The Class Action Fairness Act, while not a panacea for corporate America’s litigation woes, should end the prosecution of nationwide class actions in so-called "hellhole" jurisdictions. It should also limit the proliferation of overlapping, repetitive class actions by providing a federal forum and access to the multidistrict litigation process for significant class actions.
Federal Diversity Jurisdiction
The most important aspect of the Act is the creation of federal diversity jurisdiction for many class actions. Under the Act, putative class actions whose ultimate aggregate value exceeds $5 million satisfy the "amount in controversy" requirement for diversity jurisdiction, and can be removed to federal court. Historically, the strict prohibition against aggregation of claims to reach the requirement of a $75,000 "amount in controversy" meant that the textbook class action, involving relatively small claims of many people, could seldom be removed to federal court on the basis of diversity jurisdiction. Although the aggregate amount in controversy might be in eight figures, federal courts would only consider amounts claimed by the named plaintiffs, which seldom met the threshold. The Act recognizes the reality that the true "amount in controversy" is the recovery sought for the putative class as a whole, not merely for the named plaintiffs.
The new legislation also broadens the definition of "diverse" parties. Under the Act, federal district courts will have original jurisdiction over any claim in which the matter in controversy exceeds $5 million and:
1. where any one member of the class is a citizen of a different state from any one defendant;
2. where any one defendant is a citizen of the "forum state" (the state in which the action was originally filed) and where any one member of the plaintiff class is a citizen of a foreign state or is a foreign state; or
3. where any member of the plaintiff class is a citizen of the forum state and any one defendant is a citizen of a foreign state or is a foreign state.
Thus, the traditional plaintiff’s tactic of defeating diversity jurisdiction by naming one local defendant in a class action has gone to its reward.
A federal district court may, in the interests of justice, decline to exercise jurisdiction over a class action in which more than one-third but less than two-thirds of the class members and the primary defendant are both citizens of the forum state. In these cases, a federal court may look at several factors in weighing the appropriateness of federal jurisdiction. A federal court may not assert jurisdiction if the primary defendant and more than two-thirds of the plaintiffs are from the forum, or if the number of all proposed plaintiff class members totals fewer than 100.
Another significant feature of the legislation is that it treats "mass actions," defined as cases involving more that 100 plaintiffs and an aggregate amount in controversy in excess of $5 million, as class actions for purposes of diversity jurisdiction. This will help insure that plaintiffs’ counsel cannot sidestep the new legislation by filing individual actions that name hundreds or thousands of plaintiffs.
In short, the new class action reforms make federal diversity jurisdiction very easy to achieve in large-scale class actions and mass actions. Given the Act only applies to cases filed after its effective date, in the future only state-specific class actions (i.e., those in which more than two-thirds of the plaintiffs and all of the primary defendants are from the same state), or relatively small cases (fewer than 100 plaintiffs) are assured jurisdiction in state court. Businesses based in populous states like California, Illinois and New York will undoubtedly continue to experience substantial state-based class action litigation in their home states. However, this amendment should spell the end of the peculiar injustices worked by the filing of nationwide class actions in notorious venues where local, elected judges and massive judgments have bred scores of class actions filed by plaintiffs’ attorneys from all over the United States.
Coupon Settlements & Attorney's Fees
Another important and unique provision of the Act restricts certain "coupon" settlement practices and constrains the award of attorney’s fees. "Coupon" settlement recoveries occur when class plaintiffs receive discounts on products rather than financial settlements. Plaintiffs’ attorneys base their fee petitions on the amount of coupons issued or on the amount of coupons that are expected to be redeemed. However, under the Act, any portion of attorney’s fees awarded to class counsel that is attributable to the award of coupons must be based on the value to class members of the coupons that are actually redeemed. For example, if parties to a class action agree that coupons will be issued in consideration of settlement of the action, a plaintiff’s attorney will not receive any compensation from the coupon issuance unless and until some of the coupons are actually redeemed. The Act permits a court to hear expert testimony regarding the actual value to the class members of the coupons that are redeemed, and any proposed settlement that includes a coupon provision must be approved by the court after a hearing to determine the fairness, reasonableness, and adequacy of the settlement.
Practical Effect
The Class Action Fairness Act is appropriately named. The Act recognizes that representative litigation can play an important role in the vindication of individual rights. Unfortunately, the "in terrorem" effect of a certified class can leave defendants with no realistic alternative but to settle claims that have little merit.
The new legislation will help prevent class action abuse by giving defendants readier access to federal courts, where class action jurisprudence is better defined, more evenly applied, and carefully reviewed by the U.S. Courts of Appeals. The plaintiffs’ class action bar will now have to evaluate the prospects for certification prior to filing, giving special consideration to whether the proposed class action meets the "superiority" requirement of FRCP 23(b)(3). Cases routinely certified in state court may meet equally predictable rejection in federal court. Moreover, strict judicial scrutiny over "coupon settlements" should help discourage the filing of marginal claims that typically settle for noncash payments.
It will be interesting to see whether state legislatures now enact stricter controls over state class action litigation in order to protect resident corporations from the Act’s modest exclusions. For now, however, the business community can expect a fairer shake in hostile jurisdictions and a reduction in the overall volume of class action claims.
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