United States: U.S. Congress Makes Class Actions Easier to File In Federal Court

Originally published Spring 2005

A key plank of President Bush's reelection campaign was his promise to curb perceived legal system abuse. In the first month of the President's second term, the Republican-controlled Congress passed the Class-Action Fairness Act of 2005 (the Act). President Bush signed the bill into law the day after its passage.

The Act does not end class actions. Indeed, when the President signed the legislation, he praised class actions:

Instead, the Act makes it easier to have these actions heard in federal court. In so doing, the Act gives enhanced protections to businesses that are defendants in class-action suits.

Expanding Federal Court Jurisdiction Favors Defendants

Plaintiffs' lawyers file cases where they believe the court and jury will most favor their clients. This practice is referred to as "forum shopping." In a few small rural counties, state court juries have awarded enormous class-action judgments against large and small businesses. (Madison County, Illinois is one such pro-plaintiff forum, and just days before the passage of the new federal class-action statute, plaintiffs' law firms filed 24 new class actions in that county to avoid the effect of the new law.) In many of these same venues, the state court judges are perceived to have a pro-plaintiff bias, and appear willing to certify most cases as class actions. Not surprisingly, plaintiffs' lawyers do all they can to have their cases heard in these "pro-plaintiff" state courts.

Class-action defendants often attempt to blunt plaintiffs' state forum shopping by seeking to move the class action to federal court, called "removal." Defendants typically view federal court as more balanced and federal judges as more prepared to oversee complex cases. In addition, federal courts are usually less inclined than the state courts to certify class actions. In short, defendants prefer to defend class actions in federal court.

Prior to the Act, defendants had to overcome several hurdles to remove a case to federal court. Often, these hurdles forced defendants to litigate the case in a hostile state court forum the plaintiff selected. For example, prior to the Act, a typical class-action case (not involving a claimed violation of a federal statute) could not be removed unless every defendant named in the suit agreed to have the federal court hear the case. If a single defendant disagreed with the other defendants, the case remained in state court. (Sophisticated plaintiffs' lawyers could control the venue by naming a sympathetic defendant who would simply reject the federal forum.) Similarly, if any defendant in the action was a citizen of the state where the federal action was going to be removed, removal failed. This hurdle was increased by the fact that under federal law, each corporation is considered a citizen of two states-the state in which it is incorporated and the state in which its principal place of business is located. Finally, if the federal court rejected a defendant's attempt to remove the action, the defendant typically could not appeal. In other words, the defendant had no recourse, even if the trial court was clearly wrong in refusing to hear the case.

The Act eliminates each of these hurdles. First, it provides that so long as a single defendant wants the case removed to federal court, removal is permitted. Consensus among defendants is no longer required. Second, the Act provides that so long as a single defendant is a citizen of a state different from that where the case was filed, the case may be removed to federal court. Finally, the Act provides that an appeal court may review a trial court's order rejecting federal jurisdiction.

The Act does set some limits on the new, broad class-action jurisdiction of federal courts. The federal courts have jurisdiction only in cases involving 100 or more class members where the aggregate amount of the class members' claims exceeds $5 million. (Experienced class counsel know that this means almost every case can be argued to be within the statute.) If the class members are all within a single state-or in certain unusual circumstances, two or even three states-the class may not qualify for federal jurisdiction. (Again, in the usual multi-state class-action environment, almost every large case can be fit within the statute.) Finally, to preserve state court jurisdiction in limited circumstances, and perhaps to provide some small limit on the already overwhelming burden on the federal courts, the Act has a complex check on removal jurisdiction based on the percentage of members in the class who are citizens of the state and the citizenship and conduct of the "primary defendants." (The effectiveness of this limit is reduced or eliminated by the fact that the citizenship of the class members is usually difficult or impossible to determine and the role of "primary defendant" is undefined by the statute.)

Reduction of Attorneys' Fees

The Act carefully avoids expressly reducing the rights of a plaintiff. It does, however, limit the rights of plaintiffs' lawyers to recover attorneys' fees.

A typical class-action tool is the so-called coupon settlement, in which the class members receive a right to purchase the defendants' product at a reduced rate. The most famous coupon settlement involved plaintiffs' lawyers who proposed to settle a class action involving faulty fuel tanks on General Motors pickup trucks by giving each class member a coupon for a $1,000 reduction on a General Motors vehicle. While the class members received this modest discount, the lawyers were paid a cash fee of $9.5 million. To justify their fee, the lawyers looked at the total value of all the possible coupons, regardless of whether any class member used the coupon. (Although the trial court approved this settlement, ultimately the Court of Appeals struck it down.²)

Under the new legislation, lawyers' fees in coupon cases are limited to the value of the redeemed coupons, not the number of coupons mailed (whether or not they are used). This is a substantial disincentive to file this type of class action. The Act, however, does not bar coupon settlements, and thus continues to allow defendants to attempt to settle cases through the issuance of coupons.

The Act also makes it more difficult to have a settlement approved in which the monetary portion of the settlement is small compared with the lawyers' fees. This provision not only protects members of the settlement class from disproportionate fees, but may also make plaintiffs' lawyers reluctant to file class actions when the amount of monetary damages is small.

The Act also creates a new type of action, distinct from a class action, which the statute defines as a "mass action." In any civil action in which 100 or more persons have claims with common issues of law and fact, and any defendant is a citizen of a different state than any plaintiff, the federal court has jurisdiction over each plaintiff whose claim exceeds $75,000. On its face, this means that if a defendant is sued by a large group of diverse plaintiffs who cannot meet the class-action requirements, the defendant can elect to divide the plaintiffs into those with less than a $75,000 claim, who would be left to litigate in state court, and a group of larger claimants, who would be required to litigate in federal court. Savvy defendants can use this provision to "divide and conquer" plaintiffs, forcing those with greater damages to pursue their claims in federal court.

Conclusion

The Class-Action Fairness Act of 2005 is the culmination of years of careful thought on how to curtail and control class actions. The Act does not deprive state courts of the right to hear class actions in any way, but does give defendants the right to select federal court as an alternative venue. In practice, defendants will be able to have almost every significant class action heard in federal court. The Act will likely be a blow to most small class-action plaintiffs' firms, especially those that specialize in pro-plaintiff state court jurisdictions. When Congress passed the Private Securities Litigation Reform Act of 1995 and then the Securities Litigation Uniform Standards Act of 1998 (both pro-business statutes that reformed securities class-action lawsuits), a similar shakeout occurred. The very large plaintiffs' firms that were used to filing nationwide litigation in federal court survived. The numerous smaller firms that focused on filing small and medium-sized cases in state court were swept away. By channeling class-action litigation into federal court, the Class-Action Fairness Act of 2005 may substantially limit the number of class actions that are brought against businesses and reduce the payments made by businesses to settle these actions.

^{1 The full text of President Bush's speech delivered at the signing of the Class-Action Fairness Act of 2005 is available at www.whitehouse.gov./news/releases/2005/02.}

2 In re Gen. Motors Corp. Pick-up Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir. 1995).

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