Class Actions and Legislative Proposals in the 109th Congress: Class Action Fairness Act of 2005
Released: 2005-02-18T00:00:00

The Legislation

Section 1. Short Title. The act may be cited asthe "Class Action Fairness Act of 2005." This section also states that it amends title 28 of the UnitedStates Code.

Section 2. Findings and Purposes of the Act. Theact sets out Congress' findings describing in essentially these words the: (1) circumstances in whichclass actions are valuable to our legal system; (2) abuses of the class action process that have harmedclass members with legitimate claims and defendants that have acted responsibly, adversely affectedinterstate commerce, and undermined public respect for our judicial system; (3) the manner by whichclass members have been harmed by a number of actions taken by plaintiffs' lawyers, which providelittle or no benefit to class members as a whole, including (i) plaintiffs' lawyers receiving large fees,while class members are left with coupons or other awards of little or no value, (ii) unjustifiedrewards made to certain plaintiffs at the expense of other class members, and (iii) confusingpublished notices that prevent class members from being able to fully understand and effectivelyexercise their rights; (4) abuses in class actions which undermine the national judicial system, thefree flow of interstate commerce, and the concept of diversity jurisdiction as intended by the framersof the United States Constitution, in that State and local courts are (i) keeping cases of nationalimportance out of federal court, (ii) sometimes acting in ways that demonstrate bias againstout-of-state defendants, and (iii) making judgments that impose their view of the law on other statesand bind the rights of the residents of those states.

The act's stated purposes are to (1) ensure prompt and fair recovery of legitimate class actionclaims; (2) reflect the purpose behind the Constitution's diversity jurisdiction clause; and (3) toencourage commercial innovation and consumer-friendly prices.

Section 3. Consumer Class Action Bill of Rights and ImprovedProcedures for Interstate Class Actions. S. 5 would add five newsections to 28 U.S.C. which are intended to provide greater protections for class members. Inparticular, section 3 would add the following:

Section 1711-Class action definitions

(1) Class Action-The term is defined to include any civil action filed in federal district courtunder Rule 23 of the Federal Rules of Civil Procedure, as well as actions filed under similar rulesin state court that have been removed to federal court.

(2) Class Counsel-The term is defined as "the persons who serve as the attorneys for the classmembers in a proposed or certified class action."

(3) Class Members-The term is defined as "the persons (named or unnamed) who fall withinthe definition of the proposed or certified class in a class action."

(4) Plaintiff Class Action-The term is defined as "a class action in which class members areplaintiffs."

(5) Proposed Settlement-The term is defined as "an agreement regarding a class action thatis subject to court approval and that, if approved, would be binding on some or all class members."

Section 1712-Judicial scrutiny of coupon and other noncashsettlements

This provision is aimed at certain proposed settlements of class actions, in which theplaintiffs' lawyer and the defendant work out a settlement that provides class members withessentially valueless coupons while rewarding the lawyers with substantial attorneys' fees. Toaddress this problem, this section provides that a judge may approve a proposed settlement underwhich the class would receive noncash benefits or would otherwise be required to expend funds inorder to obtain part or all of the proposed benefits only after a hearing to determine whether, andmaking a written finding that, the settlement is fair, reasonable, and adequate for class members. In doing so, the judge on the motion of any party may receive expert testimony as to the coupons'value.

It would require that attorneys fees be based either (a) on the value of the coupons actuallyredeemed by class members in contingent fee cases; (b) on the hours reasonably billed in presentingthe class action; or (c) on the value of the coupons redeemed and, to the extent a settlement provides,for equitable relief on a reasonable hourly rate and total. Attorneys fees coupon calculations couldnot be based on unredeemed coupons, although with court approval the value of unredeemedcoupons could be distributed for charitable purposes specified in the settlement agreement.

Section 1713-Protection against loss by classmembers

This provision provides that a judge may not approve a class action settlement in which theclass member will be required to pay attorney's fees that would result in a net loss to a class memberunless the court determines in a writing finding that the benefits to the class member substantiallyoutweigh the monetary loss.

Section 1714-Protection against discrimination based on geographic location

This provision provides that a settlement may not award some class members a largerrecovery than others solely because the favored members of the class are located closer to thecourthouse in which the settlement is filed.

Section 1715. Notifications to appropriate federal and stateofficials

This provision requires defendants to notify the appropriate state and federal official of theparticulars of any class action settlement and delays the effective date of the settlement until 90 daysafter they have done so. The appropriate federal officials include the Attorney General and in thecase of financial institutions the federal regulatory authorities. State officials entitled to noticeinclude the authorities with regulatory jurisdiction over a defendant in any state in which anymember of the class resides. Should a defendant fail to comply with the notification requirements,any individual class member would be free to walk away from his obligations under the settlementagreement.

Section 4. Federal District Court Jurisdictionof Interstate Class Actions. Article III of the Constitution protects out-of-statelitigants against the prejudice of local courts by allowing for federal diversity jurisdiction when theplaintiffs and defendants are citizens of different states. However, under current law, federaldiversity jurisdiction for a class action does not exist unless every member of the class is a citizenof a different state from every defendant, and every member of the class is seeking damages inexcess of $75,000. (9) Thissection would change the law by providing additional protection for out-of-state litigants by creatinga minimal diversity rule for class actions and by determining satisfaction of theamount-in-controversy requirement by looking at the total amount of damages at stake.

Under the proposal, federal district courts receive original jurisdiction over any class actionin which the amount in controversy, exclusive of interest and costs, exceeds $5,000,000 and in which(A) "any member of a class of plaintiffs is a citizen of a State different from any defendant;" (B)"anymember of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and anydefendant is a citizen of a State;" or (C) "any member of a class of plaintiffs is a citizen of a Stateand any defendant is a foreign state or a citizen or subject of a foreign state." This rule holds trueif less than one-third of the plaintiffs and the primary defendants come from the state where the suitis filed; has no application if two-thirds or more of the plaintiffs and a primary defendant come fromthe state where the suit is filed; and applies at the discretion of the federal court if more thanone-third but less than two-thirds of the plaintiffs and the primary defendants come from the statewhere the suit is filed. (10)

In the exercise of their discretion, the federal courts must consider:

-- "Whether the claims asserted involve matters of national or interstate interest"

-- "Whether the claims asserted will be governed by laws of the State in which theaction was originally filed"

-- In the case of a class action originally filed in a State court, "whether the class actionhas been pleaded in a manner that seeks to avoid Federal jurisdiction"

-- "Whether the action was brought in a forum with a distinct nexus with the classmembers, the alleged harm, or the defendants"

-- "Whether the number of citizens of the State in which the action was originally filedin all proposed plaintiff classes in the aggregate is substantially larger than thenumber of citizens from any other State, and the citizenship of the other members ofthe proposed class is dispersed among a substantial number of States"

-- "Whether ...1 or more class actions asserting the same or similar claims on behalf ofthe same or other persons have been filed."

This section contains a similar class action definition as section 3, defining a class action as(A) any civil action filed pursuant to rule 23 of the Federal Rules of Civil Procedure or a similar statestatute or rule. It also deems to be class actions certain other types of civil actions: (1) an action thatasserts claims seeking monetary relief on behalf of 100 or more persons, in which the claims involvecommon questions of law or fact and are to be jointly tried; but not (2) an action on behalf of thegeneral public pursuant to state statute. (11)

Again, in order that actions lacking national implications remain in state court, the minimaldiversity rule does not apply in any action where "(A) two-thirds or more of the members of allproposed plaintiff classes in the aggregate and the primary defendants are citizens of the State inwhich the action was originally filed; (B) the primary defendants are States, State officials, or othergovernmental entities against whom the district court may be foreclosed from ordering relief; or (C)the number of members of all proposed plaintiff classes in the aggregate is less than 100." (12)

Section 5. Removal of Interstate Class Actions to Federal DistrictCourt. Under existing federal law, civil actions filed in state court, which mighthave been filed in federal court, can be removed to federal court under some circumstances, see 28U.S.C. 1441 et. seq. Section 5 would permit removal from state court of minimum diversity casesthat section 4 would permit to have been filed originally in federal court. It would allow class actionlawsuits to be removed from state court to federal court by any defendant without the consent of anyof the other defendants. (13)

Section 6. Report on Class Action Settlements. This provision directs the Judicial Conference of the United States with the assistance of the Directorof the Federal Judicial Center and the Director of the Administrative Officer of the United StatesCourts to report to the Judiciary Committees of the Senate and House of Representatives within 12months of the enactment with recommendations on the best practices to further ensure fairness inclass action settlements with regard to class members and attorneys' fees which should appropriatelyreflect the extent and success of the attorneys' efforts.

Section 7. Enactment of Judicial ConferenceRecommendations. This section, which perhaps survives through a scrivener'serror, first appeared in bills introduced early in 2003 and was designed to accelerate the effectivedate of class action reform amendments to Rule 23 of the Federal Rules of Civil Procedure, see H.Rept. 108-144 , at 45 (2003). Those amendments, then scheduled to become effective onDecember 1, 2003, did in fact become effective on that date. In its current form the section appearssimply redundant, for it provides that those amendments to Rule 23 shall become effective onDecember 1, 2003, or upon enactment of S. 5 , whichever comes first.

Section 8. Rulemaking Authority of Supreme Court andJudicial Conference. This section provides that nothing in this act shall restrict theauthority for the Judicial Conference and the Supreme Court to propose and prescribe the generalrules of practice and procedure for the federal courts.

Section 9. Effective Date. This section providesthat the legislation applies to any civil action commenced on or after the date of enactment.

Pro/Con

Although balanced by the enhanced class member protection features, the jurisdictional andremoval components of S. 5 are much like its antecedents in the 106th, 107th, and 108thCongresses. Proponents argue:

Class action process has been manipulated in recent years; (14)

U.S. companies have been flooded with labor and employment litigation, muchof which has been entirely without merit; (15)

Proposed changes in the law will increase sanctions against lawyers who bringfrivolous claims to court. (16)

Opponents object that they:

Would clog an already overburdened federal court system and slow the paceof certifying class action cases; (17)

Are inconsistent with the principles of federalism; (18)

Would make consumer and public interest litigation more difficult to bring,more expensive, and more burdensome. (19)