants could
force plaintiffs to travel long distances to attend
proceedings. It is also typically more difficult and time
consuming to certify a class action in federal court. By
pushing cases from state to federal court, S. 5 creates more
problems than it solves.
Fourteen states, representing nearly one-third of the
nation's population,\15\ have adopted different criteria for
class action rules than Rule 23 of the Federal Rules of Civil
Procedure.\16\ In addition, with respect to those states which
have enacted an analog to Rule 23, the federal courts are
likely to represent a more difficult forum for class
certification to occur. This ratcheting up of the standard is
the result of a series of several federal cases, such as
Castano v. American Tobacco Co.\17\, In re Rhone-Poulenc Rorer,
Inc.,\18\ In re American Medical Systems, Inc.,\19\ Georgine v.
Amchem Products, Inc.,\20\ Broussard v. Meineke Discount
Mufflers,\21\ and Ortiz v. Fibreboard,\22\ which have made it
more difficult to establish the `predominance requirement'
necessary to establish a class action under the federal rules.
---------------------------------------------------------------------------
\15\ Three states still use their common law rules, rather than
statutes, to permit class actions (Mississippi, New Hampshire, and
Virginia); four states use Field Code-based rules based on the
``community of interest'' test (California, Nebraska, South Carolina,
and Wisconsin); and seven states use class action rules modeled on the
original Federal Rule 23 (1938) which creates a distinction among class
members which depends on the substantive character of the right
asserted (Alaska, Georgia, Louisiana, New Mexico, North Carolina, Rhode
Island, and West Virginia). See 3 Herbert B. Newberg & Alba Conte,
Newberg on Class Actions Sec. 13.04 (3d ed. 1992 & Supp. 1997).
\16\ Fed. R. Civ. P. 23(a) (stating four factual prerequisites that
must be met before a court will certify the lawsuit as a class action:
(1) size--the class must be so large that joinder of all of its members
is not feasible; (2) common questions--there must be questions of law
or fact common to the class; (3) typical claims--the claims or defenses
of the representatives must be ``typical'' of those of the class; and
(4) representation--the representatives must fairly and adequately
represent the interests of the class).
\17\ 84 F.3d 734 (5th Cir. 1996) (preventing the certification of a
nationwide class action brought by cigarette smokers and their families
for nicotine addiction where there was found to be too wide a disparity
between the various state tort and fraud laws for the class action
vehicle to be superior to individual case adjudication).
\18\ 51 F.3d 1293 (7th Cir. 1995) (decertifying, under the Erie
doctrine, a nationwide negligence class action brought on behalf of
hemophiliacs infected with the AIDS virus through use of defendants'
blood clotting products because of diversity of state laws).
\19\ 75 F.3d 1069 (6th Cir. 1996) (decertifying a proposed
plaintiff settlement class comprising all U.S. residents implanted with
defective or malfunctioning inflatable penile prostheses that were
manufactured, developed, or sold by defendant company because common
questions of law or fact did not predominate the action to such an
extent that warranted class certification).
\20\ 521 U.S. 591 (1997) (overturning consensual settlement between
a class of workers injured by asbestos and a coalition of former
asbestos manufacturers because of disparate levels of the class
members' knowledge of their injuries and class members' large amount at
stake in the litigation).
\21\ 155 F.3d 331 (4th Cir. 1998) (rejecting class certification
brought by Meineke franchisees alleging violations of franchise, tort,
unfair trade, and other laws).
\22\ 527 U.S. 815 (1999) (finding mandatory limited fund class
treatment under Rule 23(b)(1)(B) is not appropriate unless the maximum
funds available are clearly inadequate to pay all claims).
---------------------------------------------------------------------------
Plaintiffs removed to Federal courts are subject to the
Federal Rules of Civil Procedure. In accordance with Rule
23(b)(3), their cases will not be certified by the Federal
court if they cannot show that a common question of law
predominates. As this rule has been interpreted by many Circuit
\23\ and District Courts,\24\ Federal courts are not certifying
class actions involving the laws of multiple states. In fact,
six Circuit Courts and 26 District Courts have consistently
denied certification of multi-state consumer cases. Only one
court has granted certification of these cases and even that
case, from the Third Circuit, has been distinguished on its
facts. [add footnote: See In re School Asbestos Litig., 789
F.2d 996, 1011 (3d Cir. 1986)]
---------------------------------------------------------------------------
\23\ See, e.g., Georgine v. Amchem Products, Inc., 83 F.3d 610 (3d
Cir. 1996) (refusing to certify a nationwide asbestos suit because the
laws of multiple states would have to be applied), Spence v. Glock,
Ges.m.b.H., 227 F.3d 308 (5th Cir. 2000) (reversing the district
court's certification because ``it erred in its choice of law
analysis''), In re American Medical Systems, Inc., 75 F.3d 1069 (6th
Cir. 1996) (denying class certification due to variances in state
laws), In re Bridgestone/Firestone, Inc., 288 F.3d 1012 (7th Cir. 2002)
(refusing certification because the district court would have to apply
the laws of several states according to Indiana's choice of law rules),
and Zinser v. Accufix Research Inst., 253 F.3d 1180 (9th Cir. 2001)
(holding the plaintiffs with pacemakers made of lead had not
demonstrated which state's laws apply under California choice of law
rules).
\24\ See, e.g., Chin v. Chrysler Corp., 182 F.R.D. 448 (D.N.J.
1998), In re Masonite Corp. Hardboard Siding Prods. Liab. Litig., 170
F.R.D. 417 (E.D. La. 1997), Lyon v. Caterpillar, Inc., 194 F.R.D. 206
(E.D. Pa. 2000).
---------------------------------------------------------------------------
Not only are the courts concerned with the federalism
implications of such action, but recognize that by doing so,
cases become simply unmanageable as courts try to apply the
laws of each plaintiff's state to the plaintiff. Scholars who
track multi-state class action suits have found that if a case
involves too many state laws, then Federal court judges can and
do dismiss the case.\25\ In fact, the U.S. Chamber of Commerce
has recognized this stating, ``federal courts have consistently
refused to certify nationwide class actions in product defect
cases because the need to apply the laws of many different
states would make such a sprawling class action unmanageable.''
\26\
---------------------------------------------------------------------------
\25\ Letter from Arthur R. Miller, Bruce Bromley Professor of Law,
Harvard Law School (Jun. 17, 2004).
\26\ Id. (quoting Brief of the Chamber of Commerce of the United
States as Amicus Curiae in Support of Appellants, In re Simon II
Litigation, No. 03-7141 (2nd Cir. June 3, 2003).
---------------------------------------------------------------------------
Federalizing class action cases creates an incentive for
violators to break the laws of multiple states, as any
collective action to hold them accountable will likely be
dismissed. And, consumers, workers and victims will be
prevented from having many important multi-state class actions
heard in either the state or Federal courts. As a result, we
will likely begin to see fewer dangerous and ineffective
products and devices removed from the marketplace.
Consumers pay the price when Federal courts dismiss a case.
When this occurs, ``[a] consumer could bring the claim in state
court as an individual action. However, individual cases would
be impractical to litigate, would not have the same deterrent
effect, and would have the potential to overwhelm state
courts.'' \27\
---------------------------------------------------------------------------
\27\ See Letter from the Consumer Federation of America, Consumers
Union, and U.S. PIRG (Feb. 5, 2003).
---------------------------------------------------------------------------
Even if consumers get their day in Federal court under this
legislation, consumer advocates argue that just outcomes are
unlikely. Federal court decisions will likely be narrowly
tailored, without establishing legal precedent for future state
court cases brought under the particular law in question.
Because of this, the class action legislation ``will slow--and
in some cases thwart--the continual interpretation of state
law.'' \28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
To solve this significant problem, S. 5 should be amended
to ensure that cases which are removed from state courts are at
least not immediately dismissed by the Federal judge on choice
of law grounds. One solution to this loophole in the
legislation is the subject of Senator Bingaman's amendment.
Quite simply, a Federal judge presented with a case that
involves a choice of law issue should be able to apply the
state law that has a sufficient connection to the case. In this
way, not only are citizens' rights and access to the courts
preserved, but the Federalism concerns that the removal creates
are undercut because state laws are being enforced.\29\ This
sensible solution to a glaring deficiency in the bill also had
the support of Chairman Specter, as he noted during the
Committee's markup.
---------------------------------------------------------------------------
\29\ See id.
---------------------------------------------------------------------------
B. One-sided delays of justice must be avoided
Last Congress, Senators Dodd, Schumer and Landrieu were
able to improve the legislation by adding a provision to the
class action bill to require that any appeal of a motion to
remand be ruled on by the court of appeals within 60 days.
However, before a motion to remand can be appealed it first
needs to be ruled on by the lower district court. S. 5
overlooks this step and creates another loophole which
defendants can exploit to delay trials. The bill contains no
deadline on how long district courts can take to rule on a
motion to remand. By simply removing all class actions to
Federal court, defendants can exploit this lack of a statutory
deadline; and therefore benefit from the delay, which
inevitably increases the costs of trials and leaves the
plaintiffs in limbo.
Since the bill already addressed the need for speedy
resolution of remand appeals, it should similarly require
speedy resolution for motions to remand at the district court
level. Senator Feingold proposed an amendment that would have
simply required district courts to work within the same
timeframe as the appeals courts. Under his proposal, any motion
for remand to a state court would need to be decided by a
district court within 60 days, which tracks the 60 days
timeframe afforded to the appeals court. Sen. Feingold's
amendment, which he withdrew at the request of Chairman
Specter, also provided an automatic additional 10 days for
review of the remand motion, and the ability to seek more time
for review, if necessary.
C. Barriers to justice for consumers and victims of mass torts
This legislation will also severely limit the ability of
consumers to pursue class action in state court, even when
state consumer protection laws are implicated. Consumers pay
the price when Federal courts dismiss a case. When this occurs,
``[a] consumer could bring the claim in state court as an
individual action. However, individual cases would be
impractical to litigate, would not have the same deterrent
effect, and would have the potential to overwhelm state
courts.'' \30\
---------------------------------------------------------------------------
\30\ See Letter from the Consumer Federation of America, Consumers
Union, and U.S. PIRG (Feb. 5, 2003).
---------------------------------------------------------------------------
Even if consumers get their day in Federal court under this
legislation, consumer advocates argue that just outcomes are
unlikely. Federal court decisions will likely be narrowly
tailored, without establishing legal precedent for future state
court cases brought under the particular law in question.
Because of this, the class action legislation ``will slow--and
in some cases thwart--the continual interpretation of state
law.'' \31\
---------------------------------------------------------------------------
\31\ Id.
---------------------------------------------------------------------------
As the American Bar Association Task Force on Class Action
Legislation's recent report noted, ``any expansion [of Federal
court jurisdiction] should preserve a balance between
legitimate state-court interests and Federal-court
jurisdictional benefits.'' \32\ The current legislation clearly
fails this test.
---------------------------------------------------------------------------
\32\ ABA Task Force on Class Action Legislation, Report of the ABA
Task Force on Class Action Legislation at 3 (Feb. 2003). See also
Letter in Opposition to S. 274, The Class Action Fairness Act of 2003,
from the Consumers Union (Apr. 2, 2003).
---------------------------------------------------------------------------
Proponents of S. 5 argue that while many class actions will
be removed to federal courts, plaintiffs can still bring their
individualized claims in state courts. This is not an adequate
solution because state judges often consolidate cases to ease
their dockets. This procedure allows cases with similar
questions of law and fact to be consolidated for all or part of
the proceedings. Consolidation does not make the case a class
action. However, S. 5 reaches not only class actions, but these
consolidated cases as well, through a new term of art called
``mass actions.'' \33\ For example, the plaintiffs who have
brought individual claims against Merck for injuries sustained
by Vioxx have had their actions consolidated in the courts.
Federalizing these cases would seriously delay not only the
victims' compensation but would also prevent victims from
holding the drug companies accountable. S. 5 places state court
judges in a considerable Catch-22: either do not consolidate
the cases and be overloaded with work, or consolidate and cede
control of an issue relating to their state laws to the federal
courts.
---------------------------------------------------------------------------
\33\ Senate Bill 5 Sec. 4(a)(2) (adding 28 U.S.C.
Sec. 1332(d)(11)).
---------------------------------------------------------------------------
Senator Durbin proposed an amendment to rectify this Catch-
22 by narrowing the scope of mass tort cases that would be
affected by S. 5. Despite the fact that a similar provision was
unanimously struck from the bill during the mark-up of class
actions legislation in the Judiciary Committee in the last
Congress, mass torts are again included in S. 5.
The net result of these various changes is that under the
proposed legislation, it will be far more difficult for
consumers and other injured individuals to obtain justice in
class action cases at the state or Federal level.
D. Special punishment for the environment and civil rights
By removing many important environmental class actions from
state to federal court, S. 5 not only denies to state courts
the opportunity to interpret their own state's environmental
protection laws, it hampers and deters plaintiffs from pursuing
important environmental litigation. The well-documented backlog
in the federal courts and the need for attorneys to engage in
choice of law debates will significantly increase the time and
cost of environmental litigation. Ultimately, environmental
class actions may not get litigated and the incentive polluters
have to keep our environment clean will be reduced.
Moreover, by failing to carve out an exception in S. 5 to
protect the environment, the majority ignores the advice of the
Judicial Conference of the United States, chaired by Chief
Justice Rehnquist. In its March 26, 2003, letter, the Judicial
Conference noted that even if the Congress adopts class action
removal legislation, there should be certain exceptions such as
``a class action in which plaintiff class members suffered
personal injury or physical property damage within the state,
as in the case of a serious environmental disaster.'' \34\
---------------------------------------------------------------------------
\34\ See Judicial Conference Letter, supra note 1.
---------------------------------------------------------------------------
Just as S. 5 turns a blind eye toward the environment and
to the advice of Chief Justice Rehnquist, the proposed
legislation will make it much more difficult to use class
actions as a means of protecting civil rights.\35\ Class
actions are the most effective means to change a policy of
discrimination and to bring claims for small amounts of
individual wage loss. State laws offer more extensive
protections for low wage workers and for many members of
minority groups, as well as for the disabled. Several civil
rights organizations have argued that S. 5 and its
``additional, substantial and costly noticing requirements and
built-in delays are not a matter of due process, but are overly
burdensome and improperly assume that federal and state
officials have proper interest in, and a capacity to respond
to, each and every class action.'' \36\
---------------------------------------------------------------------------
\35\ See Letter in Opposition to S. 5 from the Leadership
Conference on Civil Rights, AFL-CIO, Alliance for Justice, Lawyers'
Committee for Civil Rights Under Law, Mexican American Legal Defense
and Educational Fund, National Asian Pacific American Legal Consortium,
National Partnership for Women and Families, National Workers Rights
Institute, National Women's Law Center, People for the American Way,
Women Employed and others (Feb. 2, 2005).
\36\ See Letter in Opposition to S. 274 from the Leadership
Conference on Civil Rights, Alliance for Justice, Lawyers' Committee
for Civil Rights Under Law, Mexican American Legal Defense and
Educational Fund, National Asian Pacific Legal Consortium, National
Partnership for Women and Families, National Workers Rights Institute,
National Women's Law Center, People for the American Way, and Women
Employed (Mar. 20, 2003).
---------------------------------------------------------------------------
Indeed, class action litigation has been essential to
vindicating basic civil rights through our courts. For example,
the landmark Supreme Court decision in Brown v. Board of
Education was the culmination of appeals from four class action
cases, three from federal court decisions in Kansas, South
Carolina and Virginia and one from a decision by the Supreme
Court of Delaware. Only the Supreme Court of Delaware, the
state court, got the case right by deciding for the African-
American plaintiffs. The state court justices understood that
they were constrained by the existing Supreme Court law, but
nonetheless held that the segregated schools of Delaware
violated the Fourteenth Amendment. Before any federal court did
so, a state court rejected separate and unequal schools.
S. 5 sets up several new hurdles for plaintiffs who file
class actions. These requirements will be especially burdensome
for many civil rights claimants.
The bill's requirement to provide ``notice'' to state
officials, such as a state attorney general, will certainly
lead to delays in the proceedings. As a result, some of the
critical evidence of malice or discriminatory intent required
to prevail in civil rights and discrimination cases could be
lost while this additional step is taken. In addition, this
added hurdle will likely be redundant because many of these
plaintiffs will have already gone through an administrative
proceeding before being allowed to file a discrimination claim.
As a consequence of the assault that S. 5 would launch on
the defense of civil liberties, many civil rights advocates--
including the Lawyers' Committee for Civil Rights Under Law,
the Leadership Conference on Civil Rights, the Mexican American
Legal Defense and Education Fund, and the National Asian
Pacific Legal Consortium--have concluded that this legislation
``would discourage civil rights class actions, impose
substantial barriers to settling class actions and render
Federal courts unable to provide swift and effective
administration of justice.'' \37\
---------------------------------------------------------------------------
\37\ Id.
---------------------------------------------------------------------------
This legislation would have been greatly improved if
amended by a carve-out proposed by Senator Kennedy for civil
rights and employment law cases. The bill indiscriminately
applies to all multi-state class action suits, without pausing
to consider the implications on important civil rights abuse
challenges. States have strengthened their civil rights laws
after years of federal encouragement to do so, but now S. 5
will take away the states' means of enforcing those laws. If
violators are allowed to side-step these protections by
removing cases to the federal courts, those efforts will have
been for naught.
Even if Federal courts take up the claims, state judicial
interpretations of civil rights laws will be full of holes due
to a lack of state-level adjudication of issues. The bill's
additional notice requirement will not only lead to significant
delays affecting plaintiffs' ability to gain critical evidence
of malice or discriminatory intent, but also would likely be
redundant as most plaintiffs already have gone through an
administrative proceeding. Taken together, these barriers will
certainly result in worthy claimants being discouraged from
filing class action suits and civil rights violators going
unpunished.
We all agree that some reform is needed to improve the
efficiency and fairness of our nation's class action
procedures. At the same time, many state legislatures have
worked hard to develop a system of laws that defend and protect
all citizens' civil rights so it is unfortunate that this bill
seeks to gut those efforts through a clumsy reform effort.
Senator Kennedy proposed a refined approach that would have
enabled victims of civil rights violations to have their day in
court. This amendment would have exempted civil rights, as well
as wage and hour state law cases, from S. 5 and therefore
maintain the status quo for these claims.
E. Improvements made on coupon settlements
This class action bill makes an improvement on the use of
worthless coupon settlements, which provide little or no
tangible benefits to class action plaintiffs. Typically, these
settlements involve an agreement by plaintiffs' and defendants'
counsel that fully pay for the attorney fees and expenses of
the plaintiffs' counsel while class members are left holding
coupons to buy the defendants' products. For example, in a
federal class action case alleging a price-fixing conspiracy
between major airlines, class members were awarded $400 million
in flight coupons. However, the coupons were restricted to
certain dates and small increments of travel making them
virtually unusable to consumers.\38\
---------------------------------------------------------------------------
\38\ See In re Domestic Air Transportation Antitrust Litigation,
137 F.R.D. 677 (N.D. Ga. 1991).
---------------------------------------------------------------------------
This version of the class action bill creates incentives
for class members' attorneys to seek a remedy for their clients
by tying the attorneys' compensation to the value of coupons
which are actually redeemed.\39\ To help the court make a
determination of this value, the judge may hear from expert
witnesses.\40\ If the coupons are not used to determine
counsel's compensation, then the award fee must at least be
``based upon the amount of time class counsel reasonably
expended working on the action,'' subject to approval by the
court.\41\ If the plaintiffs' attorneys secure a mixed award,
i.e. coupons and an injunction, then part of their fee will be
based on the coupons redeemed and part will be based on the
reasonable expenditure of time.\42\ Any settlement based on
coupons will be subject to a hearing before the judge who will
determine if the proposed settlement if ``fair, reasonable and
adequate.'' \43\
---------------------------------------------------------------------------
\39\ Senate Bill 5 Sec. 3 (adding 28 U.S.C. 1712 (a)).
\40\ Id. (adding 28 U.S.C. 1712 (d)).
\41\ Id. (adding 28 U.S.C. 1712 (b) (1-2)).
\42\ Id. (adding 28 U.S.C. 1712 (c)).
\43\ Id. (adding 28 U.S.C. 1712 (e)).
---------------------------------------------------------------------------
III. S. 5 Will Damage the Federal and State Court Systems
By expanding federal class action jurisdiction to include
almost all state class actions, S. 5 will inevitably result in
a significant increase in the federal courts' workload. In its
letter to the Judiciary Committee concerning a prior version of
this bill, the Judicial Conference warned that:
[T]he effect of the class action provisions of [S.
353] would be to move virtually all class action
litigation into the Federal courts, thereby offending
well-established principles of Federalism [and] * * *
hold[ing] the potential for increasing significantly
the number of [class action] cases currently being
litigated in the Federal system.\44\
\44\ See Letters from Judicial Conference (Jul. 26, 1999 and Aug.
23, 1999).
---------------------------------------------------------------------------
In addition to overwhelming the federal courts with new
time-intensive class actions, S. 5 will undermine state courts'
independent authority. State Attorneys General recently wrote
to Senate leaders objecting to this ``federalizing'' of most
class actions under this legislation:
S. 5 would vastly expand federal diversity
jurisdiction, and thereby would result in most class
actions being filed in or removed to federal court.
This transfer of jurisdiction in cases raising
questions of state law will inappropriately usurp the
primary role of state courts in developing their own
state tort and contract laws, and will impair their
ability to establish consistent interpretations of
those laws.\45\
---------------------------------------------------------------------------
\45\ Letter from Eliot Spitzer, Attorney General New York and W.A.
Drew Edmondson, Attorney General of Oklahoma, on behalf of the
Attorneys General of the States of California, Illinois, Iowa,
Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New
York, Oklahoma, Vermont and West Virginia (Feb. 7, 2005).
Even more troublesome than these potential workload
problems, S. 5 raises serious constitutional issues by
challenging the vision of our founders and the intent of the
Constitution. This legislation undermines James Madison's
vision of a federal government ``limited to certain enumerated
objects, which concern all the members of the republic.'' \46\
---------------------------------------------------------------------------
\46\ The Federalist No. 14 (James Madison).
---------------------------------------------------------------------------
This bill does not merely operate to preempt state laws;
rather, it unilaterally strips the state courts of their
ability to use the class action procedural device to resolve
state law disputes. As the Lawyers' Committee for Civil Rights
Under Law observes, citing Bank of the United States v.
Deveaux:
For over 200 years, Federal diversity jurisdiction
has been exercised with care and hesitation,
demonstrating that Congress believed, with few
exceptions ``tribunals of the state * * * administer
justice as impartially as those of the nation, to
parties of every description.'' \47\
---------------------------------------------------------------------------
\47\ See Letter from Lawyers' Committee for Civil Rights Under Law
(Apr. 9, 2003) (quoting Bank of the United States v. Deveaux, 9 U.S. (5
Cranch) 61, 87 (1809)); see also City of Indianapolis v. Chase Nat'l
Bank, 314 U.S. 63, 76 (1941).
The courts have previously found that efforts by Congress
to dictate such state court procedures implicate important
Tenth Amendment Federalism concerns and should be avoided. For
example, in Fielder v. Casey the Supreme Court observed that it
is an ``unassailable proposition * * * that States may
establish the rules of procedure governing litigation in their
own courts.'' \48\
---------------------------------------------------------------------------
\48\ 487 U.S. 131, 138 (1988) (finding Wisconsin notice-of-claim
statute to be preempted by 42 U.S.C. Sec. 1983, which holds anyone
acting under color of law liable for violating constitutional rights of
others).
---------------------------------------------------------------------------
Similarly, in Johnson v. Fankell, the Court reiterated what
it termed ``the general rule bottomed deeply in belief in the
importance of State control of State judicial procedure * * *
that Federal law takes State courts as it finds them'' \49\ and
observed that judicial respect for the principal of Federalism
``is at its apex when we confront a claim that Federal law
requires a State to undertake something as fundamental as
restructuring the operation of its courts'' and ``it is a
matter for each State to decide how to structure its judicial
system.'' \50\
---------------------------------------------------------------------------
\49\ 520 U.S. 911, 919 (1997) (holding that Idaho procedural rules
concerning appealability of orders are not preempted by 42 U.S.C. Sec.
1983) (quoting Henry M. Hart, Jr., The Relations Between State and
Federal Law, 54 Colum. L. Rev. 489, 508 (1954)).
\50\ Id. at 922. See also Howlett v. Rose, 296 U.S. 356, 372 (1990)
(quoting Henry M. Hart, Jr., The Relations Between State and Federal
Law, 54 Colum. L. Rev 489, 508 (1954) for the proposition that Federal
law should not alter the operation of the state courts); New York v.
United States, 505 U.S. 144, 161 (1992) (stating that a law may be
struck down on Federalism grounds if it ``commandeer[s] the legislative
processes of the States by directly compelling them to enact and
enforce a Federal regulatory program'').
---------------------------------------------------------------------------
These same constitutional concerns were highlighted by
Professor Laurence Tribe in his testimony regarding the
constitutionality of a proposed federal class action rule
applicable to state courts included in tobacco legislation
proposed during the 105th Congress. Professor Tribe observed:
``[f]or Congress directly to regulate the procedures used by
state courts in adjudicating state-law tort claims--to forbid
them, for example, from applying their generally applicable
class action procedures in cases involving tobacco suits--would
raise serious questions under the Tenth Amendment and
principles of Federalism.'' \51\
---------------------------------------------------------------------------
\51\ The Global Tobacco Settlement: Hearings Before the Senate
Comm. on the Judiciary, 105th Cong. (1997) (statement of Laurence H.
Tribe, Tyler Professor of Law, Harvard Law School). Indeed, Former-
Chairman Hatch praised Professor Tribe at the Committee's June 4, 2003,
hearing on asbestos litigation as ``known here and throughout the
country as one of the most respected constitutional scholars and
practitioners.''
---------------------------------------------------------------------------
The Supreme Court's most recent decisions further indicate
that S. 5 is an unacceptable infringement upon state
sovereignty. In United States v. Morrison,\52\ the Court
invalidated parts of the Violence Against Women Act, claiming
that Congress overstepped its specific constitutional power to
regulate interstate commerce. Despite vast quantities of data
illustrating the effects that violence against women has on
interstate commerce, the Court essentially warned Congress not
to extend its constitutional authority to ``completely
obliterate the Constitution's distinction between national and
local authority.'' S. 5, introduced and considered in Committee
without a hearing and without any convincing data, ignores the
Court's admonitions and subverts the federal system by
hindering the states' ability to adjudicate class actions
involving important and evolving questions of state law. S. 5
not only obliterates the distinction between national and local
authority, it effectively annihilates local authority over
state class actions.
---------------------------------------------------------------------------
\52\ 529 U.S. 598 (2000).
---------------------------------------------------------------------------
Responding to these significant constitutional concerns,
proponents of this legislation argue that state courts will not
give fair hearings to out-of-state defendants, but support for
their assertion is bereft of evidence. First, the Supreme Court
has already made clear that the state courts are
constitutionally required to provide due process and other
fairness protections to the parties in class action cases. In
Phillips Petroleum Co. v. Shutts,\53\ the Supreme Court held
that in class action cases, state courts must ensure that: (1)
the defendant receives notice plus an opportunity to be heard
and participate in the litigation; \54\ (2) an absent plaintiff
must be provided with an opportunity to remove himself or
herself from the class; (3) the named plaintiff must at all
times adequately represent the interests of the absent class
members; and (4) the forum state must have a significant
relationship to the claims asserted by each member of the
plaintiff class.\55\
---------------------------------------------------------------------------
\53\ 472 U.S. 797 (1985).
\54\ Id. at 812 (stating that the notice must be the ``best
practicable, reasonably calculated, under all the circumstances, to
apprize interested parties of the pendency of the action and afford
them an opportunity to present their objections'') (quoting Mullane v.
Central Hanover Bank & Trust Co., 339 U.S. 306, 314-315 (1950)).
\55\ Id. at 806-810. These findings were reiterated by the Supreme
Court in 1995 in Matsushita Elec. Indust. Co. v. Epstein, 516 U.S. 367
(1995) (holding that state class actions are entitled to full faith and
credit so long as, inter alia: the settlement was fair, reasonable,
adequate and in the best interests of the settlement class; notice to
the class was in full compliance with due process; and the class
representatives fairly and adequately represented class interests).
---------------------------------------------------------------------------
Secondly, as fears of local court prejudice have subsided
and concerns about diverting federal courts from their core
responsibilities have increased, the policy trend in recent
years has been towards limiting Federal diversity
jurisdiction.\56\ For example, Congress enacted the Federal
Courts Improvement Act of 1996,\57\ which increased the amount
in controversy requirement needed to remove a diversity case to
federal court from $50,000 to $75,000. This statutory change
was based on the Judicial Conference's determination that fear
of local prejudice by state courts was no longer relevant \58\
and that it was important to keep the federal judiciary's
efforts focused on federal issues.\59\
---------------------------------------------------------------------------
\56\ Ironically, during the 104th Congress, the Republican Party
was extolling the virtues of state courts in the context of their
efforts to limit habeas corpus rights, which permit individuals to
challenge unconstitutional state law convictions in Federal court.
\57\ 28 U.S.C 1332(a) (West Supp. 1998).
\58\ See Judicial Conference of the United States, Long Range Plan
for the Federal Courts, Recommendation 7 at 30 (1995).
\59\ See id.
---------------------------------------------------------------------------
IV. Conclusion
Contrary to its supporters' assertions, S. 5's provisions
are much broader than merely prohibiting nationwide class
actions from being pursued in state court. In fact, this bill
will override the current state laws governing class actions in
the fifty states. And, in practice, it will bar many, if not
most, state class actions filed solely on behalf of residents
of a single state, solely involving matters of that state's law
from being heard in that state court, so long as one plaintiff
or one primary defendant is a citizen of a different state.
This is clearly an extreme and distorted change to the
diversity jurisdiction standards in our court system.
As a result, these drastic changes to longstanding federal
procedural rules will make it harder for citizens to protect
themselves against violations of state civil rights, consumer,
health, and environmental protection laws by forcing these
class action cases out of convenient state courts into federal
courts, with significant new barriers and burdens on
plaintiffs.
For these reasons, and until we reach consensus on
improvements to class action litigation for the benefit of
defendants and plaintiffs, we remain strongly opposed to S. 5.
Patrick J. Leahy.
Edward M. Kennedy.
Joseph R. Biden.
Russell D. Feingold.
Richard J. Durbin.
XII. Changes in Existing Law
The Committee has determined that it is necessary, in order
to expedite the business of the Senate, to dispense with the
requirements of rule XXVI, paragraph 12, of the Standing Rules
of the Senate, with respect to comparing the proposed changes
and existing provisions of the United States Code.