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77–557 PDF 2002

CLASS ACTION FAIRNESS ACT OF 2001

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

H.R. 2341

FEBRUARY 6, 2002

Serial No. 59

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary

(II)

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman

HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

ED BRYANT, Tennessee

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana

JOHN CONYERS, JR., MICHIGAN

BARNEY FRANK, Massachusetts

HOWARD L. BERMAN, California

RICK BOUCHER, Virginia

JERROLD NADLER, New York

ROBERT C. SCOTT, Virginia

MELVIN L. WATT, North Carolina

ZOE LOFGREN, California

SHEILA JACKSON LEE, Texas

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel

PERRY H. APELBAUM, Minority Chief Counsel

(III)

C O N T E N T S

FEBRUARY 6, 2002

OPENING STATEMENT

Page

The Honorable F. James Sensenbrenner, Jr., a Representative in Congress

From the State of Wisconsin, and Chairman, Committee on the Judiciary ... 1

The Honorable John Conyers, Jr., a Representative in Congress From the

State of Michigan, and Ranking Member, Committee on the Judiciary ......... 2

WITNESSES

Mr. Peter Detkin, Vice President and Assistant General Counsel, Intel Corporation

Oral Testimony ..................................................................................................... 11

Prepared Statement ............................................................................................. 13

Mr. John Beisner, Partner, O’Melveny & Myers, LLP

Oral Testimony ..................................................................................................... 18

Prepared Statement ............................................................................................. 20

Ms. Hilda Bankston, former small business owner, Jefferson County, MS

Oral Testimony ..................................................................................................... 34

Prepared Statement ............................................................................................. 35

Mr. Andrew Friedman, Partner, Bonnett, Fairbourn, Friedman & Balint,

PC

Oral Testimony ..................................................................................................... 37

Prepared Statement ............................................................................................. 38

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Rick Boucher, a Representative in Congress From the State

of Virginia ............................................................................................................. 5

The Honorable Bob Goodlatte, a Representative in Congress From the State

of Virginia ............................................................................................................. 7

The Honorable Sheila Jackson Lee, a Representative in Congress From the

State of Texas ....................................................................................................... 9

APPENDIX

MATERIAL SUBMITTED FOR THE RECORD

Civil Justice Report, ‘‘They’re Making A Federal Case Out of It. . .State

Court’’ .................................................................................................................... 62

Washington Post Editorial ‘‘Actions Without Class’’ ............................................. 110

Letter and Statement From Public Citizen ........................................................... 111

Letter to Members of Congress signed by 87 of America’s High-Tech Industry

Companies ............................................................................................................ 130

Letter and Statement From Alliance of American Insurers ................................ 145

Letter and Statement From the American Trucking Associations ...................... 155

Letter from the National Association of Manufacturers ...................................... 161

Letter and Study by the Chamber of Commerce of the United States of

America ................................................................................................................. 162

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CLASS ACTION FAIRNESS ACT OF 2001

WEDNESDAY, FEBRUARY 6, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Committee met, pursuant to notice, at 10 a.m., in Room

2141, Rayburn House Office Building, Hon. F. James Sensenbrenner, Jr. (Chairman of the Committee) presiding.

Chairman SENSENBRENNER. The Committee will come to order.

Today, the Committee will conduct a legislative hearing on H.R.

2341, the ‘‘Class Action Fairness Act of 2001’’, introduced by Representatives Goodlatte and Boucher.

Class action lawsuits in America have raised a number of grave

concerns. Currently, our rules foster a game where attorneys lump

thousands and sometimes millions of speculative claims in one

class action and race to any available State courthouse in hopes of

a rubber-stamped settlement. It is a part of our civil justice system

that has gone wild. Over the past 10 years State court class action

filings have increased 1,000 percent. This creates an enormous economic drain on small businesses, big industries and insurers, and

provides windfall attorney fees while individual class members

usually receive a small fraction of any settlement award.

This bill addresses some of these problems by updating antiquated Federal jurisdictional rules which have led to a situation

where State courts are left with jurisdiction over most class actions. Currently, the Federal Rules provide jurisdiction for disputes

dealing with Federal laws and disputes based on complete diversity: a requirement that all plaintiffs and defendants are residents

of different States and that every plaintiff’s claim is valued at

$75,000 or more. Naturally, few class actions meet these requirements.

H.R. 2341 would apply new diversity standards to class actions

by changing those requirements for class actions where any plaintiff and any defendant reside in different States and where the aggregate of all plaintiff’s claims is at least $2 million.

Article III of the Constitution empowers Congress to establish

Federal jurisdiction over diversity cases: cases between citizens of

different States. This authority was premised on concerns that

States may discriminate against out-of-State citizens. These concerns have been realized in settlements where members of different

classes and different State courts are pitted against each other in

copycat class actions: identical lawsuits filed in a number of States.

The first settled wins. Members of the other class actions must eiVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
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ther find a way to join the settled action, wherever it may be, or

forgo pursuing their claim.

This practice highlights jurisdictions with lax class action procedural requirements such as Madison County, Illinois; Jefferson

County, Texas; and Palm Beach County, Florida. In addition, many

of these State court decisions have the effect of making national

law, as was the case with auto insurance and the use of OEM replacement parts.

The bill also establishes a consumer’s class action bill of rights

to address ethical concerns raised in a variety of class action settlements. For example, an airline price fixing settlement that produced $16 million in attorneys fees and only $25 credit for class

members if they purchased an additional airline ticket for more

than $250; a Bank of Boston settlement over disputed accounting

practices that $8.5 million in attorneys fees actually costing class

members around $80. Later plaintiffs’ attorneys in this case also

sued the class members for an additional $25 million; an infamous

Mississippi asbestos settlement rewarded class members from Mississippi as much as 18 times more than class members from other

States; a settlement with Cheerios over food additives produced $2

million in attorneys fees and class members only received coupons

for more Cheerios.

In order to help prevent abuses like these, the bill aims to protect plaintiffs by prohibiting the payment of bounties to class representatives, barring the approval of net loss settlements, establishing a plain English requirement which clarifies class members’

rights, and requiring greater scrutiny of coupon settlements and

settlements involving out-of-State class members.

Now with regards to Enron, there are many investigations, and

there will be many lawsuits. It is important to note that nothing

in this bill—and that means nothing—will limit the rights of Enron

employees to seek redress in court. Under current law, the lawsuits

against the company will be heard in Federal bankruptcy court

under the current bankruptcy law for the same reasons Federal

courts should be able to resolve many of the other class actions:

Federal courts protect the interests of all parties. Section 4 of H.R.

2341 specifically excludes a number of Federal securities and Statebased corporate fraud lawsuits.

I reserve the balance of my time and after recognizing Ranking

Member John Conyers I would like to go to the testimony because

we will be having a vote at 11 o’clock and it is important that this

hearing conclude by noon or thereabouts.

The gentleman from Michigan.

Mr. CONYERS. Thank you, Mr. Chairman and Members of the

Committee. I want to first of all indicate to the Chairman how

much I appreciate the cooperation that has been flowing between

our staffs in terms of many activities that have required the rooms

and resources of the Judiciary Committee in the last several weeks.

I appreciate it very much.

Now this is a hearing that is bringing us together at the same

time that what may turn into one of the largest financial debacles

in the history of America is taking place. The bottom line is that

we are probably considering legislation that would make it easier

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for corporations, their lawyers, and their accountants, to engage in

questionable practices. That is the setting that brings us together.

Now my Chairman has observed that there is nothing, zero in

this measure that deals with Enron so we may breathe easier while

we are in room 2141. Well, maybe; maybe not. Because much of the

damage has been done in earlier congressional sessions, which we

may have a chance to allude to either at this hearing, or if it is

as abbreviated as suggested, somewhere else. We have got to hook

all this together. Why? Because everything is connected to everything. This hearing is not being held in isolation. We are not suspending our judgment on everything else that is going on on the

planet and in the American economy.

Now I hate to go back to the Newt Gingrich Contract With America era, but it was at that time that a Republican-driven Congress

decided to override President Clinton’s veto of securities tort reform. The result is that at this moment, and as a direct consequence of that, it is much harder for the Enron employees—forgive me for referring to them publicly at this hearing where they

are not involved—who were scammed, apparently, out of their retirement savings and will not get any relief as the top fellows

walked away with hundreds of millions of dollars, maybe more.

I also have to put this in some slight historical context with reference to the savings and loans scandals of the 1980’s in which

Keating and company—and that was considered outrageous. Several billions of dollars went down there. That too was a result of

a reduced—of regulations that were trimmed and cut and limited

to make it very difficult for there to be any real recovery for the

people who were the true victims.

Now to me this is an appropriate time to be considering things

that we, as national policymakers, may do to create more corporate

responsibility, not less. Our citizens need more protections against

being swindled, not less. But if I understand this measure, and

that is what we are here to do, this is the direction that we are

being taken, into less corporate responsibility. I have got maybe

13,000 investors from the Baptist Foundation of Arizona who would

say amen to that, who would have been barred from the courthouse

from any civil judicial relief had the measure that we are examining today been the law of the land as is being proposed at this

hearing.

Now maybe we will be drawn into a discussion of legal concepts

and terms that will attempt to minimize this issue and take our

minds off of one central fact: that at the heart of class action litigation are injured people, large numbers of them. So if a woman is

injured by a faulty product like the Dalkon shield they will have

to pay more money to get justice, jump through more hurdles to get

their case heard, and wait months and sometimes years until there

is something that could be described as a remedy. It is not uncommon for injured class members to die before their case is heard.

There will be, I hope, discussion about minimal diversity in

named plaintiffs. Now that takes us real quickly to the sick smokers who sued tobacco companies for lying about whether cigarettes

were addictive and would have never seen their day in court. We

will talk about heightened pleading rules. What that means to me

is that when scores of Americans are killed by faulty tires and hunVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
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dreds more maimed, that Congress in its wisdom would make it

more difficult for them to obtain justice when their claims are

joined together.

So in the end the question well may be whether this Congress,

starting with this Committee, understands how easing the rules of

civil liability makes it much easier for those in the business sector

to defraud working Americans.

So I thank you for the additional time that you have given me

to make my statement, Mr. Chairman.

Chairman SENSENBRENNER. Without objection, opening statements of other Members will be placed in record at this point.

[The statements follow:]

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6

7

PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Mr. Chairman, I would like to thank you for holding today’s important hearing

on the Class Action Fairness Act—legislation I have introduced along with my good

friend, Rick Boucher—to ensure that truly interstate class actions are heard in federal court.

This much-needed bipartisan legislation corrects a serious flaw in our federal jurisdiction statutes. At present, those statutes forbid our federal courts from hearing

most interstate class actions—the lawsuits that involve more money and touch more

Americans than virtually any other litigation pending in our legal system.

The class action device is a necessary and important part of our legal system. It

promotes efficiency by allowing plaintiffs with similar claims to adjudicate their

cases in one proceeding. It also allows claims to be heard in cases where there are

small harms to a large number of people, which would otherwise go unaddressed

because the cost to the individuals suing could far exceed the benefit to the individual. However, class actions have been used with an increasing frequency and in

ways that do not promote the interests they were intended to serve.

In recent years, state courts have been flooded with class actions. As a result of

the adoption of different class action certification standards in the various states,

the same class might be certifiable in one state and not another, or certifiable in

state court but not in federal court. This creates the potential for abuse of the class

action device, particularly when the case involves parties from multiple states or requires the application of the laws of many states.

For example, some state courts routinely certify classes before the defendant is

even served with a complaint and given a chance to defend itself. Other state courts

8

employ very lax class certification criteria, rendering virtually any controversy subject to class action treatment. There are instances where a state court, in order to

certify a class, has determined that the law of that state applies to all claims, including those of purported class members who live in other jurisdictions. This has

the effect of making the law of that state applicable nationwide.

The existence of state courts which broadly apply class certification rules encourages plaintiffs to forum shop for the court which is most likely to certify a purported

class. In addition to forum-shopping, parties frequently exploit major loopholes in

federal jurisdiction statutes to block the removal of class actions that belong in federal court. For example, plaintiffs’ counsel may name parties that are not really relevant to the class claims in an effort to destroy diversity. In other cases, counsel

may waive federal law claims or shave the amount of damages claimed to ensure

that the action will remain in state court.

Another problem created by the ability of state courts to certify class actions

which adjudicate the rights of citizens of many states is that often times more than

one case involving the same class is certified at the same time. In the federal court

system, those cases involving common questions of fact may be transferred to one

district for coordinated or consolidated pretrial proceedings.

When these class actions are pending in state courts, however, there is no corresponding mechanism for consolidating the competing suits. Instead, a settlement

or judgment in any of the cases makes the other class actions moot. This creates

an incentive for each class counsel to obtain a quick settlement of the case, and an

opportunity for the defendant to play the various class counsel against each other

and drive the settlement value down. The loser in this system is the class member

whose claim is extinguished by the settlement, at the expense of counsel seeking

to be the one entitled to recovery of fees.

Our bill is designed to prevent these abuses by allowing large interstate class action cases to be heard in federal court. It would expand the statutory diversity jurisdiction of the federal courts to allow class action cases involving minimal diversity

- that is, when any plaintiff and any defendant are citizens of different states - to

be brought in or removed to federal court.

Article III of the Constitution empowers Congress to establish federal jurisdiction

over diversity cases—cases ‘‘between citizens of different States.’’ The grant of federal diversity jurisdiction was premised on concerns that state courts might discriminate against out of state defendants. In a class action, only the citizenship of

the named plaintiffs is considered for determining diversity, which means that federal diversity jurisdiction will not exist if the named plaintiff is a citizen of the same

state as the defendant, regardless of the citizenship of the rest of the class. Congress

also imposes a monetary threshold—now $75,000—for federal diversity claims. However, the amount in controversy requirement is satisfied in a class action only if all

of the class members are seeking damages in excess of the statutory minimum.

These jurisdictional statutes were originally enacted years ago, well before the

modern class action arose, and they now lead to perverse results. For example,

under current law, a citizen of one state may bring in federal court a simple $75,001

slip-and-fall claim against a party from another state. But if a class of 25 million

product owners living in all 50 states brings claims collectively worth $15 billion

against the manufacturer, the lawsuit usually must be heard in state court.

This result is certainly not what the framers had in mind when they established

federal diversity jurisdiction. Our bill offers a solution by making it easier for plaintiff class members and defendants to remove class actions to federal court, where

cases involving multiple state laws are more appropriately heard.

In addition, the bill provides a number of new protections for plaintiff class members including a requirement that notices sent to class members be written in ‘‘plain

English’’ and provide essential information that is easily understood. Furthermore,

the bill provides judicial scrutiny for settlements that provide class members only

coupons as relief for their injuries, and bars approval of settlements in which class

members suffer a net loss. The bill also includes provisions that protect consumers

from being disadvantaged by living far away from the courthouse. These additional

consumer protections will ensure that class action lawsuits benefit the consumers

they are intended to compensate.

This legislation does not limit the ability of anyone to file a class action lawsuit.

It does not change anybody’s rights to recovery. Our bill specifically provides that

it will not alter the substantive law governing any claims as to which jurisdiction

is conferred. Our legislation merely closes the loophole, allowing federal courts to

hear big lawsuits involving truly interstate issues, while ensuring that purely local

controversies remain in state courts. This is exactly what the framers of the Constitution had in mind when they established federal diversity jurisdiction.

9

I urge each of my colleagues to support this bipartisan legislation, and I look forward to hearing from the witnesses who will testify before us today.

PREPARED STATEMENT OF THE HONORABLE SHEILA JACKSON LEE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF TEXAS

Thank you Chairman Sensenbrenner and Ranking Member Conyers.

I oppose this legislation, H.R. 2341, for several policy reasons. A favorable vote

on HR 2341 would take away the means by which innocent victims of corporate giants can find justice.

As a threshold matter, I believe that before even considering legislation, Congress

should insist on receiving objective and comprehensive data justifying such a dramatic intrusion into state court prerogatives. This legislation potentially damages

federal and state court systems. Expanding federal class action jurisdiction to include most state class actions, as H.R. 2341 does, will certainly result in a significant increases in the already overtaxed workload of our federal courts. For example,

it no surprise that the 68 judicial vacancies that existed as of February 2, 2002 contributed to the average federal district court judge docket backlog of 416 pending

civil cases. It is because of these and other workload problems that Chief Justice

Rehnquist took the important step of criticizing Congress for taking actions which

have exacerbated the courts’ workload problem.

H.R. 2341 also has the ability to significantly impact state courts. This is because

in cases where the federal court chooses not to certify the state class action, the bill

prohibits the states from using class actions to resolve the underlying state causes

of action.

Class actions were initially created in state courts based on equity and common

law. It permits one or more parties to file a complaint on behalf of themselves and

all other people who are ‘‘similarly situated’’ (suffering from the same problem). A

class action is often used when a large number of people have comparable claims.

It is an efficient means of seeking justice for a large group of people.

Class actions do help bring justice for many people—the innocent victims. Historically, class actions were brought against huge corporate giants who impact a large

percentage of the population.

Take asbestos. They used it on ceilings of gyms and classrooms where our children played and learned. It is of no fault of our children that they unknowingly contracted cancer. Someone should be held accountable for causing irreparable damage,

and death, to these innocent victims.

The paradoxical similarity in all of these class actions is that the corporate giant

was aware that their actions could cause cancer. Evidence during litigation showed

that the tobacco giants were aware that nicotine was addictive and caused cancer.

It is no different with Enron. The loyal employees of Enron that were terminated

lost their life savings, their retirement, their child’s college tuition, their second honeymoon, their first home. Top executives were aware of their declining financial situation and yet misrepresented themselves, or had their accounting firm do so, to

their own stockholders—their employees. They barred these employees from selling

their shares, while at the same time, allowing only top executives to sell any shares

they wanted to. Enron gave out tens of thousands of retention bonuses, while also

terminating the ‘‘rank and file’’.

I know this because these victims are my constituents and I have heard their stories and accounts. They have been robbed of savings that they were entitled to.

It is important to recall the context in which this legislation arises—a class action

has been filed in state court involving numerous state law claims, each of which if

filed separately would not be subject to federal jurisdiction (either because the parties are not considered to be diverse or the amount in controversy for each claim

does not exceed $75,000).

H.R. 2341 also has the potential to raise serious Constitutional issues. For one,

it unilaterally strips the state courts of their ability to use the class action procedural device to resolve state law disputes. The courts have previously indicated that

efforts by Congress to dictate such state court procedures implicate important Tenth

Amendment federalism issues and should be avoided. The Supreme Court has already made clear that state courts are constitutionally required to provide due process and other fairness protections to the parties in class action cases

It is also important to note that as fears of local court prejudice have subsided

and concerns about diverting federal courts from their core responsibilities increased, the policy trend in recent years has been towards limiting federal diversity

jurisdiction

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Thirdly, as the legislation is currently written, it assumes a defendant will be

automatically subject to prejudice in any state where the corporation is not formally

incorporated (typically Delaware) or maintains its principal place of business. In so

doing, it can be said the bill ignores the fact that many large businesses have a substantial commercial presence in more than one state, through factories, business facilities or employees.

In all, H.R. 2341 adversely impacts the ability of consumers and other victims to

acquire compensation in cases concerning extensive damages. The bill possess the

potential to force state class actions into federal courts resulting in expensive litigation and allowing defendants to potentially compel plaintiffs to travel distances to

participate in court proceedings. Essentially, the extensive pleading requirements of

the federal court will virtually make it impossible for individuals to bring a class

actions case. For example, under the bill, individuals are required to plead with particularity the nature of the injuries suffered by class members in their initial complaints. The plaintiff must even prove the defendant’s ‘‘state of mind,’’ such as fraud

or deception, to be included in the initial complaint. To meet this criteria is virtually

impossible in most instances that the plaintiff is able to provide this information

prior to discovery. If the pleading requirements are not met, the judge is required

to dismiss the plaintiff’s complaint.

Additionally, consumers under H.R. 2341 can be expected to have a far more complicated and time consuming problem in trying to certify class actions in the federal

court system. Fourteen states, representing some 29% of the nation’s population,

have adopted different criteria for class action rules than Rule 23 of the federal

rules of civil procedure.

Consumers may also be disadvantaged by the vague terms used in the legislation,

such as ‘‘substantial majority’’ of plaintiffs, ‘‘primary defendants,’’ and claims ‘‘primarily’’ governed by a state’s laws, as they are entirely new and undefined phrases

with no precedent in the United States Code or the case law.

Mr. Chairman, this bill is plagued with problems that cheat consumers form their

rights under law and under the Constitution. I urge my colleagues to oppose it.

Chairman SENSENBRENNER. Our first witness is Mr. Peter

Detkin, vice president and assistant general counsel of Intel Corporation. Mr. Detkin joined Intel in 1994; is a graduate of the University of Pennsylvania’s Moore School of Electrical Engineering,

and received a J.D. from the University of Pennsylvania Law

School.

The Committee will then hear from Mr. John Beisner, a partner

in the firm of O’Melveny & Myers, where he is responsible for the

firm’s class action practice group. Mr. Beisner specializes in class

action defense and mass torts, and he has an extensive background

in State and Federal class action practice. Mr. Beisner is an honors

graduate of the University of Michigan Law School.

The third witness will be Mrs. Hilda Bankston, the former owner

of Bankston Drugstore, which is the only pharmacy serving Fayette, Mississippi. Mrs. Bankston managed this drugstore with her

husband from 1971 until 2000. She was born in Guatemala, moved

to New York City in 1958, and served in the United States Marine

Corps before moving to Mississippi where she currently resides.

The final witness is Mr. Andrew Friedman, partner in the law

firm of Bonnett, Fairbourn, Friedman & Balint, where he heads the

firm’s class action, security fraud, and consumer fraud practice

group. He is a graduate of the University of Rochester and received

a J.D. from the Duke University School of Law.

Will all the witnesses please rise, raise your right hand, and

taken an oath?

Do you and each of you solemnly swear that the testimony you

are about to give this Committee shall be the truth, the whole

truth, and nothing but the truth, so help you God?

[Witnesses sworn.]

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Chairman SENSENBRENNER. Let the record show that all of the

witnesses answered in the affirmative. Without objection, each of

the witnesses’ written statements will be included in the record as

a part of their testimony. I would ask that the witnesses limit their

oral presentations to 5 minutes or so so that there will be a maximum amount of time for Members of the Committee to ask questions of members of the witness panel.

Mr. Detkin, you are first.

TESTIMONY OF PETER DETKIN, VICE PRESIDENT AND

ASSISTANT GENERAL COUNSEL, INTEL CORPORATION

Mr. DETKIN. Chairman Sensenbrenner, Congressman Conyers,

distinguished Members of the House Judiciary Committee, thank

you for inviting me here to testify before you today on behalf of

both Intel Corporation and also the Semiconductor Industry Association. As Mr. Sensenbrenner mentioned, I am a vice president,

assistant general counsel at Intel, and I’m also here on behalf of

the Semiconductor Industry Association.

Most of you are familiar with Intel. Intel was co-founded by the

person who was one of the inventors of the integrated circuit, and

also is responsible for bringing the DRAM and the microprocessor

to bear: two of the most important inventions of our age. The Semiconductor Industry Association, also known as the SIA, represents

member companies responsible for 90 percent of the semiconductor

output of the United States, and more than 280,000 employees here

in the United States.

I am not going to parrot my written testimony. You all have it

and had a chance to read it. Instead I am here to explain why the

tech community supports class action reform; in particular to draw

on Intel’s experiences with class action litigation, and to respond in

part to some of Congressman Conyers’ criticisms of the bill.

At bottom, the class action system as it is currently comprised

encourages forum shopping. It encourages an unseemly race to the

courthouse to determine who will be lead plaintiff and which court

will have jurisdiction over a particular matter, with no bearing

whatsoever on the merits of the underlying claim.

Just drawing on two of Intel’s experiences, in one instance we

had 13 class actions filed in a few-week period in six different

States. Thirteen different cases in six different States. These all involved the same facts, virtually the same claims, and the same alleged nationwide class of more than 100 million people. In the second instance we had five suits filed against us in just 9 days on

two different coasts. Again, same basic facts, same basic claims,

and the same nationwide class.

What we learned is that there are idiosyncratic local rules that

favor the local counsel who are in front of the local elected judges.

For example, in one instance we were constantly, on less than 48-

hours notice, required to appear on these so-called emergency motions. I would estimate at three or four times a week, by this local

counsel who would say, we have another emergency, Your Honor,

so Intel has to appear before you, because we were not allowed to

appear by phone. So we had to race halfway across the country to

respond to these motions.

12

At the end of the day which court would have heard this nationwide class action was going to be determined by a race to the courthouse. It had nothing to do with traditional notions such as where

should the claims be heard, where could we compel evidence, where

are the witnesses, where are the facts? That is where the Federal

court system would help, and that is where the minimal diversity

aspects that the Chairman referred to would help. There are uniform procedures. You have staff who are experienced with complex

litigation of this nature. And perhaps most importantly, you have

the ability to consolidate.

Here is where I would like to respond directly to Congressman

Conyers’ criticism. Nothing in this bill would bar any plaintiff from

any courthouse, or from the courthouse, I should say. Each of these

plaintiffs that he refers to would still be allowed to bring claims.

The key is that Enron people who have claims against Enron, had

it not been in Federal bankruptcy court, or the BAF investors before them, would be ensured of being in the right court, in the right

State.

For example, let us imagine, given the BFA situation, had there

been two investors in Illinois. There is nothing to prevent a class

action litigator from filing his claim in Illinois, getting the class

certified there, and then Mr. Friedman’s clients would be forced to

have their claims heard by a State court in Illinois determining the

rights of the people in Arizona. That is where the class would be

heard. I do not think that is the result we want.

Similarly, with Enron it is quite possible that Enron employees

in Illinois or in Palm Beach, Florida or in Texas could beat the

Houston plaintiffs to the courthouse and end up having the class

action heard there. I do not think that is an appropriate use of judicial resources.

So how would the proposed bill help? As I mentioned, the minimal diversity aspects would get the cases to Federal court where

they can be consolidated and brought before the court where it

would make—in the jurisdiction that would make most sense. In

addition, there is a lot of consumer protection in there that also

would prevent consumers from being swindled, to use Mr. Conyers’

words.

There is a plain English requirement for the notices. Anybody

who has ever received a class action notice knows that these things

are impenetrable. I refer in my testimony to the one, the two-foot

long receipt I got from Blockbuster, which I defy anybody to understand. There is scrutiny of the so-called coupon settlements, require

heightened scrutiny by the judges of settlements involving coupons.

There is a restriction on the use of bounties for lead plaintiffs. All

of these will protect consumers at the end of the day. I think that

is very important.

Mr. GEKAS [presiding]. Would the gentleman draw to a close,

please?

Mr. DETKIN. I will. Finally, it allows for interlocutory appeal of

the outcome determinative of class certification decision, and that

helps both sides because if a case is denied certified then the plaintiffs want the ability to have that reviewed by an appellate court.

If it is granted certification then it should be reviewed by an appellate court because at the end of the day that drives settlement.

13

So in summary, class actions are clearly a valuable tool. They are

needed in our jurisprudential system. We are all for them. We have

no intention of using this as a system to try to help corporations

swindle anybody. But they are subject to abuse, and the proposed

bill will eliminate the manipulation of the system that allows

abuse, while still keeping, and in fact strengthening, meritorious

claims.

Thank you for your time.

[The prepared statement of Mr. Detkin follows:]

PREPARED STATEMENT OF PETER N. DETKIN

Chairman Sensenbrenner, Congressman Conyers, and distinguished members of

the House Judiciary Committee, thank you for inviting me to testify before you

today on behalf of Intel Corporation and the Semiconductor Industry Association

(SIA), on the subject of class action litigation reform. My name is Peter Detkin, and

I am Vice President and Assistant General Counsel at Intel Corporation.

For more than three decades, Intel Corporation has developed technology contributing to the computer and Internet revolution that has changed the world. Founded

in 1968 to build semiconductor memory products, Intel introduced the world’s first

microprocessor in 1971. Today, Intel supplies chips, boards, systems, software, networking and communications equipment, and services that comprise the building

blocks of the Internet. Intel’s mission is to be the preeminent building block supplier

to the worldwide Internet economy.

The Semiconductor Industry Association is the premier trade association representing the U.S. microchip industry. SIA member companies comprise 90 percent

of U.S. semiconductor production and employ a domestic workforce of more than

284,000. The SIA provides a forum for domestic semiconductor companies to work

collectively to advance competitiveness of the $75 billion U.S. chip industry.

Intel, the SIA, and much of the rest of the technology community are hopeful that

you will act during this Congress to address a growing problem in our legal system:

abusive class action litigation. Recently, a broad array of technology companies, including Intel and other members of the SIA, came together as signatories of an open

letter to members of Congress, encouraging your support for H.R. 2341, the Class

Action Fairness Act of 2001. I want to thank Congressman Goodlatte and Congressman Boucher for sponsoring this bill, as well as its many Republican and Democratic cosponsors. The technology community supports H.R. 2341 because we believe

that it represents a good faith, bipartisan approach to preserving what is useful and

effective about the class action mechanism, while at the same time discouraging

abuse and improving the class action process to make it simpler, fairer, and faster

for all parties involved.

The class action device is intended to promote more efficient resolution of suits

involving multiple plaintiffs or defendants with very similar claims. It can enable

plaintiffs of limited means to pursue small but nonetheless significant claims. It also

may, in rare cases, be the only practical method of litigating and resolving important social issues.

In recent years, however, there has been an increase in the number of abusive

class action lawsuits filed in state courts. Of particular concern, we are seeing an

aggressive move by a limited number of plaintiffs’ attorneys to file class actions

against technology companies in areas such as allegedly defective products. It is obvious that many of these suits are brought as class actions because the injury alleged is either trivial, highly speculative, or wholly nonexistent.

As most of you are aware, technology companies have long been a prime target

in securities litigation. Quite often, these private securities suits are without merit

and are designed simply to coerce settlements out of deep-pocketed defendants.

Many of you joined to support enactment of the Private Securities Litigation Reform

Act of 1995 (PSLRA) and later the Securities Litigation Uniform Standards Act of

1998 (SLUSA), to address this problem. These narrowly tailored laws were designed

to weed out frivolous ‘‘strike’’ securities suits without unduly impeding the ability

of shareholders with legitimate claims to seek relief in federal court. The record suggests that a similar response is now needed to address other forms of abusive class

action litigation.

I. THE PROBLEM

Until the last decade, virtually all national class actions were filed in federal

court. In recent years, however, we have seen an explosion of class action filings in

14

1See E.J. Cabraser, Life After Amchem: The Class Struggle Continues, 13 Loy. L.A.L.Rev. 373,

368 (1998) (‘‘[i]t is no secret that class actions—formerly the province of federal diversity jurisdiction—are being brought increasingly in state courts’’). 2See David v. Carl Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 798 (11th Cir. 1999) (Nangle,

J., concurring) (‘‘[p]laintiffs’ attorneys are increasingly filing nationwide class actions in various

state courts’’). 3See J. Beisner & J. Miller, They’re Making a Federal Case Out of It . . . In State Court,

Civil Justice Rep’t No. 3 (Sept. 2001), to be reprinted in Harv. J. L. & Pol. (2001/2002). 4See Actions Without Class, Wash. Post, August 27, 2001, at A14. 5See David v. Carl Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 793–794 (11th Cir. 1999).

state court. Although the absence of centralized data-keeping in the state courts

makes it impossible to quantify the problem precisely, the available empirical and

anecdotal evidence leaves no doubt in my mind that state court class actions against

out-of-state defendants have increased many-fold since 1990. This point is not controversial. The migration of national class actions to state courts has been acknowledged by leading plaintiffs’ lawyers,1 noted by federal judges,2 demonstrated by empirical studies,3 and widely reported in the press. In fact, the Washington Post recently ran an editorial entitled ‘‘Actions without Class,’’ 4 which highlighted the seriousness of the problem.

The growing class action abuse phenomenon has had a number of serious, adverse

consequences. The most troubling of these are: increased forum shopping; manipulation of procedural rules to avoid federal diversity jurisdiction; displacement of the

laws of some states by local judges in other states; the resolution of class action

cases by ill-equipped state courts; ‘‘strike’’ suits intended to coerce quick settlements

from defendants; collusive settlements, where plaintiffs’ lawyers receive large fees

while accepting settlements of little or no value to class members; and grossly inflated ‘‘bounties’’ being paid to lead plaintiffs. I’ll address some of these problems

that we have seen at Intel.

Forum Shopping

Lax enforcement of certification rules in a few jurisdictions allows plaintiffs bringing national class actions to shop around for the most favorable forum, even when

that jurisdiction has little connection to the underlying dispute. As a result, a few

states—and a few local jurisdictions within those states—receive a disproportionate

share of class action filings. Furthermore, if one of these states happens to crack

down on class action abuses, the lawyers simply shift their business to other jurisdictions.

Intel has had first-hand experience with this phenomenon. In one instance, thirteen class actions were filed in a three-week period in state courts in Chicago, Detroit, Denver, Camden, and San Jose, as well as in the federal district courts in Colorado and California. All of these complaints alleged the same facts, asserted essentially the same claims, and purported to be class actions on behalf of the same nationwide class of consumers. In another instance, five class actions were filed

against Intel in a nine-day period in the state courts in San Jose, Chicago, and

Camden. Both of these situations are discussed in a little more detail later in my

testimony.

In both of these litigation ‘‘clusters,’’ the plaintiffs simultaneously pursued motions in several state courts, all of them seeking to certify a nationwide class. The

cases were settled before any of the courts certified a class. Had this not been done,

the decision as to where the class action would have been prosecuted and tried

would have been decided on the basis of this unseemly race to the courthouse, and

not based on traditional notions of judicial administration such as the convenience

of the parties, the ability to compel testimony of witnesses, and the location of documentary and physical evidence.

Manipulation of the Rules to Avoid Federal Diversity Jurisdiction

Lawyers are often able to keep national class actions in federal court by manipulating the rules that govern federal jurisdiction. Under current law, a case may be

removed from state to federal court if all of the plaintiff class representatives are

citizens of a different state than all of the defendants, and if each plaintiff is seeking

more than $75,000 in damages. To prevent removal, the class counsel may include

a named plaintiff that has the same citizenship as one of the defendants, or may

name a local ‘‘straw defendant’’ that has the same citizenship as one of the plaintiffs, or may ‘‘shave’’ claims by forgoing damages for class members in excess of

$74,999.5 These tactics may cause considerable expense and inconvenience for local

defendants, and may severely disadvantage the class members whose lawyers have

surrendered valuable claims.

15

6See Snider v. State Farm Mut. Auto. Ins. Co., No. 97–L–114 (Ill. Cir. Ct., Williamson County).

Displacement of State Law

State courts hearing national class actions sometimes apply the law of the forum

state to govern the claims of all class members, even when many members of the

class live in states whose laws differ dramatically. A local court entertaining a national class action against an auto insurer, for example, recently held that the defendant insurance company acted illegally in using ‘‘non-OEM’’ parts (i.e., parts not

produced by the original equipment manufacturer) in preparing estimates for repairs—even though most states permit (and some states require) use of non-OEM

parts in an effort to benefit consumers by keeping down repair costs.6 In cases like

this, local courts effectively override the considered policy choices of other states.

Moreover, idiosyncratic local rules also sometimes allow plaintiffs’ counsel to manipulate the system to the disadvantage of the out-of-state defendant. We experienced that problem in a case in the Midwest, where plaintiffs’ counsel repeatedly

(but unsuccessfully) sought class certification and restraining orders of various

kinds, each time petitioning the court on an ‘‘emergency’’ basis. Intel received less

than 48 hours’ notice of each new hearing, forcing us to run halfway across the

country to meet each ‘‘emergency.’’ I am aware of numerous other stories of abuse

of state procedural rules, such as the so-called ‘‘drive-by-certifications,’’ where class

actions are certified before the defendant has a chance to respond. This is particularly pernicious because, as I discuss later, the decision to certify a class action is

often decisive.

Ill-Equipped State Courts

In addition, many state courts have neither sufficient experience nor resources to

handle complex class actions. They also lack any mechanism to consolidate related

class suits that are brought in other jurisdictions, meaning that defendants often

are required to defend against multiple class actions filed in state courts across the

country. Intel has experienced this problem first-hand; as I mentioned earlier, more

than once we have been forced at substantial expense to defend identical suits in

jurisdictions from coast to coast. Federal courts, in contrast, have the expertise and

resources necessary to deal adequately with multi-party litigation, and existing procedures allow related class actions to be consolidated into a single proceeding for

pretrial purposes. At the same time, there is little doubt that local courts sometimes

give favorable treatment to local plaintiffs, at the expense of out-of-state class action

defendants; indeed, the Framers of the Constitution provided for diversity jurisdiction in the federal courts to guard against precisely that danger of bias against outof-state parties.

‘‘Strike Suits′′

Class action litigation often involves lawyer-generated suits challenging asserted

misconduct that caused no real injury. Although the amounts at stake in these cases

for individual class members are small, the enormous size of the classes, along with

the unpredictability of juries in some jurisdictions, makes such suits ‘‘bet the company’’ propositions for the defendant. This reality, combined with the substantial expense of litigating a massive class action (often on several fronts), can place significant pressure on the defendant to settle, regardless of the merits.

Intel has had experience with this problem. For example, one of the sets of suits

I mentioned earlier involved Intel’s original Pentium processor. Despite extensive

pre-production testing by Intel and major computer manufacturers, the initial version of the Pentium processor contained an undetected flaw. Intel’s scientists determined that the problem would arise approximately once in every nine billion random division operations, which was tantamount to once in 27,000 years for the average spreadsheet user. In fact, after millions of processors were shipped, there was

only one confirmed instance of a user encountering the flaw: a mathematics professor who was doing theoretical analysis of prime numbers noticed reduced precision at the 9th place to the right of the decimal in specific, rare circumstances. His

observation was posted on the Internet, drawing public attention in early November

1994.

On December 1, 1994, Intel announced a ‘‘lifetime replacement policy’’ whereby

it would ‘‘supply an updated version of the Pentium processor to replace the original version free of charge’’ for every user who wanted one, regardless of actual need.

Intel widely publicized its replacement policy, distributed a computer program to enable users to determine whether their processors were flawed, expanded its toll-free

telephone call center to handle inquiries, and established a nationwide network of

local service centers to assist with replacements.

16

7One class action was filed on November 29, but was withdrawn almost immediately on plaintiff’s own accord and was not refilled. Thus, the class actions that were involved in the eventual

settlement were all filed after the replacement policy was already announced.

On December 2—the day after Intel announced its lifetime replacement policy—

the class action complaints began to appear.7 In all, thirteen class actions were filed

in a three week-period in state courts in Chicago, Detroit, Denver, Camden, New

Jersey, and San Jose, California, as well as in the federal district courts in Colorado

and California, all alleging the same facts, all asserting essentially the same claims,

and all purporting to be class actions on behalf of the same nationwide class of consumers. When these multiple class actions were settled in March 1995, Intel confirmed only that it would continue to offer free replacements, maintain the service

centers, operate the toll-free telephone numbers, and provide the diagnostic computer programs—all of which Intel was doing before the settlement. The plaintiffs’

lawyers, meanwhile, received fees of $4,272,969 (in addition to costs of approximately $127,000). These sums do not include Intel’s expenses in defending the litigation.

A similarly abusive set of class actions was triggered by an Intel press release,

issued on January 5, 1996, announcing that, as a result of a single error in a prerelease (‘‘beta’’) version of compiler software (the error essentially being one misplaced parenthesis among hundreds of thousands of lines of programming code), the

results of one particular ‘‘benchmark’’ test on 100, 120 and 133 MHz Pentium processors were incorrect. The performance yardstick affected was not widely used and

was almost certainly not used by consumers in making purchase decisions. The erroneous benchmark results were never available in any consumer publication or on

Intel’s Web site, and at all times Intel’s web site provided dozens of other benchmarks that were accurate and were of more relevance to consumers. A small article

appeared in the New York Times on January 6, quoting an independent expert as

saying that ‘‘[i]t was an innocent mistake.’’

Two business days later, however, the first class action was filed alleging that

Intel had engaged in false and misleading advertising by releasing erroneous test

results. Ultimately, seven class actions were filed, including five in a nine-day period, in the state courts in San Jose, Chicago and Camden. The cases eventually

were settled, with class counsel receiving $1,489,000 in fees. Again, this number

does not include Intel’s own litigation costs in defending against suits.

Confusing Class ‘‘Opt-Out’’ Notices

Because class members are bound by the terms of a class settlement unless they

affirmatively ‘‘opt out’’ of the class, it is essential that all members of the class receive a description of the settlement that is intelligible and comprehensive. Yet class

members often are sent notices that are easily mistaken for junk mail and that, on

examination, are virtually incomprehensible. I don’t think I exaggerate when I say

that most of us in this room have received such notices, and that many recipients

find the notices impossible to understand. For example, if any of you rent movies

at Blockbuster, you probably were handed a two-foot long receipt full of legalese at

some point advising you of the proposed terms of a class action coupon settlement

in Jefferson County, Texas. Here is an excerpt:

If the proposed settlement is approved, class members will receive compensation

in the form of certificates to be used toward certain rentals or non-food purchases, including some or all of: (1) $1.00 off any rental or non-food purchase;

(2) free ‘‘Blockbuster Favorites’’ and five-day rentals; and (3) rent-one-get-onefree rentals. If class members paid extended viewing fees between April 1, 1999

and April 1, 2001 in an aggregate amount (1) equal to or lesser than $30; (2)

between $30 and $60; or (3) over $60, they will receive certificates worth approximately $9, $13, and $20, respectively, upon the submission of a valid Class

Settlement Claim Form (available at www.blockbuster.com or by calling

1.800.224.2703) by December 15, 2001 or upon the completion of a transaction

in a Blockbuster company-owned or participating franchise store during the

Certificate Period, which shall be a 120-day period to occur within 12 months

of a final nonappealable judgment. Settlement Class members who did not pay

extended fees to Blockbuster between March 1, 1998 and November 15, 2000

must submit a valid Class Settlement Claim Form by December 15, 2001, to

receive certificate consideration. Class members must also submit a Class Settlement Claim Form to receive certificate compensation for fees paid to Blockbuster for the nonreturn of rental items. Nonreturn fees shall be treated as extended viewing fees for the purpose of determining which of the three certificate

17

8See Benedict & Seidel, Special Compensation to Named Plaintiffs in Securities Class Actions,

24 Rev. of Sec. & Commodities Reg. 195, 200 (Nov. 13, 1991); Krislov, Scrutiny of the Bounty:

Incentive Awards for Plaintiffs in Class Litigation, 18 Ill. B.J.286 (1990) (‘‘[m]any commentators

have said that awarding representatives any more than their proportionate amount of the class

recovery creates unacceptable conflict between the class and representatives’’).

levels a class member will receive. Members may use the certificates during the

Certificate Period.

Although the notice advised customers ‘‘[t]his notice may affect your rights, please

read carefully,’’ I wonder how many ordinary Americans waded through it. I suspect

a significant number did not. In fact, after receiving my receipt from Blockbuster,

I posted it outside my office and challenged Intel’s lawyers to try to understand it.

Disproportionate ‘‘Bounties’’ for Lead Plaintiffs

The class action problem is magnified by the growing practice of giving enhanced

payments (or ‘‘bounties’’) to class representatives, offering them a share of the settlement award that is disproportionately larger than that provided to other class members. Such settlements lead to a divergence of interests between the class representatives—who will receive the bounty only if the settlement is approved—and the absent class members, who receive no bounty at all.8 In such circumstances, class representatives cannot be expected to look out for the interests of other members of

the class.

II. THE SOLUTION

Most of these problems could be either avoided altogether or substantially ameliorated if national class actions were moved to the federal courts, where uniform procedures that protect the rights of the parties could be applied; judges and their

staffs would be, on the whole, better able to deal with complex, nationwide cases;

and the courts could take steps to avoid duplicative litigation. We believe that H.R.

2341 goes a long way towards addressing all of the problems that I have mentioned.

H.R. 2341 Would Move Large, Interstate Class Actions to Federal Court, Where They

Belong.

As I mentioned earlier, current law provides that federal diversity jurisdiction for

class actions does not exist unless every member of the class is a citizen of a different state than every defendant, and unless each individual class member is seeking damages in excess of $75,000. To move the largest and most complex class actions into federal court, the bill would change the law to provide that federal jurisdiction exists whenever any member of a plaintiff class is a citizen of a different

state than any defendant, so long as the aggregate amount at issue in the suit exceeds $2 million. The bill contains exceptions to keep class actions in state court

when they primarily involve matters of local concern.

H.R. 2341 Would Establish Needed Consumer/ Plaintiff Protections.

H.R. 2341 provides a number of new protections for plaintiff class members. It

would establish a ‘‘plain English’’ requirement assuring that notices sent to class

members are written in plain, easily understood language and present essential information in an easily digestible tabular format. The bill also seeks to address coupon settlements that are unfair or abusive: judicial scrutiny would be required for

settlements that provide class members only coupons or other noncash benefits as

relief for their injuries. The bill would bar approval of settlements in which class

members suffer a net loss. It likewise addresses lead plaintiff ‘‘bounties’’ by precluding their payment when it would result in the interests of class representatives

significantly diverging from those of absent class members. Finally, the bill provides

assurance that out-of-state class members are not disadvantaged by settlements

that award some class members a larger recovery simply because those class members live closer to the state court.

H.R. 2341 Would Establish Improved Pleading Requirements.

Before an action could be maintained as a class action, H.R. 2341 would require

that the complaint specify the nature and amount of relief sought, the nature of injury to class members, and, if the defendant allegedly acted with a particular state

of mind, the facts that will demonstrate that state of mind. The bill also would stay

discovery during the pendency of a motion to dismiss on the pleadings. A similar

pleading requirement was enacted as part of both the Private Securities Litigation

Reform Act of 1995 and the Y2K Act.

18

H.R. 2341 Would Permit Interlocutory Appeal of Class Certification Decisions.

Because the court’s certification decision often is decisive—as a decision to certify

may place insurmountable pressure on the defendant to settle, while a refusal to

certify may force the plaintiffs to abandon their claims—the bill would permit immediate interlocutory appeal of certification decisions as a matter of right. This would

help to stop strike suits based on insubstantial claims, while allowing legitimate

class action litigation to proceed.

We should be clear on precisely what is at stake in this legislation. Intel and the

SIA believe that the class action device is an essential part of the legal system, and

one that has valuable uses. But the existence of serious abuses in the class action

process is inarguable. Frivolous class action lawsuits impose substantial expense on

defendants, sapping resources that could be used for productive purposes. They clog

the judicial system. And they provide no real relief to consumers. Intel and the SIA

therefore strongly support H.R. 2341 because it is thoughtfully crafted, taking a fair

and balanced approach to fixing class action litigation for all parties involved.

I am happy to answer any questions that members of Committee may have.

Thank you.

Mr. GEKAS. The time of the gentleman has expired. We turn to

the next witness, Mr. Beisner.

TESTIMONY OF JOHN BEISNER, PARTNER, O’MELVENY &

MYERS, LLP

Mr. BEISNER. Thank you very much. I appreciate the opportunity

to appear before the Committee this morning to speak in support

of H.R. 2341.

Every person in this hearing room this morning is a plaintiff in

a lawsuit. Indeed, I think you may be surprised to find that each

of us is a plaintiff in four or five different lawsuits. Did we ask anybody to file those lawsuits on our behalf? No. Did anybody ask us

if we wanted to be part of those lawsuits? No. Do we even know

the lawyers who supposedly filed those lawsuits on our behalf? No,

probably not. Do we agree with the claims asserted in those lawsuits? Who knows. We do not even know what the lawsuits are

about or where they were filed.

So how can attorneys who we do not even know file a lawsuit on

our behalf without our permission, and indeed, without even telling

us, asserting claims with which we may disagree? Well, welcome

to the world of class actions. By making this observation I am not

saying that class actions are inherently a bad thing or that they

ought to be abolished. To the contrary, the device definitely plays

an important role in our legal system.

But the class action is a very powerful legal device. It hands attorneys the right to file lawsuits on behalf of people without their

consent and without their control. It is a lawyer’s dream: a lawsuit

in which you really do not need a client in the traditional sense.

So the class action device needs to be controlled very carefully by

our courts because it creates a source of significant abuses.

Unfortunately, those abuses are rampant in today’s class action

world. They are seriously injuring our economy. And worse yet,

they are seriously injuring the consumers that class actions are

supposed to benefit. As the Washington Post bluntly editorialized

several months ago in urging the passage of this bill, ‘‘No portion

of the American civil justice system is more of a mess than the

world of class actions. None is in more desperate need of policymakers’ attention.’’

19

So in what respects is the class action world a mess? What are

the abuses? Let me just mention three of many. First, State courts

are using class actions to federalize State laws. County courts are

presiding over class actions that have little or no connection to

their own States, deciding claims of people who live in other jurisdictions, and in the process, interpreting the laws and setting the

policies for other jurisdictions.

The evidence on this point is not just anecdotal. I am the co-author of a study that is being published this week in the Harvard

Journal of Law and Public Policy that analyzes hard data on this

subject. For that study we pulled all of the class action files out of

dockets in certain county courts in Illinois, Texas, and Florida. We

found that very few of those class actions had any significant relationship to the counties in which they were filed. Most of the class

actions were brought primarily on behalf of plaintiffs who did not

live in those jurisdictions against defendants who did not reside

there either.

And this phenomenon is worsening. The study found that the

number of class actions filed in those county courts is growing by

leaps and bounds, some up over 1,000 percent in the past 3 years

alone.

Second, State courts are being inundated with copycat class actions. When one class action is filed, often many more class actions,

each asserting the same claims on behalf of the same purported

classes of people, are being filed in State courts all over the country. This phenomenon does not occur in the Federal courts because

when multiple class actions are filed in the Federal system there

is a process by which they can be all drawn together before a single

judge.

This copycat class action phenomenon injures defendants because

they end up defending exactly the same claims on behalf of the

same people in 50 or 60 courts at the same time all over the country. And the phenomenon can injure class members as well because

the lawyers who bring those cases can make money off of them

only if they are the first to settle their claims, creating enormous

incentives to sell out consumer interests.

That brings us to the third major problem. In recent years, multiple hearings before this Committee and its Senate counterpart

have uncovered many circumstances in which counsels walk off

with enormous attorneys’ fees but the class members receive next

to nothing.

As the Washington Post editorial that I mentioned earlier concluded, many of these problems would be eliminated if more interstate class actions could be heard in Federal court. That is not possible now because of a glitch in our Federal diversity jurisdiction

statute. It allows Federal court simple slip-and-fall cases to be

heard there, but cases that involve the most people, the most

money, and the most interstate commerce implications cannot be

heard there. That is the issue that this bill fundamentally is intended to address. I therefore urge this Committee to recommend

its adoption.

Thank you.

[The prepared statement of Mr. Beisner follows:]

20

1 Actions Without Class, Wash. Post, August 27, 2001, at A14. 2Deborah Hensler, et al., Preliminary Results of Rand Study Of Class Action Litigation

(1997). 3 Analysis: Class Action Litigation, Class Action Watch, Spring 1999, at 3 (Figure 2), available

at www.fed-soc.org/classaction1–2.pdf. 4 Id. at 2 (Figure 1). 5Mass Torts and Class Action Lawsuits: Hearing Before the Subcomm. on Courts and Intellectual Property of the House Comm. on the Judiciary, 105th Cong. (1998) (‘‘1998 House Hearing’’),

at 140–53.

PREPARED STATEMENT OF JOHN H. BEISNER, ESQ.

Thank you for the opportunity to testify about the abuses of class actions that are

presently occurring in our judicial system and about why enactment of H.R. 2341

would constitute an important step toward halting those abuses, which are challenging the basic legitimacy of the class action device.

My testimony today is based primarily on my experiences as an ‘‘in-the-trenches’’

class action litigator. Over the past two decades, I have defended more than 400

class action lawsuits on a wide variety of subjects in federal and local courts in 37

states. In the course of that work, I have observed the soaring numbers of class actions in state courts and the increasing abuse of the class action device, particularly

in certain state court settings. I have also personally witnessed the enormous economic waste that this inexplicable situation imposes on targeted companies, diverting attention and resources from job-creating innovation efforts and diluting the

profits available for shareholders, including both pension funds and individual investors. Today, I would like to share with you some thoughts about what has led

to this class action crisis—and why H.R. 2341 would be a positive, effective response

to these problems.

I. THE STATE COURT CLASS ACTION CRISIS IS WORSENING.

My testimony today is not a new song; it is an old refrain. Over the last several

years, most policymakers—and indeed most Americans—have read or heard about

the explosion in state court class actions and have developed at least a passing familiarity with the abuses occurring in many of those cases.

The problem is not new, and it is not going away. Congress has been considering

legislation to address these problems for several years. But in each year that Congress has failed to act, the problem has worsened, creating a vicious cycle. As more

and more interstate class actions are being filed in state courts, abuses are increasing. And as class action abuse becomes more prevalent, more lawyers seek to bring

even more class actions in state court. As the Washington Post bluntly editorialized

several months ago, ‘‘No portion of the American civil justice system is more of a

mess than the world of class actions. None is in more desperate need of policymakers’ attention.’’ 1

A. The Number Of State Court Class Actions Continues To Mount As Plaintiffs’

Counsel Go To Great Lengths To Avoid Federal Court.

Over the years, several studies have attempted to quantify the growth of state

court class actions. None, however, has been totally comprehensive because state

courts do not keep accurate records of class action filings; it would be impossible

to conduct a full statistical analysis of class action filings in the courts of all 3,066

counties nationwide. Still, despite these limitations, several studies have painted a

reasonably clear picture of a growing problem that is concentrated in certain state

courts. For example:

• A preliminary report on a major empirical research project by RAND’s Institute for Civil Justice (‘‘ICJ’’) observed that over a several year period, there

was a ‘‘doubling or tripling of the number of putative class actions’’ that was

‘‘concentrated in the state courts.’’ 2

• Another survey indicated that while federal court class actions had increased

by 340 percent over the past decade, state court class action filings had increased 1,315 percent.3 Typically, the new state court filings were on behalf

of proposed nationwide or multi-state classes.4

• A study submitted to the House Judiciary Committee in 1999 indicated that

the local courts of six small, rural Alabama counties were experiencing a tidal

wave of class action filings, many seeking relief on behalf of purported nationwide classes concerning matters of national significance.5

21

6Deborah R. Hensler, et al., CLASS ACTION DILEMMAS: PURSUING PUBLIC GOALS FOR PRIVATE

GAINS (Executive Summary 1999) (‘‘ICJ/RAND Study’’) at 7. 7See John H. Beisner and Jessica Davidson Miller, They’re Making A Federal Case Out Of

It . . . In State Court, CIVIL JUSTICE REPORT NO. 3, Sept. 2001 (‘‘Manhattan Institute Study’’). 8 As detailed below, the researchers also looked at cases filed during the early months of calendar year 2001, to the extent possible. 9Manhattan Institute Study at 7–12. 10See Michael Shaw and Jim Getz, Filing Of Class Action Suits Surges In Metro East Area;

Tactics For Finding Clients Are Assailed, St. Louis Post-Dispatch, June 19, 2000. 11Manhattan Institute Study at 8–9. 12 Id. at 9. 13See Manhattan Institute Study at 9 (citing L.H. Mecham, JUDICIAL BUSINESS OF THE

UNITED STATES COURTS: 2000 REPORT OF THE DIRECTOR 405 (2001) (Administrative Office of the

U.S. Courts). 14Manhattan Institute Study at 9.

• The final report on the RAND/ICJ study on class actions concluded that class

actions ‘‘were more prevalent’’ in certain states ‘‘than one would expect on the

basis of population.’’ 6

Recently, I co-authored an analysis of newer state court class action data yielded

by research undertaken by the Center for Legal Policy at the Manhattan Institute.7

That analysis, which will be published shortly in the HARVARD JOURNAL FOR LAW

AND PUBLIC POLICY, examined data gleaned from the class action dockets of three

state courts—Madison County, Illinois; Jefferson County, Texas; and Palm Beach

County, Florida—that appeared to have a disproportional number of class actions

based on an informal survey of newspapers, magazines and court reporters. By identifying all the purported class actions that were filed in these counties during the

1998–2000 timeframe,8 and reviewing the dockets of each of those identified class

actions, the study sought to determine whether the anecdotal reports about class action practice in these specific counties were borne out by the hard numbers—and

whether they provided insight on general class action trends. The answer turned out

to be ‘‘yes’’—on both counts.

Among the study’s most significant findings were the following points:

• Class actions increased substantially during the survey period in each of the

three counties.9 The most dramatic increase occurred in Madison County, a

southwest Illinois county with a population of 250,000, where the number of

class actions increased by 1,850 percent between 1998 and 2000. In 1998,

there were only two class actions filed there—not surprising, given its small

size and relatively inconvenient location. During 2000, there were 39. And the

upward trend appears to be continuing: During the first two months of 2001,

13 new class actions were filed. Assuming that trend continued through the

end of the year, there was another 92 percent increase in class action filings

during 2001. These findings confirmed the results of informal literature research, which suggested that Madison County has one of the highest class action filing rates in the country. Indeed, according to an article last year in

the St. Louis Post-Dispatch, Madison County has developed a nationwide reputation as the place to file nationwide class actions,10 even though it has only

one-tenth of one percent of the U.S. population.

• The number of class actions filed in each county was clearly disproportional

to the size of the counties in the survey. In order to understand the significance of the data collected in the three counties, the Manhattan Institute

study considered the per capita filing rates for class actions in each of the

three courts. Its findings were telling: if class actions were filed throughout

the country at the same per capita rates as Jefferson County, for example,

there would have been 22,331 class actions filed in state courts in 2000.11 At

the Madison County rate, the total number of class actions would have been

42,386.12 Despite the lack of published data on the total number of class actions brought each year in state courts, it is clear that these states are accounting for far more than their proportional share of class action filings.

A comparison with the federal court system is similarly revealing. Only about

2,000 class actions are filed in the entire federal court system each year.13

That amounts to a per capita rate of about 7.6 class actions for every million

residents. In Madison County in 1999, the rate of per capita state court class

actions was nearly nine times higher—with about 61 class actions filed per

million people. Even the most populous county surveyed (Palm Beach) has a

per capita class action filing rate that is three times the rate in federal

court.14

22

15 Id. at 12, 19. 16 Id. at 13–25. 17 Id. at 10–11. 18 Id. at 10. 19Schoenleber v. Prudential Prop. & Cas. Ins. Company, No. 01–L–99 (filed Jan. 18, 2001);

Lancey v. Country Mut. Ins. Co., No. 01–L–113 (filed Jan. 29, 2001); Richardson v. Progressive

Premier Ins. Co. of Illinois, No. 01–L–149 (filed Feb. 6, 2001); Edwards v. Mid-Century Ins. Co.,

No. 01–L–151 (filed Feb. 6, 2001); Knackstedt v. St. Paul Fire and Marine Ins. Co., No. 01–L–

153 (filed Feb. 6, 2001); Bordoni v. CGU Ins. Group, No. 01–L–157 (filed Feb. 6, 2001); Huff

v. Hartford Ins. Co. of Illinois, No. 01–L–158 (filed Feb. 6, 2001); Billups v. GEICO Gen. Ins.

Co., No. 01–L–159 (filed Feb. 6, 2001); Moore v. Shelter Ins. Co., No. 01–L–160 (filed Feb. 6,

2001).

• The majority of class actions in all three counties were brought on behalf of

nationwide classes.15 In Madison County, for example, 81 percent of the cases

filed during the survey period sought to certify nationwide classes. In Jefferson County, 57 percent of the class actions were brought on behalf of nationwide classes.

• The class actions filed in the three counties sought to challenge a broad array

of industry practices that touch on most Americans’ everyday lives.16 In Madison County, lawyers have sought to certify classes over the last three years

that included: (1) all Sprint customers nationwide who have ever been disconnected on a cell phone call; (2) all RotoRooter customers nationwide whose

drains were repaired by allegedly unlicensed plumbers; (3) all consumers who

purchased ‘‘limited edition’’ Barbie dolls that were later allegedly offered for

a lower price elsewhere; and (4) private owners of wells in 16 states where

a gasoline additive may have seeped into the groundwater. In Jefferson County, the proposed classes included: (1) all individuals nationwide who have paid

late fees for video rentals from Blockbuster; (2) all individuals nationwide

who have purchased a computer from the Best Buy retail chain with an extended warranty; and (3) all individuals who sought reimbursement for medical expenses or wrecked vehicles from a number of insurance companies that

use a common method of assessing such claims (there were a number of similar, overlapping class actions involving these insurance practices in Madison

County as well). In Palm Beach County, the proposed classes included: (1) all

individuals nationwide who purchased a dietary supplement that the company claimed would eliminate cellulite; (2) all healthcare providers and consumers nationwide who participate in United HealthCare health plans based

on the company’s interpretation of ‘‘medically necessary’’ treatment; and (3)

all holders of seasons tickets to the Florida Marlins who were allegedly defrauded when the team owner reneged on his promise to field a ‘‘World Class

Baseball Team.’’ Thus, these three county courts have been asked to adjudicate cases that could affect the daily of lives of millions of Americans

throughout the country—from what water they drink to how much they pay

for their next insurance policy or telephone bill.

• The class action dockets of the three county courts are monopolized by a small

cadre of out-of-county plaintiffs’ counsel.17 In Madison County, the same five

firms appeared as counsel in approximately 45 percent of the cases on the

class action docket. Similarly, in Jefferson County, five firms seem to be driving a large percentage of the local class action industry, cumulatively appearing in 32 percent of the class action lawsuits included in the survey. Moreover, most of these firms are not located in the counties where they are choosing to sue; rather, they are distant law firms that travel to these counties for

what they perceive as a more favorable forum. In Madison County, the law

firms that filed the purported class actions generally were not based in that

locale. Of the 66 plaintiffs’ firms that appeared in the Madison County case

files, 56 (or 85 percent) listed office addresses outside Madison County. Similarly, in Jefferson County, Texas, 58 percent of the law firms appearing on

complaints listed addresses outside the county.

• Many of the class actions in the three counties were clearly initiated by creative lawyers, not injured consumers.18 This was best evidenced by the large

number of ‘‘cut-and-paste’’ complaints in which attorneys brought numerous,

nearly identical complaints against a number of different defendants in the

same industry, criticizing standard industry practices. For example, within a

one-week period early this year, six law firms filed nine nearly identical class

actions in Madison County, alleging that the automobile insurance industry

is defrauding Americans in the way that it calculates claims rates for ‘‘totaled’’ vehicles.19 Another group of law firms filed two class actions against

23

20 Hobbs v. State Farm Mut. Ins. Co., No. 99–L–1068 (filed Nov. 2, 1999); Kelly v. Progressive

Premier Ins. Co., No. 00–L–277 (filed Apr. 3, 2000). 21Schachter v. Mut. Benefits Corp., No. 98–4490 AI (filed July 28, 1998); Thum v. Accelerated

Benefits Corp., No. 98–9389 AN (filed Oct. 21, 1998); Schwartz v. Dedicated Res., Inc., No. 98– 9393 AD (filed Oct. 21, 1998); Chancellor v. Future First Fin’l Group, Inc., No. 99–4429 AE (filed

May 6, 1999); Brackman v. Dedicated Res., Inc., No. 99–9361 (filed Sept. 30, 1999). 22See Filing Of Class Action Suits Surges In Metro East Area, supra n.10. 23See Actions Without Class, supra n.1. 24See The Lakin Law Firm, Class Actions, at http://www.weblinecommunications.com/practice/ class-action/index.htm. 25 Berman DeValerio Pease Tabacco Burt & Pucillo: About Class Action Lawsuits: FAQ, at http://www.bermanesq.com/content/classaction-faq.asp (cases filed by Burt & Pucillo prior to

merger). 26Manhattan Institute Study at 9. 27 Actions Without Class, supra n.1. 28Manhattan Institute Study at 11.

automobile insurers (one of which lists 20-plus defendants) involving reimbursement for replacement vehicle parts.20 A third group of lawyers filed five

class actions in Palm Beach County challenging companies that sell interests

in the life insurance policies of critically ill patients (in one of these ‘‘viatical

settlement’’ class actions, the plaintiffs’ firm was also the named plaintiff).21

Needless to say, when large numbers of very similar lawsuits attacking many

players in the same industry coalesce before the same court and involve the

same counsel, the situation does not appear to be mere happenstance. Consistent with this finding, the St. Louis Post Dispatch interviewed named

plaintiffs in a number of Madison County class actions last year and found

that for the most part, their lawyers found them—and not vice versa. One

named plaintiff in a case against an insurance company said, ‘‘I didn’t know

anything about it until they came to me.’’ 22 According to a recent Washington

Post editorial, the ‘‘clients’’ in many class actions are ‘‘something of a fiction’’ because the lawyers are essentially ‘‘representing themselves;’’ this lack of accountability, the Post opined, is one of the reasons that ‘‘class actions are unusually prone to abuse.’’ 23

In this regard, it is instructive to glance at some of the web sites of the plaintiffs’ counsel involved in the cases included in the Manhattan Institute study.

One firm boasts on its website that it has filed 24 nationwide class actions

in Madison County, challenging a broad array of practices in a number of industries. The firm’s website advertises that it specializes in class actions that seek less than $500 in damages on behalf of consumers and that it is currently involved in a number of class actions, many of which turned up in the

Manhattan Institute study, including: (1) lawsuits against ten automobile insurance companies over the standard ‘‘medical payment’’ provisions in automobile insurance policies; (2) lawsuits against three automobile manufacturers over allegedly defective paint processes; (3) a lawsuit against UPS for its

policies for excess value insurance; (4) a suit against the manufacturers of air

purifiers; and (5) a suit against Sprint on behalf of everyone who ever got

disconnected on a cell phone call.24 Another firm that is involved in ten of

the class actions identified by the research in Palm Beach County advertises

on its website that ‘‘more claimants mean greater potential liability for defendants. Because there is greater potential liability, these lawsuits become

worthwhile for lawyers to prosecute on a contingent-fee basis.’’ 25

• The vast majority of the cases had no real nexus to the county in which they

were brought.26 For example, in Madison County, none of the companies listed

as defendants was based inside Madison County, and about 37 percent of the

named plaintiffs were not county residents. Similarly, in Jefferson County,

just 13 of the 173 defendants named in class actions between 1998 and early

2001 were based inside the county, and about 35 percent of the named plaintiffs lived outside the county. In fact, many of the companies targeted in the

Madison and Jefferson county cases do not even have a retail presence in the

counties where they were sued. Even in Palm Beach County, which had the

largest number of suits against local companies, about half of the defendants

sued were based outside the county. As the Washington Post recently noted

in an editorial criticizing class action abuses, ‘‘Having invented a client, the

lawyers also get to choose a court. Under the current absurd rules, national

class actions can be filed in just about any court in the country.’’ 27

• Many of the county court cases were ‘‘copy cat’’ class actions, duplicative of

other pending litigation.28 As both the Senate and House Judiciary Committees have noted in recent reports, the jump in the number of state court class

24

29The Class Action Fairness Act of 2000, S. REP. NO. 106–420, 106th Cong. (2000) (‘‘Senate

Report’’) at 19 (‘‘Yet another common abuse [of the class action device in state courts] is the

filing of ’copy cat’ class actions (i.e., duplicative class actions asserting similar claims on behalf

of essentially the same people).’’). As noted in the Senate Report, ‘‘sometimes these duplicative

actions are filed by lawyers who hope to wrest the potentially lucrative lead role away from the

original lawyers, [and] 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.’’ Id. When these cases are filed in state

courts, there is no way to coordinate or consolidate the cases; the cases must be litigated in an

‘‘uncoordinated, redundant fashion.’’ Id. ‘‘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.’’ Id. at 19–20. ‘‘As a result, State courts and class counsel

may ’compete’ to control the cases, often harming all the parties involved.’’ Id. See also Interstate

Class Action Jurisdiction Act of 1999, H.R. REP. NO. 106–320 (1999) at 9. 30 746 N.E.2d 1242 (Ill. Ct. App. 2001).

actions has resulted in part from the increasingly common practice of filing

‘‘copy cat’’ class actions—duplicative class actions that assert the same claims

on behalf of essentially the same people in a number of different courts.29

Sometimes these class actions are brought by attorneys vying to take the lead

role in any potential lucrative settlement with the defendant. In other cases,

the strategy is to go fishing in a number of ponds—to file many identical lawsuits before many different courts, hoping to land the big one with a favorable

judge somewhere. Not surprisingly, all of the counties surveyed in the study

were sites for ‘‘copy cat’’ class actions. There were even ‘‘copy cat’’ cases within the survey itself. For example, a number of automobile insurance cases

filed in Jefferson County sought to certify the same nationwide classes as

cases filed in Madison County.

In sum, the Manhattan Institute study found that a small cadre of plaintiffs’ counsel are bringing an increasing number of nationwide class actions against a

wide range of industries in a small number of courts where they believe that they

possess a tactical advantage. These facts tend to confirm what has long been suspected—that the impetus for filing class actions often comes from lawyers eager for

substantial attorneys’ fees and not individual consumers seeking redress for what

they perceive to be real grievances.

B. Plaintiffs’ Counsel Are Attracted To State Courts Because Those Forums Provide

An Avenue To Manipulation.

While the abuses that draw plaintiffs’ counsel to state court are numerous and

are documented at great length in the report issued by the Senate Judiciary Committee last year, I would like to focus today on the two forms of abuse that in my

view are the most dangerous.

1. State Courts Are Federalizing Substantive And Procedural Law.

The most dangerous trend in state court class actions—and one that has had the

biggest impact on the proliferation of ‘‘nationwide’’ lawsuits—is that many state

courts are ‘‘federalizing’’ class actions. When I say ‘‘federalizing’’ I am talking about

‘‘false federalism’’—the current situation in which one state court goes around telling the other 49 state courts what their laws should be. When state courts preside

over class actions involving claims of residents of more than one state (especially

nationwide class actions) as they are increasingly inclined to do, they often end up

dictating the substantive laws of other states, sometimes over the protests of officials in those other jurisdictions.

The best-known example of this is the case of Avery v. State Farm Mut. Auto Ins.

Cos., which involved allegations that an automobile insurance company had

breached its contracts with all of its policyholders nationwide by requiring the use

of less expensive non-original equipment manufacturer parts—a standard industry

practice.30 In that case, an Illinois county court (not Madison County) certified a nationwide class, and at trial, a jury awarded a verdict of $1.18 billion against defendant State Farm. The Avery case received broad media attention because the judge

granted class certification and allowed the jury verdict to stand, even though several

insurance commissioners testified that a ruling in favor of the nationwide proposed

class by an Illinois court would actually contravene the laws and policies of other

states, which have enacted laws encouraging (or even requiring) insurers to use less

expensive, non-OEM parts in making covered accident repairs to motor vehicles as

a means of containing the cost of auto insurance coverage. In upholding the Avery

jury’s award last year, an Illinois court of appeals discounted testimony from

‘‘[f]ormer and current representatives of state insurance commissioners [who] testified that the laws in many of our sister states permit and in some cases . . . [even]

25

31 Id.at 1254. 32 Id. 33See Matthew J. Wald, Suit Against Auto Insurer Could Affect Nearly All Drivers, N.Y.

Times, Sept. 27, 1998, § 1, at 29. 34Senate Report at 20.

encourage competitive price control.’’ 31 According to the appellate court, this testimony was irrelevant because of the trial court’s finding that the parts were inferior.32 As The New York Times reported at the time, the import of the Illinois decision was to ‘‘overturn insurance regulations or state laws in New York, Massachusetts, and Hawaii, among other places’’ and ‘‘to make what amounts to a national

rule on insurance.’’33

The impact of the Avery decision is already apparent in the growing number of

class actions that have been filed in Illinois state courts, including Madison County,

challenging standard insurance industry practices. One case that turned up in the

Manhattan Institute study that was brought against State Farm and 19 other insurance companies making exactly the same allegations as the Avery case. The Complaint seeks to certify a class consisting of State Farm customers who purchased

policies too late to be included in the Avery class, as well as customers of 19 other

insurance companies. Plaintiffs’ counsel in this case were apparently so sure of their

ability to extract a settlement based on the Avery decision that they did not even

bother to pay lip service to the fundamental rules governing class actions by finding

representative plaintiffs who hold policies with each of the defendant insurance

companies; rather, the case is brought by one named plaintiff with one car insurance policy against 20 insurance companies.

All told, the Manhattan Institute study turned up 26 nationwide class action law

suits in Madison County targeting the insurance industry, including cases challenging the way the insurance industry determines when to reimburse medical expenses resulting from car accidents and how the industry calculates the value of

wrecked vehicles. This swelling in insurance class actions has clearly resulted from

the willingness of certain Illinois state courts to serve as free-roving insurance commissioners by issuing edicts affecting the way insurance companies can do business

in 49 other states.

The danger posed by these efforts to federalize state law extend far beyond insurance. The dockets of the three surveyed counties in the Manhattan Institute study

included numerous cases in which plaintiffs’ counsel sought to have locally elected

judges in county courts set policies in areas as diverse as warranties, land use

rights, plumbing licenses, environmental protection, advertising campaigns, bank

billing practices, employee investment plans, and numerous other broad-ranging

issues for 49 other states—and 3,065 counties—in addition to their own. While some

of the class actions pending in these jurisdictions may seem trivial (e.g., movie rental late fees, the price of Barbie dolls), even these cases (particularly if they are decided incorrectly) could have a dramatic impact on commerce by limiting how companies can market and charge for their products.

The resulting question is a simple one: Who should be charged with responsibility

for handling such types of large-scale, interstate class actions involving issues with

significant national commerce implications—federal judges who are selected by the

President and confirmed by the U.S. Senate or state court judges who are elected

by a few thousand voters in a rural county? As the Senate Judiciary Committee has

noted, ‘‘[c]learly, a system that allows State court judges to dictate national policy

from the local courthouse steps is contrary to the intent of the Framers when they

crafted our system of federalism.’’34

In addition to federalizing substantive law, state courts are also federalizing procedural class action law. Even though only a minority of state courts are routinely

failing to exercise sound judicial judgment on class action issues, those courts have

become magnets for a wildly disproportionate share of the interstate class actions

that are filed. In short, attorneys file their class actions in the minority of courts

that are most likely to have a laissez-faire attitude toward the class device. By establishing themselves as the lowest common denominator, that distinct minority of

state courts are essentially setting the national norm; they are effectively dictating

national class action policy.

A dramatic example of this phenomenon was provided in the testimony of Dr.

John B. Hendricks at the March 1998 House hearing. He offered a docket study of

state court class actions in one jurisdiction showing (a) that class actions had become disproportionately large elements of the dockets of some county courts, (b) that

many of the class actions were against major out-of-state corporations lacking any

connection with the forum county, and (c) that the proposed classes in those cases

typically were not limited to in-state residents and often encompassed residents of

26

35The Alabama Supreme Court finally issued several rulings in 1999 that have dampened this

behavior, and the Alabama legislature has established restrictions as well. But when such action

is taken in one state, counsel simply move the class action show to another jurisdiction where

the courts have shown a lax attitude toward regulating the class device; many believe that is

why so many class actions are sprouting in Jefferson County, Texas and Madison County, Illinois. 36 ICJ/RAND Study at 21–22. 37Patrick Slevin, Class-Action Lawsuit Abuse Threatens Quality Of Life For All Floridians, Tampa Tribune, Sept. 16, 2000. 38 Kamilewics v. Bank of Boston, 92 F.3d 507 (7th Cir. 1996). 39 ‘‘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) (statement of Martha Preston). 40Final Order of Settlement, Unfried v. Charter Communications, Inc., No 99–L–48 (granted

December 21, 2000). 41 Robert D. Mauk, Lawyers Win Big In Class-Action Suits: Is It Justice Or Greed?, Charleston

Daily Mail, June 19, 2001 42 Jerry Heaster, Enough Already With Lawsuits, Kansas City Star, July 10, 1999, at C1. 43 Editorial, We All Pay Dearly For Costly Class Actions, Corpus Christi Caller-Times, January

8, 2001.

all 50 states. Dr. Hendricks identified one state court judge who had granted class

certification in 35 cases over the preceding two years. As Dr. Hendricks stated,

‘‘[t]hat’s a huge number of cases when one considers that during 1997, all 900 federal district court judges in the United States combined certified a total of only 38

cases for class treatment.’’ The study failed to uncover any instance in which that

judge had ever denied class certification. Clearly, that court alone was playing a

radically disproportionate role in setting national class action policy.35

2. State Courts Are Approving Settlements That Benefit Only Lawyers: Class

Attorneys Receive Excessive Fees With Little Or No Recovery For The

Class Members Themselves.

A second form of abuse that has resulted from the explosion in state court class

actions is the approval of settlements that provide only nominal benefits to the people who are ostensibly being represented—the class members themselves—while offering a bonanza in attorneys’ fees for the plaintiffs’ lawyers. According to the Institute for Civil Justice/RAND study, class counsel in state court consumer class action

settlements (i.e., non-personal injury monetary relief cases) frequently walk off with

more money than all of the class members combined.36 Last year, an editorial in

the Tampa Tribune referred to this phenomenon as ‘‘jackpot justice’’—settlements

that provide little, if any relief, to the class members, make their lawyers rich, and

ultimately result in higher prices for consumers.37

In the now infamous Bank of Boston settlement,38 an Alabama state court judge approved a settlement that awarded up to $8.76 to individual class members, while

the class counsel received more than $8.5 million in fees. One class member testified

before the Senate Subcommittee on Administrative Oversight and the Courts that

she was charged a mysterious $80 miscellaneous deduction that she later learned

was an expense used to pay the class lawyers’ fee. In her testimony, that witness

expressed disbelief at the notion that ‘‘people who were supposed to be my lawyers,

representing my interests, took my money and got away with it.’’ 39

While the Bank of Boston settlement is the best-known (and perhaps the most

egregious) example, other settlements that provided millions to the lawyers—but

only pennies to the class members—abound:

• In a case in Madison County involving cable late fees, the customers received

no compensation for billing problems; the cable operator was required to

change its late fee policies prospectively; and plaintiffs’ counsel received $5.6

million for their efforts.40

• The settlement in a suit involving souvenirs and merchandise sold at

NASCAR Winston Cup stock car races gave consumers coupons toward the

purchase of more merchandise; their lawyers were eligible to receive more

than $2 million.41

• In a California state court case regarding the size of computer monitor

screens, the court approved a settlement that offered $13 rebates to consumers who purchased new monitors. Their lawyers received approximately

$6 million in fees.42

• Customers in a suit against a telephone company in Texas state court received three optional phone services for three months or a $15 credit if they

already subscribed to those services. The lawyers pocketed $4.5 million in

fees.43

27

44See David Koenig, Blockbuster tried to settle class-action lawsuits over late fees, ASSOCIATED

PRESS, June 6, 2001. 45Wendy Wilson, Blockbuster to settle suits on late fees, Daily Variety, June 4, 2001, at 10. 46 Cynthia Corzo, Blockbuster Settles Class-Action Lawsuit in a Smart Business Move, Miami

Herald, June 10, 2001. 47Monica Roman, A Blockbuster of a Legal Bill, Bus.Week, June 18, 2001, at 46. 48Phillip D. Bissett, Letter to the Editor, Wash. Post, June 8, 2001, at A28. 49 Actions Without Class, supra n.1. 50See Barrow S.S. Co. v. Kane, 170 U.S. 100, 111 (1898) (‘‘The object of the [diversity jurisdiction] provisions . . . conferring upon the [federal] courts . . . jurisdiction [over] 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.’’); Pease v. Peck, 59

U.S. (18 How.) 518, 520 (1856); Martin v. Hunter’s Lessee, 14 U.S. (1 Wheat) 304, 307 (1816).

See also THE FEDERALIST NO. 80, at 537–38 (Alexander Hamilton) (Jacob E. Cooke ed. 1961)

(‘‘[I]n order to [ensure] the inviolable maintenance of that equality of privileges and immunities

Continued

One of the cases cited in the Manhattan Institute study involved a recent settlement in a case alleging that a video rental company improperly assessed late fees.

Under the proposed settlement (which has reportedly received preliminary approval

from the Jefferson County court), customers would get varying amounts of benefits.44 For example, a customer who claimed payment of $30 in late fees would get two free movie rentals and five $1 coupons good toward the purchase of non-food

items.45 Initially, the video rental company announced that the various coupons to be issued would have a face value of $460 million, but the company has now acknowledged that fewer than 10 percent of the coupons will be used and that it will

not be changing its late fee policy.46 Plaintiffs’ class counsel proposed that they be paid $9.25 million in fees and expenses. One commentator has observed that ‘‘the

real winners in the settlement are the lawyers who sued the company,’’ who will

be paid ‘‘in cash, not coupons.’’ 47

A report about the video rental settlement in the Washington Post prompted the

following letter to the editor from one reader:

[This] class-action settlement illustrates the need for common-sense legal reform in our country, particularly in regard to class-action lawsuit abuse....

What a sham! Class action lawsuits have become a cottage industry for personal

injury lawyers looking to make millions in legal fees, on behalf of consumers

who receive token damages as best. From cases involving video rentals to managed care, consumers are being used simply as pawns in big-money schemes by

some sanctimonious, greedy lawyers.

It is far past time to curb the abuses of class-action lawsuits.48

II. H.R. 2341 IS A MODEST STEP THAT WOULD BOTH REDUCE CLASS ACTION ABUSE IN

STATE COURTS AND FULFILL THE FRAMERS’ CLEAR INTENT REGARDING THE PROPER

JURISDICTION OF FEDERAL COURTS.

While the growing number of state court class actions and the related increase

in class action abuse have raised serious and troubling questions for our nation’s economy and judicial system, a key source of the problem—the exclusion of most

class actions from federal court—is quite easily remedied. Currently, class actions

are excluded from the category of so-called ‘‘diversity’’ cases—cases involving citizens from different states and substantial sums of money—that are included in the

jurisdiction of federal courts. As a result, most class actions are relegated to state

court even though they are subject to the same prejudices and have the same economic significance as other large commercial cases that are afforded the protections

of federal court. By correcting this anomaly, Congress could ensure that interstate

class actions receive the same protections as other cases implicating interstate commerce—i.e., that they are adjudicated by federal judges who ‘‘operate[] according to

reasonable rules and [are] accountable to the entire country.’’ 49 That is the aim of

H.R. 2341—and why it is an important step toward class action reform.

A. The State Court Class Action Problem Results From An Anomaly In Federal Jurisdictional Law That Keeps Most Class Actions Out Of Federal Court.

Article III of the U.S. Constitution establishes that federal courts can hear not

only cases presenting federal law issues (that is, lawsuits asserting constitutional

or federal statutory claims, or involving the federal government as a party), but also

so-called ‘‘diversity’’ cases, defined as suits ‘‘between Citizens of different States.’’ In

establishing such ‘‘diversity’’ jurisdiction, the Framers sought to address concerns

that local biases would infect state courts proceedings involving disputes between

in-state plaintiffs and out-of-state defendants.50 In short, they feared that non-local

28

to which the 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 [up]on which it is founded.’’). 51See The Class Action Fairness Act of 1999: Hearing before the Subcomm. On Administrative

Oversight and the Courts of the Senate Comm. on the Judiciary, S. HRG. NO. 106–465, 106th

Cong. (1999) at 100 (prepared statement of Prof. E. Donald Elliott, Yale Law School). See also

James William Moor & Donald T. Weckstein, Diversity Jurisdiction: Past, Present and Future, 43 TEX L. REV. 1, 16 (1964). See also Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61,

87 (1809) (Marshall, C.J.) (‘‘[Even if] tribunals of states will administer justice as impartially

as those of the nation, to the parties of every description, . . . the Constitution itself . . . entertains apprehensions of the subject . . . , [such] that it has established national tribunals for

the decision of controversies between . . . citizens of different states.’’). 52 John P. Frank, Historical Bases of the Federal Judicial System, 13 LAW & CONTEMP. PROBS. 3, 22–28 (1948); Henry J. Friendly, The Historic Bases of Diversity Jurisdiction, 41 HARV. L.

REV. 483 (1928). 53 John J. Parker, The Federal Constitution and Recent Attacks Upon It, 18 A.B.A. J. 433, 437

(1932). 54See, e.g., Zahn v. International Paper Co., 414 U.S. 291 (1973). 55See, e.g. Rosmer v. Pfizer Corp., 263 F.3d 110, 114–18 (4th Cir. 2001); Gibson v. Chrysler

Corp., 261 F.3d 927 (9th Cir. 2001); In re Abbott Labs., 51 F.3d 524, 526–27 (5th Cir. 1995),

aff’d sub nom., Free v. Abbott Labs., 120 S. Ct. 1578 (2000) (per curiam; affirmance on tied vote);

Stromberg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928, 930–34 (7th Cir. 1996).

defendants might be ‘‘hometowned.’’ Diversity jurisdiction was designed not only to

diminish this risk, but also ‘‘to shore up confidence in the judicial system by preventing even the appearance of discrimination in favor of local residents.’’ 51 The

Framers reasoned that some state courts might discriminate against interstate commerce activity and out-of-state businesses engaged in such activity and that federal

courts therefore should be allowed to hear diversity cases so as to ensure the availability of a fair, uniform and efficient forum for adjudicating interstate commercial

disputes.52 Thus, since the nation’s inception, 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. Constitutional scholars have argued that ‘‘[n]o power exercised under the

Constitution . . . had greater influence in welding these United States into a single

nation [than diversity jurisdiction]; nothing has done more to foster interstate commerce and communication and the uninterrupted flow of capital for investment into

various parts of the Union, and nothing has been so potent in sustaining the public

credit and the sanctity of private contracts.’’ 53

Class actions are a type of lawsuit strongly implicated by these concerns, since

they: (1) typically involve interstate commerce; (2) clearly have strong national economic implications; and (3) are particularly vulnerable to local prejudice. However,

the law governing diversity jurisdiction, 28 U.S.C. § 1332, has been interpreted by

courts in two ways that have essentially eliminated the exercise of such jurisdiction

over the vast majority of class actions.

First, as applied to class actions, the ‘‘diversity’’ element of Section 1332 has been

interpreted to require ‘‘complete diversity’’—i.e., to bar federal jurisdiction over class

actions if any of the named plaintiffs are citizens of the same state as any of the

named defendants. Thus, plaintiffs’ counsel often seek to keep their cases out of federal court by finding a plaintiff who comes from the state where a defendant corporation is incorporated or has its main place of business, or by suing one local subsidiary or retailer to defeat the complete diversity requirement. It is not atypical,

for example, to come across nationwide class actions against major automobile manufacturers that also name as a defendant one individual automobile dealer in the

state where the plaintiff is suing.

Second, the ‘‘amount-in-controversy’’ threshold of Section 1332 has been traditionally interpreted to require that each and every member of the proposed class assert separate and distinct claims exceeding $75,000.54 Although some federal courts have

questioned the breadth and current vitality of this rule (suggesting that only one

plaintiff must meet the $75,000 minimum),55 this difficult-to-satisfy prerequisite

still bars most interstate class actions from federal court. This too has led to careful

pleading by plaintiffs’ lawyers to stay out of federal court.

Not surprisingly, the Manhattan Institute study found that most of the complaints in the three counties surveyed were carefully drafted to take advantage of

these two loopholes and thereby evade federal jurisdiction. For example, a number

of complaints sought to cap damages for the class members at $74,999 each. (These

kinds of ‘‘claims-shaving’’ tactics raise disturbing issues of adequacy-of-representaVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
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56Senate Report at 14. 57 14B Charles A. Wright, et al., FEDERAL PRACTICE AND PROCEDURE, § 3704, at 127 (3d ed.

1998) (emphasis added). 58See Davis v. Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 797 (11th Cir. 1999) (emphasis

added). 59 Id.

tion and due process. While a single plaintiff suing in his own name may limit his

claims in order to stay in state court, counsel seeking to represent a class have a

fiduciary obligation to the absentee member of the class, making it improper to unilaterally ‘‘waive’’ claims with no authorization from the claimants.)

Other complaints brought against out-of-state defendants used the tactic I mentioned previously—naming one in-state dealer or subsidiary in order to defeat the

complete diversity requirement. The inherently fraudulent nature of this tactic is

obvious: although all putative class members may conceivably have a claim against

the defendant corporation, few (if any) of the putative class members have had any

dealings with the token in-state defendant(s), meaning that there is no basis for a

classwide judgment against those defendants. The corporation is the only real defendant; the others are there simply to prevent removal of the action to federal

court.

In short, the combination of the ‘‘complete diversity’’ and ‘‘amount in controversy’’ limitations on diversity jurisdiction have been interpreted in a way that keeps class

actions out of federal courts while allowing in smaller cases with far fewer repercussions on interstate commerce. As the Senate Judiciary Committee observed last

year, the current state of the law

leads to the nonsensical result under which a citizen can bring a ‘‘federal case’’ by claiming $75,001 in damages for a simply slip-and-fall case against a party

from another State, while a class of 25 million people living in all 50 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 run-of-themill State law-based tort 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 [claimants] from multiple States, and hundreds of millions of dollars—cases that have significant implications for the national economy.56

B. A Growing Body Of Lawyers, Judges And Scholars Has Recognized That Congress Should Correct This Anomaly And Enable More Class Actions To Be

Heard In Federal Court.

Over the last few years, there has been a growing recognition that the jurisdictional laws that are keeping most class actions out of federal court should be corrected:

• The leading treatise on federal civil procedure has declared that current principles governing federal diversity jurisdiction over class actions make no

sense: ‘‘The traditional principles in this area have evolved haphazardly and

with little reasoning. They serve no apparent policy....’’57

• In a 1999 decision, the U.S. Court of Appeals for the Eleventh Circuit

‘‘apologi[zed]’’ for its ‘‘seemingly arbitrary’’ and ‘‘anomal[ous]’’ ruling sending

a large 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.’’ 58 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 section 1332 would have had in mind.’’ 59

• In that same case, Judge John Nangle, for many years the chair of the federal

Judicial Panel on 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

30

60 Id. at 798–99 (emphasis added). 61 In re Prudential Ins. Co. America Sales Practice Litig., 148 F.3d 283, 305 (3d Cir. 1998)

(emphasis added). Agreement with this view can also be found in Cohen v. Office Depot, Inc., 204 F.3d 1069, 1079 (11th Cir. 2000) (noting that there are ‘‘persuasive reasons’’ for viewing

the class action in its totality for purposes of determining the existence of federal jurisdiction). 62The Interstate Class Action Jurisdiction Act of 1999: Hearing on H.R. 1875 and H.R. 2005

Before the House Comm. on the Judiciary, 106th Cong. (1999) (statement of Hon. Walter E.

Dellinger), available at http://www.house.gov/judiciary/dell0721.htm. 63See Federal News Service Transcript, Mass Torts and Class Actions: Hearing before the

Subcomm. on Intellectual Property and the Courts, House Comm. on the Judiciary (March 9,

1998), at 19 (‘‘FNS Transcript’’). 64 Id. at 33–34. 65Gibbons v. Ogden, 22 U.S. (9 Wheat) 1, 194–195 (1824). 66 Jefferson County Election Results, available at www.co.jefferson.tx.us/cclerk/election—

2000.htm. 67 2000 Official Presidential General Election Results, available at http://fecweb1.fec.gov/

pubrec/ 2000presgeresults.htm.

counsel. . . . [T]he present [jurisdictional] case law does not . . . accommodate the reality of modern class action litigation and settlements.’’ 60

• Similarly, in an opinion by Judge Anthony Scirica (chairman of the federal

Judicial Conference’s Standing Committee on Rules and Procedure), the U.S.

Court of Appeals for the Third Circuit observed that ‘‘national (interstate)

class actions are the paradigm for federal diversity jurisdiction because, in a

constitutional sense, they implicate interstate commerce, foreclose discrimination by a local state, and tend to guard against any bias against interstate

enterprises,’’ but that ‘‘at least under the current jurisdictional statutes, such

class actions may be beyond the reach of the federal courts.’’ 61

• In 1999, former Solicitor General Walter Dellinger testified before the House

Judiciary Committee, if Congress were to start over and write a new federal

diversity jurisdiction statute, interstate class actions would be the first category of cases to be included within the scope of the statute.62

• Even attorneys and scholars associated with the plaintiffs’ bar have voiced

support for expanding federal court jurisdiction over class actions. For example, at the March 1998 House hearing, Prof. Susan Koniak of the Boston University School of Law stated that such a move would be ‘‘a good idea. . . .

Often these [state] courts are picked, and they are in the middle of nowhere.

You can’t have access to the documents, and I don’t think it’s a full answer,

but I think it should be done.’’ 63 Similarly, Elizabeth Cabraser, a leading

plaintiffs’ class action attorney, opined that ‘‘much of the confusion and lack

of consistency that is currently troubling practitioners and judges and the

public in the class action area could be addressed through the exploration, the

very thoughtful exploration, of legislation that would increase federal diversity jurisdiction, so that more class action litigation could be brought in the

federal court.’’ 64

There are several bases for the conclusion reached by all of these authorities— that more interstate class actions should be subject to federal court diversity jurisdiction.

First, because these cases clearly have significant interstate commerce ramifications, federal supervision and management of such cases is desirable. As Chief Justice Marshall recognized, the Commerce Clause reflects the substantial federal interest in regulating ‘‘that commerce which concerns more States than one’’ (as opposed to ‘‘the exclusively internal commerce of a State’’).65 Clearly, that federal interest is implicated by interstate class actions, which typically involve more money,

more people in more states, and more interstate commerce ramifications than any

other type of lawsuit.

Second, the rationales underlying the constitutionally established concept of diversity jurisdiction apply fully to interstate class actions. Such cases typically involve

in-state plaintiffs suing out-of-state defendants, thereby raising the specter of local

court biases against the out-of-state defendant.

Third, unlike state court judges who are elected to office and subject to political

pressure, federal judges are selected by the President of the United States and are

constitutionally insulated from political pressure because of their tenure and salary

protection. Consider this: In the most recent judicial election in Jefferson County,

approximately 55,000 people voted for the judge who was elected to the 60th Judicial District.66 That amounts to just one-tenth of one percent of the 50.4 million people who voted for the President who was elected in the same election67 and who is

31

68 Civil filings in state trial courts of general jurisdiction have increased 28 percent since 1984

(versus an increase of only 4 percent in the federal courts). See B. Ostrom & N. Kauder, Examining the Work of State Courts, STATE JUSTICE INSTITUTE, 1997, at 15 (Court Statistics Project

1998). Most tellingly, in most jurisdictions, each state court judge is assigned an average of

1,000 to 2,000 new cases each year. Id. In contrast, each federal court judge was assigned an

average of 500 cases last year. See L.H. Mecham, JUDICIAL BUSINESS OF THE UNITED STATES

COURTS: 2000 REPORT OF THE DIRECTOR 20, 22 (2001) (Administrative Office of the U.S. Courts)

The federal court trend is downward. Since 1997, there has been an eight percent decrease in

the number of pending civil cases in our federal courts nationwide. Id. at 22. 69Senate Report at 16. 70 Id. 71See 28 U.S.C. § 1407. 72Senate Report at 19 (‘‘Yet another common abuse [of the class action device in state courts]

is the filing of ’copy cat’ class actions (i.e., duplicative class actions asserting similar claims on

behalf of essentially the same people).’’). As noted in the Senate Report, ‘‘sometimes these duplicative actions are filed by lawyers who hope to wrest the potentially lucrative lead role away

from the original lawyers, [and] 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.’’ Id. When these cases are filed in state

courts, there is no way to coordinate or consolidate the cases; the cases must be litigated in an

‘‘uncoordinated, redundant fashion.’’ Id. ‘‘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.’’ Id. at 19–20. ‘‘As a result, State courts and class counsel

may ’compete’ to control the cases, often harming all the parties involved.’’ Id. See also House

Report at 9. 73Senate Report at 21. 74 Advisory Comm. Memo at 14.

responsible—under the U.S. Constitution—for nominating judges to the federal

bench. While the Jefferson County judge will face re-election in just four years, the

federal judge has tenure and salary protection for life. Which of these judiciaries

should be charged with responsibility for handling large-scale, interstate class actions involving issues with significant national commercial implications?

Fourth, on the whole, federal courts are better equipped to deal with the substantial burdens of presiding over the sprawling, complex proceedings that are often

triggered by the filing of an interstate class action. While our federal courts are facing substantial burdens, state courts are as well. The civil caseload in state courts

has grown much more rapidly than the federal court civil caseload.68 Federal courts

have more resources to meet this challenge.69 Virtually all federal court judges have

two or three law clerks on staff; state court judges often have none.70 Federal court

judges are usually able to delegate some aspects of their class action cases (e.g., discovery issues) to magistrate judges or special masters; such personnel are usually

not available to state court judges. And federal courts are authorized to transfer and

consolidate similar class actions from various states before a single judge in the interest of efficiency; 71 state courts lack such consolidation authority and therefore

must engage in the wasteful exercise of separately handling such overlapping cases.

Fifth, federal courts have significant institutional advantages over state courts in

adjudicating interstate class actions. For example, both the Senate and House Judiciary Committees have noted in recent reports that the jump in the numbers of

state court class actions has resulted in part from the increasingly common practice

of filing ‘‘copy cat’’ class actions—duplicative class actions that assert the same

claims on behalf of essentially the same people in a number of different courts.72

Sometimes these class actions are brought by attorneys vying to take the lead role

in any potential lucrative settlement with the defendant. In other instances, the

‘‘copy cat’’ cases are part of a strategy is to go fishing in a number of ponds—to file

many identical lawsuits before many different courts, hoping to land the big one

with a favorable judge somewhere. When such ‘‘copy cat’’ class actions are filed in

federal courts, the federal judiciary can address this problem by establishing a

multi-district litigation (‘‘MDL’’) proceeding pursuant to 28 U.S.C. § 1407; however,

there is no analogous multi-state procedure to address the duplication and waste

caused by multiple class action filings in different states.

Similarly, the congressional record reflects cases in which counsel have effectively

asked state courts to overrule the denial of class certification by federal courts.73

This strategy, which takes forum shopping to the extreme, is generally unavailable

to the extent that class actions are pending in the federal courts because, as noted

previously, ‘‘competing federal court class actions can be consolidated for pretrial

purposes by the Judicial Panel on Multidistrict Litigation.’’ 74

Sixth, federalism principles dictate that interstate class actions be heard by federal courts because 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). What business does a state court judge elected by the several thousand

32

75See American Judicature Society (State Justice Institute), CERTIFICATION OF QUESTIONS OF

LAW: FEDERALISM IN PRACTICE 28, 34–35 (1995) (noting that over a several year period, federal

appeals and trial courts had certified hundreds of state law questions to state appellate courts

for resolution). 76See Senate Report at 16–17 (citing numerous examples). 77Federal Judicial Center, EMPIRICAL STUDY OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT

COURTS 68–69 (1996). 78Senate Report at 15–22. 79See, e.g., State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530–31 (1967) (‘‘in a variety

of contexts, [federal courts] have concluded that Article III poses no obstacle to the legislative

extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are

not co-citizens’’). In State Farm, the Court noted that the concept of ‘‘minimal diversity’’ providing the basis for diversity jurisdiction in the class action context had already been discussed

in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). On several subsequent occasions,

the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction

where there is less than complete diversity among the parties is wholly consistent with Article

III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 199–200 (O’Connor, J., dissenting)

(‘‘Complete diversity . . . is not constitutionally mandated.’’); Newman-Green, Inc. v. AlfonzoLarrian, 490 U.S. 826 (1989) (‘‘The complete diversity requirement is based on the diversity

statute, not Article III of the Constitution.’’); Owen Equipment & Erection Co. v. Kroger, 437

U.S. 365 (1978) (‘‘It is settled that complete diversity is not a constitutional requirement.’’); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only

the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity).

residents of a small county in Illinois have in telling the state of Massachusetts

what its laws mean? Why should a Jefferson County state court judge be rendering

interpretations of Massachusetts law that are binding on Massachusetts residents

and that cannot be appealed to or reviewed by Massachusetts courts? Such matters

of interstate comity are more appropriately handled by federal judges appointed by

the President and confirmed by the Senate. Further, federal courts have the authority (which they frequently exercise 75) to use ‘‘certified questions’’ to ask state courts

to advise how their laws should be applied in uncharted situations.

Finally, as I noted previously, some state courts have shown a tendency to approve settlements that generously compensate the class counsel while giving little

or nothing to the people on whose behalf the action supposedly was brought—the

unnamed class members.76 In contrast, a Federal Judicial Center study found that ‘‘[i]n most [class actions handled by federal courts], net monetary distributions to

the class exceeded attorneys’ fees by substantial margins.’’ 77 In this same vein, the

Senate Judiciary Committee report documented numerous problems that it identified with the adjudication of interstate class actions in state courts (not federal

courts)—including the failure to carefully apply class certification requirements

(some of which have due process underpinnings), the use of the class device as ‘‘judicial blackmail’’ (giving class counsel leverage to obtain unwarranted settlements),

and denials of defendants’ due process rights (denying the opportunity to contest

plaintiffs’ claims).78

C. H.R. 2341 Would Address These Concerns By Ensuring That Large Interstate

Class Actions Can Be Heard In Federal Court And Protecting Consumers From

Common Forms Of Class Action Abuse.

H.R. 2341 offers a simple, commonsense solution to the jurisdictional anomaly

that prevents federal courts from hearing most class actions, and the continued and

growing class action abuse that is taking place in a number of state courts. Moreover, as drafted in H.R. 2341, this solution would be implemented without undesirable side effects. The bill would not alter any party’s substantive legal rights. The

bill would not permit removal of truly local disputes; such matters would remain

within the exclusive purview of the relevant state courts. And the bill would not

preempt state courts’ authority to hear class actions of any sort; if the parties prefer

to litigate a particular interstate class action before an appropriate state court, they

may do so.

Instead, H.R. 2341 would simply amend current law by extending federal diversity jurisdiction to cover any class action that involves a substantial amount of

money (i.e., with an aggregate amount in controversy in exceeding $2 million) in

which there exists ‘‘partial diversity’’ between plaintiffs (including all unnamed

members of any plaintiff class) and defendants—an approach wholly consistent with

Article III of the Constitution and one that would enable federal courts to hear class

actions that are truly interstate in nature.79 This expanded jurisdiction would not

encompass disputes that are not interstate in nature—cases in which a class of citizens of one state sue one or more defendants that are citizens of that same state

would remain subject to the exclusive jurisdiction of state courts. Further, federal

courts would be required to abstain from hearing certain local cases and state action

33

cases. Thus, contrary to what has been argued by some critics, the bill would not

move all class actions into federal court. Consistent with existing diversity jurisdiction precepts, it would preserve exclusively to state court jurisdiction what are primarily local controversies.

H.R. 2341 would also amend the laws governing removal of cases to federal court

to enable the removal of any purported class action that falls within the additional

grant of federal diversity jurisdiction over class actions described above—and to prevent plaintiffs’ counsel from trying to game the system in order to stay out of federal

court. To that end, the bill would:

• Amend 28 U.S.C. § 1441(b) to confirm defendants’ ability to remove all purported class actions qualifying for federal jurisdiction under the revised section 1332 (as discussed above) regardless of the state in which the action was

originally brought;

• Amend 28 U.S.C. § 1446(b) to provide that a defendant could remove a putative class action at any time (even at a date more than one year after commencement of the action), so long as the action is removed within 30 days

after the date on which the defendants may first ascertain (through a pleading, amended pleading, motion order or other paper) that the action satisfies

the jurisdictional requirements for class actions (as set forth in the proposed

section 1332(b)). This provision is intended to prevent parties from filing

cases as individual actions and then recasting them as purported class actions

(or as broader class actions) after the one-year deadline for removal has

passed;

• Amend 28 U.S.C. § 1446(a) to allow any class action defendant to remove an

action. At present, an action typically may be removed only if all defendants

concur. This provision is intended to address situations in which local defendants with little at risk or defendants ‘‘friendly’’ to the named plaintiffs may

preclude other defendants with substantial exposure from gaining access to

federal court; and

• Authorize unnamed class members (not just defendants) to remove cases. This

even-handed change would allow class members to move cases to federal

court (within a reasonable time after notice is given) if they are concerned

that the state court has not or will not adequately protect the absent class

members’ interests.

To avoid leaving cases in federal court that do not warrant the attention of the

federal judiciary, the legislation would also require a federal court to dismiss any

case (that is in federal court solely due to the expanded diversity jurisdiction provisions) that it has determined may not be afforded class treatment. However, the bill

specifies that an amended action may be refiled in state court. Further, the bill also

protects the interests of the unnamed class members by specifying that federal tolling law will apply to the limitations periods on the claims asserted in the failed

class action.

In addition to these jurisdictional provisions, the bill also contains a ‘‘consumer

class action bill of rights,’’ which seeks to help consumers understand their rights

when they become members of a class action and to protect consumers from abusive

settlements. Under this section of the bill:

• Written notice of a proposed federal court class action settlements would have

to be provided to class members in a clearer, simpler format.

• A federal court could not approve a coupon or other non-cash settlement unless it first holds a hearing and makes a written finding that the settlement

is fair, reasonable and adequate.

• A federal court could not approve a settlement that results in a net loss for

the class members unless it makes a written finding that non-monetary benefits to the class members outweigh any loss precipitated by the terms of the

settlement.

• A federal court could not approve a settlement that: (1) provides greater sums

of money to certain class members because they are located in closer proximity to the court, or (2) provides a bounty to the class representatives.

In urging Congress to enact legislation to address the class action problem, a recent Washington Post editorial stated:

The focus of tort reform should be to inject the world of class actions with more

accountability to real clients and with some consequences to lawyers who file frivolous claims. The first step is to make it easier to shift state court cases into the

federal system. This would ensure that national classes get handled by a court sysVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
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80 Actions Without Class, supra n.1.

tem that operates according to reasonable rules and is accountable to the entire

country. A bill to do that is pending in Congress. Passing it would be a place to

start.80

The bill referred to in that editorial is, of course, H.R. 2341. I respectfully add

my voice to that of the Washington Post and numerous others in urging this Committee to act favorably on the bill and in urging Congress to pass it forthwith.

Chairman SENSENBRENNER [presiding]. Thank you, Mr. Beisner.

Ms. Bankston.

TESTIMONY OF HILDA BANKSTON, FORMER SMALL BUSINESS

OWNER, JEFFERSON COUNTY, MISSISSIPPI

Ms. BANKSTON. It is an honor and a privilege for me to be here

today. Thank you, Mr. Chairman and Members of the Committee.

I am pleased today to testify about a subject with which I have become all too familiar: class action lawsuit abuses in Jefferson County, Mississippi.

While I understand that class actions are not allowed under Mississippi State law, what is permitted is the consolidation of lawsuits. These consolidations involve Mississippi plaintiffs or defendants who are included in cases along with plaintiffs from across the

country. While I am not a lawyer, they seem like class actions to

me. I understand the legislation you are considering would cover

the kinds of cases we have in Mississippi as well.

I would like to discuss the consequences of these unchecked

abuses, both to businesses and the community as a whole, that

have turned my American dream into an American nightmare. I

am not your typical Southern belle.

I was born in Guatemala and moved to New York in 1958 in

search of a future and to be with my brother who was my legal

guardian. After a few years of working factory jobs and at the local

automat—my English was not that good—I decided to serve my

new homeland. Wanted to travel, I enlisted in the United States

Marine Corps. The travel between South and North Carolina was

not quite as exciting as I expected, but it did come with some

perks. Two and-a-half years into my tour I met my husband, Navy

Seaman Fourth Class Mitchell Bankston at Camp Lejeune.

My husband had a dream, to own and run a small pharmacy.

After graduation from Ole Miss, an internship in Vicksburg, and

jobs in Greenville and Meridian, he found a drugstore he could call

his very own in Fayette in 1971. Through long hours and hard

work, Mitch built a solid reputation as a caring, honest pharmacist

in Fayette; the town we called home and where we raised our two

sons.

Then in 1999, our world and dreams were shaken to their foundation. Bankston Drugstore was named as a defendant in the national Fen-phen class action lawsuit. Why were we singled out as

a defendant in a massive suit against one of the Nation’s largest

drug companies? We filled prescriptions of this FDA-approved drug

for patients in Jefferson County. We kept accurate records of prescriptions dispensed as required by law for 5 years, providing the

trial lawyers with a database of potential clients, and we were the

only drugstore in Jefferson County. By naming us as a defendant,

the trial lawyers were able to keep the case in the county.

35

Mitch was mostly concerned about what our customers would

think. In a small town like Fayette news travels fast, and Mitch

had worked hard to gain the trust and respect of the community.

But at that time we did not understand the size and scope of the

mountain that had been planted in front of us. Our life’s work became a way for trial lawyers to cash in on lucrative class actions;

a back door into the Jefferson County court system.

Sadly, within 3 weeks of being named in the lawsuit, my husband, a 58-year-old in good health, died suddenly of a massive

heart attack. The shock had barely subsided in December when I

was called to testify in the first Fen-Phen trial. By January 1,

2000, I was out of the pharmacy business, having sold the drugstore but still deeply mired in lawsuits.

Bankston Drugstore has been named as a defendant in hundreds

of lawsuits brought by individual plaintiffs against a variety of

pharmaceutical manufacturers: Fen-Phen, Propulsid, Rezulin,

Baycol. The book work has become so extensive that I have lost

track of the specific cases. Today, even though I no longer own the

drugstore I still get named as a defendant time and again.

Jefferson is a poor county and the attorneys handling these

claims have aggressively marketed their actions as the same as

winning the lottery. Nor are their efforts hurt by rumors that five

plaintiffs in the first Fen-Phen case split $150 million. The lawsuit

frenzy has done more harm than good to our community. Businesses will not relocate to Jefferson County because of fear of litigation, and the county’s lawsuit-friendly environment has driven liability insurance rates through the roof giving small business owners all over Fayette additional headaches they do not need.

No small business should have to endure the nightmares I have

experienced. Class action attorneys have caused me to spend countless hours retrieving information for potential plaintiffs. I have

been dragged into court on numerous occasions to testify. I have

endured the whispers and questions of my customers and neighbors wondering what we did to end up in court so often. And I have

spent many sleepless nights wondering if my business will survive

with all the weight of lawsuits cresting over it.

These lawsuits continue to this day, 2 years after I sold my business. I am not a lawyer, but to me something is wrong with our

legal system when innocent bystanders are used by lawyers seeking to strike it rich in Jefferson County, or anywhere else. I urge

you to pass legislation that reforms our legal system and prevents

lawsuit abuses such as those that have plagued my business and

my family for the past 3 years.

Thank you for your attention. I would be happy to answer any

questions you may have.

[The prepared statement of Ms. Bankston follows:]

PREPARED STATEMENT OF HILDA BANKSTON

Thank you Mr. Chairman and Members of the Committee. I am pleased today to

testify about a subject with which I have become all too familiar: class action lawsuit abuses in Jefferson County, Mississippi.

I would like to discuss the consequences of these unchecked abuses—both to businesses and the community as a whole—that have turned my American dream into

an American nightmare.

I am not your typical Southern belle. I was born in Guatemala and moved to New

York in 1958 in search of a future and to be with my brother who was my legal

36

guardian. After a few years of working factory jobs and at the local automat—my

English wasn’t as good in those days—I decided to serve my new homeland. Seeking

travel and expanded horizons, on the advice of a friend, I enlisted in the Marines.

The travel—between South and North Carolina—wasn’t quite as exciting as expected, but it did come with quite a few perks. Three-and-half years into my tour,

I met my husband, Navy Seaman Fourth Class Mitchell Bankston, at Camp

Lejeune.

My husband had a dream—to own and run a small pharmacy. After graduation

from Ole Miss, and stints in Vicksburg, Greenville and Meridian, he found a drugstore he could call his very own in Fayette in 1971.

Through long hours and hard work, Mitch built a solid reputation as a caring,

honest pharmacist in Fayette—the town we called home and where we raised our

two sons.

Then, in 1999, our world and dreams were shaken to their foundation. Bankston

Drugstore was named as a defendant in the national Fen-Phen class action lawsuit.

Why were we singled out as a defendant in a massive suit against one of the nation’s largest drug companies? We filled prescriptions of this FDA-approved drug for

patients in Jefferson County. We kept accurate records of prescriptions dispensed— as required by law—for five years, providing the trial lawyers with a virtual database of potential clients. And, we were the only drugstore in Jefferson County. By

naming us as a defendant, the trial lawyers were able to keep the case in the county.

Mitch was mostly concerned about what our customers would think. In a small

town like Fayette, news travels fast, and Mitch had worked hard to gain the trust

and respect of the community. He had always taken the utmost caution and care

with his patients, and his honesty and ethics were what mattered most to him.

But at that time, we didn’t understand the size and scope of the mountain that

had been planted in front of us. Our life’s work was merely a means to an end for

trial lawyers seeking to cash in on lucrative class actions—a back door into the Jefferson County court system.

Sadly, within three weeks of being named in the lawsuit, my husband, a 58-yearold in good health, died suddenly of a massive heart attack. The shock had barely

subsided in December when I was called to testify in the first Fen-phen trial. By

January 1, 2000, I was out of the pharmacy business—having sold the drugstore— but still deeply mired in lawsuits.

Bankston Drugstore has been named as a defendant in hundreds of lawsuits

brought by individual plaintiffs against a variety of pharmaceutical manufacturers.

Fen-phen. Propulsid. Rezulin. Baycol. Initially, some customers questioned whether

prescriptions had been filled incorrectly. The bookwork has become so extensive that

I’ve lost track of the specific cases, but still I get named as a defendant time and

again.

Jefferson is a poor county, and the attorneys handling these claims have aggressively marketed their actions as tantamount to winning the lottery. Nor are their

efforts hurt by rumors that five plaintiffs in the first Fen-phen case split $150 million between them.

But I believe that the lawsuit frenzy has done more harm than good to our community. Businesses will not relocate to Jefferson County because of fear of litigation.

And, the county’s lawsuit-friendly environment has driven liability insurance rates

through the roof, giving small business owners all over Fayette additional headaches they don’t need. Business is hard enough without having to constantly look

over your shoulder wondering where the next lawsuit is coming from.

No small business should have to endure the nightmares I have experienced. In

using Bankston Drugstore as a springboard into the Jefferson County courts, class

action attorneys have caused me to spend countless hours retrieving information for

potential plaintiffs. I have been dragged into court on numerous occasions to testify.

I have endured the whispers and questions of my customers and neighbors wondering what we did to end up in court so often. And, I have spent many sleepless

nights wondering if my business would survive the tidal wave of lawsuits cresting

over it.

These lawsuits continue to this very day, two years after I sold my business. I’m

not a lawyer, but to me, something is wrong with our legal system when innocent

bystanders are little more than pawns for lawyers seeking to strike it rich in Jefferson County—or any other county in the United States where lawsuits are ‘‘big business.’’ I urge you to pass legislation that reforms our legal system and prevents lawsuit abuses such as those that plagued my business and my family for the past

three years.

Thank you for your attention. At this time, I would be happy to answer any questions you may have.

37

Chairman SENSENBRENNER. Thank you, Mrs. Bankston.

Mr. Friedman.

TESTIMONY OF ANDREW FRIEDMAN, PARTNER, BONNETT,

FAIRBOURN, FRIEDMAN & BALINT, PC

Mr. FRIEDMAN. Good morning, Chairman Sensenbrenner, Congressman Conyers, and other Committee Members. I want to thank

you for inviting me here to testify this morning on H.R. 2341. I am

not a policymaker. I am not an academic. I am an attorney with

a medium-sized law firm in Phoenix, Arizona, who represents class

members in an action pending in Arizona arising out of the financial collapse of the Baptist Foundation of Arizona. It involves

13,000 investors who lost their life savings as a result of the financial collapse.

Mr. Beisner mentioned that class action lawyers do not need clients. The reality is, we do have clients. I have two here with me

today, Ann and Joe Cacase. They live in Sun City, Arizona. They

are victims of the Ponzi scheme that was known as Baptist Foundation of Arizona.

Baptist Foundation was a faith-based organization that raised

hundreds of millions of dollars from faithful. It has collapsed now

in bankruptcy and it is the largest non-profit bankruptcy in the

history of this country. Like many of the other investors, the

Cacases have lost their life savings as a result of the Baptist Foundation collapse. Mrs. Cacase is 67-years-old, Joe is 83-years-old.

She had to come out of retirement to go back to work because they

lost their life savings in this collapse. And they are typical of the

other investors who have lost their life savings in the Baptist

Foundation scandal.

In many respects, Baptist Foundation is the first Enron. In all

respects, it is the Arizona Enron. BFA, like Enron, hid its losses

in a maze of corporate subsidiaries. Just like Enron, BFA created

off-balance sheet transactions to hide losses in companies that were

controlled by BFA. And just like Enron, BFA was audited by Arthur Andersen who issued clean audits right up to the verge of the

collapse. We allege that Andersen is guilty of the same wrongdoing

in the BFA case that is alleged in the Enron scandal: ignoring

whistleblowers, destroying or doctoring documents, and ignoring

red flags that were passed on to mid-level management, some of

the same mid-level management whose names have surfaced in the

Enron scandal.

The Baptist Foundation case belongs in State court. Unlike

Enron, the Baptist Foundation securities were not traded on the

public markets. They were not registered under the Federal securities laws. The Baptist Foundation was an Arizona company, its directors and officers were Arizona residents, its offices were located

in Arizona, it invested in properties in Arizona, and an overwhelming majority, 80 percent of the BFA investors live in Arizona.

It was audited by the Arizona office of Arthur Andersen. It was the

subject of regulatory and criminal proceedings all pending in the

Arizona State courts, brought by the Arizona regulatory officials.

Every claim we have alleged in this case is a claim that arises

out of Arizona law. This case belongs right where it was filed, in

Arizona State court. If H.R. 2341 were the law, the BFA would be

38

inevitably dragged into Federal court, even though it alleges claims

on behalf of Arizona citizens against Arizona entities for a fraudulent scheme that was born and perpetrated in Arizona.

If we were dragged into Federal court under this legislation it

would have devastating consequences to the BFA investors. This

legislation would impose onerous pleading standards, much like

those of the PSLRA, requiring us to plead facts without the benefit

of any discovery. This legislation would have imposed a stay of all

discovery.

More importantly, this legislation would have resulted in enormous delays. If we were relegated to Federal court it would take,

under this legislation, a minimum of 5 to 8 years to get to trial.

In Arizona State court we will be in trial in 2 years. The first BFA

trial is scheduled to go forward in early March, only 18 months

after the case was filed.

If we were in Federal court we would lose protections that exist

under existing Arizona law. We would lose priority trial settings.

We would lose some of the toughest disclosure rules in the country.

We would lose the benefits of accelerated discovery. We would lose

the ability to coordinate our case with the pending regulatory proceedings brought by the Arizona attorney general’s office, the Arizona Board of Accountancy, and the BFA Liquidation Trust. We

would lose our ability to have Arizona law interpreted by Arizona

courts, who know it best. And we would lose the right to a nonunanimous jury trial.

In short, this is an anti-investor, anti-consumer piece of legislation. Now is not the time to weaken the protections available to investors or to close the courthouse doors to investors. Now is the

time, in the wake of Enron and BFA, to strengthen those protections. I would urge the Committee to defeat and not pass H.R. 2341

out of Committee.

I would be happy to answer any questions.

[The prepared statement of Mr. Friedman follows:]

PREPARED STATEMENT OF ANDREW FRIEDMAN, ESQ.

Good morning Mr. Chairman and Members of the Committee.

I am Andy Friedman. I am a lawyer from Phoenix, Arizona and am a founding

member of Bonnett, Fairbourn, Friedman & Balint. Our law firm represents businesses and professionals in litigation matters. I have extensive experience prosecuting and defending commercial cases in both federal and state courts. For the

past twenty-three years, my practice has been in the commercial arena. Most recently, I have focused on helping victims of fraud attempt, through class actions in

federal and state courts, to recover money stolen from them.

I was one of the lawyers who represented the defrauded bondholders in the

Charles Keating/Lincoln Savings & Loan/American Continental Corporation case. As

you doubtless will recall, Keating’s victims included 23,000 Californians and Arizonians—mostly seniors—who were deceived into believing they were making insured

deposits at Lincoln S&L’s Southern California branches but were fraudulently sold

uninsured bonds in another Keating entity. The bonds were worthless and many

lost their lives’ savings. That case went to trial in 1992 in Tucson. All told, we obtained a total recovery of over $250 million, and have recovered more than seventy

cents on the dollar of the victims’ losses after payment of attorneys’ fees. I also have

served as class counsel in state and federal court class actions to recover losses on

behalf of victims of deceptive sales practices perpetrated by life insurance companies

during the 1980s. In total, these cases, which we brought in both federal and state

courts, have recovered over $15 billion for life insurance purchasers.

I appreciate the chance to offer my comments on the class action legislation pending before you. H.R. 2341 would ‘‘federalize’’ most class actions. If enacted, this legislation will impose onerous requirements that inevitably will create delays, inVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
39

crease litigation costs, erect barriers to recovery by victims, and reduce or eliminate

recoveries for those who have been victimized by fraudulent and deceptive corporate

practices.

To illustrate the difficulties of H.R. 2341, I would like to explain how it would

apply to a current case that occupies much of my time. This case was the subject

of a front-page article in the Arizona Republic just last week, a copy of which has

been submitted to the Committee. The article notes the parallels between the Arizona case and the Enron case, which I will address shortly.

My case involves a fraudulent scheme perpetrated by an Arizona religious organization that called itself the Baptist Foundation of Arizona (‘‘BFA’’). The Arizona Attorney General has called the BFA scandal ‘‘one of the largest affinity fraud cases

in U.S. history.’’ Our lawsuit charges that the defendants, with their auditors’ knowledge and assistance, maintained a ‘‘Ponzi’’ scheme to bilk faithful churchgoing people of their retirement income and life savings. BFA issued worthless notes

and pedaled them in many Arizona communities. All told, approximately 13,000 investors in BFA lost approximately $590 million in this scheme.

Many, if not most, of the BFA victims are elderly and retired. Twenty-five percent

of the BFA investors are 70 years of age or older. Two thousand of these investors

are 80 years of age or older! One of our class representatives, Mrs. Ann Cacace is

67 years old. She lives in Sun City, Arizona with her husband Joe, who is 83 years

old. Mr. Cacace has significant health problems that prevent him from working. The

Cacaces are both here with me today. After the Cacaces invested and lost their lives’ savings with BFA, Mrs. Cacace was forced to go back to work to support her family.

Tragically, the Cacaces are typical of the other thousands of investors who mortgaged their homes or invested their life savings both because they were assured the

investments were ‘‘safe’’ and because they wanted to support their charitable causes.

Various offering circulars touted these investments as a good way of ‘‘protecting capital,’’ while supporting ‘stewardship ministries’’ and other religious causes. They

were promoted as appropriate ‘‘to achieve your retirement dreams’’ and ‘‘prudent,

profitable, and protected.’’ The BFA tragedy is a mirror image of the Enron scandal. Like Enron, the Baptist

Foundation hid millions and millions of dollars in losses in ‘‘off the books’’ transactions with sham companies that were controlled by BFA and corporate insiders.

Like Enron, BFA operated through a complex maze of corporate subsidiaries and

falsely portrayed itself as financially sound when, in reality, BFA was a financial

house of cards. And, like Enron, BFA collapsed even though the company had received an unbroken string of supposedly ‘‘clean’’ audits by its outside accountant.

But the similarities to the Enron meltdown do not end there. The outside auditor

who gave BFA a clean bill of health virtually up to the time the company collapsed

was none other than Arthur Andersen. Andersen’s conduct with respect to BFA is

eerily reminiscent of its actions in the Enron scandal. The facts that have emerged

show that, just as in Enron, Andersen ignored a parade of whistleblowers, including

a BFA accountant, who described to Andersen auditors the ongoing financial fraud

involving hundreds of millions of dollars in losses hidden in overvalued assets and

off-book companies. Just like Enron, reports of BFA’s improprieties were circulated

to Arthur Andersen’s management and lawyers at its Chicago offices. Just like

Enron, the evidence suggests that high-level Andersen personnel destroyed documents and sanitized work papers. And just like in Enron, the Andersen audit partner in charge of the BFA engagement has invoked the Fifth Amendment to avoid

answering questions about Andersen’s conduct. It is no small irony that the Arthur

Andersen audit partner in charge of the Baptist Foundation account was the same

Andersen audit partner who worked on Charles Keating’s books!

The BFA Ponzi scheme collapsed in August 1999. While Enron is the largest forprofit bankruptcy in our nation’s history, BFA is the largest not-for-profit bankruptcy in this nation’s history. After the Ponzi scheme collapsed, we brought a class

action lawsuit for investors in Arizona state court against a number of the perpetrators and Arthur Andersen. We filed our suit under state securities statutes and consumer fraud laws. Fortunately for the investors, because BFA securities were not

registered or traded on a national stock exchange, we were not required to file our

case in federal court under the onerous provisions of the Private Securities Litigation Reform Act. The PSLRA would have imposed tremendous hurdles to recovery,

including heightened pleading requirements and a crippling discovery stay; it would

have abrogated the investors’ ability to hold Andersen jointly and severally liable

for their enormous losses; and (since an amendment to the PSLRA to restore aiding

and abetting liability was defeated) it would have prevented investors from holding

Arthur Andersen accountable as an aider and abetter of the BFA insiders.

So, we filed a state court class action under the state securities laws. That action

is one of several BFA-related cases that are currently pending in Arizona state

40

court. Those actions include cases brought by the BFA liquidation trustee, the Arizona Attorney General’s office, the Arizona Board of Accountancy, and criminal proceedings. All of the civil cases have proceeded in a coordinated fashion, with common discovery and depositions. Because the Arizona civil rules provide for expedited

trial settings in hardship cases, the first of these cases is scheduled to go to trial

in early March, 2002, only 18 months after it was filed.

H.R. 2341, the so-called Class Action Fairness Act of 2001, would not be ‘‘fair’’ in

any sense of that word. If it were law in our case, it would raise substantial hurdles

for us to recover from the defendants. It would force cases into federal court that

belong in state court; it would provide no exemption for companies that do substantial business in the state but are not headquartered or incorporated there; and it

would cause unconscionable delays for the victims of wrongdoing.

Our case belongs in state court. Four of six of the ‘‘lead plaintiffs’’ live in Arizona.

The Baptist Foundation of Arizona was an Arizona corporation with its headquarters in Arizona. Most, but not all or substantially all, of the 13,000 individuals

and entities who invested close to $600 million with the BFA were Arizona residents. The for-profit subsidiaries of the Baptist Foundation were Arizona corporations. The individual defendants were all Arizonians.

And, Arthur Andersen has a substantial office in Phoenix, Arizona, although it

is headquartered in Chicago, Illinois. It receives audit fees, consulting fees, and otherwise does business within the state of Arizona and is certainly eligible to sue and

be sued in the state of Arizona.

In short, the State of Arizona has an overriding interest in this case. That local

interest is reflected not only in the overwhelming contacts between the BFA fraud

and Arizona, but also in the pending criminal and civil enforcement proceedings

brought by Arizona officials.

I file many cases in Federal court when that is the proper forum. I am currently

prosecuting a number of Federal class action cases under the Civil Rights Act on

behalf of African-Americans who were charged more for life insurance based on the

color of their skin. Those cases belong in Federal court. But in the BFA case, we

are seeking to enforce Arizona laws against Arizona defendants for the benefit of

a predominately Arizona class against defendants who either live in Arizona or that

do a substantial amount of business in Arizona. How in the world is a Federal court

more qualified to hear those claims than an Arizona court?

Why would Congress pass legislation to benefit corporate defendants such as Arthur Andersen at the expense of innocent and elderly victims like the BFA investors? I think it is extraordinary in light of Enron that Congress would even consider

this move.

The Arizona judicial system is perfectly capable of fairly judging the rights of a

business such as Arthur Andersen. The argument that class actions are complex

and therefore must go into Federal court is to me extremely questionable. State

courts routinely hear and resolve complex commercial disputes between corporations. State courts routinely handle cases involving product defects, construction defects and other complex cases. We charge state courts with complex determinations

on matters of life or death—capital murder cases frequently involve complicated evidence about the sanity of those charged with crimes and, ultimately, whether the

death penalty is warranted. State courts are perfectly capable of affording fair treatment to consumers and victims and those who are alleged to have perpetrated

fraudulent schemes.

HOW WOULD H.R. 2341 HURT THE VICTIMS IN THE BFA CASE?

H.R. 2341 permits any defendant or any absent class member to ‘‘remove’’ the

case to federal court. If the law were to apply in the BFA case, it could have devastating consequences to the BFA investors.

First, H.R. 2341 is a prescription for delay. Once a defendant opts to pull the removal trigger and the case is automatically removed to Federal court, cases will be

bogged down with collateral litigation to determine whether the case was properly

removed and should stay in Federal court or should be remanded back to state

court. Then, any consideration of the merits will be stalled in the face of motions

to dismiss and the class certification motion practice. Moreover, in addition to the

stay of the proceedings during the motion to dismiss, the bill would permit an immediate appeal of the class certification decision and another stay of the proceedings

during that appeal. All the while, plaintiffs will be precluded from obtaining discovery to prove their case.

More importantly, the Federal courts are clogged and backlogged with criminal

cases. Federal judges have long complained that they are overwhelmed and understaffed. For this very reason, Congress has consistently increased the minimum

41

amount in controversy requirements for Federal diversity jurisdiction. As a result

of these practical realities, cases filed in Federal court on average take far longer

to reach trial than cases filed in the Arizona state court system. H.R. 2341 runs directly counter to ongoing efforts to decrease the workload of the Federal courts.

The inevitable delays resulting from removal of the BFA action to Federal court

would have devastating consequences for the investors. As noted, thousands of the

BFA investors are elderly and many of them are infirm. Thousands of the BFA investors have lost their lives’ savings and their retirement incomes. Time is not on

their side; for the BFA investors, justice delayed will be justice denied. Based on

these circumstances, one of the BFA cases was assigned priority status and the trial

was accelerated under the Arizona rules. The Federal rules contain no counterpart.

Second, if H.R. 2341 applied to the BFA case, it would erect additional obstacles

to certification of a class of BFA investors. In addition to federalizing class actions,

H.R. 2341 adopts some of the most onerous provisions of the Private Securities Litigation Reform Act. For example, like the PSLRA, it requires that the plaintiff plead

the defendants’ state of mind with particularity. It states:

In any class action in which a claim is asserted on which the plaintiff may prevail only on proof that the defendant acted with a particular state of mind, the

complaint shall, with respect to each act or failure to act alleged to give rise

to liability, state with particularity facts which, if proven, will demonstrate that

the defendant acted with the required state of mind.

In many cases, pleading with particularity that a defendant acted with a certain

state of mind at the beginning of a case, before discovery is taken, is extremely difficult, if not impossible.

At the same time, the statute imposes a ‘‘stay of discovery’’ during the pendency

of any motion to dismiss. This is a Catch-22. In order to defeat a motion to dismiss

and obtain discovery, the plaintiff must plead specific facts with no opportunity to

discover them. Class actions are the primary vehicle for recovery by victims of fraud

and deception. By its very nature, this sort of wrongdoing is self-concealing and the

true facts are simply not available to the defrauded victims. This pleading requirement sets a standard that is often impossible for victims of fraudulent conduct to

satisfy, as experience with the PSLRA has proved. Professor John Coffee, the Adolf

Berle Professor of Law at Columbia School, has cited these pleading requirements

as among the chief causes of creating an atmosphere of laxity that led to the Enron

scandal. Indeed, Arthur Andersen was busy destroying documents while the discovery stay was in place in the Enron case.

In fact, the same sort of draconian pleading standard that H.R. 2341 seeks to impose in all class actions directly impacted some BFA investors. A group of approximately 100 investors filed a separate individual action in Federal court under the

PSLRA. They alleged facts that were similar to those alleged in our state court class

action. The Federal case was dismissed because it failed to meet the onerous PSLRA

pleading standard. Similar motions to dismiss the action in State court were rejected. The contrast is clear: In our case, our class has a shot of recovering $590

million based on a Ponzi scheme. If this case were brought in Federal court, the

chances of recovery would be far less. If H.R. 2341 were the law, Arizona investors

seeking redress for an Arizona scheme against Arizona defendants under Arizona

law would be hauled into Federal court to face potentially insurmountable hurdles.

Third, if H.R. 2341 applied to the BFA case, the elderly BFA investors would lose

a host of procedural and substantive protections that they now have in the Arizona

state court. In Arizona state court, defendants (and plaintiffs) must make extensive

disclosures about the facts and documents bearing on the case and the existence of

insurance coverage to protect victims; the same detailed disclosures are not required

in Federal court. The Arizona court system provides procedures for the parties to

appeal important decisions on Arizona law directly to the Arizona appellate courts.

The Arizona state court has rules allowing for the coordination and consolidation

of related cases, such as the BFA investor class action and the pending civil enforcement proceedings brought by the Arizona Attorney General; there is no formal system to coordinate or consolidate cases in Federal court with cases pending in the

state courts. In the Arizona state court, the BFA victims will obtain a successful

verdict if 75% of the jurors conclude that Arthur Andersen is guilty; in Federal court

the verdict must be unanimous. And, as I stated earlier, the Arizona rules provide

for an accelerated and early trial in hardship cases brought by elderly investors; the

Federal system has no directly comparable rule.

All of these protections would be lost if H.R. 2341 were the law. So, who would

H.R. 2341 protect? Cigarette companies, Enron types, huge powerful wrongdoers.

Who would it hurt? Investors, consumers, your constituents. Congress tinkered with

the class action device with respect to securities in 1995 when it enacted the PSLRA

42

over President Clinton’s veto. As Professor Coffee has testified, that law contributed

directly to the Enron debacle. Why would Congress now essentially extend the disastrous PSLRA to the rest of class litigation?

Congress should reject H.R. 2341.

43

Chairman SENSENBRENNER. Thank you very much, Mr. Friedman.

Because of the limited amount of time and the interest of Members of the Committee, the chair will waive his 5 minutes and recognize the gentleman from Texas, Mr. Smith.

Mr. SMITH. Mr. Chairman, thank you.

First of all, Mr. Detkin, thank you for your testimony about a

very good piece of legislation introduced by Congressman Goodlatte

and Congressman Boucher. I would like to start off by reading

what I think is the most important sentence in your written testiVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
44

mony where you list the abuses under current law and say that the

most troubling of these are ‘‘increased forum shopping, manipulation of procedural rules to avoid Federal diversity jurisdiction, displacement of the laws of some States by local judges in other

States, the resolution of class action cases by ill-equipped State

courts, strike suits intended to coerce quick statements from defendants, collusive settlements where plaintiffs lawyers receive

large fees while accepting settlements of little or no value to class

members, and grossly inflated bounties being paid to lead plaintiffs.’’

I would like to squeeze in four questions, if I can, in my time.

The first of these is this. Do you feel that the bill under consideration would lead to the dismissal of meritorious class action

claims?

Mr. DETKIN. Absolutely not. This is primarily procedural in nature and any meritorious claim, such as those that Mr. Friedman

refers to, would absolutely still go forward.

Mr. SMITH. Would the current bill lead to, in your judgment, an

increase in any destruction of documents?

Mr. DETKIN. Absolutely not. I cannot imagine that would happen.

Mr. SMITH. Why not?

Mr. DETKIN. For one thing, even though there is a stay on discovery, in the judge’s discretion they can still issue—allow discovery to go forward while the stay is in place if they believe that

there is any possibility of there being a destruction of documents.

Moreover, there is nothing to prevent the judge from issuing an

order saying, stop—do not destroy any documents if there is any

suggestion that that is happening. Personally, I do not know of too

many cases—I recognize—I am fully cognizant of the Enron situation, but I think that is the exception, not the rule.

Mr. SMITH. The legislation that we are considering, would it lead

to—it makes it easier to get into Federal court. We acknowledge

that. Is that going to lead to overburdening the already overworked

Federal courts?

Mr. DETKIN. I do not believe it will. No, I do not believe that

there will be—what you will do is consolidate judicial resources.

Where you now have six or seven courts, or possibly even more in

the case of some insurance cases, up to 50 hearing the same class

action, it will be consolidated before a single judge. So I do not

think that will be a problem.

Mr. SMITH. Would it not really lead to a relief of overburdening

of State courts?

Mr. DETKIN. Absolutely.

Mr. SMITH. Why is that?

Mr. DETKIN. Again, you will have, instead of 50 cases proceeding

in parallel with the same claims and same facts and same class,

you will have one case in front of a court, in front of a system that

has the resources to handle it. Most State courts do not have the

resources to handle the kinds of class action that we are talking

about here.

Mr. SMITH. Plus you have the multiple filings in a number of

State courts as well that will be avoided.

Mr. DETKIN. Absolutely.

45

Mr. SMITH. Lastly, let me read a statement from Mr. Friedman’s

testimony and ask you to respond to that. He says that H.R. 2341

would federalize most class actions. If enacted, this legislation will

impose onerous requirements that inevitably will create delays, increase litigation cost, erect barriers to recovery by victims, and reduce or eliminate recovery for those who have been victimized by

fraudulent and deceptive corporate practices. I gather you do not

agree, but why do you not agree?

Mr. DETKIN. I do not agree, and actually I think the PSLRA, the

Securities Reform Act is instructive here. According to the New

York Times article which did an exhaustive study, the number of

cases filed—securities cases has increased since that was filed, and

the settlement value of those cases has increased. So while this

might weed out the frivolous claims, the meritorious claims will get

even better consideration.

I would also like to point out that while Mr. Friedman is eloquent in his defense of his case belonging in Arizona State court,

and I agree it does appear to belong in Arizona, I imagine he would

be singing a very different tune had he been beaten to the courthouse by a plaintiff’s attorney in Illinois who got his case certified

in Illinois before Mr. Friedman did, thereby preventing him really

from going forward with any real relief in Arizona State courts.

Mr. SMITH. Mr. Detkin, thank you for your answers.

Mr. Chairman, thank you.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentleman from Michigan, Mr. Conyers.

Mr. CONYERS. Thank you, Mr. Chairman. I thank the witnesses.

This should be an all-day hearing, should it not, lawyers? But we

get 5 minutes.

First of all, Mrs. Bankston, I sure want to welcome you here.

Ms. BANKSTON. Thank you, sir.

Mr. CONYERS. So nice of you to be here. You are retired now. You

sold your business. You are still being hassled by lawyers. But

what are you doing here? I mean, why did you come?

Ms. BANKSTON. I came because if I can help in any way for somebody not to go through what I have gone through, and with you

all’s help, that would be terrific.

Mr. CONYERS. But this is about lawsuits, the kind that you do

not even have in Mississippi. That is another problem you have got

there.

Ms. BANKSTON. They do not call them class action lawsuits but

they call them consolidations. But in Mississippi——

Mr. CONYERS. Didn’t the U.S. Chamber of Commerce help you

with that testimony?

Ms. BANKSTON. No, the firm of Clausen and—Guter, Clausen.

Mr. CONYERS. Are they here today?

Ms. BANKSTON. Yes, sir.

Mr. CONYERS. I am happy you came anyway——

Ms. BANKSTON. Thank you, sir.

Mr. CONYERS [continuing]. Because I am going to read your testimony very carefully.

Ms. BANKSTON. I hope so.

Mr. CONYERS. Now Mr. Detkin, I hardly know where to start

with you. You have been involved in so much here. I mean, here

46

Intel is large or larger than Microsoft. You are the world’s largest

chip maker on the planet Earth, and here you are explaining to us

how we can make class actions better. Your company’s history of

doing a very good job at blocking litigation that seeks to help consumers and the public, sir, is well known to at least some Members

of the Congress.

We have reports about how you handled antitrust cases already.

Namely, the relationship between an Intel employee, probably

former, Steve McGeedy, and it is in public. All we do is pull this

off the wire, where you threatened to fire him if he agreed to an

interview by the Government in the Microsoft antitrust case. Here

we are now listening to your sound and cogent advice about how

we ought to make the laws of this subject matter more favorable

to corporations.

But at least you differ from the lawyer sitting to your left because as I hear it he is against class actions altogether. You support Federal class actions, so that puts you up—in my little hierarchy of corporate lawyers you go up over Mr. Beisner.

But there are disturbing—let me ask you. Let’s get to it. Cayman

Island shell companies by Intel. What are you guys doing down

there? Where we have funds being hidden. We have so many people from FBI, securities, all over, searching, scouring for all of

these offshore non-reporting banks, and here you, Mr. Detkin, your

company, do you know how many people, how many companies you

have got down there? Some with different names. Well, I do not either. You may not know.

So I want to commend you—— Chairman SENSENBRENNER. The gentleman’s time has expired

with that commendation.

Mr. CONYERS. Could I ask you to write your answers back to me,

sir?

Mr. DETKIN. I would like the opportunity to briefly respond to

these attacks on both myself and the company.

Chairman SENSENBRENNER. The witness will respond, and all of

the witnesses may submit written answers to questions by Members of the Committee which will be included in the record. Mr.

Detkin.

Mr. DETKIN. With all due respect, I take umbrage, both on behalf

of myself and the company, at these attacks. Intel has been investigated. We are a large company. We are the world’s largest semiconductor company. We believe our practices are both lawful and

fair. We understand that various Government entities have an obligation to investigate the antitrust—whether there has been any

violation of antitrust laws. We have been investigated twice by the

FTC, twice by the European Community, once by the Taiwan FTC.

Every single time we have been cleared, most recently by the EC

as reported in the New York Times over the weekend.

As for your personal attacks on me with respect to Mr. McGeedy,

you are relying, I believe quite improperly and inappropriately on

hearsay accounts in a book by a reporter for Wired magazine that

have no basis in factual reality.

The Cayman Islands issue that I believe you were referring to is

a minor nit with respect to purchasing of patents. I cannot imagine

that has anything to do with the merits of whether the class action

47

system needs reform, and I defy you to find any connection between the two.

Mr. CONYERS. No, there probably are not. But I am talking about

other practices, sir.

Chairman SENSENBRENNER. The time of the gentleman from

Michigan has expired. Are you complete with your answer, Mr.

Detkin?

Mr. DETKIN. I am complete with how I would like to defend my

honor in front of this Committee. A written response will follow.

Chairman SENSENBRENNER. The gentleman from Virginia, Mr.

Goodlatte.

Mr. GOODLATTE. Thank you, Mr. Chairman, and thank you for

holding these hearings on this important issue. This is legislation

that has, in a very similar form, passed the last House of Representatives, and I thank you for giving consideration to it again.

I understand that my opening statement will be made a part of the

record.

I would also ask that this editorial of the Washington Post entitled, Action Without Class, that has been made available to everybody be made a part of the record.

Chairman SENSENBRENNER. Without objection.

[The information referred to follows in the Appendix]

Mr. GOODLATTE. I also have a letter signed by 87 executives of

high tech companies that are supportive of this legislation for the

same reasons that have been expressed by the gentleman representing Intel, be made a part of the record as well.

Chairman SENSENBRENNER. Without objection.

[The letter follows in the Appendix]

Mr. GOODLATTE. Thank you, Mr. Chairman. Mr. Chairman, there

are two compelling reasons why this legislation should pass. First,

to end the egregious practice of forum shopping in the environment

of having literally 4,000 local court jurisdictions to choose that one

favorite judge that they think are the most lenient in certifying

class actions, even if they have no merit. Secondly, to give due respect to our Federal courts, created for the purposes of determining

these very types of lawsuits regarding thousands or hundreds of

thousands, or millions of parties from, in any instances, all 50

States.

The gentleman from Michigan said that citizens need more protections against being swindled, not less. I agree, and that is exactly what this legislation will do, because it will not take away the

rights of anybody to bring a meritorious class action lawsuit. However, it will take care of some of the cases cited by the Chairman

in his opening remarks. It will take care of the great case in which

the plaintiffs’ attorneys received millions of dollars in attorneys

fees and the plaintiffs’ class, not only did they not receive anything,

but they received the privilege of paying $91 each for those attorneys fees. That is a swindle if there ever was one.

Mr. Friedman, why in cases of national importance impacting the

rights of thousands, perhaps millions of people in many different

States, should they be tried in a single State? Why should one local

court judge rule on law in the other 49 States? Why is that not exactly the kind of case that was intended under our Constitution

and our Federal court system to be heard in the Federal courts?

48

Mr. FRIEDMAN. Congressman, the cases that we bring in State

court are cases which are focused in that particular case. When a

State, like the BFA case of Arizona has an overriding interest in

applying its own State laws to protect its own citizens, that case

belongs in State court, not in Federal court.

Mr. GOODLATTE. But what about a case involving plaintiffs in all

50 States spread out across the country where each one has a claim

for $100? That cannot possibly be brought in Federal court, even

though if there are 1 million plaintiffs. That is a $100 million lawsuit that cannot be brought in Federal court. Why should that not

be corrected?

Mr. FRIEDMAN. Because, Congressman, if that same case were

brought in Federal court you would have a single court and a single judge also applying the law of all 50 States, applying State law,

not Federal law. My experience has been that State judges are very

sensitive to the need to properly apply the law of their own States

and laws of other States, and do so only when it can be accommodated in the context of proper jury instructions. So you would have

the same phenomenon of a single court.

Mr. GOODLATTE. My time is going to run short here. So you are

saying that if a woman has a slip-and-fall injury and she resides

in Maryland and the case occurs in Virginia and she alleges damages of $75,000, that that is perfectly fine for that case to be

brought in the United States District Court. But if you have a case

involving one million plaintiffs each claiming $1,000, or a $1 billion

lawsuit, involving plaintiffs in all 50 States, that that should be excluded from Federal court as it is under our current Federal rules?

Mr. FRIEDMAN. No. What I am saying is that the diversity of citizenship laws were not passed to deal with the amount in controversy as the overriding factor. They were passed in parochial

times to prevent discrimination against out-of-State parties. My experience has been that corporate defendants have the ability to defend themselves in my State court system without discrimination.

The jurisdictional limits that have been imposed, $75,000 for example, were imposed to reduce the number of cases going to Federal

court, not to define those cases that properly belong in Federal

Court.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentleman from Virginia, Mr. Boucher.

Mr. BOUCHER. Thank you very much, Mr. Chairman. As my

friend and colleague Mr. Goodlatte indicated, during the last Congress the bill that would contain this modest litigation reform that

he and I put forward was passed in the House with a bipartisan

majority. Since that time more voices have now been raised in support of the reform effort, including the Washington Post. I would

call the Members’ attention to the copy of the Washington Post editorial which has been placed on every Members’ desk.

We are achieving broad cosponsorship in the House of this measure, and I want to thank Chairman Sensenbrenner for scheduling

the hearing this morning and giving us another opportunity to

make the case for why this reform is necessary.

Mr. Beisner, I would like to get you to respond to the question

of harm that current practices and the abuse of class action litigation cause, not just for defendants but for the plaintiff class memVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6601 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
49

bers also, and to talk about what our bill does in order to address

those harms and provide remedies. Let me just mention a couple

of the harms to plaintiffs that appear obvious to me.

Sometimes the State class action suits are filed without claiming

as much for recovery as could potentially be received by individual

plaintiffs within the class. These amounts claimed are artificially

kept below the $75,000 Federal jurisdictional amount simply for

the purpose of keeping the case from being removed to Federal

court. In other instances, Federal causes of action that could be asserted on behalf of the plaintiff class are simply not asserted. Simply, again, for the reason that if they were asserted that case could

be removed to Federal court. So the plaintiff class members are deprived of the opportunity to have these Federal causes of action

heard.

As Mr. Goodlatte indicated, there are instances in which upon a

settlement of the State class action cases the plaintiff class members wind up getting coupons while their lawyers get millions. And

then that one notorious case, the plaintiff class members were actually worse off after the case had been settled because they had

a debit of $91 per plaintiff class member posted to their mortgage

escrow accounts. I am told that in that case their lawyers received

payment of $8.5 million.

So plaintiff class members often are harmed as well as the defendants by the misuse of class action litigation in the States.

Tell us, if you would, how the bill addresses these particular

problems, and why would the plaintiff class members themselves

be better off when this bill is passed into law?

Mr. BEISNER. The bill does a number of things. With respect to

a number of abuses, Mr. Boucher, that you mentioned, the bill has

specific provisions with respect to coupon settlements or non-cash

settlements. It requires a Federal court to give special scrutiny to

those to make sure that a real benefit is being given to class members.

With respect to potential net loss situations, the Bank of Boston

case that you mentioned, the court is required to give special scrutiny to those cases before approving settlements like that, and to

decline to approve, if it determines that there would indeed be a

net loss situation.

The bill also deals with the bounty situation; instances where the

named plaintiff, the person who is actually supposed to be making

decisions for the class may end up being paid more than the class

members. The court is required to give special scrutiny in those circumstances.

So the bill culls out those sorts of particular abuses that this

Committee has been hearing about for the last several years and

directly addresses those by requiring the court to give special scrutiny to those sorts of situations.

Mr. BOUCHER. Thank you, Mr. Beisner.

Ms. Bankston, let me get you to tell the Committee, if you would,

why the practice of having you sued more than 100 times simply

for the purpose of having a local defendant to defeat complete diversity of jurisdiction and keep the case out of Federal court has

caused harm to you. Talk about the kinds of harm that have occurred to you as a consequence of being sued in this capacity withVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
50

out any expectation that recovery would be obtained from you,

more than 100 times.

Ms. BANKSTON. It has been a tremendous amount of paperwork;

going to court so many times. And being that it is such a small

county, about the people trying to figure out why is it that we are

involved in so many—what did we do wrong to be involved in so

many different lawsuits. Jefferson County is a place where everybody knows each other. The rumor that Mitch had filled these prescriptions incorrectly. And out of all of these prescriptions that

have been looked into by the trial attorneys and everything, there

has not been one that was filled incorrectly. Not that he did not

make mistakes, but that was a very good record.

And people have a very good feeling—we were there for 28 years.

He practiced pharmacy for 28 years there, and these people had no

idea that they were suing us because the trial lawyers never did

tell them that they were suing us until we went to court. My attorney asked them, did they know they were suing the Bankstons?

They said, I had no idea that this was happening. Mr. Bankston

was nothing but good to me through these years. He always talked

to me and tried to lead me to where I was supposed whenever I

needed.

So it just is not the people in Jefferson County. It is the trial attorneys that talked to them into anything. It is mostly elderly people that are just talked into these things, and they do not really

know what they are being talked into.

Mr. BOUCHER. Thank you, Ms. Bankston.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentleman from Arizona, Mr. Flake.

Mr. FLAKE. Thank you, Mr. Chairman. I appreciate the testimony from the witnesses. Particularly appreciate the Cacases for

traveling all the way from Arizona. For those who spend time in

Arizona in February they know it is a particular burden to travel

to the East Coast at this time of year. But thank you for the testimony.

Mr. Friedman, you are obviously involved deeply in the BFA

case. It has been a tragic story in Arizona for a lot of investors. It

would, under this law, you could simply go to Federal court. You

say it is not so simple. That the rules of discovery are different and

everything else. But I would first be interested in the other panelists in their assessment of your claim that you would be or your

clients would be disenfranchised somehow for going to Federal

court, and then for you to respond to them. Mr. Beisner or Mr.

Detkin, either one, if you want to respond to that.

Mr. BEISNER. I would respond to a couple of points there. One

that concerns me the most is a concern about delay. If you look at

statistics, if you look at the hard data it doesn’t support the idea

that a case like this is going to get to trial substantially faster in

State court than in Federal court. You can compare two in a particular circumstance and there may be an instance like that, but

if you look at statistics on this there has been an 8 percent decrease in the number of cases pending in our Federal district courts

since 1997. The number of new diversity jurisdiction cases has decreased almost 5 percent since 1997.

51

And I think the most telling statistic, that the number of cases

of general jurisdiction filed in the State courts since 1984 has increased 28 percent versus only 4 percent increase in the number

of cases filed in Federal courts. Each State court judge nationwide

is assigned an average of 1,000 to 2,000 cases, new cases each year,

compared to fewer than 500 new cases in Federal court each year.

I have a real question. You can say, the Federal courts are busy.

That is true. But the State courts are busy as well and I am just

not sold on the idea that you are going to get to trial a lot faster

in a State court.

Mr. FLAKE. Mr. Detkin?

Mr. DETKIN. I would echo Mr. Beisner’s comments. I would point

out that, as you know, I am sure, Intel has a fairly substantial

presence in Arizona and we have a familiarity with the Arizona

Federal court system and have had generally very positive experiences there. Never had a case take 8 years to go to trial, as Mr.

Friedman mentioned, so I do not believe that would be a problem.

Again, I would point out that I am sure Mr. Friedman would be

singing a very different tune had a nationwide class been certified

before his class, or allowed to go to trial in Illinois or in Palm

Beach, Florida, thereby preventing him from getting real relief in

Arizona State courts. That would be precluded from happening for

all the reasons that Congressman Goodlatte so eloquently mentioned, under this bill.

Mr. FLAKE. Before you respond, Mr. Friedman, have there been

any copycat cases or are you the only lawyers handling the BFA

case?

Mr. FRIEDMAN. No. In fact I would like to address that in the

context of the question, Congressman. There was another case in

Arizona, and you know what, it was filed in Federal court in Arizona under the PSLRA. A lawyer from California advertised and

encouraged people to opt out of the class and file separate litigation. WHAT happened to that case in terms of delay? We are going

to trial in March, 18 months after filing. That case, a motion to dismiss was filed and it was not resolved until a year later, and that

case was thrown out because of the same onerous pleading standards that now would apply under this legislation.

So you have the very delay I am talking about in our very case,

the BFA scandal, and you have the results. The investors who went

to Federal court were given nothing. They were thrown out. They

are now tied up in the Ninth Circuit Court of Appeals while Mrs.

Cacase and the class I represent will have their trial and their day

in court before they die. So there is a significant difference in our

experience in this very case.

Mr. FLAKE. Mr. Friedman, do you concede that there are abuses,

and what would you suggest, if not this legislation, to address

them? First, are there abuses? We have heard——

Mr. FRIEDMAN. I have read stories, the same newspaper articles

that you have read. I have not had personal experience with those

abuses, so I have to take at face value what I read. There are instances, which if what I read is true, there are instances which results occur which would appear to be bad results. But that is not

a reason to further victimize all victims and take rights away from

all victims because there are a few problems.

52

I can tell you that in the cases in which I represent class members we obtain substantial recoveries. You may or may not know,

Congressman, I was one of the lawyers who represented the Lincoln Savings, Charlie Keating bondholders. We recovered 78 cents

on the dollar for those people.

So I have not had personal experience with the abuses, but to the

extent the abuses exist State judges have the ability to deal with

those abuses in the specific facts under which they arise. It is not

a reason, I think, to overhaul the entire system to the detriment

of all victims.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentlewoman from California, Ms. Lofgren.

Ms. LOFGREN. Thank you, Mr. Chairman. I wanted to also express my thanks to all the panel, but especially to Mr. Detkin who

I know took the trip on the same flight I did yesterday from California, to share his company’s experiences with class action lawsuits. In reading the testimony I think the experience of Intel with

the minor defect on your chip and the class action lawsuit is very

instructive for the kinds of problems that really should demand our

attention here in the Congress.

Looking at your testimony, you point out that the glitch, which

only somebody engaged in higher mathematics would ever even run

into and I think there was only one individual that did run into

it, resulted in a case where the fees, plaintiffs’ lawyers fees were

over $4 million, but the remedy was exactly what the company had

already done. So I guess in a way I think it would be incorrect for

us to ignore the fact that there are problems in some class action

lawsuits where you have basically a remedy that is almost nonexistent for plaintiffs and yet fees that are very high, that provide

an incentive for frivolous pursuit of companies.

Having said that, the question in my mind is whether the bill before us is the appropriate remedy for those types of abuses. I do

have questions, as I mentioned to you on the plane, about some of

the reach of this bill. So I guess one of the questions I have for you

is whether another remedy that would reduce the incentive might

actually provide relief in the case such as you outlined in your testimony?

For example, if we were to examine the function of attorneys fees

as a multiplier of the actual award to plaintiffs, whether we might

also go after the frivolous pursuits of lawsuits in a way that was

less draconian on class action lawsuits altogether. Do you have a

comment on that?

Mr. DETKIN. I absolutely agree that those would be two very good

objectives to go after. I think that this bill does address those. I believe it does call for heightened scrutiny of attorneys fees, of settlements generally including the popular coupon settlements. I believe

also the heightened pleading standards will go a long way toward

eliminating the frivolous suits but still maintain the meritorious

suits.

So I believe the drafters of the bill really did attempt to address

those very concerns that you are raising and tried to address them

in the best way possible. I also think it would be important to get

them into Federal court where you do not have local elected judges

reviewing the work of the local counsel, and you have it guaranteed

53

to be in the proper jurisdiction. I think those are some of the most

important aspects of this bill. I would urge that they be maintained.

Ms. LOFGREN. Could I ask, is it Mr. Beisner? Am I mispronouncing?

Mr. BEISNER. You have it correct.

Ms. LOFGREN. One of the concerns, and I know that the authors

are sincere and this would not be an intent on their part, but I do

have concerns about the delay in the Federal court system. I just

handed a letter to Senator Feinstein that I received yesterday outlining the severe shortage of Federal judges in the Southern District in California which is unlikely to be remedied any time soon.

At the same time, California engaged in reform efforts several

years ago where you cannot have more than 4 months from issue

to trial, so things are really moving through the California court

system. We have added lots of lawyers. That is a concern on whether this stuff will get clogged.

But let me ask you, because I have been puzzling over this, on

page 16 of the bill, line 15—I hope you have a copy. I am trying

to understand the implications of section A where the bill would be

extended to named plaintiffs who act for the interest of its members or the interest of the general public.

Now it seems to me that essentially this section of the bill would

subject individuals who are acting under California’s Unfair Competition Act or antitrust law to the same rules as class action—actually, it basically would eliminate the private right of action for

individuals in California under California’s antitrust statute. Is

that your reading of this?

Mr. BEISNER. As I interpret this, it would not eliminate that at

all. This addresses, I think, circumstances in the growth of what’s

known as non-class action class actions in the trade.

Ms. LOFGREN. If I may interrupt, I think that’s what the intent

is. But what the language is is much broader than that.

Mr. BEISNER. I think that this would address really the non-class

action class action situation. If there is a need for modification of

that language then it should be done. But I think that the intent,

as I understand it, is to address those sorts of non-class action

class actions.

Chairman SENSENBRENNER. The gentlewoman’s time has expired.

The gentleman from California, Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. I would also like to thank

the chair, maybe for the benefit of the gentlelady from California,

for working so hard and so diligently to help us get those five additional judges in San Diego that have caused the courts to be backed

up for lack of them. Although for lack of them because of our tremendous load on immigration it really is why some other litigation

was being put behind.

But I would like to turn my attention to the panel. Mr. Friedman, I guess my first question is, do you practice in Federal court?

Mr. FRIEDMAN. I do extensively.

Mr. ISSA. So you are comfortable in Federal court.

Mr. FRIEDMAN. I am.

54

Mr. ISSA. So if Federal court were more appropriate you would

go there?

Mr. FRIEDMAN. When Federal claims are alleged in my cases I

bring them in Federal court. We have a series of cases now, for example, involving race discrimination against African-Americans in

the sale of life insurance. We have alleged claims under Federal

law and brought those claims in Federal court.

Mr. ISSA. So I understand, when it is convenient you go to Federal court. When it is appropriate, you go to Federal court, or when

it is just something that you have to do you go to Federal court.

You also made your case very strongly on the Arizona, Arizona,

Arizona case. Do you seek business in other States?

Mr. FRIEDMAN. I am not sure I understand what you mean.

Mr. ISSA. Do you advertise for clients in other States?

Mr. FRIEDMAN. Our firm has run advertisements from time to

time.

Mr. ISSA. Why would you do this?

Mr. FRIEDMAN. If there is a situation in which we are aware and

conduct an investigation, we will run ads in which we ask for people with information to come forward.

Mr. ISSA. So when on January 26th of this year you advertised

in the Peoria Star and said, many insurance companies have failed

to pay for diminished value of insurance vehicles, and please contact us, would that have been a Federal case?

Mr. FRIEDMAN. Those cases have typically been brought in State

court.

Mr. ISSA. So when it is convenient you will go across the country

to sue in a State court.

Mr. FRIEDMAN. When it is appropriate we will bring cases in

State court, often on a State-only basis, other times on a nationwide basis.

Mr. ISSA. I am not a lawyer. I sort of have the Sonny Bono seat

here. I am the non-lawyer—— [Laughter.]

Mr. ISSA. I am proud of that. I have about 34 patents. I have operated—to maintain that intellectual property and my trademarks,

so I have a comfort level with the importance of litigation both as

a plaintiff and as a defendant. But I also have to go back to the

same thing, it says, many insurance companies have failed to pay

for diminished value. Now you advertised in Peoria, but I assume

that if you are doing a case in Illinois, this is a national problem,

is it not?

Mr. FRIEDMAN. Those cases have been brought, many of those

cases they have been brought on a State by State basis.

Mr. ISSA. So when it is convenient you will choose your venue,

you choose your States, and you will sue in State on something

that would benefit the entire Nation if you took it to Federal court,

but you have chosen to go to State court even though it is a national problem; is that right?

Mr. FRIEDMAN. I disagree.

Mr. ISSA. I appreciate you disagreeing, but it certainly seems like

you picked Peoria on something that is going on all over the Nation. You made a decision to go to State court, not to Federal court

because it was, for some reason, perhaps in your best interest as

a trial lawyer. Certainly if I were in Peoria and I could be part of

55

a much larger group and pay a lot lower fees and get a more efficient adjudication on behalf of everyone that may have been so

damaged I would want that.

Did you offer the people of Peoria when they responded to your

advertising an opportunity to go to Federal court and be part of a

larger class action suit?

Mr. FRIEDMAN. I do not believe that those cases could have been

brought in Federal court, nor would they be appropriately brought

in Federal court.

Mr. ISSA. But if this law were passed it could.

Mr. FRIEDMAN. If this law were passed all cases could be removed, of any kind, to Federal court regardless.

Mr. ISSA. So this law would be good for the people of Peoria if

they have been so harmed.

Mr. FRIEDMAN. I very much disagree with that.

Mr. ISSA. I thought you would. In the past, have there been cases

in which you have received more in fees than your clients have received in settlement? In other words, more than half of the total

dollars that came in went to your firm?

Mr. FRIEDMAN. Not to my knowledge. We almost always apply

based upon a percentage of the recovery for the clients.

Mr. ISSA. So what would be your typical part that you would re- ceive on a $10-million case?

Mr. FRIEDMAN. It varies anywhere from 5 percent to as high in

some cases as one-third.

Mr. ISSA. But at $10 million one-third would be more common

than 5 percent, I trust.

Mr. FRIEDMAN. Not in class action jurisprudence.

Mr. ISSA. That is a good deal if you can do it for 5 percent I

guess. I guess the real question I have for the panel is, we are here

representing the interest of all the American people and looking for

the appropriate time to remove something to Federal court and the

appropriate time to respect States’ rights. I listened to all of you

and I have a hard time understanding why this law would not simply give one more tool, when appropriate, to remove to Federal

court. Do any of you have a comment on something I may not be

seeing?

Chairman SENSENBRENNER. The gentleman’s time has expired.

Mr. ISSA. Thank you, Mr. Chairman.

Chairman SENSENBRENNER. The gentlewoman from Texas, Ms.

Jackson Lee.

Ms. JACKSON LEE. Thank you very much, Mr. Chairman, for

holding this meeting along with the Ranking Member.

Mr. Friedman, I would like to pose my questions to you. I must

acknowledge Ms. Bankston. I am very moved by the testimony. The

concern in this Committee room should be to redress the grievances

of those who have been harmed, and I certainly would not want

any legal actions, laws to unfairly harm small businesses. So I do

want that on the record.

Mr. Friedman, first of all, I just want to clarify, as a licensed attorney—you are licensed where?

Mr. FRIEDMAN. Arizona.

Ms. JACKSON LEE. You have the opportunity, of course, to petition courts and to be in Peoria, Illinois, the State of Illinois. There

56

is no bar to you representing grieved individuals in States throughout the Nation; is that correct?

Mr. FRIEDMAN. That is true, particularly when we have local

counsel who are involved in the cases.

Ms. JACKSON LEE. So where there is harm and where there are

people who have been injured, if you will, you with your expertise

are able to go in and assist them?

Mr. FRIEDMAN. That is absolutely correct.

Ms. JACKSON LEE. Tell me very succinctly why this present legislation is injurious to people who are harmed, and who are harmed

without resources to mount the enormous litigating effort against

giant corporations.

Mr. FRIEDMAN. This legislation, besides allowing a defendant at

its whim to remove cases to Federal court, and then as some

palamanders have candidly said, sweep it elsewhere within the

Federal system far away from where the victims actually reside, includes provisions including the heightened pleading standard of the

PSLRA, including a stay on discovery, which means that we do not

get documents, we do not get testimony until that stay is lifted.

It is a prescription for delay because once we are in the Federal

system, the discovery stay kicks in until a motion to dismiss is

filed. Then class certification rulings are immediately appealable

and you are in the appellate system.

Ms. JACKSON LEE. So in essence, if I might stop you because I

have a series of questions, more costly and more apt for delay?

Mr. FRIEDMAN. Absolutely.

Ms. JACKSON LEE. It therefore undermines the individual litigant

even more because they certainly will not have the resources for

that delay. So as a class, the class as collectively representing individuals without means are also diminished.

Mr. FRIEDMAN. That is true. And the delay in cases where you

have elderly investors can mean that the case will not go to trial

even during their lifetimes.

Ms. JACKSON LEE. Let me cite for you the Private Securities Litigation Reform Act of 1995 which ended the use of the private RICO

statute as a means of seeking treble damages and attorneys fees

in securities fraud cases unless preceded by a criminal conviction.

This was put into place over President Clinton’s veto, and certainly

what it did is it narrowed the ability of a single litigant to be able

to protect themselves when such horrific acts were perpetrated.

We have no findings right now in the Enron case, and I have

held myself to the tenets of innocent until proven guilty. It happens

to be in my congressional district. I have got 20,000, at best, minimally impacted. Even though this is not a case on the bankruptcy

issues, as you may be aware the bankruptcy proceedings were

moved to or are in New York, away from the harm, the injured, the

victimized, the sick, the sad, and the emotionally distressed.

What does this particular legislation that we have, how can you

compare that to the present status of these particular victims?

Some of them may be engaged in class actions, by the way, but I

do not want to speak to that—the fact that it has moved, it is in

a Federal court, it is away from where they have been victimized.

Mr. FRIEDMAN. I would first point out that it was noted I think

this Sunday in the New York Times that the PSLRA in the view

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of many has led to laxity of standards that led in turn to Enron

and situations like the Baptist Foundation. But I would say that

the disenfranchising for people to have to watch litigation across

the country when it impacts their lives on a local level, I can tell

you that we have investors who come to court because their life

savings are at risk, to see what is happening and see what is happening in their lawsuit. They cannot do that if the case is hauled

into Federal court and transferred across the country. They cannot

afford to go to court. They cannot afford to see it. They will not see

it, and that is a disenfranchising experience for people who have

lost their life savings.

Ms. JACKSON LEE. Thank you very much, Mr. Friedman.

Chairman SENSENBRENNER. The gentlewoman’s time has expired.

The gentleman from North Carolina, Mr. Coble.

Mr. COBLE. Thank you, Mr. Chairman. Good to have you all with

us. Most of my probing colleagues have beaten me to the punch.

Most of the questions I had have already been resolved, but let me

gloss over them quickly again.

Mr. Detkin, Mr. Friedman indicated in his statement that the

Federal courts generally were overburdened or overwhelmed or

understaffed to handle the jurisdiction that might be imposed upon

them as a result of this bill if enacted into law. I believe you said

you did not agree with that. This may well be subject to personal

interpretation, but you did not agree with that; is that correct?

Mr. DETKIN. That is true, and it is true it is subject to personal

interpretation. However, some clear data is that, for example, all

Federal courts, all Federal judges have clerks and have staffs; most

local judges do not. That is one clear example of the resources that

are available to a Federal judge, not available to most State judges.

Mr. COBLE. Thank you, sir. Mr. Beisner, section 3, I think of the

bill, the consumer bill of rights, how will that section help protect

the rights of members in a class action lawsuit once these cases are

resolved?

Mr. BEISNER. I think that the main way in which the consumer

protection sections would help is to ensure that when you have settlements, particularly settlements that involve non-cash arrangements where there is a possibility of the class members suffering

a net loss, that the courts will specially scrutinize those settlements to make sure that the class members’ rights are protected.

I would also note that the notice provisions in the bill that require that notices go out in plain English I think will contribute

significantly to the public having a better understanding of what

rights are at issue for them in class actions and ensure that they

understand what they are signing up for when they agree to the

settlement.

Mr. COBLE. Thank you, sir. Ms. Bankston, you and Mr. Bankston

were tangled up in the web of class action suits down in Mississippi. If I were to ask you what was the worst experience you

had of the many experiences you all encountered what would your

answer be? What was the worst feature of that experience that you

remember?

Ms. BANKSTON. I would think the first one was the first Fenphen case where I had to testify, because I had never had to be

58

in court, and it was just 6 months after my husband had died. I

think the second worse was whenever we had a Rezulin case and

they moved it from Jefferson County to Clayborn County because

all the plaintiffs and the jurors had the same last names. Then we

went to Jefferson County—we were there and we still had the

same judge. So that was really a slap in the fact.

Mr. COBLE. I understand. Mr. Friedman, to show my impartiality

I have a little time left. Do you want to be heard on my segment?

Mr. FRIEDMAN. No, Congressman.

Mr. COBLE. Thank you, Mr. Chairman. I yield back.

Chairman SENSENBRENNER. That is appreciated.

The other gentleman from North Carolina, Mr. Watt.

Mr. WATT. Thank you, Mr. Chairman. These hearings are very,

very frustrating to me. As somebody who practiced law for 22

years, I feel kind of the same way I did in the hearings regarding

bankruptcy. I was the first to acknowledge that there were real

problems in the existing bankruptcy system. I am the first to acknowledge after 22 years in the practice of law that there are real

problems in the existing class action and tort system. There are

plaintiffs’ lawyers who press to the edge of the law and will do anything either appropriate or inappropriate to achieve objectives.

I hasten to say that for every one of those plaintiffs’ lawyers

there are defense lawyers who will do exactly the same. Yet as a

whole, lawyers probably are among the highest integrity people in

America, both plaintiff and defense lawyers. So it varies.

There are problems in the system, as there were in the bankruptcy system. I did not support the bankruptcy reform bill because

I thought that response to the problems created as many or more

problems as already exist. I do not support this legislation because

I think it will create as many or more problems than already exist,

and it is not going to solve many of the problems. I think it is going

to exacerbate many of the problems.

Just as Mr.—well, I will not associate myself with any particular

witness. Let me just do this independently. We started out in the

civil rights era thinking that Federal judges were in fact better

than State judges. At a point in time we reached a conclusion that

that was not necessarily so. If you have got a claim and it is a good

claim, theoretically, that claim ought to get you the same result before a Federal judge as before a State judge, and the same result

before a State judge as before a Federal judge.

Now having said that, I know that is not so, in some cases. But

a remedy that delivers all of these cases to Federal court would be

no more reasonable than what we have now that delivers many of

the cases to State court because in some cases the Federal judges

are terrible, and in some cases the State judges are terrible. In

some cases, the State judges are wonderful; in some cases the Federal judges are wonderful. This legislation is not going to solve

that. State interpretation of law, whether it is done by a Federal

judge or by a State judge should not be any different.

There is one major concern that nobody has really mentioned

here, and that is a concern that I think is maybe illustrated by Mr.

Friedman on the one hand and Mr. Beisner on the other hand, and

Arthur Andersen on the one hand as opposed to little individual or

2-man or 15-person law firms. I am not sure that—I do not think

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this legislation would further escalate a tendency toward all these

cases being handled by some mega law firms. That might be beneficial to O’Melveny & Myers and maybe not so beneficial to a smaller practice in Phoenix, Arizona. I am not saying that that is anybody’s motivation here. It is just a fact.

Chairman SENSENBRENNER. The gentleman’s time has expired.

Mr. WATT. Can I just make one final comment, and that is just

to emphasize what my point was. This is extremely complicated,

and I think this bill applies kind of a global fix to an extremely

complicated issue and it is not going to work.

Chairman SENSENBRENNER. The chair would like to thank all of

the witnesses for their good testimony and good answers to the

questions. I think this has been a very worthwhile and useful hearing and shed a lot of light on, again, what is a very complicated

subject.

I have a number of unanimous consent requests to include items

in the record. So without objection, the following will be put in the

record: a letter and study by the U.S. Chamber of Commerce, a letter and statement on behalf of the American Trucking Association,

and a letter and statement on behalf of the Alliance of American

Insurers.

[The information referred to follows in the Appendix]

Chairman SENSENBRENNER. Does the minority have anything they would want to place in the

record?

Mr. CONYERS. No.

Chairman SENSENBRENNER. Okay. Without objection, the Committee stands adjourned.

[Whereupon, at 11:35 a.m., the Committee was adjourned.]

(61)

A P P E N D I X

STATEMENTS SUBMITTED FOR THE HEARING RECORD

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CLASS ACTION LITIGATION:

PROBLEMS AND SOLUTIONS

EXECUTIVE SUMMARY

Although class actions have been a part of American jurisprudence since its inception, it is the recent explosion in such suits and the abuses that accompany them,

which have generated a high level of concern on the part of insurers and the larger

business community alike.

While many explanations exist for the dramatic rise in class actions—from

changes in procedural rules to the need for an ever-growing population of attorneys

to become more entrepreneurial—the result is the same across all segments of the

business community. Class actions are forcing corporations to focus on lawsuits

rather than manufacturing better products, providing better services, or lowering

their prices.

In an effort to curb these abuses and restore class actions to their original purpose, the Alliance has developed a set of reforms that it is proposing at both the

federal and state levels. Specifically, the Alliance supports federal efforts to reform

class action litigation by making it easier for class actions to be removed from state

court to federal court and granting federal district courts original jurisdiction over

class actions in which there is minimal diversity. The Alliance also supports reforms

to the Federal Rules of Civil Procedure governing the certification of class actions.

Additionally, the Alliance supports legislation in the states that would:

• Create a rebuttable presumption of validity in a civil action against a regulated entity for practices and activities engaged in by the regulated entity

that have been approved by the regulatory authority charged with overseeing

that entity;

• Require a court to dismiss or abate a proceeding where state agency jurisdiction is involved and that provides that relief awarded to a claimant by an administrative agency may be adequate even if the relief does not include exemplary damages, multiple damages, attorneys’ fees, or costs of court; and

• Stay discovery in class actions while a motion to dismiss is pending.

Further, the Alliance will seek to facilitate appeal of class action verdicts by supporting legislation or rules of court that:

• Limit the size of appellate bonds required for all civil awards for damages in

such actions; or

• Authorize the waiver of such bonds, especially in the appeal of punitive damage awards.

The Alliance believes the time is right to achieve these reforms. Efforts by Congress to enact class action reform legislation and Alabama’s recent enactment of a

class action reform bill are signs that the public’s tolerance of class action abuse is

waning. Further, high profile class action settlements where the plaintiffs’ attorneys

have walked away with millions and the class members received virtually nothing,

have also served to heighten the public’s overall awareness of the abuses inherent

in the current system.

WHAT IS A CLASS ACTION?

A class action is a procedural device that, under certain circumstances, allows a

number of individual claims and the rights of a large number of persons to be decided in one lawsuit. The class action involves joining a number of parties and a

number of related claims, plus representing the interests of persons not before the

court.

The key to the class representative suit is that not all class members must become parties to the lawsuit in order to have their rights adjudicated. Instead, the

great majority of the group may participate only as class members while a smaller

number represents them in court as parties to the litigation.

A class action is designed to promote efficiency and fairness in handling large

numbers of similar claims. A fundamental objective of the class action device is the

promotion of uniformity of decision with regard to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results. The

advantages inherent in a class action are to vindicate the rights of numerous claimants in one action when individual actions might be impracticable.

HOW HAS THE PRESENT RULE DEVELOPED?

The class action evolved over 250 years ago in the English Chancery courts. The

Chancery courts were separate tribunals through which the English Crown disVerDate 11-MAY-2000 00:23 Apr 15, 2002 Jkt 000000 PO 00000 Frm 00066 Fmt 6601 Sfmt 6621 G:\WORK\FULL\020602\77557.000 HJUD3 PsN: HJUD3
63

pensed justice when the common law courts did not work and the ‘‘remedy at law

was inadequate.’’ As part of the equity concepts involved in the Chancery courts,

the class action appeared to combine common issues in order to resolve them expeditiously. Thus, it was used when many parties were involved to prevent the inconvenience of a multiplicity of lawsuits.

Because both law and equity were retained in U.S. courts, the class action was

fully incorporated into American jurisprudence. At the federal level, the class action

device was incorporated by virtue of Rule 23 of the Federal Rules of Civil Procedure

(FRCP) and many states have statutes or rules that are based on, or are substantially similar to, the federal rules.

Rule 23 was promulgated in 1938 as part of the first FRCP. No changes were

made to the rule until 1966 when Congress, among other revisions, expanded the

ability of attorneys to prosecute class action lawsuits. Previously, the law had required that all plaintiffs in a class action suit be identified and demonstrate a willingness to participate in the litigation. However, the 1966 amendments gave attorneys, through the use of token plaintiffs, the ability to sue on behalf of limitless

numbers of unknown persons. Prior to 1966, individuals had to choose affirmatively

to be a party in such a lawsuit, and only parties could share in the recovery. The

more permissive procedural changes, however, allowed lawyers to sue whenever

they believed that a group of individuals was harmed, merely by suing on one individual’s behalf. Some observers believe that the recent explosion in class action litigation can be traced back to this change in the federal rules.

In an attempt to curtail some of the abuses associated with the class action mechanism, efforts were initiated in 1996 to begin the long and arduous task of amending the FRCP. The Judicial Conference of the United States is charged with recommending to the U.S. Supreme Court, improvements in the rules of practice and procedure in the federal courts. There are six Advisory committees that all report to

a Standing Committee on Rules of Practice and Procedure in the Judicial Conference. The Advisory Committee on Civil Rules considers changes to the FRCP.

Other advisory committees deal with the appellate rules, the bankruptcy code,

criminal rules and the rules of evidence.

After considerable debate, the Advisory Committee on Civil Rules submitted several proposed changes to FRCP 23 to the Standing Committee, which approved

them, published them in the Federal Register, and allowed six months for comment.

The proposed changes are set forth below:

• Permissive Interlocutory Appeals—this provision would provide for a discretionary interlocutory appeal of an order granting or denying class action certification;

• Settlement Classes—this proposal would have essentially permitted claims to

be settled on a class action basis even if they would have been denied such

status in trial;

• Dismissal or Compromise—this proposal would have made explicit something

which is current practice in most courts—the holding of a hearing to determine whether the court should approve a settlement;

• Balancing Individual Recoveries with the Costs and Burdens to the System—

this proposal would have required an examination of whether the probable relief to individual class members justifies the costs and burdens of class litigation;

• The Need for Class Certification and Viability of Individual Claims—this proposal would have added additional factors to consider in the court’s determination under (b)(3) as to whether the class action is superior to other methods of adjudication;

• Maturity—this proposal would have directed courts to consider the ‘‘maturity’’

of related litigation involving class members;

• Timing of Certification—this proposal would have required a certification decision ‘‘when practicable’’ as opposed to ‘‘as soon as practicable’’ after the action has been brought.

Over 200 interested parties submitted comments on the proposed changes to Rule

23 and the Advisory Committee on Civil Rules compiled nearly four volumes of commentary on the proposals. However, because the proposals were so controversial, the

Advisory Committee ultimately recommended only one change to the Standing Committee—an amendment to Rule 23(f) which authorizes an interlocutory appeal from

an order granting or denying class action certification. This change addressed a concern that in cases involving large classes, certification as a class gave the prevailing

party an almost insurmountable advantage in terms of negotiating a settlement of

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the case because class action certification orders were previously not appealable.

Once large classes are certified, the defendant will almost always settle rather than

litigate.

Pursuant to 28 U.S.C. 2074, the U.S. Supreme Court approved and submitted this

change to FRCP 23 to Congress in late April 1998. Congress had until December

1998 to overturn this action by legislation, which, as anticipated, did not occur.

Drafters of the 1998 amendment hoped that by streamlining the review process for

the certification rulings, a coherent and uniform body of law would emerge, perhaps

obviating the need to overhaul the remainder of Rule 23, or at least highlighting

those areas of class action law that can be salvaged.

Since that time, the Advisory Committee on Civil Rules has turned its attention

to process and procedures to be followed by courts concerning whether to certify

classes, when to provide more detailed ‘‘opt out’’ procedures for potential class members who do not wish to be a part of the litigation, and how to address issues posed

by settlements and attorney fees in complex class action settings. Proposed amendments have been released by the Standing Committee addressing these items, with

comments due in early 2002.

HOW DOES A ‘‘CLASS’’ BECOME CERTIFIED?

Under FRCP 23, the following requirements must be satisfied in order to be certified as a class action:

• Numerosity: the class must be so numerous that joinder of all members is impracticable;

• Commonality: there must be questions of law or fact common to the class;

• Typicality: the claims or defenses of the representative parties must be typical of the claims or defenses of the class; and

• Representation: the representative parties must fairly and adequately protect

the interests of the class.

In addition to the above requirements, one of the following prerequisites must also

be satisfied:

• The prosecution of separate actions would create a risk of inconsistent or

varying adjudications with respect to individual members of the class which

would establish incompatible standards of conduct for the party opposing the

class; or

• The prosecution of separate actions would create a risk of adjudications with

respect to individual members of the class which would, as a practical matter,

be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or

• 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; or

• The court finds 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.

IS THERE A PROBLEM?

Today, the class action device is employed in a wide variety of types of litigation,

including consumer, securities, antitrust, employment, and civil rights, and increasingly in mass-accident, product-liability, and toxic-tort litigation. Nevertheless,

while the class action concept is quite appealing in theory—permitting ordinary citizens, each with relatively minor claims and damages, to invoke the power of the

law against wealthy and organized corporations—abuses have developed which are

raising product costs and drastically diminishing the litigants recovery, while comparatively increasing their attorneys’ recovery.

Class actions can take on a tone of coerciveness when filed as a threat or pressure

tactic. Such suits are often frivolous and founded in harassment and intimidation.

Nevertheless, defendants can be forced into unwanted settlements when faced with

the extraordinary costs of defending a class action.

Further abusing the procedure, plaintiffs will often take a shotgun approach to

class actions by including defendants without investigating whether they are proper

parties to the lawsuit. The shotgun approach again abuses the class action by permitting discovery and fishing expeditions merely to support filing subsequent class

actions after dismissal.

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The entrepreneurial character of many such suits and the business decision to settle them has become an unmistakable facet of class actions today. Even when plaintiffs win a class action, high attorneys’ fees allow little dollar return for class members. From the perspective of the members of the class, only the attorneys seem to

profit from such windfalls. Consider these examples:

Dexter Kamilewicz discovered he was part of a class action suit against his mortgage bank only when he spotted a $91.33 deduction from his escrow account that

turned out to be his payment for lawyers he never knew he hired. His winnings—

$2.19 in back interest (minus the $91.33 in attorneys’ fees). Lawyers received $8.5

million in total fees from Mr. Kamilewicz and 300,000 other unknowing consumers.

(Source: The New York Times, November 21, 1995)

• In a class action against Allstate and Texas Farmers insurance companies

over practices encouraged by state insurance regulators, both companies settled to avoid even larger legal expenses, plus a potential of tens of millions

in losses. Insured motorists received $5.50 apiece, while the attorneys were

expected to receive $8.5 million, after expenses. (Source: San Antonio ExpressNews, October 14, 1996)

• In a class action suit against Cheerios cereal over a food additive with no evidence of injury to any consumers, lawyers were paid nearly $2 million in fees,

or approximately $2,000 per hour. Consumers received coupons for a free box

of cereal. (Source: The Metropolitan Corporate Counsel, February 1998)

In a study conducted in 1997, the RAND Institute for Civil Justice noted that the

landscape of class action activity has shifted dramatically in the past several years.

Litigation is increasing rapidly, especially in the state courts, and most of the

growth is taking place in the consumer area, with burgeoning claims alleging fraud,

deceptive advertising, and improper calculation of fees and other charges. The study

further noted that plaintiffs, claims, remedies, and damages are all becoming more

diverse.

In its study, the ICJ notes that there is no national database on class actions.

Accordingly, it was not able to observe the changes in class action activity over the

last several years. Nevertheless, the ICJ staff conducted interviews with more than

50 people at 34 firms representing different interests. Plaintiff trial lawyers, corporate and outside defense counsel, along with public interest lawyers, and state attorney generals, were all interviewed as part of the study. The study notes that,

with a few exceptions, all those interviewed, on both the plaintiff and defense side,

stated that class action activity has grown dramatically over the past 2–3 years.

Further, all agreed that recent growth has been concentrated in the state courts,

as plaintiffs and defendants both see increased unwillingness among federal judges

to certify or to sustain certification of class actions.

Additionally, according to the Federal Judicial Conference’s Advisory Committee

on Civil Rules, corporations are facing a 300 percent to 1,000 percent increase in

class action lawsuits. At a hearing before the Advisory Committee on changes to

Rule 23, Ford Motor Company’s general counsel observed that his company, which

in the past might have fought a half-dozen class action suits at a time, as of 1997

faced nearly 70 such actions. Similarly, in an October 1999 newspaper article, Allstate is listed as having at least 50 class action suits pending, up from three in

1988. Such increases are forcing corporations to focus on lawsuits rather than manufacturing better products, providing better services, or lowering their prices.

Statistics compiled by the Administrative Office of the United States Courts further illustrate this rise in class action activity. During the time period 1985–1987,

a total of 2,317 class action suits were filed in federal court. Ten years later, 4,171

class action suits were filed in federal court during the same time period—1995–

1997—an 80 percent increase!

Further supporting this claim that class action suits are on the rise and impact

the majority of U.S. businesses are the results of a survey conducted by the Federalist Society for Law & Public Policy Studies and a member survey conducted by

the Alliance.

The survey conducted by the Federalist Society indicates that between 1988 and

1998, the number of pending class actions in state courts increased by 1,315 percent, and the number in all federal courts increased by 340 percent. Further, among

respondents, class action litigation rose at a faster rate in state courts than in federal courts, with class action activity more than doubling in federal courts between

1993 and 1998, and more than tripling in state courts for the same years.

In January 1999, the Alliance conducted a survey of its members to learn more

about their experiences with class actions and problems faced during the course of

such litigation. Of those Alliance members responding to the survey, approximately

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63 percent indicated that in the past five years, their company has been named as

a defendant in a lawsuit seeking class action certification. Of those involved in such

litigation, workers compensation rating issues dominated the list of legal theories

forming the basis of the complaints. Further, the majority of those responding indicated that the suits took place in state court only.

The survey asked the members to list specific issues or problems the Alliance

should consider with respect to strengthening the defenses available to insurers in

class action litigation. Not surprisingly, issues relating to class certification and attorneys fees and sanctions dominated the list.

WHAT CAN BE DONE?

The Alliance supports federal efforts to reform class action litigation by

making it easier for class actions to be removed from state court to federal

court and granting federal district courts original jurisdiction over class actions in which there is minimal diversity.

Federal courts are better equipped to deal with complex cases such as class actions. Accordingly, the Alliance supports federal efforts to reform class action litigation by making it easier for class actions to be removed from state court to federal

court and granting federal district courts original jurisdiction over class actions in

which there is minimal diversity. The Alliance recognizes that S. 353 and HR 1875

(legislation pending in the 106th Congress) do not change class action rules, nor do

they change anybody’s rights to recovery. They merely impact which court should

hear the case. The Alliance’s own survey results and the study conducted by the

RAND Institute for Civil Justice, confirm that class actions filed in state court make

up the bulk of all class action litigation. Thus, the Alliance recognizes the need to

redirect the bulk of these filings into the federal court system, which has generally

been more protective of consumers’ and defendants’ rights in class actions and

which is better equipped to deal with such complex cases. Following are a few of

the reasons the Alliance believes the bulk of class actions belong in the federal

courts:

Judges:

Resources. Unlike many state court trial judges, federal district judges are

well supported by law clerks, research assistants, etc.

Freedom from local political considerations. Federal district judges generally are less subject to local political considerations.

Federal judges ‘‘run a tight ship.’’ Federal court hearings are scheduled regularly, requiring counsel to report on the status of the case. Continuances

are generally more difficult to obtain and declarations showing good cause

are required. Federal judges do not hesitate to impose sanctions against

counsel who abuse federal procedures. Although case management standards are now in effect in many state courts, federal judges more often intervene in cases assigned to them to impose scheduling orders, to manage discovery and motion practice, to promote settlement or reference to ADR procedures, and to control the length of trials.

Well-developed body of law: Federal Rule of Civil Procedure 23 governing class actions has been applied in hundreds of cases. In many states,

there are few, if any, reported decisions relating to class actions. The body

of reported opinions available to the federal judiciary tends to increase the

level of predictability in a generally unpredictable area of the law.

Dispositive motions: Federal judges are generally perceived as being

more inclined to grant dispositive motions (motions for summary judgment

or for dismissal of the action).

Discovery stays: Some federal judges will stay both discovery and class

certification motions pending adjudication of a dispositive motion.

Jury considerations: The federal courts generally provide a better jury

pool since the geographic area from which federal jurors are chosen is typically larger, resulting in a more diverse jury panel. In addition, unless the

parties otherwise agree, a unanimous verdict is required in federal civil

trials.

Interlocutory appeals: Under new Rule 23(f) of the Federal Rules of Civil

Procedure, parties have conditional access to interlocutory appellate review

of orders granting or denying certification.

Costs: In federal court, the expenses of class identification and class notice

generally must be borne exclusively by the plaintiff or plaintiff’s counsel.

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In state courts, the trial judge may be somewhat more likely to order the

defendant to advance these costs.

The Alliance supports changes to FRCP 23 that would result in:

• Greater specificity in trial courts orders defining a class and in detailing optout procedures;

• More understandable and informative class action notices;

• Stricter judicial scrutiny of class action settlements and requests for attorney

fees filed by class counsel; and

• Judicial appointment of class counsel.

Further, the Alliance opposes any changes to the federal rules governing class actions that would result in greater administrative expenses in defending class action

litigation or would have the effect of protracting such litigation.

Reforms that produce these results will improve the class action process by enhancing the practical ability to defend them on their merits and improving the ability to control expense of the litigation and its duration.

In addition to the need for federal reforms, the state system also needs change.

The Alliance further supports legislation in the states that would:

• Create a rebuttable presumption of validity in a civil action against a regulated entity for practices and activities engaged in by the regulated entity

that have been approved by the regulatory authority charged with overseeing

that entity;

• Require a court to dismiss or abate a proceeding where state agency jurisdiction is involved and that provides that relief awarded to a claimant by an administrative agency may be adequate even if the relief does not include exemplary damages, multiple damages, attorneys’ fees, or costs of court; and

• Stay discovery in class actions while a motion to dismiss is pending.

• Facilitate the appeal of class action verdicts by limiting the size of appellate

bonds required for all civil awards for damages in such actions, or authorizing

the waiver of such bonds, especially in the appeal of punitive damage awards.

Presumption of Validity

Oftentimes, an insurer will be named as a defendant in a class action suit where

the practice or activity giving rise to the complaint was the subject of an earlier approval by the state insurance department, or the insurer was in compliance with

all applicable statutory and regulatory requirements relating to the practice or activity at issue at all relevant times. In such cases, insurers experience great frustration and feel they are in a ‘‘no-win’’ situation, in that the company at the time in

question had acted in good faith, but could not, at a later date, once the activity

or practice was being challenged, use the department’s prior approval or the company’s compliance, as a defense in the litigation.

To illustrate, Allstate and Texas Farmers Insurance Company were sued in early

1996 in Texas over a practice known as ‘‘double-rounding.’’ Pursuant to state insurance regulations, insurers were allowed to round automobile and homeowners’ insurance premiums to the nearest dollar to simplify their calculations. However, a

class action suit was filed over Farmers’ and Allstate’s practice of rounding twice—

once after calculating premiums and again after dividing premiums into two, sixmonth payments.

In court proceedings, Allstate produced written documentation from a Texas insurance regulator instructing Allstate to engage in this double-rounding procedure.

Nevertheless, this approval did not carry the day in court, and Allstate ultimately

settled the case for approximately $35 million with $25 million going to policyholders in the form of refunds and $10 million to the plaintiffs’ attorneys. Each policyholder was expected to receive approximately $5.50 a piece.

An interesting postscript to this story is that the regulation at issue was later rewritten to specifically prohibit double rounding of automobile and homeowners’ insurance bills. Further, the Insurance Commissioner acknowledged that the prior

rule was not clearly written and that former Texas Department of Insurance officials misdirected the companies.

The Texas rounding case is just one of many class actions involving insurers who

have, in good faith, followed the law and instructions received from their regulator

with respect to a particular practice or activity, only to later find themselves in

court being second-guessed by a plaintiffs’ attorney engaging in ‘‘class action regulation.’’ It is thus in an effort to promote fairness and provide greater certainty and

predictability in the business of insurance, that the Alliance supports state legislation that would create a rebuttable presumption of validity in civil actions against

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regulated entities for practices and activities engaged in by those entities that have

been approved by the applicable regulatory body.

The Alliance believes that such a presumption should exist for all regulated entities, not simply for insurers. The ability to rely on state agency pronouncements and

determinations should be a part of the public policy adopted by each state.

Model legislation developed by the Alliance on this issue is attached as Appendix

1.

Exhaustion of Administrative Remedies

The Alliance also supports legislation in the states that would require a court to

dismiss or abate a proceeding where state agency jurisdiction is involved and that

further provides that relief awarded to a claimant may be adequate even if the relief

does not include exemplary damages, multiple damages, attorneys’ fees, or costs of

court.

Had such a procedure been in place in Texas at the time Allstate and Texas

Farmers were sued in the premium rounding case discussed above, the matter

would have been transferred from state court to the Texas Department of Insurance

for resolution. As such, consumers who were unhappy with their bills could have

filed complaints with the Department. The Department, in turn, could have ordered

appropriate relief, saving all parties both time and money.

Consumers will undoubtedly be better served under this approach since state insurance regulators are experts in the field and will not be motivated, as are class

action plaintiffs’ attorneys, by their own financial gain. Additionally, judicial resources would be conserved under such an approach and referral to an administrative agency would likely discourage the filing of frivolous class action suits and give

companies more time to take corrective action.

Model legislation developed by the Alliance on this issue is attached as Appendix

2.

Staying Discovery

The Alliance also studied recent federal legislation intended to curb abuses associated with class action securities litigation. Although many of the reforms were specific to the securities industry, the Alliance believes that the provision staying discovery while a motion to dismiss is pending could be easily extended to all class actions and that doing so would help solve several of the abuses associated with class

action litigation. For instance, attorneys’ fees would be greatly reduced by staying

discovery while a motion to dismiss is pending and insurers who never should have

been named as defendants in the first place could be dismissed from the litigation

with minimal time and money expended.

Model legislation developed by the Alliance on this issue is attached as Appendix

3.

Appellate Bonds

Class action verdicts have become increasingly large and often lack a rational

basis in law to justify their size. Many state appellate courts have discretion to require that a bond be posted in the amount, or in an amount in excess of, an award

before an appeal can proceed. As a result, many corporate defendants find that the

bond requirement is an obstacle to appealing large jury verdicts, such as from class

action suits and those involving punitive damages or other large jury awards. They

contend that the discretion currently given to state courts is being used to inhibit

corporate defendants from appealing runaway awards at the trial court level. Posting a bond can be particularly onerous for small businesses that are defendants in

litigation.

Accordingly, the Alliance will seek to facilitate appeal of class action verdicts by

supporting legislation or rules of court that limit the size of appellate bonds required for all civil awards for damages in such actions, or that authorize the waiver

of such bonds, especially in the appeal of punitive damage awards.

Several states, including Georgia, Kentucky, Virginia, North Carolina, and Florida

enacted legislation on this issue during their 2000 legislative sessions. Legislation

was also introduced in Missouri during the 2000 session, but failed to pass.

Model legislation developed by the Alliance on this issue is attached as Appendix

4.

RECENT STATE REFORMS

Perhaps signaling a shift in the states’ seeming tolerance of class action abuse,

Alabama, a state notorious for large jury verdicts and a haven for class actions,

passed a significant piece of class action reform legislation in May 1999. Senate Bill

72 establishes certain procedures concerning the certification of class actions in the

Alabama courts. The bill purports to cover all civil class actions brought in Alabama

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courts and states that, if there is any inconsistency between SB 72 and the Alabama

Rules of Civil Procedure, SB 72 is controlling.

Senate Bill 72 requires a court considering a class action to hold an early conference to establish a schedule for any discovery the parties may wish to engage in

that is allowed by the rules of civil procedure and germane to the issue of whether

the class action should be certified. At the conference, the court may set a date for

hearing on the issue of class certification, but the hearing cannot be set sooner than

90-days after the date on which the court issues its schedule order, unless a shorter

time is agreed to by the parties.

On the motion of any party, the court is required to stay all discovery directed

solely at the merits of the claims or defenses in the action until the court has made

a decision regarding certification of the class. However, the court may decline to

issue the stay for good cause shown if the interests of justice require that the court

not issue the stay.

The court is required to hold a full evidentiary hearing on class certification on

the motion of any party. At the hearing, parties are allowed to present, in the same

manner as at trial, any admissible evidence in support of or in opposition to the certification of the class.

The court is required to use a ‘‘rigorous analysis’’ in deciding whether to certify

the class. The burden is on the class proponent to show that certification is proper.

The court is prohibited from certifying the class unless all of the factors required

by Ala. R. Civ. P. 23 for certification of a class action have been met. The court is

required to place in the record a written order addressing all the factors and specifying the evidence, or lack of evidence, on which the court based its decision as to

whether each factor has been established.

The court’s order certifying or refusing to certify a class action is appealable in

the same manner as a final order to the appellate court that would otherwise have

jurisdiction over an appeal from a final order in the action. The appeal may only

be filed within 42 days of the order certifying or refusing to certify the class. The

filing or failure to file this type of appeal does not affect the right of any party, after

the entry of final judgment, to appeal the earlier certification of or refusal to certify

the class. During the pendency of an appeal as to the certification of the class, the

action in the trial court is stayed.

CONCLUSION

The Alliance believes that the time is right to achieve the reforms discussed

above. Recent high profile settlements, such as that between Big Tobacco and the

State Attorneys General, have created a backlash against attorneys and heightened

the public’s overall awareness of the abuses inherent in the civil justice system.

In the tobacco litigation, private lawyers who helped eight states sue the tobacco

industry were paid $221 million in legal fees under a settlement with the industry.

In addition, an arbitration panel in December 1998 awarded $8 billion to lawyers

who negotiated separate multi-billion dollar settlements for Texas, Florida, and Mississippi.

Additionally, efforts by Congress to enact class action reform legislation and Alabama’s recent enactment of a class action reform bill are expected to generate momentum within the states to curb such abuses.

Appendix 1

PRESUMPTION OF VALIDITY

MODEL LEGISLATION

In a civil action brought against a regulated entity doing business in this state

for harm allegedly caused by an activity or practice engaged in by that entity, there

is a rebuttable presumption that the entity and/or its agent(s) is not liable if, at the

time the act giving rise to the complaint took place, the entity had received the explicit or implicit approval of the regulatory authority charged with overseeing that

entity to engage in the activity or practice at issue, or the entity has complied with

all applicable statutory and regulatory requirements relating to the practice or activity at issue, including but not limited to, rules, regulations and bulletins.

Appendix 2

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EXHAUSTION OF ADMINISTRATIVE REMEDIES

MODEL LEGISLATION

I. DISMISSAL OR ABATEMENT IF STATE AGENCY JURISDICTION INVOLVED:

(a) A court shall abate or dismiss an action unless the court determines that:

(1) the interpretation, application, or violation of an agency statute or rule

involves only questions of law; and

(2) the state agency may not make any findings of fact or conclusions of

law or issue any orders that would aid the court in resolving the action.

(b) A court may abate or dismiss an action if the court determines that a

state agency may order in a contested case all or part of the relief the

claimant seeks. The court shall specify in its order of abatement or

dismissal the state agency and the portion of the agency statute on which

the court bases its order.

(c) A court that abates an action under this section:

(1) shall refer specific issues or claims within the state agency’s jurisdiction

to the agency for action; and

(2) may direct the state agency to report to the court periodically concerning the disposition of the matters referred to the agency.

(d) The statute of limitations for an action dismissed or abated under this

section is tolled for the period during which the claimant seeks an

administrative remedy.

II. PERIOD OF ABATEMENT: The court shall provide that the period of abatement is at least six months from the date the court enters the order of

abatement, or such other reasonable time as the court may determine.

III. ADEQUATE RELIEF: Relief awarded to a claimant may be adequate even

if the relief does not include exemplary damages, multiple damages, attorneys’ fees, or costs of court.

IV. APPLICABILITY: This section applies only to a civil action in which:

(1) a claimant seeks recovery of damages on behalf of a class of claimants

and

(2) the interpretation, application, or violation of an agency statute or rule

is involved for at least one defendant.

Appendix 3

STAYING DISCOVERY

MODEL LEGISLATION

In any civil action in which class certification is being sought, all discovery and

other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds, upon the motion of any party, that particularized discovery is

necessary to preserve evidence or to prevent undue prejudice to that party.

Appendix 4

APPELLATE BONDS

MODEL LEGISLATION

(NOTE: Dollar amounts will need to be determined based upon state economic and

political considerations.)

Section 1. Waiver of Appeal Bond

(A) The state supersedeas bond requirements shall be waived as to that

portion of any civil award for damages that exceeds

$—————————————————if the party or parties found liable

seek a stay of enforcement of the judgment during the appeal.

(B) If the party seeking the appeal is a small business organized and doing

business under the laws of this state, the state supersedeas bond requirements shall be waived as to that portion of any civil award for

damages that exceeds $—————————————————while any

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appeals are pending. A small business is a business that has 50 or

fewer employees and annual revenues of $5,000,000 or less.

(C) If plaintiff proves by a preponderance of the evidence that a party

bringing an appeal, for whom the supersedeas bond requirement has

been waived, is purposefully dissipating its assets or diverting assets

outside the jurisdiction of the United States courts, waiver shall be rescinded and the bond requirement shall be reinstated for the full

amount of the judgment.

(D) A court may otherwise waive the filing of a supersedeas bond in a civil

action for good cause shown.

Section 2. Effective Date

This Act shall take effect on its date of enactment and shall apply to any action

which has not yet begun or which is pending on the date of enactment of this Act.

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