The Class Action Fairness Act of 2005

Article by John F. Pritchard, John M. Grenfell, Bruce A. Ericson and Andrew D. Lanphere

The primary focus of the Act is on jurisdiction over large, interstate class actions. With various exceptions, the Act gives the federal courts jurisdiction over class actions involving 100 or more class members, where the aggregate amount of all the class members’ claims exceeds $5,000,000, and any member of the class is a citizen of a state or foreign country different from any defendant’s state or country of citizenship. The Act applies prospectively to any class action filed after the date of enactment; it does not apply to pending class actions. The Act also does not apply to securities class actions and most class actions brought against states, state officials or other governmental entities.

The Act does not strip state courts of jurisdiction over these large class actions, but rather makes them removable to federal court. The removal rules established by the Act are more lenient than in other actions, however. Unlike in most other actions, under the Act any defendant can remove a qualified class action without the consent of all defendants,¹ and a qualified class action may be removed even if a defendant is a citizen of the state in which the case is filed.² In addition, as discussed further below, the Act establishes a procedure for discretionary appellate review of orders on motions to remand that does not exist for any other cases removed to federal court.

The Act potentially covers a wide range of large class actions, including any large class action with class members from three or more states, and many, but probably not all, class actions with class members from two states.³ Thus, any "nationwide" class actions may now be subject to federal jurisdiction. Federal jurisdiction is not automatic for all such class actions, however. The Act sets forth limits on its application that depend on the extent to which the plaintiffs and defendants are citizens of the state in which the action is filed.

• If two-thirds or more of the class members and "the primary defendants" are citizens of the state in which the action is filed, federal courts do not have jurisdiction.

• If two-thirds or more of the class members are citizens of the state in which the action is filed, regardless of whether "the primary defendants" are citizens, federal courts do not have jurisdiction if at least one defendant from whom significant relief is sought and whose conduct forms the basis of the class members’ claims is a citizen of the state in which the case was filed, and no other class action has been filed asserting "the same or similar factual allegations against any of the defendants on behalf of the same or other persons" during the previous three years.

• If between one-third and two thirds of the class members and "the primary defendants" are citizens of the state in which the action is filed, federal courts may decline to exercise jurisdiction "in the interests of justice and looking at the totality of circumstances." In determining whether to exercise jurisdiction, courts are required to consider a series of factors enumerated by the Act, including whether the class action concerns matters of national or interstate interest, whether it has been pleaded in a manner that seeks to avoid federal jurisdiction or whether one or more class actions asserting "the same or similar claims on behalf of the same or other persons" (apparently without regard to whether the class action was brought against any of the defendants) has been filed over the previous three years.

In summary, the Act effects a wholesale redefinition of "diversity" for purposes of large class actions. Previously, class actions were subject to the same tests for diversity of citizenship as other actions, with the court considering only the citizenship of the nominal class representative. Under the Act, the citizenship of all class members in large class actions will be relevant to the existence of diversity of citizenship.

Many of the Act’s provisions are cumbersome and use terminology that is not clearly defined. For example, the Act does not specify how courts will determine the percentage of class members that are and are not citizens of the state in which the action is filed, something that is usually not clear from the face of a complaint. Nor does the Act define how one identifies "the primary defendants" for purposes of the Act. Similarly, the Act provides no guidance for determining whether another class action raising "the same or similar" claims or factual allegations has been brought. These and other ambiguities in the Act will undoubtedly be the subject of intensive litigation, and the resulting rulings will have a significant effect on the Act’s ultimate importance and effect. In the meantime, plaintiffs’ lawyers who want to keep their class actions in state court will be under heavy pressure to attempt to plead around the Act, for example by limiting the class definition to residents of a single state.

Apparently anticipating the need for quick guidance by the courts, the Act provides that a court of appeals may, in its discretion, accept an appeal from an order granting or denying a motion to remand.⁴ Moreover, if the court of appeals accepts such an appeal, it is required to complete the appeal and render judgment within 60 days, although it may grant extensions of time under certain circumstances.

Another area of anticipated litigation is the federal courts’ treatment of class certification in actions involving the law of more than one state. Federal courts have often held that nationwide or multistate class actions cannot be certified under Rule 23 because "in a multistate class action, variations in state law may swamp any common issues."⁵ Therefore, defendants may be able to remove multi-state class actions to federal court under the Act and then defeat certification under Rule 23, leaving the class members unable to litigate multistate class actions in a single forum. The federal courts may react to this scenario by exercising their discretion under Rule 23 to certify separate sub-classes for each affected state.⁶ However, the burdens this would impose on the federal courts would make it an unattractive alternative. If the federal courts decline to certify multi-state class actions removed by defendants under the Act, then plaintiffs’ lawyers may adapt by filing multiple statewide class actions in the state courts in lieu of a single, multi-state class action. Of course, such statewide actions could themselves be subject to removal under the Act (depending on the citizenship of the defendants), but if removed they would face fewer obstacles to class certification in the federal courts.

The Act also defines a new type of action removable to federal court, the "mass action." The Act defines a mass action to be any civil action other than a class action in which monetary relief claims of 100 or more persons are proposed to be tried jointly because the claims involve common issues of law or fact. The creation of the mass action raises the prospect of federal jurisdiction for large mass tort or product liability cases which cannot be certified as a class action but are consolidated for trial on common issues.

Under the Act, federal jurisdiction exists if the parties to the mass action meet the minimal diversity requirements of the Act (i.e., any plaintiff is a citizen of a different state than any defendant). However, only the claims of those plaintiffs in the mass action whose claims exceed the $75,000 jurisdictional minimum for diversity actions may be removed to federal court. As written, the Act thus appears to create the possibility of a mass action where some plaintiffs’ claims are removable to federal court and some are not, depending on whether their individual claims are worth more than $75,000. This would be a truly novel development.

The Act also addresses a subject which has generated great controversy over recent years: the amount of attorney’s fees that plaintiffs’ lawyers may receive in connection with a settlement that provides class members with coupons redeemable for the defendant’s products instead of cash. The Act requires district courts to make a written finding that any such settlement is fair, reasonable and adequate to class members before approving a coupon settlement, and the court may require that a portion of the value of unclaimed coupons be distributed to charitable or governmental organizations.

The Act also provides that any attorney’s fee award arising out of a coupon settlement must be based on the value of the coupons actually redeemed by the class, as opposed to the value of all coupons issued. If any part of the attorney’s fee award is based on factors other than the value of the coupons, such as the value of equitable relief obtained as part of the settlement, then counsel will be separately compensated based on the amount of time reasonably expended working to obtain this relief.

The Act also addresses a number of class action related issues which may prove significant.

First, the Act restricts the ability of parties to negotiate settlements where the monetary benefit to the class is less than any sums that the class is obligated to pay to its counsel. Such settlements can be approved only if the court makes a written finding that non-monetary benefits to the class "substantially outweigh" the monetary loss. This provision is likely to prevent attorneys’ fees awards larger than the monetary relief received by the class.

Second, the Act prohibits settlements that discriminate geographically by awarding greater sums to certain class members based on their geographic proximity to the court.

Third, the Act requires defendants to notify federal and state officials with regulatory responsibilities over the matters raised by any class action about any class action settlement before it is approved. The settlement cannot be approved until at least 90 days after such notice is given. If appropriate notice is not given, then class members may refuse to comply or be bound by the settlement.

Finally, the Act requires the Judicial Conference of the United States to report to Congress within twelve months on class action settlements, incorporating in its report recommendations for best practices to ensure fairness to class members and appropriate fee awards.

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