United States: Proposed Legislation That Could Impact Class Action Litigation And Arbitration – The Fairness In Class Action Litigation Act Of 2017 And The Arbitration Fairness Act Of 2017

Two new pieces of proposed legislation could, if passed, change the architecture and requirements of class actions and outlaw mandatory arbitration clauses in employment and consumer contracts. But neither is a sure thing. Vocal critics as well as supporters are already lined up on both sides of each bill.

The Fairness in Class Action Litigation Act of 2017

On March 9, 2017, the U.S. House of Representatives passed the Fairness in Class Action Litigation Act of 2017 (H.R. 985) (the Act).

The Act – introduced by Chairman of the House Judiciary Committee Bob Goodlatte, who also introduced the Class Action Fairness Act of 2005 (CAFA) – makes several significant changes to class action practice. In passing this Act, the House asserted these changes were intended to "diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system" and "ensure Federal court consideration of interstate controversies of national importance consistent with diversity jurisdiction principles."Generally, the Act alters the class certification process, discovery, litigation funding and settlement. In particular, it makes the following changes:

  • Stricter Standards. Creates stricter standards for class certification by limiting class certification to actions in which the representative can demonstrate that each proposed class member "suffered the same type and scope of injury as the named class representative or representatives."
  • Direct Appeals. Permits a direct right of appeal, from an order certifying or refusing to certify a class action.
  • No Issue – Only Classes. The Act prohibits federal courts from granting certification to a class only for a specific issue under Rule 23(c)(4) of the Federal Rules of Civil Procedure unless the entirety of the cause of action from which the issue arises satisfies all the class certificate prerequisites of Rules 23(a) and (b). This provision is an attempt to limit class actions where there is no measurable classwide damage, as the Supreme Court required in Comcast v. Behrend, 133 S. Ct. 1426 (2013).Any order issued under 23(c)(4) that certifies a class with respect to particular issues must include a determination "based on a rigorous analysis of the evidence presented" that the requirement in Rule 23(a) has been met.
  • Required Conflict Disclosures. The Act requires detailed conflict disclosures from proposed class counsel that outline whether any proposed class representative or named plaintiff has a relationship with class counsel outside of the proposed class action. If there is a conflict, the Act prohibits certification. Prohibited conflicts include relatives, present or former employees, present or former clients, and other contractual relationships.
  • Ascertainability. The Act mandates an ascertainability requirement for class certification, under which plaintiffs must "affirmatively demonstrate that there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within the class definition and (b) for distributing directly to a substantial majority of class members any monetary relief secured for the class."
  • Attorney Fees. The Act affects the calculation, determination and distribution of attorney fees. Among other provisions, the Act limits fees to either a reasonable percentage of payments directly distributed and received by class members or a reasonable percentage of the value of any equitable relief awarded (including injunctive relief). The Act further caps fees at the total amount distributed to class members. Finally, the Act prohibits calculation or distribution of attorney fees until distributions to class members are complete.
  • Mandatory Reporting. The Act also requires certain reporting about class action settlements. It requires class counsel to submit a settlement accounting to the director of the Federal Judicial Center and the director of the Administrative Office of the United States Courts that identifies how all monies paid by the defendant are distributed. This data will then be reported annually. Class counsel cannot receive any attorney fees until this data is submitted.
  • Mandatory Discovery Stay. A stay of discovery is required while any motion to transfer, dismiss, strike or dispose of class allegations is pending, unless the court finds that specific discovery is needed "to preserve evidence or to prevent undue prejudice to that party."
  • Third-Party Litigation Funding. The Act also requires that class counsel disclose in writing to the court and other parties the identity of any person or entity (other than a class member or class counsel of record) who has any right to receive compensation from any settlement, judgment or other relief secured in the action.

If ultimately signed into law, the Act will be the most significant class action legislation since CAFA. But critics and supporters are already weighing in on the Act. For example, a Feb. 16, 2017, article by Daniel Fisher in Forbes stated, "Rep. Goodlatte's latest bill would go much further than [CAFA] to eliminate 'most of the tactics plaintiff lawyers used to extract large fees for themselves while delivering little or nothing to their clients.'"

On the opposite end of the ideological spectrum, Professors Chris Sagers and Joshua Davis wrote a March 13, 2017, piece for The New York Times declaring: "A chilling little bill is working its way through Congress. It could have the effect of ending the class action as an American Institution."

Only time will tell if the Act will make it through the Senate and, if so, what provisions it will contain.

The Arbitration Fairness Act of 2017

Sen. Al Franken of Minnesota and Rep. Hank Johnson of Georgia are introducing several pieces of legislation, including the Arbitration Fairness Act of 2017. The bill would amend the Federal Arbitration Act (FAA) by adding a new chapter invalidating agreements that require arbitration of employment, consumer, antitrust or civil rights disputes entered into before a dispute arises.

Sen. Franken's description of the bill acknowledges that "arbitration can be a suitable alternative to litigation if the consent to arbitration is truly voluntary and occurs after the dispute arises . . . ." Sen. Franken has previously attempted to curtail the use of mandatory arbitration agreements. We discussed his reintroduced Arbitration Fairness Act of 2011 in a May 24, 2011, article. The original bill was first introduced by Sen. Franken in 2009.

While no one knows what Congress will do in the future, it's hard to envision that the outcome for the 2017 bill will be different than that of prior versions. Importantly, the U.S. Supreme Court has granted certiorari in three cases which will determine the legality of arbitration agreements with class waivers in the employment arena. We covered those cases in a Jan. 17, 2017, blog post here.

BOTTOM LINE

Views differ on the value of class action litigation and mandatory arbitration agreements. The two bills addressed in this article reflect some of those political, economic and ideological differences. It is unlikely that the Arbitration Fairness Act of 2017 will make it into law. And while the Fairness in Class Action Litigation Act of 2017 has now made it through the House, challenges still abound.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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