Class Actions and Legislative Proposals in the 108th Congress: Class Action Fairness Acts of 2003 and 2004
Released: 2004-08-18T00:00:00

Background

In 2003, Class Action Fairness Acts were reintroduced in the House and Senate after previouslegislation had died in the Congress. (1) Generallysimilar in content, each bill -- H.R. 1115 , and S. 274 / S. 1751 (2) -- has threemain sections: (1) an amendmentto the federal diversity statute, 28 U.S.C. ï¿½ 1332; (3) (2) a provision regarding removal; (4) and (3) aconsumer class action "bill of rights." (5)

The Legislation

Section 1. Short Title (H.R. 1115 and S.274/S. 1751). (6) The Act may becited as the "Class ActionFairness Act of 2003." This section also states that it amends title 28 of the United States Code.

Section 2. Findings and Purposes of the Act. Both bills set out Congress' findings describing the: (1) circumstances in which class actions arevaluable to our legal system; (2) abuses of the class action process that have harmed class memberswith legitimate claims and defendants that have acted responsibly, adversely affected interstatecommerce, and undermined public respect for our judicial system; (3) the manner by which classmembers have been harmed by a number of actions taken by plaintiffs' lawyers, which provide littleor no benefit to class members as a whole, including (i) plaintiffs' lawyers receiving large fees, whileclass members are left with coupons or other awards of little or no value, (ii) unjustified rewardsmade to certain plaintiffs at the expense of other class members, and (iii) confusing published noticesthat prevent class members from being able to fully understand and effectively exercise their rights;(4) abuses in class actions which undermine the national judicial system, the free flow of interstatecommerce, and the concept of diversity jurisdiction as intended by the framers of the United StatesConstitution, in that State and local courts are (i) keeping cases of national importance out of federalcourt, (ii) sometimes acting in ways that demonstrate bias against out-of-state defendants, and (iii)making judgments that impose their view of the law on other states and bind the rights of theresidents of those states.

Section 3. Consumer Class Action Bill of Rights and ImprovedProcedures for Interstate Class Actions. These sections would add seven (five in H.R. 1115 ) new sections to 28 U.S.C. which are intended to provide greater protectionsfor class members. In particular, section 3 would add the following:

Section 1711-Judicial scrutiny of coupon and other noncash settlements (Section 1712 in S. 274/S. 1751) (7)

This provision is aimed at certain proposed settlements of class actions, in which the plaintiffs' lawyer and the defendant work out a settlement that provides class members with essentiallyvalueless coupons while rewarding the lawyers with substantial attorneys' fees. To address thisproblem, this section provides that a judge "may approve a proposed settlement under which theclass would receive noncash benefits or would otherwise be required to expend funds in order toobtain part or all of the proposed benefits only after a hearing to determine whether, and making awritten finding that, the settlement is fair, reasonable, and adequate for class members."

S. 2062 would require that attorneys fees be based either on (a) the proportionate value of the coupons actually redeemed by class members or (b) the hours actually billed inpresenting the class action.

Section 1712-Protection against loss by class members (Section 1713 in S. 274/S. 1751)

This provision provides that a judge may not approve a class action settlement in which the class member will be required to pay attorney's fees that would result in a net loss to the classmembers until after a hearing to determine whether the nonmonetary benefits to the class outweigh(or substantially outweigh in S. 274 ) the monetary loss, and if so making a writtenfinding to that effect.

Section 1713-Protection against discrimination based on geographic location (Section 1714 in S. 274/S. 1751; deleted in S.2062)

This provision provides that a settlement may not award some class members a larger recovery than others solely because the favored members of the class are located closer to the courthouse inwhich the settlement is filed.

Section 1714-Prohibition on the payment of bounties (Section 1715 in Section in S. 274/S. 1751; deleted in S.2062)

This provision provides that a class action may not be settled on terms that award special and disproportionate bounties to the named class representative. A class representative will, however,be able to be compensated for his reasonable time or costs that were required to be expended infulfilling his obligations as a class representative.

Section 1715-Class action definitions (Section 1711 in S. 274/S. 1751)

(1) Class Action-The term is defined to include any civil action filed in federal district court under 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 class members in a proposed or certified class action."

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

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

(5) Proposed Settlement-The term is defined as "an agreement that resolves claims in a class action, that is subject to court approval and that, if approved, would be binding on the classmembers."

Section 1716-Clearer and simpler settlement information (In S. 274/S. 1751 only; see Section 7 in H.R. 1115-Enactment ofJudicial Conference Recommendations)

This provision provides that class notices should present information in "plain English." The notices must be designed to attract the attention of class members by stating at the outset, in 18-pointtype, that the recipient is a plaintiff in a class action lawsuit and has legal rights that are affected bythe settlement described in the notice. In addition, the notice must offer:

(A) the subject matter of the class action;

(B) the members of the class;

(C) the legal consequences of being a member of the class;

(D) detailed information about any proposed settlement, (i) including a description of thebenefits for class members, (ii) the rights that class members will lose or waive through settlement,(iii) the obligations imposed on the defendant, and (iv) the amount of attorney's fee counsel will beseeking or, if not possible, a good faith estimate of such fee;

(E) any other material matter. (8)

S. 2062 would eliminate what was considered a complicated set of burdensome notice requirements for notice to potential class members and preserve the current federal law relatedto class notification.

Section 1717. Notifications to appropriate federal and state officials (S.274/S. 1751 only)

This provision requires defendants to notify the appropriate state and federal official of the particulars 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.

Section 4. Federal District Court Jurisdiction of Interstate ClassActions. Article III of the Constitution protects out-of-state litigants against theprejudice of local courts by allowing for federal diversity jurisdiction when the plaintiffs anddefendants are citizens of different states. However, under current law, federal diversity jurisdictionfor a class action does not exist unless every member of the class is a citizen of a different state fromevery defendant, and every member of the class is seeking damages in excess of $75,000. (9) Thissection in both bills would change the law by providing additional protection for out-of-state litigantsby creating a 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 proposals, federal district courts receive original jurisdiction over any class action in which the amount in controversy, exclusive of interest 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 the primary defendants comefrom the 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: (11)

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

-- "Whether the claims asserted will be governed by laws other than those of the State in which the action was originally filed"

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

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

-- "Whether 1 or more class actions asserting the same or similar claims on behalf of the same or other persons have been or may be 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 actionseeking monetary relief on behalf of persons who are not parties to the action (unless the namedplaintiff is the state attorney general); or (2) an action that asserts claims seeking monetary relief onbehalf of 100 or more persons, in which the claims involve common questions of law or fact and areto be jointly tried. (12)

Again, in order that actions lacking national implications remain in state court, the minimal diversity rules 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."

Section 5. Removal of Interstate Class Actions to Federal DistrictCourt. This section would allow class action lawsuits to be removed from statecourt to federal court, either by a defendant or by any plaintiff who is not a named or representativeclass member. (13)

Section 6. Appeals of Class Action Certification Orders (H.R.1115 only). This section provides that orders granting or denying classcertification may be appealed if notice of appeal is filed within 10 days after entry of the order. Italso provides that discovery shall be stayed during the pendency of the appeal unless the judge findsthat specific discovery is necessary to preserve evidence or to prevent undue prejudice to a party.

Section 6. Report on Class Action Settlements (Section 6 in S.274/S. 2062). This provision directs the Judicial Conferenceof the United States to report to the Judiciary Committees of the Senate and House ofRepresentatives within 12 months of the enactment with recommendations on the best practices tofurther ensure fairness in class action settlements with regard to class members and attorneys' feeswhich should appropriately reflect the extent and success of the attorneys' efforts.

Section 7. Effective Date (Section 8 in H.R. 1115). This section provides that the legislation applies to any civil actioncommenced on or after the date of enactment. In the case of H.R. 1115 it also appliesto civil actions filed but not certified as class actions prior to enactment. An amendment adoptedby the House Judiciary Committee in reporting H.R. 1115 would apply the terms of thebill to some pending class action suits thereby causing them to be moved to federal courts thuschanging the original language that would make the legislation effective only after the bill wassigned by the President.

Section 7. Enactment of Judicial Conference Recommendations(H.R. 1115 and S. 2062). This section, deferring the proposedclass action notification reforms, would put into effect the pending Federal Rule of Civil Procedure23 amendments simultaneously with the enactment of the bill should the bill pass prior to December1, 2003.

Section 8. Effective Date (H.R. 1115 only). This section provides that the provisions apply to: (1) civil actionscommenced on or after the date of enactment of the bill, and (2) any civil action commenced beforethe date of enactment in which a class certification order is entered on or after the date of enactment. It further provides that in cases commenced before the date of enactment, the 30-day removal periodwould begin on the date on which the class certification order is entered by a state court.

Section 8. Rulemaking Authority of Supreme Court and JudicialConference (S. 2062 only). This section provides the authority for theJudicial Conference and the Supreme Court to propose and prescribe the general rules of practiceand procedure for the federal courts.

Section 9. Effective Date (S. 2062 only). This section provides that the legislation applies to any civil actioncommenced on or after the date of enactment.

Recent Legislative Action

On June 12, 2003, the House of Representatives passed H.R. 1115 by a vote of 253-170. (14) As amended on the floor of theHouse, the bill would allow class actions to be movedfrom state to federal court if fewer than one-third of the plaintiffs in a case are from the same stateas the defendant, and the claims are at least $5,000,000 or more. (15) These amendments will broadenthe category of class action cases that would remain in state courts in two ways: (16) (1) the amendmentraises the aggregate amount in controversy required for federal court jurisdiction from $2,000,000and to $5,000,000, and (2) it would allow federal courts to exercise their discretion to returnintrastate class actions in which local law would apply after weighing five factors. This discretionwould only apply when more than one-third and less than two-thirds of the plaintiffs and the primarydefendants are citizens of the same state where the suit was filed. If less than one-third are citizensof the same state, the case would automatically be eligible for federal court jurisdiction under thenew diversity Rule 23 of the Federal Rules of Civil Procedure in H.R. 1115. Similarly,if more than two-thirds and the primary defendants are citizens of the same state where the case isfiled, it would not be subject to the new rules in the bill.

On October 17, 2003, the Senate began the consideration of S. 274 . Everything following the enacting clause was struck and the text of S. 1751 (17) was inserted in lieuthereof and considered as original text for the purpose of amendment. (18)

On October 21, 2003, Senator John Breaux introduced S. 1769 , "National Class Action Act of 2003," as an alternative bill which is considered to be much broader than S. 1751 . (19)

On October 22, 2003, the Senate rejected, by one vote, (20) an attempt to limit debate on S. 1751 in the form of a cloture motion which in effect narrowed the chances forenactment of class action reform at this time.

On December 15, 2003, Senator Dodd proposed Senate Amendment 2232 to S. 274 which was introduced in the Senate on January 20, 2004, (21) by Senator Grassley. Similarlanguage to that contained in Senate Amendment 2232 is also reflected in S. 2062 (theClass Action Fairness Act of 2004) which was introduced in the Senate on February 10, 2004 (22) andplaced on the Senate Calendar on February 11, 2004. (23)

An attempt was made by the proponents of S. 2062 to move the bill on June 1, 2004, but it was withdrawn due to lack of support to end debate or for cloture which would haverequired 60 votes. (24)

On July 8, 2004, the proponents of S. 2062 again failed to get 60 votes needed to proceed for further consideration of the bill. (25) The vote was 44-43. (26) This latest action willprobablyaid the demise of the legislation for this legislative year.

Pro/Con

Although balanced by the enhanced class member protection features, the jurisdictional and removal components of H.R. 1115 and S. 274 are much like theirantecedents in the 106th and107 th Congresses. Proponents argue:

Class action process has been manipulated in recent years; (27)

U.S. companies have been flooded with labor and employment litigation, much of which has been entirely without merit; (28)

Proposed changes in the law will increase sanctions against lawyers who bring frivolous claims to court. (29)

Opponents object that they:

Would clog an already overburdened federal court system and slow the pace of certifying class action cases; (30)

Are inconsistent with the principles of federalism; (31)

Would make consumer and public interest litigation more difficult to bring, more expensive, and more burdensome. (32)