Class Action Fairness Act Places Multistate Class Actions Before Federal Courts

Article by Perry A. Napolitano and Robert D. “Bo” Phillips, Jr.

Recently, 53 Senate Republicans teamed with 18 Democrats and one Independent to pass what is considered a key component of President Bush’s litigation reform agenda. On February 18, 2005, the president signed into law the Class Action Fairness Act of 2005. Supported by the U.S. Chamber of Commerce and other business interests, the Act is intended to enhance federal court jurisdiction over multistate class actions-actions that are filed in state courts based on the residency of a few class members, but in which the class consists of consumers or employees from around the nation. Accordingly, the Act grants federal district courts original jurisdiction over civil actions in which the total matter in controversy exceeds $5 million, and at least one class member and one defendant are citizens of different states. This aggregation of the amount in controversy and "minimal diversity" jurisdiction will apply to actions commenced on or after February 18, 2005.

One of the Act’s purposes is to end "forum shopping" and reduce the likelihood that out-of-state defendants will be subject to excessive verdicts and coerced settlements in certain plaintiff-friendly state courts. Advocates of the measure believe that by forcing multistate class actions into the federal courts, the class action system will become more fair and predictable. Notably, the House of Representatives Sponsors’ Statement counsels a broad view of the amount in controversy and resolution of doubts in favor of federal jurisdiction. The Act also aims to ensure close scrutiny of settlements so that class members are protected.

However, the new class action rules create uncertainty as well. District courts retain some discretion in their exercise of federal jurisdiction over class actions and observers differ on what the ultimate outcome will be, some predicting fewer class action plaintiffs having their day in court while others foresee the further balkanization of class action litigation.

Companies, insurers and counsel must prepare to brief class action jurisdiction issues and influence the first judicial interpretations of the Act.

The Class Action Fairness Act amends 28 U.S.C. § 1332 to provide federal district courts with original jurisdiction over class actions in which:

• The amount in controversy exceeds $5 million, exclusive of interest and costs; and

• Any member of the plaintiff class is a citizen of a state different from any defendant;

• Any member of the plaintiff class is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a state; or

• Any member of the plaintiff class is a citizen of a state and any defendant is a foreign state or a citizen or a subject of a foreign state.

This jurisdiction does not extend to cases in which the primary defendants are states, state officials, or other governmental entities against which the district court may be foreclosed from ordering relief; in which the number of members of all proposed plaintiff classes in the aggregate is less than 100; or that solely involve securities covered by various federal laws or corporate/business enterprise governance claims arising under the laws of the state in which such corporation or business enterprise is incorporated or organized.

The effect of the Act is blunted where the controversy can be characterized as focusing on the state in which the case is filed. Based primarily on class plaintiffs’ citizenship, limitations in the Act provide that under certain circumstances, a district court must decline to exercise jurisdiction and under other circumstances the district court may decline to exercise jurisdiction.

If more than one-third but less than two-thirds of the plaintiff class members and the primary defendants are citizens of the state in which the action was originally filed, the district court may decline to exercise jurisdiction.

In determining whether to decline to exercise jurisdiction, the district court must consider the following six factors in examining "the totality of circumstances": (1) whether the claims asserted involve matters of national or interstate interest; (2) whether the claims asserted will be governed by the laws of the state in which the action was originally filed; (3) whether the class action has been pleaded so as to avoid federal jurisdiction; (4) whether the action was brought in a state with a distinct nexus with the class members, the alleged harm, or the defendants; (5) whether plaintiff class members from the forum state substantially outnumber those of another state, and the citizenship of class members is widely dispersed among the states; and (6) whether similar class actions have been filed within the three-year period prior to commencement of the action.

The Act does not identify any procedures or criteria to determine the respective percentages of class members’ citizenship within or outside of the forum state, a process that is usually fact-intensive, expensive and burdensome. Thus, this determination of class members’ citizenship is likely to be disputed in many cases and, notwithstanding the House Sponsors’ desire to avoid burdensome discovery on this issue, will likely lead to substantial discovery requests.

The district court must decline to exercise jurisdiction when:

• Two-thirds or more of the members of all proposed plaintiff classes in the

• greater than two-thirds of the plaintiff class members are citizens of the state in which the action was filed;

• the plaintiffs’ principal injuries occurred in the state in which the action was originally filed;

• no similar class actions have been filed against any of the defendants within the three-year period prior to commencement of the action; and

• there is at least one defendant from whom the plaintiff class seeks significant relief, whose alleged conduct forms a significant basis for the claims in the action, and who is a citizen of the state in which the action was originally filed.

Notably, the terms "significant relief," "significant basis" and "principal injuries" are undefined and will likely be the subject of federal district court and appellate litigation, and few guideposts are provided by interpretation of similar terms in existing legislation.

By phrasing these provisions in terms of declining jurisdiction, the Act seems to contemplate abstention rather than exceptions to jurisdiction. This is significant, in that if these provisions are treated under an abstention analysis, the issue may not be revisited throughout the case (unlike subject matter jurisdiction); removal papers could focus on much narrower jurisdictional requisites and avoid the detail of these provisions; issues like head counts and citizenship, significant relief and principal injuries would only arise later; and principles governing appeals would differ.

Section 5 of the Act amends Title 28, Chapter 89 of United States Code to include § 1453, which concerns removal and remand of actions covered by the Act. This provision affects three important concepts. First, the one-year limitation on removal contained in § 1446(b) does not apply. Second, the consent of all defendants is not required for removal. Third, removal may occur regardless of the fact that any defendant is a citizen of the state in which the action is brought. Again, the Sponsors’ Statement clearly signals that the burden of proof on a remand motion should be placed on the party seeking remand.

The Act also provides that a court of appeals may accept an appeal from an order of the district court granting or denying a motion to remand a class action covered by the Act, if application is made within seven days of entry of the district court’s order. This marks a significant change from standard federal appellate procedure, which provides that an order remanding a case to state court (except in civil rights cases) is not reviewable.

If the court of appeals accepts such an appeal, however, it must complete all action on the appeal, including rendering judgment, not later than 60 days after the date on which the appeal was filed, unless an extension is granted. Extensions for any period of time may be granted if all parties agree to the extension. Extensions of up to 10 days may be granted for good cause shown and in the interests of justice. If a final judgment on appeal is not issued before the end of the period described above, the appeal shall be denied. Accordingly, appellate practice concerning the exercise of federal jurisdiction over class actions may be highly compressed.

To date, the U.S. Court of Appeals for the Tenth Circuit recently affirmed the ruling of the U.S. District Court for the District of Colorado in remanding a case that was originally filed in state court prior to the effective date of the Act but removed after the effective date, determining that the action was "commenced" when originally filed in state court, not when it was removed. Similar issues are foreseeable in cases where complaints filed before the effective date are amended thereafter to add class claims or new plaintiffs.

The Act also applies to "mass actions," which are defined as civil actions "in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact." A "mass action" would be removable as a class action under the Act, with some exceptions. Perhaps most importantly, the district court would have jurisdiction over only the plaintiffs whose claims placed more than $75,000 in controversy. A mass action shall not include any civil action in which all of the claims arise from an event or occurrence in the forum state and the alleged injuries occurred either in that state or a contiguous state, the claims are joined upon motion of the defendant, the claims are asserted on behalf of the general public pursuant to a state statute, or the claims are consolidated solely for pretrial purposes.

A mass action removed to federal court under the Act may not be transferred to another federal court pursuant to Section 1407 unless a majority of the plaintiffs request such transfer.

The various aspects of the definition of mass actions, such as requiring 100 or more plaintiffs, monetary claims, and joinder for trial (as opposed to pretrial coordination), and the individual amount in controversy requirement and various exceptions may make these provisions avoidable through careful pleading, and thereby limit the utility of this provision.

Class member protections in the Act are subtitled the Consumer Class Action Bill of Rights. Section 3 of the Act amends Title 28 of the United States Code by adding Chapter 114, sections 1711 through 1715. Section 1711 contains definitions and the remaining sections are designed to correct certain perceived abuses in prior class action practice.

The Act mandates judicial review of class action settlements involving the issuance of coupons. Advocates believe that review of coupon settlements will ensure that plaintiffs are adequately compensated and that attorneys’ fee awards in such settlements will not be excessive relative to the benefits to class members.

Under new section 28 U.S.C. § 1712, if a proposed settlement would provide coupons to class members, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to the class members of the coupons that are actually redeemed, not awarded. The reviewing court may receive expert testimony on the actual value of coupons that are redeemed. If a portion of the recovery of the coupons is not used to determine the attorney’s fee to be paid to class counsel, any attorney’s fee award shall be based upon the amount of time class counsel reasonably expended working on the action. Any attorney’s fee involving coupon settlements is subject to approval by the court and shall include an appropriate attorney’s fee, if any, for obtaining equitable relief. The attorney may also use a lodestar with a multiplier method for determining attorneys’ fees. The court may approve the proposed settlement only after conducting a hearing and making a written finding that the settlement is fair, reasonable, and adequate for the class members.

Under 28 U.S.C. § 1713, the court may approve a proposed settlement under which any class member is obligated to pay sums to class counsel that results in a net loss to the class member only if the court makes a written finding that the non-monetary benefits to the class members substantially outweigh the monetary loss.

Under 28 U.S.C. § 1714, the court may not approve any settlement that provides for greater sums to some class members than to others solely on the basis that certain class members have closer geographic proximity to the court.

Significantly, 28 U.S.C. § 1715 creates procedures for notification of proposed settlements to appropriate federal and state officials, and prohibits approval of a settlement until at least 90 days thereafter. Absent such notice, a class member generally may choose not to be bound by the settlement. This will no doubt raise issues as to which officials should receive such notification and may raise the profile of, and thereby complicate, some settlements.

The Act requires the Judicial Conference of the United States to submit a report on class action settlements within 12 months of enactment to the Senate and House Judiciary Committees, providing recommendations on best practices that courts can use to ensure that proposed class action settlements are fair to class members and that fee and expense awards are appropriate.

As with any substantial statutory change, the Act may create unintended consequences that will not be clear until the courts have had the opportunity to apply and interpret the Act in litigation. Commentators disagree about the likely impact and significance of the Act, which will depend in part on the nature of suits filed in the future and the ability to plead around the Act’s provisions. Many key terms of the Act are undefined, and there will likely be litigation over the interpretation and application of these terms, such as what qualifies a defendant as a "primary defendant" for purposes of jurisdiction, or the procedure for determining the residency of class members in large consumer actions where the members have not been identified. At least in the short term, the jurisdictional provisions of the Act may result in relatively protracted disputes over the residency and significance of the various parties, as well as the enumerated factors to support discretionary jurisdiction. Finally, increased scrutiny of settlements may complicate low-value settlements even if such valuation is appropriate where the merits of the case are weak.

The impact of this long-anticipated legislation obviously will play out over time. Early battles will provide opportunities for both sides to create momentum in judicial interpretation of the Act. Accordingly, the application of resources and attention to these issues early on may affect class litigation for years to come.

This article is presented for informational purposes only and is not intended to constitute legal advice.