[Senate Report 108-123]
[From the U.S. Government Publishing Office]
Calendar No. 117
108th Congress Report
1st Session SENATE 108-123
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THE CLASS ACTION FAIRNESS ACT OF 2003
_______
July 31 (legislative day, July 21), 2003.--Ordered to be printed
_______
Mr. Hatch, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 274]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to which was referred the
bill (S. 274) to amend title 28, United States Code, to allow
the application of the principles of federal diversity
jurisdiction to interstate class actions, having considered the
same, reports favorably thereon with amendments and recommends
that the bill, as amended, do pass.
CONTENTS
Page
I. Legislative history..............................................2
II. Votes of the Committee...........................................2
III. Purposes.........................................................5
IV. Background and need for legislation..............................7
V. How S. 274 works................................................28
VI. Section-by-section analysis.....................................32
VII. Critics' contentions and rebuttals..............................51
VIII.Congressional Budget Office cost estimate.......................71
IX. Regulatory impact statement.....................................72
X. Minority views of Senators Leahy, Kennedy, Biden, Feingold,
Schumer, Durbin and Edwards.....................................73
XI. Changes in existing law.........................................90
I. Legislative History
The Senate began consideration of the Class Action Fairness
Act in the 105th Congress when the Senate Judiciary
Subcommittee on Administrative Oversight and the Courts
convened a hearing on October 30, 1997. John H. Church, Jr.,
John C. Coffee, Jr., Lewis H. Goldfarb, Paul V. Niemeyer,
Martha Preston, and Brian Wolfman testified at the hearing on
issues such as unfair class settlements, attorneys' fees, and
State court abuses. On September 28, 1998, the Subcommittee on
Administrative Oversight and the Courts approved S. 2083, the
``Class Action Fairness Act of 1997,'' introduced by Senators
Charles Grassley (R-IA) and Herb Kohl (D-WI), with an amendment
in the nature of a substitute. No further action was taken on
S. 2083 in the 105th Congress.
On February 3, 1999, S. 353, ``The Class Action Fairness
Act of 1999,'' was introduced in the 106th Congress by Senators
Charles Grassley (R-IA), Herb Kohl (D-WI), and Strom Thurmond
(R-SC). S. 353 was referred to the Senate Committee on the
Judiciary. On May 4, 1999, the Judiciary Subcommittee on
Administrative Oversight and the Courts held a legislative
hearing (S. Hrg. 106-465) on the bill, and received testimony
from Eleanor D. Acheson, John H. Beisner, Richard A. Daynard,
E. Donald Elliot, John P. Frank, and Stephan G. Morrison.
On June 29, 2000, the Judiciary Committee approved S. 353
with an amendment in the nature of a substitute, offered by
Chairman Orrin G. Hatch (R-UT), Senators Charles Grassley and
Herb Kohl, by a rollcall vote of 11 yeas and 7 nays. S. 353 was
then ordered favorably reported by the Committee without
additional amendment.
The Senate continued consideration of the Class Action
Fairness Act in the 107th Congress when Senator Charles
Grassley (R-IA), on November 15, 2001, introduced S. 1712 along
with Senators Kohl, (D-WI), Hatch (R-UT), Carper (D-DE),
Thurmond (R-SC), Chafee (R-RI), and Specter (R-PA). While S.
1712 contained similar provisions from its predecessor bills,
S. 1712 included some new provisions. On July 30, 2002, the
Senate Judiciary Committee, which was then chaired by Senator
Leahy (D-VT), held a hearing to discuss class actions
generally, during which S. 1712 was discussed at length by
Committee Members. The committee received testimony from Paul
Bland, Thomas Henderson, former Solicitor General Walter E.
Dellinger III, (Insurance) Commissioner Laurence Mirel, Shaneen
Wahl and Hilda Bankston. No further action was taken on S. 1712
during the 107th Congress.
On February 4, 2003, Senator Charles Grassley (R-IA)
introduced S. 274, the ``Class Action Fairness Act of 2003.''
Senators Herb Kohl (D-WI), Orrin Hatch (R-UT), Thomas Carper
(D-DE), Arlen Specter (R-PA), Lincoln Chafee (R-RI), and Zell
Miller (D-GA) joined the bill as original cosponsors. On April
11, 2003, the Judiciary Committee reported S. 274 favorably,
with amendments, after two days of mark-up.
II. Votes of the Committee
Pursuant to paragraph 7 of rule XXVI of the Standing Rules
of the Senate, each Committee is to announce the results of
rollcall votes taken in any meeting of the Committee on any
measure or amendment. The Senate Judiciary Committee, with a
quorum present, met on April 10 and 11, 2003 to mark up S. 274.
The Committee rejected six amendments and accepted two
amendments, one of which was accepted conditionally by
unanimous consent.\1\ The following rollcall votes occurred on
S. 274.
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\1\ The Committee approved by unanimous consent a Specter/Feinstein
amendment to strike 1332(d)(9)(i) and 1332(d)(i)(ii) from the bill on
condition that the Committee would develop compromise language as a
substitute before floor consideration of S. 274. The Chairman proposed
this solution because the Specter/Feinstein amendment was not
circulated in advance of the mark-up, thus giving the Committee little
time to consider alternative language. Following the mark-up session,
discussions between Judiciary Committee staff for Senators Hatch,
Grassley and Specter were held to address Senator Specter's concerns
and legislative language was agreed upon, to be included in a manager's
amendment on the Senate floor.
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A Feinstein/Hatch/Kohl/Grassley amendment to modify the
jurisdictional structure governing whether a class action will
be considered in Federal or state court was accepted 11 yeas to
8 nays.
YEAS NAYS
Grassley DeWine
Specter Leahy (Proxy)
Kyl Kennedy
Sessions Biden (Proxy)
Graham Feingold
Craig (Proxy) Schumer (Proxy)
Chambliss (Proxy) Durbin
Cornyn Edwards (Proxy)
Kohl
Feinstein
Hatch
A Durbin amendment to exclude from the Act class action
claims relating to tobacco products was rejected 8 yeas to 11
nays.
YEAS NAYS
DeWine Grassley
Leahy (Proxy) Specter (Proxy)
Kennedy Kyl
Biden (Proxy) Sessions
Feingold Graham
Schumer (Proxy) Craig (Proxy)
Durbin Chambliss (Proxy)
Edwards (Proxy) Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
A Kennedy amendment to exclude from the Act class action
claims relating to civil rights violations was rejected 7 yeas
to 11 nays.
YEAS NAYS
Leahy (Proxy) Grassley
Kennedy Kyl
Biden (Proxy) DeWine
Feingold Sessions
Schumer (Proxy) Graham
Durbin (Proxy) Craig
Edwards (Proxy) Chambliss (Proxy)
Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
A Kennedy amendment to exclude from the Act class action
claims relating to firearms injury was rejected 7 yeas to 11
nays.
YEAS NAYS
Leahy (Proxy) Grassley
Kennedy Kyl
Biden (Proxy) DeWine
Feingold Sessions
Schumer (Proxy) Graham
Durbin (Proxy) Craig
Edwards (Proxy) Chambliss (Proxy)
Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
A Feingold amendment to permit cases that fail to meet
federal class action certification requirements to proceed in
state court if state certification can be met was rejected 7
yeas to 11 nays.
YEAS NAYS
Leahy (Proxy) Grassley
Kennedy (Proxy) Kyl
Biden (Proxy) DeWine
Feingold Sessions
Schumer (Proxy) Graham
Durbin Craig
Edwards (Proxy) Chambliss (Proxy)
Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
A Feingold amendment to exclude from the Act class action
claims arising from State consumer protection laws was rejected
7 yeas to 11 nays.
YEAS NAYS
Leahy (Proxy) Grassley
Kennedy (Proxy) Kyl
Biden (Proxy) DeWine
Feingold Sessions
Schumer (Proxy) Graham
Durbin Craig
Edwards (Proxy) Chambliss (Proxy)
Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
A Leahy amendment to exclude from the Act class action
claims arising from state environmental protection statutes was
rejected 7 yeas to 11 nays.
YEAS NAYS
Leahy (Proxy) Grassley
Kennedy Kyl
Biden (Proxy) DeWine
Feingold Sessions
Schumer (Proxy) Graham
Durbin (Proxy) Craig
Edwards (Proxy) Chambliss (Proxy)
Cornyn
Kohl (Proxy)
Feinstein (Proxy)
Hatch
Motion to report favorably S. 274. The motion was approved
12 yeas to 7 nays.
YEAS NAYS
Grassley Leahy (Proxy)
Specter Kennedy (Proxy)
Kyl Biden (Proxy)
DeWine Feingold
Sessions Schumer (Proxy)
Graham Durbin
Craig Edwards (Proxy)
Chambliss
Cornyn
Kohl
Feinstein
Hatch
III. Purposes
Our current class action system is plagued by numerous
problems and abuses that threaten to undermine the rights of
both plaintiffs and defendants. One key reason for these
problems is that most class actions regardless of their
nationwide scope are currently adjudicated in state courts,
where the governing rules are applied inconsistently
(frequently in a manner that contravenes basic fairness and due
process considerations) and where there is often inadequate
supervision over litigation procedures and proposed
settlements. Moreover, current law enables lawyers to ``game''
the procedural rules to trap nationwide or multi-state class
actions in certain state courts whose judges have reputations
for readily certifying classes and approving settlements
without regard to class member interests. In this environment,
consumers are the big losers: in too many cases, judges are
readily approving class action settlements that offer little--
if any--meaningful recovery to the class members, and simply
enrich class counsel. Often, the settlement notice in such
cases is so confusing that the plaintiff class members do not
understand what--if anything--the settlement offers, or how
they can opt out of it. To make matters worse, multiple class
action cases purporting to assert the same claims on behalf of
the same people often proceed simultaneously in several
different state courts, causing judicial inefficiencies and
promoting collusive activity between plaintiffs' attorneys and
defendants. Indeed, many state courts freely issue rulings in
class action cases that have nationwide ramifications, thus
overturning well-established laws and policies of other
jurisdictions.
The Class Action Fairness Act of 2003 is a modest, balanced
bill to address some of the most egregious problems in class
action practice. The Committee emphasizes, however, that the
Act is not intended to be a ``panacea'' that will correct all
class action abuses. The Act has three key components:
First, S. 274 includes a consumer class action bill of
rights, with multiple components. One element prohibits federal
courts from approving coupon or ``net loss'' settlements
without making written findings that such settlements benefit
the class members. The bill's notice provisions require that
notices be in plain English and easily understandable. These
provisions complement recently promulgated rules under the
Rules Enabling Act that also seek to improve notices in class
actions. Another element requires special scrutiny of
settlements in which the named plaintiffs (i.e., the persons
who are supposed to be negotiating on behalf of the class)
receive special compensation beyond that being given to the
other class members. Yet another element of the consumer bill
of rights provides an additional mechanism to safeguard
plaintiff class members' rights by requiring that notice of
class action settlements be sent to appropriate state and
federal officials, so that they may voice concerns if they
believe that the class action settlement is not in the best
interest of their citizens.
Second, S. 274 corrects a flaw in the current diversity
jurisdiction statute (28 U.S.C. Sec. 1332) that prevents most
interstate class actions from being adjudicated in federal
courts. One of the primary historical reasons for diversity
jurisdiction ``is the reassurance of fairness and competence
that a federal court can supply to an out-of-state defendant
facing suit in state court.'' \2\ Because interstate class
actions typically involve more people, more money, and more
interstate commerce ramifications than any other type of
lawsuit, the Committee firmly believes that such cases properly
belong in federal court. To that end, this bill (a) amends
section 1332 to allow federal courts to hear more interstate
class actions on a diversity jurisdiction basis, and (b)
modifies the federal removal statutes to ensure that qualifying
interstate class actions initially brought in state courts may
be heard by federal courts if any of the real parties in
interest (including the unnamed class members or the
defendants) so desire. Thus, S. 274 makes it harder for
plaintiffs' counsel to ``game the system'' by trying to defeat
diversity jurisdiction, increases efficiency of the judicial
system by allowing overlapping and ``copycat'' cases to be
consolidated in a single federal court, and places the
determination of more interstate class action lawsuits in the
proper forum--the federal courts.
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\2\ Davis v. Carl Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 797
(11th Cir. 1999).
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Third, S. 274 directs the Judicial Conference of the United
States to conduct a review of class action settlements and
attorneys' fees and to present Congress with recommendations
for ensuring that attorneys' fees are determined in a fair and
reasonable way. This provision will help address the problem of
excessive attorneys' fees and will provide legislative
oversight of the Judicial Conference's efforts in this area.
IV. Background and Need for Legislation
As set forth in Article III of the Constitution,\3\ the
Framers established diversity jurisdiction to ensure fairness
for all parties in litigation involving persons from multiple
jurisdictions, particularly cases in which defendants from one
state are sued in the local courts of another state. Interstate
class actions--which often involve millions of parties from
numerous states--present the precise concerns that diversity
jurisdiction was designed to prevent: the potential for local
prejudice by the court against out-of-state defendants or a
judicial failure to recognize the interests of other states in
the litigation. Yet, because of a technical glitch in the
diversity jurisdiction statute (28 U.S.C. Sec. 1332), such
cases are usually excluded from federal court. The glitch is
not surprising given that class actions as we now know them did
not exist when the statute's concept was crafted in the late
1700s.
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\3\ In the words of Article III, ``[t]he judicial power shall
extend * * * to Controversies * * * between citizens of different
States.''
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This Committee believes that the current diversity and
removal standards as applied in interstate class actions have
facilitated a parade of abuses, and are thwarting the
underlying purpose of the constitutional requirement of
diversity jurisdiction. S. 274 addresses these concerns by
establishing ``balanced diversity''--a rule allowing a larger
number of class actions into federal courts, while continuing
to preserve primary state court jurisdiction over others.
A. A Brief History of Class Actions
Although class actions have some roots in common law, the
general concept was first codified in 1849.\4\ Early class
actions merely required that numerous parties demonstrate a
common interest in law or fact.
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\4\ See Newberg on Class Actions 3d Sec. Sec. 13-14 to 13-17
(1997).
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Rule 23 of the Federal Rules of Civil Procedure, the rule
governing federal court class actions, was initially adopted in
1938.\5\ However, the concept of class actions that are a
familiar part of today's legal landscape did not arise until
1966, when Rule 23 was substantially amended to expand the
availability of the device. Under Rule 23, a class action can
be brought in federal court if (1) the class is so numerous
that joinder of all members is impracticable; (2) there are
questions of law or fact common to the class; (3) the claims or
defenses of the representative parties are typical of those of
the class; and (4) the representative parties will fairly and
adequately protect the interests of the class. In addition, a
proponent must show that the proposed class meets one of three
additional requirements set forth in Rule 23(b). For example,
for a Rule 23(b)(3) damages class action to be certified, a
proponent must show that ``the questions of law or fact common
to the members of the class predominate over any questions
affecting only individual members, and that a class action is
superior to other available methods for the fair and efficient
adjudication of the controversy.'' \6\
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\5\ For a more comprehensive history of Rule 23, see e.g., The
Class Action Fairness Act of 1999: Hearings on S. 353 Before the
Subcomm. on Administrative Oversight and the Courts of the Senate Comm.
on the Judiciary, 106th Cong. (1999) (hereinafter ``Hearings on S.
353''), Prepared Statement of John P. Frank.
\6\ Fed.R.Civ.P. 23(b)(3). Alternatively for a Rule 23(b)(1) class,
the class proponent must show that the prosecution of separate actions
by or against individual members of the class would create a risk of
either (i) inconsistent or varying adjudication which would establish
incompatible standards of conduct for the party opposing the class or
(ii) adjudications which, as a practical matter, would be dispositive
of the interests of the other members not parties to the adjudications
or which would substantially impair or impede their ability to protect
their ability to protect their interests. Id. at 23(b)(1). To obtain
certification of a Rule 23(b)(2) class, the proponent is required to
show that ``the party opposing the class has acted or refused to act on
grounds generally applicable to the class, thereby making appropriate
final injunctive relief or corresponding declaratory relief with
respect to the class as a whole.'' Id. at 23(b)(2).
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As originally envisioned, class action lawsuits were to be
primarily a tool for civil rights litigants seeking injunctions
in discrimination cases.\7\ Prof. John P. Frank, a member of
the 1966 Advisory Committee on Civil Rules that proposed
amending Rule 23 to its current form, testified that those who
wrote the new class action rule thought it would rarely (if
ever) apply to product liability or mass torts cases.\8\ In the
1980s, however, some plaintiffs' lawyers successfully persuaded
judges to expand class actions to the area of mass torts.\9\
These courts began to expand the types of claims they were
willing to certify as class actions because they feared that
the large number of individual mass tort cases could slow or
stop the judicial system.\10\ Thus, class actions have evolved
from their original primary purpose--to counter civil rights
abuses--and have become a common tool for plaintiffs' attorneys
bringing personal injury or product liability claims. While the
landscape of class actions has changed dramatically, the
procedural rules regarding which courts can hear class actions,
and consequently, which procedural law will apply to such
cases, generally have remained the same since 1966.
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\7\ See Hearings on S. 353, Prepared Statement of John P. Frank
(``If there was a single, undoubted goal of the committee, the
energizing force which motivated the whole rule, it was the firm
determination to create a class action system which could deal with
civil rights and, explicitly, segregation.'').
\8\ Administrative Office of the U.S. Courts, Working Papers of the
Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule
23 (Vol. 2) (``Advisory Committee Working Papers''), at 260 (1997).
Another member of the 1966 Advisory Committee--Hon. William T. Coleman,
Jr.--has testified to a similar effect. Id. (Vol. 3), 11/22/96 Public
Hearing Tr. at 204 (``I assure you that what the courts have done with
respect to Rule 23(b)(3) is far beyond what we * * * ever intended. To
the extent that there's difficulty [with class actions, it] is not
because of anything that was drafted in 1966, but [because] of how the
rule has been handled since that time.'').
\9\ See John C. Coffee, Jr., Class Wars: The Dilemma of the Mass
Tort Class Action, 95 Colum. L. Rev. 1343, 1358 (1995).
\10\ Id. at 1356-58, 1363-64.
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B. Federal Diversity Jurisdiction and Removal Provisions
1. The basics of diversity jurisdiction
The Constitution extends federal court jurisdiction to
cases of a distinctly federal character--for instance, cases
raising issues under the Constitution or federal statutes, or
cases involving the federal government as a party--and
generally leaves to state courts the adjudication of local
questions arising under state law. However, the Constitution
specifically extends federal jurisdiction to encompass one
category of cases involving issues of state law: ``diversity''
cases, or suits ``between citizens of different States.'' \11\
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\11\ U.S. Const. art. III, sec. 2.
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According to the Framers, the primary purpose of diversity
jurisdiction was to protect citizens in one state from the
injustice that might result if they were forced to litigate in
out-of-state courts.\12\ Quoting James Madison, Judge Henry
Friendly explained that diversity jurisdiction is essential to
a strong union because it ``may happen that a strong prejudice
may arise in some state against the citizens of others, who may
have claims against them.'' \13\ Justice Frankfurter expressed
a similar understanding of Madison's concerns: ``It was
believed that, consciously or otherwise, the courts of a state
may favor their own citizens. Bias against outsiders may become
embedded in a judgment of a state court and yet not be
sufficiently apparent to be made the basis of a federal
claim.'' \14\
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\12\ See Pease v. Peck, 59 U.S. (18 How) 595, 599 (1856) (``The
theory upon which jurisdiction is conferred on the court of the United
States, in controversies between citizens of different States, has its
foundation in the supposition that, possibly the state tribunal might
not be impartial between their own citizens and foreigners.''); see
also Martin v. Hunter's Lessee, 14 U.S. (1 Wheat) 304, 347 (1816); Bank
of the United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87 (1809);
Barrow S.S. Co. v. Kane, 170 U.S. 100 (1898) (``The object of the
provisions of the Constitution and statutes of the United States in
conferring upon the Circuit Courts of the United States jurisdiction of
controversies between citizens of different States of the Union * * *
was to secure a tribunal presumed to be more impartial than a court of
the State in which one of the litigant resides.''); The Federalist No.
80, at 537-38 (Alexander Hamilton) (Jacob E. Cooke, ed. 1961) (``In
order to [ensure] the inviolable maintenance of that equality of
privileges and immunities to which citizens of the union will be
entitled, the national judiciary ought to preside in all cases in which
one state or its citizens are opposed to another state or its citizens.
To secure the full effect of so fundamental a provision against all
evasion and subterfuge, it is necessary that its construction should be
committed to that tribunal which, having no local attachments, will be
likely to be impartial between the different states and their citizens,
and which, owing its official existence to the union, will never be
likely to feel any bias inauspicious to the principles on which it is
founded.'').
\13\ H. J. Friendly, The Historic Basis of Diversity Jurisdiction,
41 Harv. L. Rev. 483, 492-93 (1928).
\14\ Burford v. Sun Oil Co., 319 U.S. 315, 336 (1943) (Frankfurter,
J., dissenting).
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In addition to protecting individual litigants, diversity
jurisdiction has two other important purposes. In testimony
several years ago before the Subcommittee on Administrative
Oversight and the Courts, Prof. E. Donald Elliott of the Yale
Law School expressed the view that diversity jurisdiction was
designed not only to protect against actual discrimination, but
also ``to shore up confidence in the judicial system by
preventing even the appearance of discrimination in favor of
local residents.'' \15\ In addition, several legal scholars
have noted that the Framers were concerned that state courts
might discriminate against interstate businesses and commercial
activities, and thus viewed diversity jurisdiction as a means
of ensuring the protection of interstate commerce.\16\ As
former Acting Solicitor General Walter Dellinger testified last
year before the Committee, ``diversity jurisdiction has served
to guarantee that parties of different state citizenship have a
means of resolving their legal differences on a level playing
field in a manner that nurtures interstate commerce.'' \17\
Both of these concerns--judicial integrity and interstate
commerce--are strongly implicated by class actions.
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\15\ Hearings on S. 353, Prepared Statement of E. Donald Elliott,
May 4, 1999; see also, Adrienne J. Marsh, Diversity Jurisdiction:
Scapegoat of Overcrowded Federal Courts, 48 Brooklyn L. Rev. 197, 201
(1989).
\16\ See generally John P. Frank, Historical Bases of the Federal
Judicial System, 13 Law & Contemp. Probs. 3, 22-28 (1948); H. J.
Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv. L.
Rev. 483 (1928).
\17\ See Class Action Litigation: Hearing on Class Actions Before
the Senate Comm. on the Judiciary, 107th Cong. (2002) (hereinafter
``Hearing on Class Actions''), Prepared Statement of Walter E.
Dellinger, III.
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Over the years since the First Congress enacted provisions
in the Judiciary Act of 1789 setting forth the parameters of
federal diversity jurisdiction, two statutory limitations on
that jurisdiction have been constants. The first is the
``amount in controversy'' requirement (currently $75,000),
which Congress enacted in order to ensure that diversity
jurisdiction extends only to non-trivial state-law cases.\18\
The second is the ``complete diversity'' requirement, a rule
that federal jurisdiction lies only when all plaintiffs are
diverse as to all defendants.\19\ It is important to recognize
that these procedural limitations regarding interstate class
actions were policy decisions, not constitutional ones. In
fact, the U.S. Supreme Court has repeatedly acknowledged that
the complete diversity and minimum amount-in-controversy
requirements are political decisions not mandated by the
Constitution.\20\ Indeed, as Professor Dellinger noted in his
testimony before this Committee last year, class action
legislation expanding federal jurisdiction over class actions
``would fulfill the intentions of the Framers because the
rationales that underlie the diversity jurisdiction concept
apply with equal--if not greater--force to interstate class
actions.'' \21\ It is therefore the prerogative of Congress to
modify these technical requirements as it deems appropriate.
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\18\ See 28 U.S.C. Sec. 1332(a).
\19\ See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806).
\20\ See, e.g., Newman-Greene, Inc. v. Alfonzo-Larrian, 490 U.S.
826, 829 n.1 (1989) (noting that ``[the] complete diversity requirement
is based on the diversity statute, not Article III of the
Constitution.''); Owen Equip. & Co. v. Kroger, 437 U.S. 365, 373 n. 13
(1978) (to the same effect).
\21\ See Hearing on Class Actions, Prepared Statement of Walter E.
Dellinger, III.
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2. How diversity cases arrive in federal court
A diversity case can be taken to federal court in two ways:
(1) by the plaintiffs' initial decision to file the case in
federal court, or (2) by the defendants' decision to remove the
case to federal court. The concept of ``removing'' cases from
state courts to federal courts is based largely on the same
core premise as diversity jurisdiction--i.e., that an out-of-
state defendant in a state court proceeding should have access
to an even-handed federal forum.\22\ The general removal
statute, 28 U.S.C. Sec. 1441(a), provides that any civil action
brought in a state court may be removed by the defendant(s) to
federal court if the claim could have originally been brought
in federal court. In other words, so long as a federal district
court could exercise original jurisdiction over a claim, a
defendant may remove the case to federal court.
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\22\ See David P. Currie, Federal Jurisdiction 115-116 (4th ed.
1999).
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Section 1446(b) of Title 28 outlines the procedure for
removal. Under this provision, a defendant must file papers
seeking removal to federal court within 30 days after receiving
a copy of the initial pleading (or service of summons if a
pleading has been filed in court and is not required to be
served on the defendant). If the original complaint was not
removable, but the plaintiff subsequently amends the pleadings
in such a way that removal becomes proper, then the notice of
removal must be filed within 30 days of receipt by the
defendant of ``a copy of an amended pleading, motion, order, or
other paper from which it may first be ascertained that the
case [is removable].'' \23\ Under current law, however, a case
can only be removed on diversity jurisdiction grounds within a
year from commencement of the action.\24\
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\23\ 28 U.S.C. Sec. 1446(b).
\24\ Id.
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C. How Diversity Jurisdiction and Removal Statutes are Abused
The current rules governing federal jurisdiction have the
unintended consequence of keeping most class actions out of
federal court, even though most class actions are precisely the
type of case for which diversity jurisdiction was created
because of their interstate character.\25\ In addition, current
law enables plaintiffs' lawyers who prefer to litigate in state
courts to easily ``game the system'' and avoid removal of large
interstate class actions to federal court.
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\25\ See generally, Victor E. Schwartz, Mark A. Behrens & Leah
Lorber, Federal Courts Should Decide Interstate Class Actions: A Call
for Federal Class Action Diversity Jurisdiction Reform, 37 Harv. J.
Legis. 483 (Summer 2000).
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This gaming problem exists for two reasons. The first
reason is the ``complete diversity'' requirement. Although the
Supreme Court has held that only the named plaintiffs'
citizenship should be considered for purposes of determining if
the parties to a class action are diverse, the ``complete''
diversity rule still mandates that all named plaintiffs must be
citizens of different states from all the defendants.\26\ In
interstate class actions, plaintiffs' counsel frequently and
purposely evade federal jurisdiction in multi-state class
actions by adding named plaintiffs or defendants simply based
on their state of citizenship in order to defeat complete
diversity. For example, it is quite common in insurance cases
for plaintiffs to name a few local insurance agents in a
nationwide class action against an out-of-state insurance
company, even though the vast majority of proposed class
members had no dealings with these agents.\27\ Similarly, in
product liability cases against automobile manufacturers,
plaintiffs often name a local dealer even though only a few
class members purchased their cars from that dealer.\28\ One
witness at last year's hearing on class actions testified that
her drug store was named as a defendant in ``hundreds of
lawsuits'' so that ``the lawyers could keep the case in a place
known for its lawsuit-friendly environment.'' \29\ If all it
takes to keep a class action in state court is to name one
local retailer, it is no surprise that few interstate class
actions meet the complete diversity requirement.
---------------------------------------------------------------------------
\26\ See Snyder v. Harris, 394 U.S. 332 (1969).
\27\ See, e.g., Blanke v. Lincoln National Corp., 1997 U.S. Dist.
LEXIS 20384 (E.D. La. Dec. 18, 1997).
\28\ See, e.g., Triggs v. John Crump Toyota, 154 F.3d 1284 (11th
Cir. 1998).
\29\ See Hearing on Class Actions, Prepared Statement of Hilda
Bankston.
---------------------------------------------------------------------------
The second reason that lawyers are able to game the system
is the amount-in-controversy requirement. In interpreting 28
U.S.C. Sec. 1332(a), some federal courts of appeals, relying on
a 1974 Supreme Court decision,\30\ have held that the amount-
in-controversy requirement is normally met in class actions
only if each of the class members individually seeks damages in
excess of the statutory minimum.\31\ That means federal courts
can only hear class actions in which each plaintiff claims
damages in excess of $75,000.\32\ The Committee believes that
requiring each plaintiff to reach the $75,000 mark makes little
sense in the class action context. After all, class actions
frequently involve tens of millions of dollars even though each
individual plaintiff's claims are far less than that amount.
Moreover, class action lawyers sometimes misuse the
jurisdictional threshold to keep their cases out of federal
court. For example, class action complaints often include a
provision stating that no class member will seek more than
$75,000 in relief, even though certain class members may be
entitled to more and the class action seeks millions of dollars
in the aggregate.
---------------------------------------------------------------------------
\30\ See Zahn v. International Paper Co., 414 U.S. 291 (1974).
\31\ See Trimble v. Asarco, Inc., 232 F.3d 946 (8th Cir. 2000);
Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214 (3d Cir.
1999); Leonhardt v. Western Sugar Co., 160 F.3d 631 (10th Cir. 1998).
\32\ Other federal courts of appeals have held that for a class
action to be heard in federal court only one or more named plaintiffs
must have claims exceeding $75,000. See, e.g., Rosmer v. Pfizer, Inc.,
263 F.3d 110 (4th Cir. 2001); Gibson v. Chrysler Corp., 261 F.3d 927
(9th Cir. 2001); Stromberg Metal Works. Inc. v. Press Mechanical, Inc.,
77 F.3d 928 (7th Cir. 2000); In re Abbott Labs., Inc., 51 F.3d 524 (5th
Cir. 1995), aff'd by an equally divided Court, 529 U.S. 333 (2000);
Allapattah Servs. v. Exxon Corp., 2003 U.S. App. LEXIS 11628 (June 11,
2003). In the view of these courts, the value of the claims of the
other class members is irrelevant--they are deemed to be part of the
class as a matter of supplemental jurisdiction. The Committee stresses,
however, that even in those Circuits following this rule, relatively
few class actions find their way into federal court because plaintiffs
offer named plaintiffs who do not have $75,000 claims or name a non-
diverse plaintiff or defendant in order to prevent removal of the case
to federal court.
---------------------------------------------------------------------------
This leads to the nonsensical result under which a citizen
can bring a ``federal case'' by claiming $75,001 in damages for
a simple slip-and-fall case against a party from another state,
while a class action involving 25 million people living in all
fifty states and alleging claims against a manufacturer that
are collectively worth $15 billion currently must usually be
heard in state court. In other words, under the current
jurisdictional rules, federal courts can assert diversity
jurisdiction over a typical state law claim arising out of an
auto accident between a driver from one state and a driver from
another, but cannot assert jurisdiction over claims covering
large-scale, interstate class actions involving thousands of
plaintiffs from multiple states, defendants from many states,
the laws of several states, and hundreds of millions of
dollars.
There is a growing chorus of authoritative sources
declaring that something is badly amiss with the manner in
which federal diversity jurisdictional requirements are applied
to class actions:
The leading federal civil procedure law treatise
has noted: ``The traditional principles [regarding federal
diversity jurisdiction over class actions] have evolved
haphazardly and with little reasoning. They serve no apparent
policy and their application to a certain degree turns on a
mystifying conceptual test.'' \33\
---------------------------------------------------------------------------
\33\ 14B Charles A. Wright, et al., Federal Practice and Procedure
Sec. 3704, at 127 (3d ed. 1998).
---------------------------------------------------------------------------
In a recent Minnesota state appellate court
decision upholding a grant of class certification, a concurring
judge noted that the nationwide class action before the court
was a ``poster child for national class action reform. We have
here a Minnesota [state] district court, applying a New Jersey
consumer fraud statute to a nationwide class of plaintiffs,
with few of those plaintiffs residing in New Jersey. And, it is
probably a fair assumption that the legislative authors of the
New Jersey consumer protection scheme did not have in mind
midwestern farmers purchasing agricultural chemicals as the
protected class. * * * This is not a recipe for uniformity or
consistency, it is fair neither to claimants nor defendants and
it is long past time for national policy makers to address
class action procedures.'' \34\
---------------------------------------------------------------------------
\34\ Peterson v. BASF Corp., 657 N.W. 2d 853 (Minn. App. Ct. 2003).
---------------------------------------------------------------------------
The U.S. Court of Appeals for the Eleventh Circuit
apologized for sending an interstate class action back to state
court, noting that ``an important historical justification for
diversity jurisdiction is the reassurance of fairness and
competence that a federal court can supply to an out-of-state
defendant facing suit in state court.'' Observing that the out-
of-state defendant in that case was confronting ``a state court
system [prone to] produce[] gigantic awards against out-of-
state corporate defendants,'' the court stated that ``[o]ne
would think that this case is exactly whatthose who espouse the
historical justification for [diversity jurisdiction] would have in
mind * * *.'' \35\
---------------------------------------------------------------------------
\35\ Davis v. Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 797 (11th
Cir. 1999).
---------------------------------------------------------------------------
In that same case, Judge John Nangle, the former
chairman of the Judicial Panel for Multidistrict Litigation,
concurred: ``Plaintiffs' attorneys are increasingly filing
nationwide class actions in various state courts, carefully
crafting language * * * to avoid * * * the federal courts.
Existing federal precedent * * * [permits] this practice * * *,
although most of these cases * * * will be disposed of through
`coupon' or `paper' settlements * * * virtually always
accompanied by munificent grants of or requests for attorneys'
fees for class counsel * * *. [T]his judge is of the opinion
that the present [jurisdictional rules] do[] not accommodate
the reality of modern class litigation and settlements.'' \36\
---------------------------------------------------------------------------
\36\ Id. at 798.
---------------------------------------------------------------------------
In another case, Judge Anthony Scirica (chair of
the Judicial Conference's Standing Committee on Rules and
Procedure) observed that although ``national (interstate) class
actions are the paradigm for federal diversity jurisdiction
because * * * they implicate interstate commerce, foreclose
discrimination by a local state, and tend to guard against any
bias against interstate enterprises, * * * the current
jurisdictional statutes [put] such class actions * * * beyond
the reach of the federal courts.'' \37\
---------------------------------------------------------------------------
\37\ In re Prudential Ins. Co. America Sales Practice Litig., 148
F.3d 283, 305 (3d Cir. 1998).
---------------------------------------------------------------------------
In a March 26, 2002 letter to the Committee, the
Judicial Conference of the United States acknowledges ``current
problems with class action litigation.'' Further, in that
letter, the Conference for the first time ``recognizes that the
use of [expanded] diversity jurisdiction may be appropriate to
the maintenance of significant multi-state class action
litigation in the federal courts.'' \38\
---------------------------------------------------------------------------
\38\ Letter from the Judicial Conference of the United States to
Senator Orrin G. Hatch, (R-UT), Chairman of the Senate Committee on the
Judiciary. March 26, 2003.
---------------------------------------------------------------------------
The Committee notes that a number of congressional hearing
witnesses (including former Carter Administration Attorney
General Griffin Bell and Clinton Administration Solicitor
General Walter E. Dellinger) and other legal experts agree that
if Congress were to draft an entirely new federal diversity
jurisdiction statute and start over in deciding which cases
should be subject to federal diversity jurisdiction, Congress
likely would conclude that interstate class actions are among
the cases that most warrant access to the federal courts
because they involve the most people, put the most money in
controversy, and have the greatest implications for interstate
commerce.\39\ As Prof. Dellinger noted in his testimony last
year before this Committee, ``the rationales that underlie the
diversity jurisdiction concept apply with equal--if not
greater--force to interstate class actions.'' \40\
---------------------------------------------------------------------------
\39\ See generally Hearing on Class Actions; Hearings on S. 353;
Hearing on H.R. 1875.
\40\ See Hearing on Class Actions, Prepared Statement of Walter E.
Dellinger III.
---------------------------------------------------------------------------
D. Other Abuses With the Class Action Rules
The ability of plaintiffs' lawyers to evade federal
diversity jurisdiction has helped spur a dramatic increase in
the number of class actions litigated in state courts--an
increase that is stretching the resources of the state court
systems. In his testimony to the Subcommittee on Administrative
Oversight and the Courts several years ago, Prof. E. Donald
Elliott pointed out that the flood of class actions in our
state courts is too well documented to warrant significant
discussion, much less debate.\41\ According to recent studies,
federal class action filings over the past ten years have
increased by more than 300 percent. At the same time, class
action filings in state courts have grown more than three times
faster--by more than 1,000 percent.\42\
---------------------------------------------------------------------------
\41\ Hearings on S. 353, Prepared Statement of E. Donald Elliott.
\42\ See Analysis: Class Action Litigation--A Federalist Society
Survey, Class Action Watch at 5 (Vol. 1, No. 1 1998); Deborah Hensler,
et al., Preliminary Results of the Rand Study of Class Action
Litigation 15 (May 15, 1997); see also Advisory Committee Working
Papers (Vol. 1) at ix-x (May 1, 1997) (memorandum of Judge Paul V.
Niemeyer to members of the Advisory Committee on Civil Rules).
---------------------------------------------------------------------------
Notably, many of these cases are being filed in improbable
jurisdictions. A recent study conducted in three venues with
reputations as hotbeds for class action activity found
exponential increases in the numbers of class actions filed in
recent years. For example, in the Circuit Court of Madison
County, Illinois, a mostly rural county that covers 725 square
miles and is home to less than one percent of the U.S.
population, the number of class actions filed annually grew
from 2 in 1998 to 39 in 2000--an increase of 3,650 percent.\43\
And a follow-up study found that the number of class actions
filed in the county continued to grow dramatically in 2001 and
2002.\44\
---------------------------------------------------------------------------
\43\ See John H. Beisner and Jessica Davidson Miller, They're
Making A Federal Case Out Of It * * * In State Court, 25 Harv. J. L. &
Pub. Pol'y 1 (Fall 2001).
\44\ See John H. Beisner and Jessica Davidson Miller, Class Action
Magnet Courts: The Allure Intensifies, 4 BNA Class Action Litig. R. 58
(Jan. 24, 2003).
---------------------------------------------------------------------------
The reason for this dramatic increase in state court class
actions cannot be found in variations in class action rules;
after all, the rules governing the decision whether cases may
proceed as class actions are basically the same in federal and
state courts. In fact, thirty-six states have adopted the basic
federal class action rule (Rule 23), sometimes with minor
revisions. Of the remaining states, most have rules that are
guided by federal court class action policy and contain similar
requirements. Two states do not have rules or statutes
authorizing class actions. Thus, there are no wide variations
between federal and state court class action policies.
The Committee finds, however, that one reason for the
dramatic explosion of class actions in state courts is that
some state court judges are less careful than their federal
court counterparts when applying the procedural requirements
that govern class actions. In particular, many state court
judges are lax about following the strict requirements of Rule
23 or the state'sparallel governing rule, which are intended to
protect the due process rights of both unnamed class members and
defendants. Alternatively, in a limited few jurisdictions where class
action procedures do not exist--and even in some states where they do
exist--some judges have nevertheless espoused a willingness to allow
curious mass consolidations or mass joinders that are not capable of
rigorous class certification rule scrutiny. In contrast, federal courts
generally scrutinize proposed settlements more carefully and pay closer
attention to the procedural requirements for certifying a matter for
class treatment.\45\
---------------------------------------------------------------------------
\45\ See Hearings on S. 353, Oral Statement of Senator Charles E.
Grassley.
---------------------------------------------------------------------------
Another problem is that a large number of state courts lack
the necessary resources to supervise proposed class settlements
properly.\46\ Many state judges do not have law clerks, and the
explosion of state court class actions has simply overwhelmed
their dockets. Not surprisingly, abuses are much more likely to
occur when state court judges are unable to give class action
cases and settlements the attention they need.
---------------------------------------------------------------------------
\46\ See Hearings on S. 353, Prepared Statement of Stephen G.
Morrison (``I think it is clear that the explosion of class action
filings can only be attributed to the fact that certain members of the
plaintiffs' bar have discovered that some of our state courts can be a
fertile playing field for class litigation.'').
---------------------------------------------------------------------------
The lack of a federal forum for most interstate class
actions and the inconsistent administration of class actions in
state courts have led to several forms of abuse. The Committee,
in drafting this bill, has focused upon six major types of
abuses that result in unfair treatment of litigants and
consumers. First, lawyers, not plaintiffs, may benefit most
from settlements. Second, corporate defendants are forced to
settle frivolous claims to avoid expensive litigation, thus
driving up consumer prices. Third, constitutional due process
rights are often ignored in class actions. Fourth, expensive
and predatory copy-cat cases force defendants to litigate the
same case in multiple jurisdictions, driving up consumer costs.
Fifth, class members frequently are unable to understand their
rights when reading class action notice documents, and there is
a need to provide them with additional protections from
unfairly reached settlements. Sixth, lawyers sometimes
structure settlements so that some plaintiff class members
unfairly receive additional geography or bounty payments, to
the detriment of all other class members.
1. Lawyers receive disproportionate shares of settlements
The first abuse involves settlements in which the attorneys
receive excessive attorneys' fees with little or no recovery
for the class members themselves. In the now infamous Bank of
Boston class action settlement,\47\ for example, the defendant
bank was accused of over-collecting escrow monies from
homeowners and profiting from the interest. The settlement,
approved by an Alabama state court, awarded up to $8.76 each to
individual class members, while the class counsel got more than
$8.5 million in fees. To make matters worse, the fees were
simply debited directly from individual class members' escrow
accounts, leaving many of them worse off than they were before
the suit. In testimony before the Subcommittee on
Administrative Oversight and the Courts, class member Martha
Preston recounted how she received $4 from the settlement, but
was charged a mysterious $80 ``miscellaneous deduction,'' which
she later learned was an expense used to pay the class lawyers'
$8.5 million settlement fee. Ms. Preston expressed her
disbelief over how ``people who were supposed to be my lawyers,
representing my interests, took my money and got away with
it.'' \48\
---------------------------------------------------------------------------
\47\ Kamilewicz v. Bank of Boston, 92 F.3d 506 (7th Cir. 1996).
\48\ See Class Action Lawsuits: Examining Victim Compensation and
Attorneys' Fees: Hearing before the Subcomm. on Administrative
Oversight and the Courts of the Senate Comm. on the Judiciary, Serial
No. J-105-62 (S. Hrg. 105-504), 105th Cong., 1st Sess. (Oct. 30, 1997),
Prepared Statement of Martha Preston.
---------------------------------------------------------------------------
Through several hearings over the past several years, the
Committee has become aware of numerous class action settlements
approved by state courts in which most--if not all--of the
monetary benefits went to the class counsel, rather than to the
class members those attorneys were supposed to be representing.
These settlements include many so-called ``coupon settlements''
in which class members receive nothing more than promotional
coupons to purchase more products from the defendants. The
record before the Committee is replete with examples, but the
common theme is the same: the lawyers get cash, while the
plaintiffs get coupons or less. For example:
In a case involving customers who alleged that
they were charged excessive late fees by Blockbuster, the class
members received $1 off coupons for rentals--at the same time,
their attorneys divided up a $9.25 million fee award. Experts
have predicted that at most, only 20 percent of the class
members will redeem the coupons. However, the settlement allows
Blockbuster to continue its practice of charging customers for
a new rental period when they return a tape late.\49\ In this
settlement approved by a Texas state court, only the lawyers
received cash.
---------------------------------------------------------------------------
\49\ Scott v. Blockbuster Inc. (No. D162-535, Jefferson County,
Texas, 2001); Judge OKs Blockbuster Plan On Fees, Associated Press,
Jan. 11, 2002.
---------------------------------------------------------------------------
Under a settlement in a class action against
American Airlines filed in state court, which resulted from
allegations regarding changes in American Airlines' frequent
flyer program, members of the program received vouchers good
for $25 to $75 off the price of future travel, or a similarly
valued reduction in the number of miles required for an award.
American agreed to pay the lawyers up to $25 million in fees.
One news article about the settlement quoted travel experts
saying that ``the practical value of those discounts will be
modest,'' and ``American could end up generating enough extra
revenue to more than offset the cost of the offer.'' \50\
---------------------------------------------------------------------------
\50\ American Airlines Settles Lawsuits Over Frequent Flier
Program, Fort Worth Star-Telegram, June 22, 2000.
---------------------------------------------------------------------------
A manufacturer offered consumers who bought a
dozen Pinnacle golf balls free golf gloves. When the
manufacturer ran out of the golf gloves and substituted a set
of three free golf balls, it was hit with a class action. The
settlement provided that the manufacturer would send each class
member three more free golf balls. Meanwhile, by order of a
state court, the attorneyswho brought the lawsuit received
$100,000 in fees and the persons who served as class representatives
each received $2,500.\51\
---------------------------------------------------------------------------
\51\ Enough Already With the Lawsuits, Kansas City Star, July 10,
1999.
---------------------------------------------------------------------------
A class action alleged that certain ``zip drives''
supposedly contained a defect that sometimes caused the failure
of the drives or the zip disks. The plaintiffs' attorneys
received $4.7 million in fees, while the estimated 28 million
purchasers of an Iomega Zip drive between 1995 and March 19,
2001 received coupons for a rebate of between $5 and $40 on
future purchases of Iomega products. In addition, the
settlement called for the defendant to donate $1 million of its
products to schools.\52\
---------------------------------------------------------------------------
\52\ Rinaldi v. Iomega Corp. (No. 98C-09-064-RRC, Delaware); Utah-
Based Tech Company Settles Lawsuit With Rebate Offer, Standard-
Examiner, Apr. 14, 2001.
---------------------------------------------------------------------------
In a suit involving port charges, a sea cruise
line agreed to give vouchers worth $25 to $55 off a future
cruise to 4.5 million people who sailed on its cruises between
April 19, 1992 and June 4, 1997. The vouchers can be used for a
future cruise or redeemed for cash at 15 or 20 percent of face
value.\53\ In this state court class action settlement, only
the lawyers received cash payments.
---------------------------------------------------------------------------
\53\ Carnival Cruise Settles Lawsuit, Florida Today, Mar. 16,
2001.
---------------------------------------------------------------------------
In a case alleging flawed television sets, Thomson
Consumer Electronics agreed to reimburse customers who had
receipts documenting repairs, to provide $50 rebates on the
purchase of future products for consumers who did not repair
their problems or did not have receipts, and to provide $25
rebates on future products to consumers who did not experience
a problem. Thus, those plaintiffs with actual injuries were
required to split awards with those without any injury
whatsoever. The lawyers reportedly received $22 million in fees
and costs.\54\
---------------------------------------------------------------------------
\54\ Thomson Antes Up $100 Million Settlement, Indianapolis
Business Journal, Mar. 12, 2001.
---------------------------------------------------------------------------
In one state court class action involving faulty
pipes, lawyers for a group of Alabama plaintiffs received more
than $38.4 million in fees, and lawyers for a class of
Tennessee plaintiffs received $45 million, or the equivalent of
about $2,000 an hour. In contrast, the homeowners only received
8 percent rebates toward new plumbing--and to get those
rebates, they had to first prove that they had suffered leaks
and then go out and buy a new system.\55\
---------------------------------------------------------------------------
\55\ See Richard B. Schmitt, Leaky System: Suits Over Plastic Pipe
Finally Bring Relief, Especially for Lawyers, Wall St. J., Nov. 20,
1995, at A1.
---------------------------------------------------------------------------
In March 1995, a computer manufacturer settled
multiple state court class actions alleging a chip flaw that
would arise only once in 27,000 years for the average
spreadsheet user. It essentially agreed to do what it was
already doing: offer free replacements, maintain service
centers, operate toll-free phone numbers, and provide
diagnostic computer programs. Meanwhile, class counsel received
$4.27 million in fees.\56\
---------------------------------------------------------------------------
\56\ See The (San Francisco) Recorder, Jan. 4, 1996.
---------------------------------------------------------------------------
In another case, an Illinois state court approved
a coupon settlement of a class action filed against
Southwestern Bell Mobile Systems, Inc., alleging that the
company failed to fully disclose the fact that it rounded up
customer calls to the next minute. Under the state court
settlement, the class members received $15 vouchers toward
Cellular One products, while the class lawyers took home more
than $1 million in fees.\57\
---------------------------------------------------------------------------
\57\ See Michelle Singletary, Coupon Settlements Fall Short, Wash.
Post, Sept. 12, 1999, at H01.
---------------------------------------------------------------------------
In a state court class action alleging that Coca-
Cola improperly added sweeteners to apple juice, the defendant
agreed to distribute 50-cent coupons toward the purchase of
apple juice. Meanwhile, class counsel received $1.5
million.\58\
---------------------------------------------------------------------------
\58\ Lawyers Get $1.5 Million, Clients Get 50 Cents Off, Fulton
County Daily Report, Nov. 21, 1997.
---------------------------------------------------------------------------
A California state court approved a settlement
under which class members, who had alleged that manufacturers
misrepresented the size of computer monitor screens, received a
$13 rebate if they purchased new monitors. The class attorneys,
however, received approximately $6 million in fees.\59\
---------------------------------------------------------------------------
\59\ Coupon Settlements Fall Short, Washington Post, Sept. 12,
1999.
---------------------------------------------------------------------------
The Chicago Tribune reported that in a state court
class action against a record company to recover the prices
paid for albums by the group Milli Vanilli (that contained the
voices of other performers), class members were given a
settlement of $1 to $3 each. The Illinois state court awarded
the lawyers $675,000, but the lawyers turned around and
petitioned the court for an increase to $1.9 million.\60\
---------------------------------------------------------------------------
\60\ See $675,000 Approved for Lawyers In Milli Vanilli Lip-Sync
Lawsuit, Chicago Tribune, July 24, 1992.
---------------------------------------------------------------------------
In a state court action alleging that General
Mills treated oats with a non-approved pesticide, class members
were offered coupons; the attorneys received $1.75 million.\61\
---------------------------------------------------------------------------
\61\ Cereal Plan Called Soggy, National Law Journal, May 22, 1995.
---------------------------------------------------------------------------
In a settlement of a state court antitrust class
action involving cellular service, coupons and small service
credits were offered. But counsel obtained agreement to be paid
up to $9.5 million.\62\ Virtually all the cash paid in the
settlement went to lawyers.
---------------------------------------------------------------------------
\62\ Judge OK's Plan For Class Members, The Recorder, Feb. 24,
1998.
---------------------------------------------------------------------------
In another case, class action plaintiffs alleged
that discount stores overstated the value of software bundles
that came with computers. In a class settlement approved by a
state court, consumers received coupons worth the lesser of a 7
percent or $25 discount off future purchases of products from
the defendants' stores. The attorneys received $890,000 in
fees.\63\
---------------------------------------------------------------------------
\63\ Los Angeles Times, June 8, 1998, at D3. For more examples of
coupon settlements, See Hearings on S. 353, Prepared Testimony of
Stephan G. Morrison.
---------------------------------------------------------------------------
Examples of abusive settlements in which attorneys receive
fees that are disproportionate to any client benefits can be
found in both state and federal court; however, such abuses
tend to occur predominantly in state court. Too often, the
current system results in settlements where only lawyers are
rewarded, and plaintiffs are left unprotected.
2. Judicial blackmail forces settlement of frivolous cases
The current system also permits the use of the class device
as ``judicial blackmail'' in cases that are clearly frivolous.
Such a result drives up prices for all consumers, because
corporate defendants are forced to settle these frivolous
cases.
Because class actions are such a powerful tool, they can
give a class attorney unbounded leverage, particularly in
jurisdictions that are considered plaintiff-friendly. The
reason for this unbounded leverage in such jurisdictions is
because, as a general rule, the question of whether a class is
properly certified can only be appealed following a costly, and
risky, trial. Thus, the Hobson's choice is to either settle a
frivolous suit, or invest in expensive litigation.
Consequently, such leverage can essentially force corporate
defendants to pay ransom to class attorneys by settling--rather
than litigating--frivolous lawsuits. This is a particularly
alarming abuse because the class action device is intended to
be a procedural tool rather than a mechanism that affects the
substantive outcome of a lawsuit. Nonetheless, state court
judges often are inclined to certify cases for class action
treatment, not because they believe a class trial would be more
efficient than an individual trial, but because they believe
class certification will simply induce the defendant to settle
the case without trial.\64\ As Judge Richard Posner of the U.S.
Court of Appeals for the Seventh Circuit has explained,
``certification of a class action, even one lacking merit,
forces defendants to stake their companies on the outcome of a
single jury trial, or be forced by fear of the risk of
bankruptcy to settle even if they have no legal liability. * *
* [Defendants] may not wish to roll these dice. That is putting
it mildly. They will be under intense pressure to settle.''
\65\ Hence, when plaintiffs seek hundreds of millions of
dollars in damages, basic economics can force a corporation to
settle the suit, even if it is meritless and has only a five
percent chance of success.
---------------------------------------------------------------------------
\64\ See E. Donald Elliott, Managerial Judging and the Evolution of
Procedure, 53 U. Chi. L. Rev. 306, 323-24 (1986).
\65\ In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298, 1299 (7th
Cir. 1995). See also Blair v. Equifax Check Svcs., Inc., 181 F.3d 832,
834 (7th Cir. 1999) (``a grant of class status can put considerable
pressure on the defendant to settle, even when the plaintiff's
probability of success on the merits is slight.'').
---------------------------------------------------------------------------
Not surprisingly, the ability to exercise unbounded
leverage over defendant corporations and the lure of huge
attorneys' fees have led to the filing of many frivolous class
actions. The Committee has learned of several shocking examples
of frivolous cases:
As District of Columbia Insurance Commissioner
Lawrence Mirel testified before the Committee last year,
insurance companies are often forced to settle lawsuits even
though the challenged actions were fully in accordance with
state law--or encouraged by state policies.\66\ For example,
two automobile insurance companies, worried about mounting
legal expenses and negative publicity, settled a lawsuit for
nearly $36 million over a long-standing industry-wide practice
of rounding insurance premiums up to the nearest dollar, even
though the premiums were calculated according to specific
instructions from the Texas Department of Insurance.\67\
---------------------------------------------------------------------------
\66\ See Hearings on Class Actions, Statement of Lawrence Mirel.
\67\ Id.
---------------------------------------------------------------------------
Within days after the fight in which Mike Tyson
bit Evander Holyfield's ear, for example, lawsuits were filed.
These were not actions by Holyfield, the only person who really
got hurt--they were class actions filed on behalf of pay-per-
view cable television subscribers alleging that they did not
get their money's worth because the fight was cut short.\68\
---------------------------------------------------------------------------
\68\ Although plaintiffs succeeded in certifying their class in a
lower court, the class action was rejected by an appellate court. See
Castillo et al. v. Tyson; No. 3133 (NY Sup. Ct., App. Div., Jan. 20,
2000). See also NY Court Rejects Claim That Boxer's Bite Was A Rip-off,
Entertainment Litigation Reporter, February 29, 2000.
---------------------------------------------------------------------------
A suit was brought against Ford Motor Company in
New York state court by the Milberg Weiss firm, one of the
better known plaintiffs' class action firms in the country,
that involved an inadvertent mistake made by Ford--it had put a
slightly overstated price on the window stickers on certain
vehicles. As soon as Ford discovered the mistake, the company
began sending letters to the affected customers apologizing for
the error and enclosing checks that more than compensated them.
Nonetheless, fully knowing that this refund program was already
well underway, the Milberg Weiss law firm filed a class action
lawsuit charging that Ford had committed fraud. Even worse, it
asked the court immediately to enjoin Ford from continuing its
refund efforts--presumably so that the lawyers could get a cut
of the refund money. In this case, the court properly dismissed
the action; nonetheless, Ford was required to waste time and
corporate resources on a lawsuit that clearly served no
legitimate purpose.\69\
---------------------------------------------------------------------------
\69\ See Faden-Bayes Corp. v. Ford Motor Co., Index No. 97-601076
(N.Y. Sup. Ct. County of New York) (filed Feb. 28, 1997).
---------------------------------------------------------------------------
3. Current class action rules can ignore due process rights
A third type of class action abuse occurs when state courts
ignore the due process rights of out-of-state defendants by
denying them the opportunity to contest the plaintiffs' claims
against them. One expert witness who testified before the
Subcommittee on Administrative Oversight and the Courts blamed
this phenomenon on a ``laissez faire'' attitude of some state
courts.\70\ The most egregious examples of this are the so
called ``drive-by class certification'' cases, in which a class
is certified before the defendant has a chance to respond to
the complaint, or in some cases, has even received the
complaint. The Committee learned of several examples of due
process violations, a few of which are listed below.
---------------------------------------------------------------------------
\70\ See Hearings on S. 353, Prepared Statement of John H. Beisner.
---------------------------------------------------------------------------
In one lawsuit filed against an auto manufacturer
in a Tennessee state court, the complaint was filed on July 10,
1996. Plaintiffs filed several inches of documents with their
complaint. Amazingly, by the time the court closed that same
day, the judge had entered anine-page order granting
certification of a nationwide class of 23 million members. The
defendant was not even notified about the lawsuit before the
certification and thus had no opportunity to tell its side of the
story.\71\ The defendant later discovered that a group of record
companies had the same experience with the same judge in an antitrust
class action filed several days earlier.\72\
---------------------------------------------------------------------------
\71\ Hearings on S. 353, Prepared Statement of Stephen G. Morrison.
\72\ Id.
---------------------------------------------------------------------------
In another case, a Kentucky state court ordered
injunctive relief in favor of the class before the defendant
was even notified of the lawsuit.\73\
---------------------------------------------------------------------------
\73\ See Order, Farkas v. Bridgestone/Firestone, Inc., Case No. 00-
CI-5263 (Cir. Ct., Jefferson County, KY) (dated Aug. 18, 2000).
---------------------------------------------------------------------------
It is not uncommon for state courts to certify
classes in cases where federal courts find that the claims are
uncertifiable. In one case, for example, a state court judge
certified a nationwide class of persons who claimed that the
house siding they had purchased was defective. Later, a federal
district court judge presented with the same case rejected any
prospect of certifying a class in that manner, finding that
affording class treatment in that case would clearly violate
the due process rights of the defendants and the purported
class members.\74\
---------------------------------------------------------------------------
\74\ Compare Naef v. Masonite Corp., No. CV-94-4033 (Cir. Court,
Mobile County, Alabama), with In re Masonite Hardboard Siding Prods.
Litig., 170 F.R.D. 417, 424 (E.D. La. 1997).
---------------------------------------------------------------------------
Thus, the current system allows the due process rights of
defendants to be ignored, with little or no recourse. Such an
abuse harms those defendants, consumers, and ultimately a
public that relies upon firmly-held constitutional due process
rights for an orderly administration of justice by the courts.
4. Copycat class actions clog the courts and permit forum
shopping
Yet another common abuse is the filing of ``copy cat''
class actions (i.e., duplicative class actions asserting
similar claims on behalf of essentially the same people).
Sometimes these duplicative actions are filed by lawyers who
hope to wrest the potentially lucrative lead role away from the
original lawyers. In other instances, the ``copy cat'' class
actions result from blatant forum shopping--the original class
lawyers file similar class actions before different courts in
an effort to find a receptive judge who will rapidly certify a
class. When these similar, overlapping class actions are filed
in state courts of different jurisdictions, there is no way to
consolidate or coordinate the cases. The ``competing'' class
actions must be litigated separately in an uncoordinated,
redundant fashion because there is no mechanism for
consolidating state court cases.
The result is enormous waste--multiple judges of different
courts must spend considerable time adjudicating the same
claims asserted on behalf of the same people.\75\ As a result,
state courts and class counsel may ``compete'' to control the
cases, often harming all the parties involved. Class counsel
may offer a defendant a ``sweetheart deal'' in an effort to
draw that defendant into a binding settlement so that the
counsel can obtain their share of the award. The deal, however,
may well be the worst result for plaintiffs. The opposite can
also occur, whereby a defendant might seek to entice class
counsel with a sham deal that favors the lawyers in order to
buy a binding settlement. This ``race to the bottom'' that
copycat cases presents is harmful to class members.
---------------------------------------------------------------------------
\75\ For example, in the ongoing litigation concerning Firestone
tires, approximately 100 virtually identical class actions seeking to
represent the same purported class members were filed in courts all
over the country. In the recently publicized HMO cases, multiple
overlapping class actions were filed against each of the major health
insurance companies. No less than 17 class actions have been filed
against Humana, most of which assert similar allegations and claims on
behalf of similarly defined nationwide classes. In the Humana example,
the federal cases were consolidated for pretrial proceedings before a
single judge. See In re Humana Inc. Managed Care Litig., 2000 U.S.
Dist. LEXIS 5099 (J.P.M.L. Apr. 13, 2000). In the 12 months ending
September 30, 2002, over 7,000 federal cases were centralized for
pretrial proceedings through the MDL process. There is no parallel
methodology for consolidating state court class actions. See http://
www.uscourts.gov/judbus2002/tables/s19sep02.pdf.
---------------------------------------------------------------------------
Copycat cases also clog the court system. They involve
multiple courts, judicial personnel, and even juries,
administering and adjudicating essentially the same claims
between the same parties. Such an inefficient result--
especially where the likely outcome for the majority of the
cases will be dismissal in favor of a single case that
settles--takes valuable judicial resources away from other
claims working their way through the state court systems.
By contrast to the state courts, when overlapping cases are
pending in different federal courts, they can be consolidated
under one single judge to promote judicial efficiency and
ensure consistent treatment of the legal issues involved.
Consequently, the copycat problem does not exist in the federal
system.
5. Inadequate notice and representation harm unnamed class
members
Another problem with current class action procedures is the
lack of emphasis placed upon protecting unnamed class members
through proper notice procedures. Without proper notice or
other protections, consumers can unwittingly be bound by
settlements approved in a court thousands of miles away. Too
often, consumers find themselves without redress after their
legal rights are signed away in a class action settlement
without their knowledge.\76\
---------------------------------------------------------------------------
\76\ State of Vermont v. Homeside Lending, Inc., and BankBoston
Corporation, 2003 VT 17 (Feb. 21, 2003).
---------------------------------------------------------------------------
For example, in one case filed in Chicago but involving
mostly Texas class members, notice of a proposed settlement
that would have the effect of waiving future rights was
published in the New York Times.\77\ The notion that these
Texas plaintiffs could possibly be adequately notified by a New
York Times ad is absurd. Notice must be adequate to inform
unnamed class members of the rights they are waiving.
---------------------------------------------------------------------------
\77\ Hearing before the Committee on the Judiciary, July 31, 2002,
page 9.
---------------------------------------------------------------------------
The lack of adequate notice has serious results. In one
case in Connecticut, a woman was barred from bringing suit for
defective roofing materials because she had been part of a
class action in Alabama.\78\ Recently, the Vermont Supreme
Court held that the Bank of Boston settlement was invalid as to
Vermont residents because of inadequate notice.\79\
---------------------------------------------------------------------------
\78\ Rigat v. GAF Materials Corp., 2002 Conn. Super LEXIS 272 (Jan.
25, 2002).
\79\ State of Vermont v. Homeside Lending, Inc., and BankBoston
Corporation, 2003 VT 17 (Feb. 21, 2003).
---------------------------------------------------------------------------
S. 274 addresses this concern not only by improving notice
but by introducing state officials into cases to protect
unnamed class members. As one witness noted, ``[t]he addition
of the state attorneys general is a splendid idea; it brings
into the proceedings a true representative of the public,
someone who is not simply trying to make money out of the
situation.'' \80\ Examples of the need for state officials to
be involved in such proceedings are commonplace. For example,
unrepresented plaintiffs in the State Farm case, discussed
throughout this report, would have greatly benefited from the
involvement of the various state insurance commissioners who
could have advised the court of their states' particular
insurance laws dealing with less expensive aftermarket parts.
Likewise, Vermont citizens in the Bank of Boston matter would
have benefited from the Vermont Attorney General's involvement
in the Alabama case. The Vermont State Supreme Court
subsequently found that case to be a violation of its citizens'
due process rights.\81\ The Constitution's Full Faith and
Credit clause requires states to honor the decisions of other
states' courts. For this reason, the Vermont Supreme Court was
forced to attempt to unravel a settlement after it had been
finalized, and was required to identify constitutional grounds
in order to do so. Thus, adequate notice and other protections
prior to finalizing a settlement for unnamed class members are
critical.
---------------------------------------------------------------------------
\80\ Hearing before the Subcommittee on Administrative Oversight
and the Courts, May 4, 1999, page 169.
\81\ Homeside Lending, 2003 VT 17.
---------------------------------------------------------------------------
6. Bounties and geographic discrimination harm unnamed
class members
Bounty payments for class members--the practice of paying
class representatives just for agreeing to be named in the
suit--present a serious conflicts-of-interest problem because
the representatives, who are supposed to guard the interests of
all class members, may be self-interested at the prospect of a
big payday. These payments ``raise[], at the very least, the
specter of apparent collusion, as well as grave conflicts of
interest between the named plaintiffs and class members.'' \82\
Thus, at best, ``the class representative `has been reduced to
little more than an admission ticket to the courthouse and one
anecdotal example of the class claim.' '' \83\ At worst, the
class representative is at odds with other class members over
the course of the litigation. Indeed, as one court noted, ``[a]
class representative is a fiduciary to the class. If class
representatives expect routinely to receive special awards * *
* they may be tempted to accept suboptimal settlements at the
expense of the class. * * *'' \84\
---------------------------------------------------------------------------
\82\ J. Benedict and M. Seidel, Special Compensation to Named
Plaintiffs in Securities Class Actions, 24 Review of Securities &
Commodities Regulation 195, 200 (Nov. 13, 1991).
\83\ Hearing before the Subcommittee on Administrative Oversight
and the Courts, May 4, 1999, page 78. J. Burns, Decorative Figureheads:
Eliminating Class Representatives in Class Actions, 42 Hastings L.J.
165, 166 (1990).
\84\ Weseley v. Spear Leeds & Kellogg, 711 F. Supp. 713, 720
(E.D.N.Y. 1989).
---------------------------------------------------------------------------
The results of this conflict can been seen in cases where
unnamed members get little benefit from a settlement, but named
class members get big bonuses. For example, in a recent case
involving potential computer defects, a settlement resulted in
coupons for all class members except the two named plaintiffs
who received $25,000 each. It is no surprise that these
representatives agreed to this settlement regardless of how it
affected other class members.\85\ Similarly, in a settlement
where most class members received just three golf balls, the
class representatives were awarded $2,500 each.\86\ That's a
pretty good payday for these ``victims'' whose sole injury
missing out on the free golf gloves in a promotion undertaken
by the defendant.
---------------------------------------------------------------------------
\85\ See Shaw v. Toshiba America Information Systems, Inc., No.
1:99CV1020 (E.D. Tex.).
\86\ See Heaster, Enough Already with the Lawsuits, Kansas City
Star, July 10, 1999 at C1.
---------------------------------------------------------------------------
Another inequity that could result from the current system
is geographic discrimination--where local plaintiffs are
awarded a bigger chunk of settlement proceeds merely by virtue
of their proximity to the courthouse. The problem exists
because locally elected judges may be willing to direct a
greater share of awards to their voting constituents. Such a
result is clearly improper, and is unfair to other injured
class members. As one witness described this favorable
treatment of local plaintiffs, it is ``the worst sort of `home
cooking' that is fostered by the existing system.'' \87\ This
is yet another inequity under the current system that needs to
be eliminated.
---------------------------------------------------------------------------
\87\ Testimony of Lawrence H. Mirel, Hearing before the Committee
on the Judiciary, July 31, 2002.
---------------------------------------------------------------------------
E. National Class Actions Belong in Federal Court Under Traditional
Notions of Federalism
Many of the abuses taking place in state courts are
magnified by the growing trend among plaintiffs' attorneys to
bring huge class actions on behalf of hundreds of thousands or
even millions of consumers. These cases, which generally
involve overly broad claims, put any class members with real
injuries at risk. The incentive for class lawyers to gather the
largest class possible is clear: why sue on behalf of just
1,000 people when you can sue for 1 million claimants and
increase your intake? The problem with such broad claims,
however, is that the entire lawsuit proceeds on a lowest common
denominator basis. As a result, persons with legitimate
injuries will be lumped in with the ``average,'' often
meritless claims and will not be given individual attention for
their grievances.\88\ Conversely, when only a few of the
plaintiffs have legitimate claims, but nevertheless a class
action is certified, the defendant is frequently denied a fair
trial because a jury is likely to improperly attribute the
injuries of the few to the many.
---------------------------------------------------------------------------
\88\ See Hearings on S. 353, Prepared Statement of John H. Beisner.
---------------------------------------------------------------------------
The effect of class action abuses in state courts is being
exacerbated by the trend toward ``nationwide'' class actions,
which invite one state court to dictate to 49 others what their
laws should be on a particular issue, thereby undermining basic
federalism principles.\89\ A recent study found that 77 percent
of class actions brought in 2001 in a rural Illinois county
known for its heavy class action docket sought to certify
nationwide classes.\90\ These cases challenged matters as
diverse as MTBE in wells, telephone billing practices, chicken
processing procedures, and insurance reimbursement policies.
Clearly, a system that allows state court judges to dictate
national policy on these and other issues from the local
courthouse steps is contrary to the intent of the Framers when
they crafted our system of federalism. In one case, for
example, plaintiffs filed suit in an Alabama county court on
behalf of more than 20 million people alleging that the design
of federally mandated airbags is faulty.\91\ From the
standpoint of federalism, this suit defies logic. Why should an
Alabama state court tell 20 million people in all 50 states
what kind of airbags they can have in their cars?
---------------------------------------------------------------------------
\89\ See Hearings on S. 353, Prepared Statement of John H. Beisner.
\90\ See John H. Beisner and Jessica Davidson Miller, Class Action
Magnet Courts: The Allure Intensifies, 4 BNA Class Action Litig. R. 58
(Jan. 24, 2003).
\91\ See Smith v. General Motors Corp., et al., Civ. A. No. 97-39
(Cir. Ct. Coosa County, AL).
---------------------------------------------------------------------------
The most egregious of such cases are those in which one
state court issues nationwide rulings that actually contradict
the laws of other states. This problem is particularly
prevalent in insurance cases, which are being filed in
increasingly greater numbers. As District of Columbia Insurance
Commissioner Lawrence Mirel testified before this Committee
last year, class actions ``frequently go[] around or simply
ignore[] the role of state regulators.'' \92\
---------------------------------------------------------------------------
\92\ See Hearing on Class Actions, Prepared Statement of Lawrence
Mirel.
---------------------------------------------------------------------------
One case reported in the New York Times, for example,
involved a longstanding practice of the State Farm Insurance
Companies (shared by other insurers) of using non-original
equipment manufacturer (OEM) parts to repair cars.\93\ The
practice was fully disclosed to policyholders, and the majority
of states expressly permit insurers to specify non-OEM parts.
Indeed, two states, Hawaii and Massachusetts, actually require
the specification of non-OEM parts. Nonetheless, plaintiffs
brought suit in Illinois state court claiming that all non-OEM
parts used by policyholders were inferior to OEM parts, and
that State Farm had breached its contractual obligation to
policyholders and committed fraud each time it specified such
parts. Even though the plaintiffs eventually dropped their
claim that all non-OEM parts were inferior, and conceded that
this could only be determined on a part-by-part basis, the
trial court still permitted the jury to reach a group judgment
on the class action. The court was not even deterred by the
fact that the plaintiffs in the class came from states
throughout the nation with widely varying laws regarding the
use of non-OEM parts, including the two states--Hawaii and
Massachusetts--that strongly embraced the very practice
condemned by plaintiffs.\94\ Indeed, in affirming a $1.3
billion verdict against State Farm in this case, an Illinois
state appellate court acknowledged that it had disregarded
``state insurance commissioners [w]ho testified that the laws
of many of our sister states permit and in some cases * * *
[even] encourage'' usage of non-OEM parts.\95\
---------------------------------------------------------------------------
\93\ Suit Against Auto Insurer Could Affect Nearly All Drivers,
N.Y. Times, Sept. 27, 1998, at 29.
\94\ See Snider v. State Farm Mutual Automobile Insurance Co., Cir.
Ct. for Williamson City., IL, Docket No. 97-L-114 (1999).
\95\ Avery v. State Farm Auto. Ins. Cos., 746 N.E.2d 1242, 1254
(Ill. Ct. App. 2001).
---------------------------------------------------------------------------
The State Farm case is not unique. This state court
interference with the laws of other jurisdictions is becoming
disturbingly common. For example:
Just recently an Ohio court determined that it was
appropriate to apply Ohio's laws to a laundry list of claims
asserted against a plumbing company by a nationwide class of
plaintiffs, holding that all fifty states essentially have the
same laws with regard to fraud and unjust enrichment cases.\96\
---------------------------------------------------------------------------
\96\ See Opinion and Order Granting Class Certification, Linn v.
Roto-Rooter, Inc., No. CV-467403 (Court of Common Please, Ohio,
February 23, 2003).
---------------------------------------------------------------------------
The Supreme Court of Oklahoma recently affirmed
the certification of a nationwide product liability class
action, applying the laws of a single state to transactions
that occurred in all 50 states.\97\ Thus, in this case, a state
court has decided effectively to override whatever policy
determinations another state's legislature or courts may have
made on warranty or product liability policy to protect their
own residents.
---------------------------------------------------------------------------
\97\ Ysbrand v. DaimlerChrysler Corp., 2003 Okla. LEXIS 17 (Okla.
2003).
---------------------------------------------------------------------------
The Minnesota Court of Appeals recently affirmed a
nationwide class action where the plaintiffs alleged fraud in
the marketing of an herbicide, in which the court applied the
laws of a single state to transactions that occurred in many
different jurisdictions (and virtually none of which occurred
in the state whose laws were applied).\98\ One judge who
decided the case openly acknowledged that the court was
engaging in the ``false federalism'' that has become part of
the state court class action game.\99\
---------------------------------------------------------------------------
\98\ Peterson v. BASF Corp., 657 N.W.2d 853 (Minn. App. Ct. 2003).
\99\ Id. at 875.
---------------------------------------------------------------------------
A few years ago, a state trial court in Minnesota
approved for class treatment a case involving millions of
claimants from 44 states that would have had the effect of
dictating the commercial codes of all those states.\100\ The
specific issue in the case was whether individuals have a state
law right to recover interest on refundable deposits paid to
secure an automobile lease. In certifying a class in that case,
the court adopted an understanding of Minnesota's version of
the Uniform Commercial Code that was contrary to the
interpretation of every other state to have considered the
issue under their own versions of the UCC. By certifying the
class, the court decided that its unprecedented interpretation
of the UCC would bind the remaining 43 states that had yet to
decide the question (even though the ``Uniform Commercial Code
is not uniform'' and is interpreted differently in different
states \101\). In essence, the action of the Minnesota court
proposed to dictate the interpretation of 43 other states' UCC
provisions even though the other states might well have reached
a different conclusion in applying their own state's laws.
---------------------------------------------------------------------------
\100\ Rosen v. PRIMUS Automotive Fin. Servs., Inc., No. CT 98-2733
(Minn. D. Ct., 4th Jud. Dist., May 4, 1999).
\101\ Walsh v. Ford Motor Co., 807 F.2d 1000, 1016-17 (D.C. Cir.
1986).
---------------------------------------------------------------------------
The sentiment reflected in these cases flies in the face of
basic federalism principles by embracing the view that other
states should abide by the deciding court's law whenever it
determines that its own laws are preferable to other states'
contrary policy choices. Indeed, such examples of judicial
usurpation, in which one state's courts try to dictate its laws
to 49 other jurisdictions, have been duly criticized by some
congressional witnesses, including former Clinton Solicitor
General Walter Dellinger, as ``false federalism.'' \102\ When
this occurs, is poses serous problems for the courts of other
states. For example, as noted earlier, the Vermont Supreme
Court recently nullified an Alabama court's approval of the
Bank of Boston case as it applied to Vermonters because it
violated due process.\103\
---------------------------------------------------------------------------
\102\ See Interstate Class Action Jurisdiction Act of 1999: Hearing
on H.R. 1875 Before the House Comm. on the Judiciary, 106th Cong.
(1999) (hereinafter ``Hearing on H.R. 1875), Prepared Statement of
Walter E. Dellinger III.
\103\ See State of Vermont v. Homeside Lending, Inc. and
BankBostonCorporation, 2003 VT 17 (Vt. 2003).
---------------------------------------------------------------------------
Given the range and severity of class action abuse, it is
not surprising that defendants frequently find it necessary to
remove class actions against them to a federal forum--a forum
where the threat of prejudice is significantly lower. Under
current law, however, plaintiffs' lawyers can easily manipulate
their pleadings to ensure that their cases remain at the state
level. As noted above, the two most common tactics employed by
plaintiffs' attorneys in order to guarantee a state court
tribunal are: adding parties to destroy diversity and shaving
off parties with claims for more than $75,000. It is not rare
to see complaints in which plaintiffs sue several major
corporations and then add one local supplier or dealer as a
defendant merely to defeat diversity.\104\ Other complaints
seek $74,999 in damages on behalf of each plaintiff or
explicitly exclude from the proposed class anybody who has
suffered $75,000 or more in damages.\105\
---------------------------------------------------------------------------
\104\ See Hearings on S. 353, Prepared Statement of Stephen G.
Morrison.
\105\ Id.
---------------------------------------------------------------------------
The Committee believes that the federal courts are the
appropriate forum to decide most interstate class actions
because these cases usually involve large amounts of money and
many plaintiffs, and have significant implications for
interstate commerce and national policy. By enabling federal
courts to hear more class actions, S. 274 will help to minimize
the class action abuses taking place in state courts and to
ensure that these cases can be litigated in a proper forum.
F. The Support for This Bill Is Unprecedented
The class action abuse problem has hit critical mass. Like
never before, the public, the media, and experts agree that the
nation's class action system is seriously broken, and that
current practices are far from what the Framers envisioned. A
recent study commissioned by the United States Chamber of
Commerce found unprecedented support for class action reform.
Major media outlets have editorialized in favor of reform and,
in many instances, in favor of this very legislation. Further,
despite the contrary claims of the increasingly dwindling ranks
of critics, the Judicial Conference of the United States has
recently embraced the notion of expanded federal jurisdiction
for class actions. Likewise, the American Bar Association now
recognizes that federal jurisdiction for selected class actions
is the right fix for the growing problem of abuses. Below is a
sampling of the public and expert support this reform effort
enjoys.
An overwhelming number of Americans have been
personally affected by class action lawsuits, and the majority
were disappointed by the results. 50 percent have received a
notice in the mail that they may be a party to a class action
lawsuit. Of these, 30 percent have taken the steps necessary to
participate in the lawsuit. Of those who took the steps, 53
percent report that they didn't receive anything of meaningful
value.\106\
---------------------------------------------------------------------------
\106\ Penn, Schoen & Berland Associates 2003 Chamber of Commerce
poll.
---------------------------------------------------------------------------
Americans believe that their legal system is in
need of reform. 44 percent think it is in need of major reform;
45 percent think it needs minor reform; while only 7 percent
think it needs no reform at all.\107\
---------------------------------------------------------------------------
\107\ Id.
---------------------------------------------------------------------------
According to a USA Today poll, 67 percent of those
polled believe that class actions most benefit the lawyers, and
only 9 percent believe that the plaintiffs benefit most.
Numerous newspapers have expressed support for
legal reform of the abusive class action system, including: The
Washington Post, The Wall Street Journal, the Chicago
Tribune,Financial Times, USA Today, The Christian Science Monitor, the
Akron (Ohio) Beacon Journal, the Albany (New York) Times-Journal, The
Buffalo (New York) News, The Des Moines Register, The Jacksonville
(Florida) Times-Union, The Cedar Rapids (Iowa) Gazette, The Everett
(Washington) Herald, The Indianapolis Star, King County (Washington)
Journal, The Las Vegas Journal-Review, The Lincoln (Neb.) Journal-Star,
The Santa Fe New Mexican, The St. Louis Post-Dispatch, Newsday (Long
Island, New York), Northwest Arkansas Business Journal, The Odessa
(Texas) American, The Omaha World-Herald, The Orlando Sentinel, The
(Portland) Oregonian, The Providence (Rhode Island) Journal, and The
Tyler (Texas) Morning Telegraph.
The Judicial Conference of the United States, in a
March 26, 2003 letter to the Committee, ``recognize[d] that the
use of minimal diversity of citizenship may be appropriate to
the maintenance of significant multi-state class action
litigation in federal courts.'' The Conference encourages
Congress to include limitations such as a heightened
jurisdictional threshold, a role for the states for in-state
class actions, and like limitations. This bill reflects those
considerations in its discretionary remand section.
In February of 2003, the House of Delegates of the
American Bar Association adopted a resolution acknowledging
problems with the class action system and supporting expanded
federal jurisdiction to fix abuses with the system.
The Department of Justice has expressed support
for the House class action bill (H.R. 1115).
Clinton Administration Solicitor General Walter
Dellinger has testified before the Congress in support of
expanded federal jurisdiction to curb class action abuses, and,
in particular, to restore the Framers' intention that federal
courts have jurisdiction over large inter-state cases.
V. How S. 274 Works
S. 274 is a modest step toward addressing a number of the
problems and abuses in the current class action system. First,
S. 274 implements a consumer bill of rights that requires
greater scrutiny of coupon and net loss settlements, and
regulates ``bounty'' payments to class representatives and
class members who are geographically located near the court. S.
274 also implements additional notice requirements to better
inform plaintiff class members about: (a) the terms of a class
action settlement, (b) the rights they will forfeit as members
of the class, (c) the obligations the settlement agreement
places on the defendants, and (d) the amount of attorneys' fees
that will be awarded to counsel representing their interests.
Furthermore, S. 274 provides an additional mechanism to
safeguard plaintiff class members' rights by requiring class
counsel to provide appropriate state and federal officials with
notice of class action settlements, so that the state and
federal governments have the opportunity to intervene in a case
if they feel that a class action settlement is not in the best
interests of their citizens.
Second, S. 274 modifies diversity jurisdiction and removal
rules so that larger interstate class actions can be heard in
federal court. In doing so, the Act also makes it harder for
plaintiffs' counsel to ``game the system'' by inappropriately
keeping class actions in state courts where certain judges are
quick to certify a class regardless of due process concerns or
to approve a settlement regardless of the fairness to class
members. Moreover, the Act improves the efficiency of the
judicial system by enabling overlapping and ``copycat'' cases
to be consolidated in a single federal court, rather than
allowing them to proceed in numerous state courts as does the
current system. However, the bill ensures that matters
principally involving single state issues and parties will
continue to proceed in that state's courts.
Finally, S. 274 addresses the problem of unfair settlements
and excessive attorneys' fees by directing the Judicial
Conference of the United States to conduct a review of class
action settlements and attorneys' fees and to present Congress
with recommendations to improve the system.
A. Consumer Bill of Rights
S. 274 contains a number of provisions to protect class
members from unfair settlements and to better inform them of
their rights in class action cases. For example, S. 274
requires greater scrutiny of coupon and other noncash
settlements; such settlements are prohibited absent written
findings by the court that they benefit the class members. This
provision will protect consumers against the abusive practices
that allow lawyers to enrich themselves while ignoring
meaningful relief for the parties who were actually injured.
S. 274 also requires careful oversight of the payment of
``bounties'' to class representatives and of extra compensation
to members of a class who live closer to the court. This
provision will protect unnamed class members from having to
unnecessarily share their awards, and will end the practice of
unscrupulous lawyers finding a perceived wrong, then shopping
for a client. The Committee heard testimony about a consortium
of class action lawyers that would meet to strategize and
search for cases to bring long before they had an actual
plaintiff on whose behalf to sue.\108\ In order to better
protect class members, S. 274 amends the class action rules by
requiring that class counsel serve appropriate state and
federal officials with notice of a proposed settlement. This
notice must occur no later than 10 days after the proposed
settlement is filed in federal court.
---------------------------------------------------------------------------
\108\ See Class Action Lawsuits--Examining Victim Compensation and
Attorney's Fees: Hearing before the Subcomm. on Administrative
Oversight and the Courts, Senate Comm. on the Judiciary, Serial No. J-
105-62 (S. Hrg. 105-504), 105th Cong., 1st Sess. (Oct. 30, 1997),
Prepared Statement of Lewis Goldfarb; Mass Torts and Class Action
Lawsuits: Hearing before the Subcomm. on Courts and Intellectual
Property of the House Comm. on the Judiciary, Serial No. 141, 105th
Cong., 2d Sess. (Mar. 5, 1998), Prepared Statement of Dick Thornburgh.
---------------------------------------------------------------------------
The notice to the appropriate officials would include: (1)
a copy of the complaint and amended complaints, unless those
materials are available through the Internet and the notice
includes directions on how to access the materials on-line; (2)
notice of any scheduled judicial hearing in the class action;
(3) proposed or final notification to class members of their
right to be excluded from the class; (4) any proposed or final
class action settlement; (5) any settlement made between class
counsel and defendants' counsel; (6) any final judgment or
notice of dismissal; and (7) the names of the class members who
reside in each respective state and the proportionate claims of
such members. The designated officials would then have at least
90 days to review the proposed settlement before a court gives
a settlement final approval.
Nothing in this section creates an affirmative duty for
either the state or federal officials to take any action in
response to a class action settlement. Moreover, nothing in
this section expands the current authority of the state or
federal officials. The purpose of this notice provision is to
protect citizens of one state from unfair rulings by another
state, such as the Alabama settlement in the Bank of Boston
case that the Vermont Supreme Court held violated due process.
Generally, under the Constitution's full faith and credit
clause, one state court is bound by another court's decisions.
Thus, absent a finding like the one made by the Vermont Supreme
Court, consumers are bound by settlements reached before other
state courts. S. 274 would help protect consumers from being
bound by unfair out-of-state settlements by enabling state
officials to inject themselves into federal class actions to
protect their citizens, prior to a judgment being rendered,
rather than having multiple states try to undo an unfair
settlement after the fact.
S. 274 also aims to help class members better understand
their rights in a class action, by requiring that any notice
provided to class members explain in plain, easily understood
language: (1) the subject matter of the class action; and (2)
the legal consequences of being a member of the class action.
In addition, if the notice involves a proposed settlement, it
must explain, also in plain, easily understood language: (1)
the benefits a settlement will offer the class; (2) the rights
a plaintiff would waive through settlement; (3) the obligations
a defendant would incur in the proposed settlement; and (4) the
amount of the attorneys' fees or a good faith estimate of the
fees being sought, and an explanation of how the fees will be
calculated.
The Committee believes that improved notice requirements
will create a better informed plaintiff class. Not only will
plaintiffs be able to more effectively monitor their own case,
but the notice provisions will provide an effective deterrent
against many of the types of abuse taking place in class action
litigation.
The Committee is aware that pursuant to the Rules Enabling
Act, the U.S. Supreme Court recently transmitted to Congress
several amendments to Rule 23 of the Federal Rules of Civil
Procedure.\109\ Several of those amendments reflect very
thoughtful efforts by the Judicial Conference of the United
States, the Standing Committee on Rules and Procedure, and the
Advisory Committee on Civil Rules to address this same issue of
clarity of notices to class members. In reviewing those
amendments carefully, the Committee believes that the notice-
related provisions of S. 274 and the proposed amendments to
Rule 23 are complementary.
---------------------------------------------------------------------------
\109\ See Amendments to Federal Procedure Rules, 71 U.S.L.W. 4253,
4254-55 (U.S. Apr. 1, 2003) (Supreme Court order amending rules
pursuant to Rules Enabling Act).
---------------------------------------------------------------------------
S. 274 also requires that radio, television or Internet
notice informing class members of their right to be excluded
from a settlement must explain in plain, easily understood
language who may be a member of the class and that class
members will be subject to the class action or settlement
unless they take steps to exclude themselves.
B. Diversity Jurisdiction and Removal
S. 274 amends the diversity jurisdiction and removal
statutes applicable to larger interstate class actions. S. 274
modifies 28 U.S.C. Sec. 1332 to incorporate the concept of
balanced diversity. The bill grants the federal courts original
jurisdiction to hear interstate class action cases where (a)
any member of the proposed class is a citizen of a different
state from any defendant and (b) the $5 million jurisdictional
amount requirement (taking account of all claims of all
purported class members in the aggregate, exclusive of interest
and costs) is satisfied, and (c) the case involves a class of
100 or more members.
Under current law, the threshold dollar amount for bringing
a federal class action varies. In some jurisdictions, so long
as one class member suffered over $75,000 in damages, federal
jurisdiction is satisfied if diversity is otherwise
satisfied.\110\ In other jurisdictions, all class members must
satisfy the $75,000 jurisdictional threshold.\111\ Thus, a
curious disparity results: in some jurisdictions, if the named
class member suffered $75,001 in damages, and no other class
member suffered financial injury, the case could go to federal
court. Yet in other jurisdictions, if a number of class members
suffer millions in damages, yet a few do not satisfy the
$75,000 threshold, the case cannot go to federal court. S. 274
draws a reasonable line, avoiding arbitrary and rigid
requirements for individual class members, while focusing on
the total amount in controversy in an effort to target large,
national cases.
---------------------------------------------------------------------------
\110\ See Rosmer v. Pfizer, Inc., 263 F.3d 110 (4th Cir. 2001).
\111\ See Trimble v. Asarco, Inc., 232 F.3d 946 (8th Cir. 2000).
---------------------------------------------------------------------------
The bill, however, includes several provisions intended to
ensure that state courts can adjudicate class actions that are
truly local in nature, by restricting the right to remove some
class actions brought in a defendant's home state. Under these
provisions, class actions filed in the home state of the
primary defendants would automatically be subject to federal
jurisdiction if less than one-third of the class members were
citizens of that state. Conversely, if two-thirds or more of
the class members are from the defendant's home state, the case
would not be subject to federal jurisdiction. For cases brought
in a defendant's home state in which between one-third and two-
thirds of the class members were citizens of that state,
federal jurisdiction would also exist; however, a federal judge
could decline to exercise that jurisdiction based on
consideration of five factors designed to help assess whether
the claims at issue are indeed local in nature.
S. 274 also excludes from its federal jurisdiction grant:
(1) class actions involving fewer than 100 plaintiff class
members and (2) class actions in which the primary defendants
are states, state officials, or other governmental entities
against whom the district court may be foreclosed from ordering
relief. S. 274 also exempts from its diversity jurisdiction and
removal reforms any securities class action cases covered by
the Securities Litigation Reform Act and corporate governance
cases.
In order to better protect the rights of all class members
and parties, S. 274 creates four new rules regarding the
removal of class actions filed in state court. First, unnamed
plaintiff class members would be able to remove class actions
to federal court. Second, parties would be able to remove a
class action to federal court without the consent of any other
party. Third, any plaintiff or defendant would be able to
remove a class action to federal court, regardless of whether
that party is a citizen of the state in which the action was
brought. And fourth, the current ban on removal of a class
action to federal court after one year would be eliminated,
although the requirement that removal occur within 30 days of
notice of grounds for removal would be modified and retained.
This last provision protects against the abusive practice of
manipulating, and then amending, pleadings to aid plaintiffs'
counsel in forum shopping.
In addition, S. 274 provides that a federal court must
dismiss a class action without prejudice if it finds that the
removed class action does not meet the requirements for
proceeding on a class basis under Rule 23 of the Federal Rules
of Civil Procedure. Plaintiffs could then amend and refile
their complaint in state court; however, the refiled case would
once again be eligible for removal if original federal
jurisdiction exists.
S. 274 also addresses statutes of limitations issues in two
ways. First, if plaintiffs file a class action in state court
and the case is then removed to a federal court, which
dismisses it for failure to meet the requirements of Rule 23,
the statute of limitations would not run for the period that
the dismissed class action was pending in either court,
provided the case is refiled in the same state court by at
least one of the original named plaintiffs. Second, if a
removed class action is dismissed by a federal court for
failure to meet the requirements of Rule 23, the statute of
limitations will not have been tolled with regard to any
individual actions later brought by members of the dismissed
class, regardless of where such individuals choose to sue.
C. Report on Class Action Settlements
In order to assist Congress in its oversight of class
action settlements, S. 274 directs the Judicial Conference of
the United States, with the assistance of the Federal Judicial
Center and Administrative Office of the United States Courts,
to prepare a report on class action settlements to be
transmitted to the House and Senate Judiciary Committees. The
report will include recommendations on best practices to ensure
the fairness of proposed class action settlements for class
members, recommendations on best practices to ensure the
appropriateness of attorneys' fees and expenses, and a
discussion of any actions taken or planned by the Judicial
Conference to implement the recommendations in the report.
VI. Section-by-Section Analysis
Section 1.--Section 1 establishes the ``Class Action
Fairness Act of 2003'' as the short title of the bill.
Section 2.--Section 2 sets forth findings and purposes. The
Committee is concerned that there have been abuses of the class
action device over the last decade that have hurt consumers,
adversely affected interstate commerce, and undermined public
respect for our judicial system. In particular, the Committee
is concerned about class actions that do little to benefit--and
sometimes actually harm--the class members who are supposed to
be the beneficiaries of such cases, while enriching their
lawyers. The Committee is also concerned that this problem is
exacerbated by confusing notices that make it difficult for
class members to understand and effectively exercise their
rights. Taken together, the Committee believes that such abuses
hurt consumers by resulting in higher prices and less
innovation, and that they undermine the principles of diversity
jurisdiction, which were established by the Framers to promote
interstate commerce.
The purposes of the Act are therefore to assure fair and
prompt recoveries for class members with legitimate claims; to
restore the intent of the Framers by expanding federal
jurisdiction over interstate class actions; and to benefit
society by encouraging innovation and lowering consumer prices.
Section 3.--Section 3 sets forth a ``Consumer Class Action
Bill of Rights'' to help ensure that class actions do not hurt
their intended beneficiaries. This section is intended to
address a number of common abuses that were discussed by
witnesses at class action hearings and have been reported on in
the press--and to encourage greater judicial scrutiny of
proposed class action settlements.
Abusive class action settlements in which plaintiffs
receive promotional coupons or other nominal damages while
class counsel receive large fees are all too commonplace. The
risk of such abusive practices is particularly pronounced in
the class action context because these suits often involve
numerous plaintiffs, each of whom has only a small financial
stake in the litigation. As a result, few (if any) plaintiffs
closely monitor the progress of the case or settlement
negotiations, and these cases become ``clientless litigation,''
in which the plaintiff attorneys and the defendants have
``powerful financial incentives'' to settle the ``litigation as
early and as cheaply as possible, with the least publicity.''
\112\ These financial incentives create inequitable outcomes.
``For class counsel, the rewards are fees disproportionate to
the effort they actually invested in the case * * * For
society, however, there are substantial costs: lost
opportunities for deterrence (if class counsel settled too
quickly and too cheaply), wasted resources (if defendants
settled simply to get rid of the lawsuit at an attractive
price, rather than because the case was meritorious), and--over
the long run--increasing amounts of frivolous litigation as the
attraction of such lawsuits becomes apparent to an ever-
increasing number of plaintiff lawyers.'' \113\
---------------------------------------------------------------------------
\112\ Deborah Hensler, et al., Class Action Dilemmas, Pursuing
Public Goals for Private Gain 10 (1999) (executive summary).
\113\ Id.
---------------------------------------------------------------------------
New section 28 U.S.C. Sec. 1712 requires federal courts,
before approving a proposed settlement that involves non-cash
benefits or that would require class members to expend money in
order to obtain benefits, to hold a hearing and make written
findings that the settlement is fair, reasonable and adequate
for class members. The purpose of this provision is to ensure
that non-cash settlements provide real benefits to class
members, consistent with the strength and validity of the
claims that are proposed for settlement. This provision is
intended to apply, for example, to cases in which the
settlement provides coupons, requiring consumers to buy a
product from the offending company at a nominally reduced
price. This section is intended to address the rapidly
increasing volume of class settlements in which consumers
receive little or no benefit and attorneys are awarded
substantial compensation. The Committee wishes to make clear
that it does not intend to forbid all non-cash settlements.
Such settlements may be appropriate where they provide real
benefits to consumer class members (e.g., where coupons entitle
class members to receive something of actual value free of
charge) or where the claims being resolved appear to be of
marginal merit. However, where such settlements are used, the
fairness of the settlement should be seriously questioned by
the reviewing court where the attorneys' fees demand is
disproportionate to the level of tangible, non-speculative
benefit to the class members. In adopting this provision, it is
the intent of the Committee to incorporate that line of recent
federal court precedents in which proposed settlements have
been wholly or partially rejected because the compensation
proposed to be paid to the class counsel was disproportionate
to the real benefits to be provided to class members.\114\
---------------------------------------------------------------------------
\114\ See, e.g., Cope v. Duggins, 2001 WL 333102 (E.D. La. 2001)
(rejecting proposed class settlement because attorneys' fees were
disproportionate to class benefits); Schwartz v. Dallas Cowboys
Football Club, Ltd., 157 F. Supp. 2ds 561 (E.D. Pa. 2001) (same);
Sheppard v. Consolidated Edison Co., 2000 WL 33313540 (E.D.N.Y. 2000)
(same); Polar Int'l Brokerage Corp. v. Reeve, 187 F.R.D. 108 (S.D.N.Y.
1999) (same).
---------------------------------------------------------------------------
New section 28 U.S.C. Sec. 1713 prohibits federal courts
from approving a proposed settlement under which class members
would be required to pay class counsel a sum of money that
results in a net loss (as occurred in the Bank of Boston case,
discussed above), unless the court makes a written finding that
nonmonetary benefits to the class members substantially
outweigh the monetary loss.
New section 28 U.S.C. Sec. 1714 prohibits federal courts
from approving proposed settlements that provide for payment of
greater sums to certain class members based on where they
reside. The Committee wishes to emphasize that this provision
is intended solely to prohibit circumstances in which the
preferential payments have no legitimate legal basis. For
example, it is perfectly appropriate for a settlement of an
environmental class action to differentiate settlement payment
amounts based on a claimant's proximity to an alleged chemical
spill. This provision is not intended to affect such a
determination. But where putative class members' claims are
legally and factually indistinguishable, it is inappropriate to
give one class member extra settlement benefits merely because
he or she resides in (or closer to) the county where the court
sits.
New section 28 U.S.C. Sec. 1715(a) prohibits the payment of
``bounties'' to class representatives. In a class action, a
class representative has the responsibility of making decisions
on behalf of the putative class regarding the litigation. In
making such decisions, the class representative has a fiduciary
duty to represent the interests of all class members and to
avoid self-dealing in any respect. The Committee is concerned
that in negotiating settlements on behalf of the class, the
capacity of class representatives to negotiate separate deals
for themselves may be inconsistent with that fiduciary
obligation. Where class representatives are awarded relief in
excess of what is provided to other class members in a
settlement, there is an appearance that the fiduciary duty has
been breached--that the class representative may have been less
than zealous in representing the class interests in order to
secure personal compensation for himself or herself from the
defendant. This provision is intended to ensure that no
breaches of this fiduciary duty occur and that there be no
appearance of such breaches. Nevertheless, the Committee is
aware that because of the burdens involved in being a class
representative, there is a risk that legitimate claims may not
be brought because of the unwillingness of any class member to
undertake that role. Section 1715(b) therefore makes clear that
section 1715(a) is not intended to preclude payments to class
representatives for the reasonable time and costs that they
have invested in serving as the class representative, so long
as the court approves such payments.
The Committee wishes to stress that this provision is not
intended to address injunctive relief; the section applies only
to monetary relief--to the ``payment of a greater share of [an]
award.'' Thus, for example, if under the terms of a employment-
related class action, a class representative is among those
class members entitled to be reinstated to their former
positions, section 1714 should not come into play (even though
some other class members might not be reinstated under the
terms of the settlement). Similarly, the Committee wishes to
emphasize that section 1714 restricts only those payments that
exceed a class representative's entitlement under ``the formula
for distribution to other class members.'' Thus, if a class
representative was employed by a company longer than other
members of the purported class, he/she might be entitled to
greater benefits under the terms of an employment-related class
action. Section 1714 should not preclude or otherwise affect
those payments. Section 1714 is intended to regulate only those
payments that are made to class representatives solely because
they have that role; it is not intended to restrict payments to
class representatives that are based on the value of their
individual claims as determined for settlement purposed on a
class-wide basis.
New section 28 U.S.C. Sec. 1716 mandates that plaintiffs be
made aware of their rights and obligations under proposed class
settlements in a manner calculated to be readily comprehended
by consumer class members. Thus, settlement notices must
explain in ``plain, easily understood language'' the subject
matter of the case, the members of the class, the consequences
of being a member, the benefits of settlement to the class, the
rights that class members will lose through the settlement, the
obligations of defendants under the proposed settlement, the
dollar amount class counsel are seeking in attorneys' fees (or,
if not possible, a good faith estimate of the fees thatclass
counsel will request), and an explanation of how attorneys' fees will
be calculated. The notice must also include any other material
information regarding the class action. Such ``material matter'' would
include any other information a reasonable person would want to know
before deciding whether to participate in a class action or proposed
settlement.
The proper test for determining if class notice is written
in ``plain, easily understood language'' is reasonableness--
i.e., whether a reasonable person would find the language in
the notice to be ``plain, easily understood language.'' The
Committee intends that class counsel bear the burden of proving
that a reasonable person would find that the notice includes
all of the requirements listed in this section in ``plain,
easily understood language.''
During hearings on class action reform, witnesses discussed
the problem of conveying to the potential class member a clear
understanding of the rights and obligations that accompany
membership in the class. As one witness testified: ``The class
notices that class members receive frequently are written in
small print and legalese. Since those notices typically are
telling class members that they are about to give up important
legal rights (unless they take appropriate action), it is
imperative that they understand what they are doing and the
ramifications of their actions.'' \115\
---------------------------------------------------------------------------
\115\ See Hearings on S.353, Prepared Statement of Stephan G.
Morrison.
---------------------------------------------------------------------------
The Committee believes that a better-informed plaintiff
class will be better able to police the abuses rampant in
current class action litigation and will be better able to
exercise their rights. Thus, much like the attorney general
notification provision, the plain language requirement should
create another layer of protection against inequitable class
settlements and the ``clientless litigation'' problem.
The Committee is aware that pursuant to the Rules Enabling
Act, the U.S. Supreme Court recently transmitted to Congress
several amendments to Rule 23 of the Federal Rules of Civil
Procedure. Several of those amendments reflect very thoughtful
efforts by the Judicial Conference of the United States, the
Standing Committee on Rules and Procedure, and the Advisory
Committee on Civil Rules to address this same issue--clarity of
notices to class members. In reviewing those amendments
carefully, the Committee believes that the notice-related
provisions of S. 274 and the proposed amendments to Rule 23 are
complementary.
New section 1717 sets forth requirements for notification
to appropriate federal and state officials of proposed class
action settlements.
New section 28 U.S.C. Sec. 1717 requires defendants to
provide notice of proposed settlements to the appropriate
federal official and to the appropriate state official of each
state in which a class member resides. Under new section
1717(a), the appropriate federal official is the Attorney
General of the United States, or in the case of depository
institutions and other banks, the person who has primary
federal regulatory supervisory responsibility over the
defendant if some or all of the matters at issue in the
litigation are subject to regulation or supervision by that
person. Thus, for example, if a national bank were sued over
its lending practices, notice would have to be provided to the
Comptroller of the Currency. If it were sued in a nationwide
lawsuit regarding the food in its cafeterias, notice would be
provided to the Attorney General.
Under new section 28 U.S.C. Sec. 1717(a), the appropriate
state official is defined as the person in the state who has
primary regulatory or supervisory responsibility with respect
to the defendant or licenses the defendant, if some or all of
the matters alleged in the class action are subject to
regulation by that person. If no such state regulatory or
licensing authority exists, or the matters are not subject to
regulation by that person, then notice should be given to the
state attorney general. Thus, for example, in a case against an
insurance company involving insurance practices, such as how
premiums are calculated, notice would be required to be given
to the state insurance commissioner in each state where the
company is licensed and where class members reside. If some
class members reside in states where the company does not do
business and therefore is not subject to regulation, then
notice would be given to those states' attorneys general.
Similarly, if the company at issue were a toy manufacturer,
which is not licensed by a particular regulatory body, then
notice would have to be given to the state attorney general of
each state where plaintiffs reside.
New section 28 U.S.C. Sec. 1717(c) clarifies that in the
case of federal depository institutions and other non-state
depository institutions, the notice requirements are satisfied
by notifying the person who has primary Federal regulatory or
supervisory responsibility with respect to the defendant, if
some or all of the matters alleged in the class action are
subject to regulation or supervision by that person. No notice
is required to state officials in these circumstances. Thus,
for example, if a national bank were sued over its depository
or lending practices, notice would have to be given to the
Comptroller of the Currency, who has regulatory authority over
the institution. However, no notice would be required to state
officials.
With regard to state depository institutions, the notice
requirements are satisfied by notifying the state banking
supervisor in the state where the defendant is incorporated, if
some or all of the matters alleged in the class action are
subject to regulation or supervision by that person, and upon
the appropriate federal official. Thus, no notice is required
to state officials in other states even if some class members
reside in those states.
This provision is intended to combat the ``clientless
litigation'' problem by adding a layer of independent oversight
to prohibit inequitable settlements. Under section 28 U.S.C.
Sec. 1717(b), class counsel must provide the notice within 10
days after the proposed settlement is filed in court. Such
notice must include, according to 28 U.S.C. Sec. 1717(b) (1)-
(8): a copy of the complaint; any scheduled judicial hearings;
any final judgment or notice of settlement; any proposed or
final notice to the class; and the names of class members who
reside in each state, if feasible. The notice would also
include any written judicial decision related to settlement, a
final judgment, or notice of dismissal. If disagreement arises
over the feasibility of providing the names of class members
and their proportional share of the proposed settlement under
28 U.S.C. 1717(b), it is the intent of the Committee that class
counsel bear the burden of proving that it is not feasible to
provide any of this required information.
Once the appropriate state and federal officials have
received notice under 28 U.S.C. Sec. 1717(b), they would then
have at least 90 days to review the proposed settlement and
decide whether to object in the interest of the plaintiff
class. The state and federal officials are not required to take
any affirmative action once they receive the proposed
settlement according to new section 28 U.S.C. Sec. 1717(f), nor
does this section expand their current authority in any
respect.
New section 28 U.S.C. Sec. 1717(e)(1) instructs that in
cases where the appropriate state and federal officials are not
provided notice of the potential settlement, plaintiffs can
choose not be bound by that settlement. The Committee wishes to
make clear that this provision is intended to address
situations in which defendants have simply defaulted on their
notification obligations under this provision; it is not
intended to allow settlement class members to walk away from an
approved settlement based on a technical noncompliance (e.g.,
notification of the wrong person or failure of the official to
receive notice that was sent), particularly where good faith
efforts to comply occurred. In particular, the Committee wishes
to note that where the appropriate officials received
notification of a proposed settlement from at least one
defendant, section 1717(e) should not be operative. New
subsection 1717(e)(2) specifically states that a class member
may not refuse to comply with a settlement if the notice was
directed to the appropriate federal official and to the state
attorney general or the primary licensing authority. This
provision reflects the overall intent of section 1717 that a
settlement should not be undermined because of a defendant's
innocent error about which federal or state official should
have received the required notice in a particular case.
The Committee believes that notifying appropriate state and
federal officials of proposed class action settlements will
provide a check against inequitable settlements in these cases.
Notice will also deter collusion between class counsel and
defendants to craft settlements that do not benefit the injured
parties.
Section 4.--Section 4 amends 28 U.S.C. Sec. 1332 to
redesignate current subsection 1332(d) as subsection (e) and
create a new subsection 1332(d).
The new subsection 1332(d)(2) gives the federal courts
original jurisdiction over class action lawsuits in which the
matter in controversy exceeds the sum or value of $5,000,000,
exclusive of interest and costs, includes 100 or more members
of the class, and either (a) any member of a class of
plaintiffs is a citizen of a different state from any
defendant; (b) any member of a class of plaintiffs is a foreign
state or a citizen or subject of a foreign state and any
defendant is a citizen of a state; or (c) any member of a class
of plaintiffs is a citizen of a state and any defendant is a
foreign state or a citizen or subject of a foreign state.
The Committee notes that for purposes of the citizenship
element of this analysis, S. 274 does not alter current law
regarding how the citizenship of a person is determined,
including the provisions of 28 U.S.C. Sec. 1332(c) specifying
that ``a corporation shall be deemed to be a citizen of any
State by which it has been incorporated and of the State where
it has its principal place of business.'' The bill also does
not alter the current law regarding when citizenship is
determined for diversity purposes: the time a pleading is filed
with the court. However, for removal purposes, citizenship may
be reevaluated upon certification of the class.
While the core concept of the bill is that class actions
filed against defendants outside their home state are subject
to federal jurisdiction if citizens from different states are
on opposing sides and more than $5 million is at issue, new
subsections 1332(d)(3) and (d)(4)(A) address the jurisdictional
principles that will apply to class actions filed against a
defendant in its home state, dividing such cases into three
categories. These rules are designed to direct appropriate
national cases to federal court, and appropriate local cases to
state court.
First, for cases in which two-thirds or more of the members
of the plaintiff class and the primary defendants are citizens
of the state in which the suit was filed, new subsection
1332(d)(4)(A) states that federal jurisdiction will not be
extended by S. 274. Such cases will remain in state courts
under the terms of S. 274, since virtually all of the parties
in such cases (both plaintiffs and defendants) would be local,
and local interests therefore presumably would predominate.
Second, cases in which more than two-thirds of the members
of the plaintiff class and one or more of the primary
defendants are not citizens of the state in which the action
was filed will be subject to federal jurisdiction, pursuant to
the provisions of new subsection 1332(d)(2). Federal courts
should be able to hear such lawsuits because they have a
predominantly interstate component--they affect people in many
jurisdictions, and the laws of many states may be at issue.
Finally, there is a middle category of class actions in
which more than one-third but fewer than two-thirds of the
members of the plaintiff class and the primary defendants are
citizens of the state in which the action was filed. In such
cases, the numbers alone may not always confirm that the
litigation is more fairly characterized as predominantly
interstate in character. New subsection 1332(d)(3) therefore
gives federal courts the discretion, in the ``interests of
justice,'' to decline to exercise jurisdiction over such cases
based on the consideration of five factors:
Whether the claims asserted are of ``national or
interstate interest''.--If a case presents issues of national
or interstate significance, that argues in favor of the matter
being handled in federal court. For example, if a nationally
distributed pharmaceutical product is alleged to have caused
injurious side-effects and class actions on the subject are
filed, those cases presumably should be heard in federal court
because of the nationwide ramifications of the dispute and the
probable interface with federal drug laws (even if claims are
not directly filed under such laws). Under this factor, the
court would inquire as to whether the case presents issues of
national or interstate significance of this sort. If such
issues are identified, that point favors the exercise of
federal jurisdiction. If such issues are not identified and the
matter appears to be more of a local (or intrastate)
controversy, that point would tip in favor of allowing a state
court to handle the matter.
Whether the claims asserted will be governed by
laws other than those of the forum state.--As noted previously,
the Committee believes that one of the significantproblems
posed by multi-state state court class actions is the tendency of some
state courts to be less than respectful of the laws of other
jurisdictions, applying the law of one state to an entire nationwide
controversy and thereby ignoring the distinct, varying state laws that
should apply to various claims included in the class depending on where
they arose. Under this factor, if the federal court determines that
multiple state laws will apply to aspects of the class action, that
determination would favor having the matter heard in the federal court
system, which has a record of being more respectful of the laws of the
various states in the class action context. Conversely, if the court
concludes that the laws of the state in which the action was filed will
apply to the entire controversy, that factor will favor allowing the
state court to handle the matter.
Whether the class action has been pleaded in a
manner that seeks to avoid federal jurisdiction.--The purpose
of this inquiry is to determine whether the plaintiffs have
proposed a ``natural'' class--a class that encompasses all of
the people and claims that one would expect to include in a
class action--as opposed to proposing a class that appears to
be gerrymandered solely to avoid federal jurisdiction by
leaving out certain potential class members or claims. If the
federal court concludes evasive pleading is involved, that
factor would favor the exercise of federal jurisdiction. On the
other hand, if the class definition and claims appear to follow
a ``natural'' pattern, that consideration would favor allowing
the matter to be handled by a state court.
Whether the number of citizens of the forum state
in the proposed plaintiff class(es) is substantially larger
than the number of citizens from any other state, and the
citizenship of the other members of the proposed class(es) is
dispersed among a substantial number of states.--This factor is
intended to look at the geographic distribution of class
members in an effort to gauge the forum state's interest in
handling the litigation. To be subject to this inquiry, between
one-third and two-thirds of the class members are citizens of
the state in which the class action was filed and the primary
defendants are also citizens of that state. If all of the other
class members (that is, the class members who do not reside in
the state where the action was filed) are widely dispersed
among many other states (e.g., no other state accounted for
more than five percent of the class members), that point would
suggest that the interests of the forum state in litigating the
controversy are preeminent (versus the interests of any other
state). The Committee intends that such a conclusion would
favor allowing the state court in which the action was
originally filed to handle the litigation. However, if a court
finds that the citizenship of the other class members is not
widely dispersed, the opposite balance would be indicated. A
federal forum would be favored in such a case because several
states other than the forum state would have a strong interest
in the controversy.
Whether one or more class actions asserting the
same or similar claims on behalf of the same or other persons
have been or may be filed.--The purpose of this factor is
efficiency and fairness: to determine whether a matter should
be subject to federal jurisdiction so that it can be
coordinated with other overlapping or parallel class actions.
If other class actions on the same subject are likely to be
filed elsewhere that will remain in federal court, the
Committee intends that this consideration would favor placing
all of the matters in federal court so that all claims of all
proposed classes could be handled efficiently on a coordinated
basis pursuant to the federal courts' multi-district litigation
process as established by 28 U.S.C. Sec. 1407. Under that
process, it is likely that all class actions filed on an issue
will be handled by a single tribunal that will, in any event,
be facing the challenge of interpreting the varying state laws
and assessing how they should be applied to the purported class
claims. Allowing a case to remain in federal court so that it
may become part of that coordinated multidistrict litigation
proceeding makes good sense. On the other hand, if other courts
are unlikely to have to undertake the burden of handling the
class claims and the state court appears positioned to handle
the case in a manner that is respectful of state law
variations, that consideration would favor remand of the matter
to state court.
For example, if a Virginia state court class action were
filed against a Virginia pharmaceutical drug company on behalf
of a proposed class of 60% Virginia residents and 40% Maryland
residents alleging harmful side effects attributable to a drug
sold nationwide, it would make sense to leave the matter in
federal court. There would be a substantial possibility that
other class actions would be filed elsewhere, possibly
including nationwide or other multi-state class actions that
might sweep in all or most Virginia and Maryland residents in
the Virginia state court action. The state laws that would
apply in all of these cases would vary depending on where the
drug was prescribed and purchased, such that allowing a single
court to sort out such issues and handle the balance of the
litigation would make sense both from an efficiency and
federalism standpoint. On the other hand, if a checking account
fee disclosure class action were filed in a Maryland state
court against a Maryland bank located in a border city and the
class consisted of 65% Maryland residents and 35% Virginia
residents (who crossed the border to conduct transactions in
the Maryland bank), it might make sense to allow that matter to
proceed in state court. There is less likelihood that multiple
actions will be filed around the country on the same subject,
so as to give rise to a coordinating federal multidistrict
litigation proceeding. And it is likely that Maryland banking
law would apply to all claims (even those of the Virginia
residents), since all of the transactions occurred in Maryland.
Thus, the federalism concerns would be substantially
diminished.
In sum, the Committee intends that these factors would
permit a federal court, in its discretion, to allow a class
action asserting primarily local claims under local law for
what is primarily a local group of claimants to proceed in
state court, particularly where the action has not been pleaded
manipulatively to avoid federal jurisdiction and the case is
not likely to become an ``orphan'' that cannot be coordinated
with similar class actions that are or, in the future, may be
pending in federal court.
New subsection 1332(d)(4) (B) and (C) specify,
respectively, that S. 274 does not extend federal diversity
jurisdiction to class actions in which (a) the primary
defendants are states, state officials, or other governmental
entities against whom the district court may be foreclosed from
ordering relief (``state action'' cases) or (b) the number of
members of all proposed plaintiff classes in the aggregate is
fewer than 100 class members (``limited scope'' cases). The
purpose of the ``state action'' cases provision is to prevent
states, state officials, or other governmental entities from
dodging legitimate claims by removing class actions to federal
court and then arguing that the federal courts are
constitutionally prohibited from granting the requested relief.
This provision will ensure that cases in which such entities
are the primary targets will be heard in state courts that do
not face the same constitutional impediments to granting
relief. The ``limited scope'' cases provision is intended to
allow class actions with relatively few claimants to remain in
state courts.\116\
---------------------------------------------------------------------------
\116\ Under federal law, a purported class action may involve as
few as 21 class members. See, e.g., Cox v. American Cast Iron Pipe Co.,
784 F.2d 1546, 1553 (11th Cir. 1986) (noting that classes encompassing
fewer than 21 persons normally are not subject to class certification);
Tietz v. Bowen, 695 F. Supp. 441, 445 (C.D. Cal. 1987) (certifying
class with 27 class members).
---------------------------------------------------------------------------
Federal courts should proceed cautiously before declining
federal jurisdiction under the subsection 1332(d)(4)(B) ``state
action'' case exception, and do so only when it is clear that
the primary defendants are indeed states, state officials, or
other governmental entities against whom the ``court may be
foreclosed from ordering relief.'' In making such a finding,
courts should apply the guidance regarding the term ``primary
defendants'' discussed below. The Committee wishes to stress
that this provision should not become a subterfuge for avoiding
federal jurisdiction. In particular, plaintiffs should not be
permitted to name state entities as defendants as a mechanism
to avoid federal jurisdiction over class actions that largely
target non-governmental defendants. Similarly, the subsection
1332(d)(4)(C) exception for ``limited scope'' cases (actions in
which there are fewer than 100 class members) should also be
interpreted narrowly. For example, in cases in which it is
unclear whether ``the number of members of all proposed
plaintiff classes in the aggregate is less than 100,'' a
federal court should err in favor of exercising jurisdiction
over the matter.
As S. 274 was originally drafted, the jurisdictional
provisions in the bill would have applied not only to class
actions but also to two types of actions that are highly
similar to class actions: (1) cases in which the named
plaintiff (who is not a state attorney general) seeks monetary
relief on behalf of its members (who are not parties to the
action) or for the interests of the general public; and (2)
cases in which the claims at issue seek monetary relief on
behalf of 100 or more persons, on the ground that the claims
involve common questions of law or fact and should therefore be
jointly tried in any respect. The former definition was
intended to encompass so-called ``private attorney general''
suits such as those in which an individual seeks to recover on
behalf of the general public. The latter definition referred to
``mass actions''--suits that are brought on behalf of hundreds
or thousands of named plaintiffs who claim that their suits
present common questions of law or fact that should be resolved
simultaneously in a single proceeding in which large groups of
claims are tried together, in whole or in part. Although
private attorney general suits and mass action cases do not
proceed under Rule 23 because they do not involve class
representatives suing on behalf of unnamed persons, they
function very much like class actions. Thus, the bill's
original drafters were concerned that the use of these devices
should not be allowed to permit an end-run around the due
process and fairness considerations inherent in the federal
class certification requirements.\117\
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\117\ The due process-threatening abuses that often arise in such
cases are detailed in Beisner, Miller, and Shors, One Small Step for a
County Court . . . One Giant Calamity for the National Legal System,
Civil Justice Report (Center for Legal Policy, March 2003).
---------------------------------------------------------------------------
During the Committee mark-up, Senators Specter and
Feinstein introduced an amendment to strike from the bill these
provisions, which would have been codified as section
1332(d)(9). That amendment was accepted by Chairman Hatch, with
the understanding that there would be discussions about
reformulating the provision. However, the amendment included a
drafting error because it struck Section 1332(d)(9)(A) but
failed to strike 1332(d)(9)(B). (Because of another amendment
in the bill, Section 1332(d)(9)(B) has now been redesignated as
1332(d)(10)(B).) Thus, as reported from Committee, the bill
currently includes language at Section 1332(d)(10)(B) that
erroneously refers to the stricken language and is thus
surplusage in the reported version of S. 274.
The Committee notes that although not reflected in the bill
as reported by the Committee, ensuing conferences have produced
a modified provision regarding ``mass actions'' that Senator
Specter and the bill's other sponsors reportedly agree should
be added to S. 274. That modified provision tracks the original
bill, authorizing removal to federal court of major ``mass
actions'' that otherwise meet the jurisdictional requirements
for class actions established by the bill. However, there are
four changes:
First, the revised provision expressly does not permit
removal of a ``mass action'' in which all claims arise from a
single sudden accident (e.g., a building fire, a chemical plant
explosion) that occurred in the state in which the action was
filed and that allegedly resulted in injuries in that state or
in states contiguous thereto. The rationale of this change is
that in the event of a major sudden accident, many individual
lawsuits are likely to be filed in local state courts and
collected before a single court. In that narrow circumstance,
moving a mass action to federal court might lessen (not
increase) efficiencies, inasmuch as both federal and state
courts might simultaneously be hearing what are essentially the
same cases. Thus, it might be preferable to allow all such
cases to proceed on a coordinated basis in state court.
Further, single event accident cases do not create the risk of
abuses posed by most mass actions--the potential that counsel
are attempting to aggregate in a single lawsuit claims that
arose in widely dispersed locations under widely varying
factual circumstances and have little or no relationship to the
forum.
Second, the revised mass actions provision would prevent
removal to federal court in cases in which the defendant (not
the plaintiff) seeks to join the monetary damages claims of
more than 100 persons for a single trial. This provision will
prevent defendants from moving to federal courts claims that do
not otherwise qualify for federal jurisdiction--something the
original S. 274 mass actions provision was never intended to
do.
Third, the revised mass actions provision limits the
authority of the Judicial Panel on Multidistrict Litigation to
transfer into MDL proceedings ``mass actions'' removed under
this provision. Under the revised provision, such transfers
would be permitted only if transfer were requested by a
majority of the plaintiffs in the action, if plaintiffs asked
that the matter be turned into a class action, or if the court
turns the matter into a class action (by affording the matter
class status). This change recognizes the fact that a mass
action of this sort will itself be a major piece of litigation
(perhaps larger than any parallel MDL action), such that the
matter should be left in the forum in which it was originally
filed (unless attempts are made to turn the matter into a class
action that should be subject to the bill's removal and
jurisdictional provision to ensure coordination with other
parallel class actions).
Finally, the revised mass action provision confirms that
the applicable statutes of limitations on mass action claims
removed to federal court under this section shall be tolled
while those claims are pending in federal court.
Pursuant to new subsection 1332(d)(5), the claims of the
individual class members in any class action shall be
aggregated to determine whether the amount in controversy
exceeds the sum or value of $5,000,000 (exclusive of interest
and costs). The Committee intends this subsection to be
interpreted expansively. If a purported class action is removed
pursuant to these jurisdictional provisions, the named
plaintiff(s) should bear the burden of demonstrating that the
removal was improvident (i.e., that the applicable
jurisdictional requirements are not satisfied). And if a
federal court is uncertain about whether ``all matters in
controversy'' in a purported class action ``do not in the
aggregate exceed the sum or value of $5,000,000,'' the court
should err in favor of exercising jurisdiction over the case.
By the same token, the Committee intends that a matter be
subject to federal jurisdiction under this provision if the
value of the matter in litigation exceeds $5,000,000 either
from the viewpoint of the plaintiff or the viewpoint of the
defendant, and regardless of the type of relief sought (e.g.,
damages, injunctive relief, or declaratory relief). The
Committee is aware that some courts, especially in the class
action context, have declined to exercise federal jurisdiction
over cases on the ground that the amount in controversy in
those cases exceeded the jurisdictional threshold only when
assessed from the viewpoint of the defendant. For example, a
class action seeking an injunction that would require a
defendant to restructure its business in some fundamental way
might ``cost'' a defendant well in excess of $75,000 under
current law, but might have substantially less ``value'' to a
class of plaintiffs. Some courts have held that jurisdiction
does not exist in this scenario under present law, because they
have reasoned that assessing the amount in controversy from the
defendant's perspective was tantamount to aggregating damages.
Because S. 274 explicitly allows aggregation for purposes of
determining the amount in controversy in class actions, that
concern is no longer relevant.
The Committee also notes that in assessing the
jurisdictional amount in declaratory relief cases, the federal
court should include in its assessment the value of all relief
and benefits that would logically flow from the granting of the
declaratory relief sought by the claimants. For example, a
declaration that a defendant's conduct is unlawful or
fraudulent will carry certain consequences, such as the need to
cease and desist from that conduct, which will often ``cost''
the defendant in excess of $5,000,000. As another example, a
declaration that a standardized product sold throughout the
nation is ``defective'' might well put a case over the
$5,000,000 threshold, even if the class complaint did not
affirmatively seek a determination that each class member was
injured by the product.
Overall, new section 1332(d) is intended to expand
substantially federal court jurisdiction over class actions.
Its provisions should be read broadly, with a strong preference
that interstate class actions be heard in a federal court if
properly removed by any purported class member or any
defendant.
As noted above, it is the intent of the Committee that the
named plaintiff(s) should bear the burden of demonstrating that
a case should be remanded to state court (e.g., the burden of
demonstrating that more than two-thirds of the proposed class
members are citizens of the forum state). Allocating the burden
in this manner is important to ensure that the named plaintiffs
will not be able to evade federal jurisdiction with vague class
definitions or other efforts to obscure the citizenship of
class members. The law is clear that, once a federal court
properly has jurisdiction over a case removed to federal court,
subsequent events generally cannot ``oust'' the federal court
of jurisdiction.\118\ While plaintiffs undoubtedly possess some
power to seek to avoid federal jurisdiction by defining a
proposed class in particular ways, they lose that power once a
defendant has properly removed a class action to federal court.
---------------------------------------------------------------------------
\118\ See, e.g., St. Paul Mercury Indem. Co. v. Red Cab Co., 303
U.S. 283, 293 (1938).
---------------------------------------------------------------------------
For purposes of class actions that are subject to
subsections 1332 (d)(3) and (d)(4)(A), the Committee intends
that the only parties that should be considered ``primary
defendants'' are those defendants who are the real ``targets''
of the lawsuit--i.e., the defendants that would be expected to
incur most of the loss if liability is found. Thus, the
Committee intends for the term ``primary defendants'' to
include any person who has substantial exposure to significant
portions of the proposed class in the action, particularly any
defendant that is allegedly liable to the vast majority of the
members of the proposed classes (as opposed to simply a few
individual class members). For example, in a class action
alleging that a drug was defective, the defendant manufacturer
of the drug would be a primary defendant, since it is a major
target of the allegations of the full class. However, if
several physicians who had each prescribed the drug to a
handful of class members were also named as defendants, they
would not be primary defendants. Similarly, in a class action
alleging that a type of ladder was defective, both a defendant
manufacturer that made 60% of the ladders at issue and a
defendant manufacturer that built 20% of the ladders at issue
would be primary defendants, since both are major targets of
the allegations and have substantial exposure to significant
percentages of the class in the case. However, if two local
hardware stores that each sold a few of the ladders were named
as defendants, they would not be deemed ``primary defendants.''
Merely alleging that a defendant conspired with other class
members to commit wrongdoing will not, without more, be
sufficient to cause a person to be a ``primary defendant''
under this subsection.
It is the Committee's intention with regard to each of
these exceptions that the party opposing federal jurisdiction
shall have the burden of demonstrating the applicability of an
exemption. Thus, if a plaintiff seeks to have a class action
remanded under section 1332(d)(4)(A) on the ground that the
primary defendants and two-thirds or more of the class members
are citizens of the home state, that plaintiff shall have the
burden of demonstrating that these criteria are met by the
lawsuit. Similarly, if a plaintiff seeks to have a purported
class action remanded for lack of federal diversity
jurisdiction under subsection 1332(d)(4)(C) (``limited scope''
class actions), that plaintiff should have the burden of
demonstrating that ``all matters in controversy'' do not ``in
the aggregate exceed the sum or value of $5,000,000, exclusive
of interest and costs'' or that ``the number of all proposed
plaintiff classes in the aggregate is less than 100.''
The Committee understands that in assessing the various
criteria established in all of these new jurisdictional
provisions, a federal court may have to engage in some fact-
finding, not unlike that which is necessitated by the existing
jurisdictional statutes. The Committee further understands that
in some instances, limited discovery may be necessary to make
these determinations. However, the Committee cautions that
these jurisdictional determinations should be made largely on
the basis of readily available information. Allowing
substantial, burdensome discovery on jurisdictional issues
would be contrary to the intent of these provisions to
encourage the exercise of federal jurisdiction over class
actions. For example, in assessing the citizenship of the
various members of a proposed class, it would in most cases be
improper for the named plaintiffs to request that the defendant
produce a list of all class members (or detailed information
that would allow the construction of such a list), in many
instances a massive, burdensome undertaking that will not be
necessary unless a proposed class is certified. Less burdensome
means (e.g., factual stipulations) should be used in creating a
record upon which the jurisdictional determinations can be
made.
New subsection 1332(d)(6) clarifies that the diversity
jurisdiction provisions of this section shall apply to any
class action before or after the entry of a class certification
order by the court. The purpose of this provision is to confirm
that both pre- and post-certification class actions shall be
subject to the jurisdictional and removal provisions of S. 274.
This provision is not intended to alter the deadlines for
removal under the Judicial Code or as established by this
legislation. Instead, it is intended to indicate that the
certification status of a class action should not affect its
removability.
New subsection 1332(d)(7) details the procedures governing
cases removed to federal court on the sole basis of new section
1332(d) jurisdiction. Pursuant to new subsection 1332(d)(7)(A),
the district courts are directed to dismiss any civil action
subject to federal jurisdiction if it is determined that the
civil action may not proceed as a class action because it fails
to satisfy the conditions of Rule 23 of the Federal Rules of
Civil Procedure. Notwithstanding this subsection, new
subsection 1332(d)(7)(B) clarifies that the action may be
amended and refiled in federal or state court; however, if such
an action is refiled in state court, it may be removed if it is
an action over which the district courts of the United States
have original jurisdiction. The Committee has concluded that
the alternative--forbidding re-removal--would be bad policy.
That approach would allow counsel effectively to ask a state
court to review and overrule the class certification decision
of a federal court, since federal and state court class
certification standards typically do not differ radically.
Allowing a state court to certify a case that a federal court
has already found non-certifiable would set a troubling (if not
constitutionally suspect) precedent under which state courts
would serve as points of appellate review of federal court
decisions. Moreover, since federal court denials of class
certification typically involve explicit or implied
determinations that allowing a case to be litigated on a class
basis would likely result in the denial of some or all of the
parties' due process rights, there should be no room
constitutionally for a state court to reach a different result
on class certification issues.
In addition, new subsection 1332(d)(7)(C) provides that, if
a dismissed case is refiled by any of the original named
plaintiffs in the same state court venue in which it was
originally filed, the statute of limitations on the claims
therein will be deemed tolled during the pendency of the
dismissed case. A new class action filed either in a different
venue or by different named plaintiffs would not enjoy the
benefits of this provision.
However, if a class action is dismissed under this section
and an individual action is later filed asserting the same
claims, the statute of limitations will be deemed tolled during
the pendency of the dismissed class action, regardless of where
the subsequent individual case is filed.
Pursuant to new subsection 1332(d)(8), the Act excepts from
new subsection 1332(d)(2)'s grant of original jurisdiction
those class actions that solely involve claims that relate to
matters of corporate governance arising out of state law. The
purpose of this provision is to avoid disturbing in any way the
federal versus state court jurisdictional lines already drawn
in the securities litigation class action context by the
enactment of the Securities Litigation Uniform Standards Act of
1998 (P.L. 105-353).
The Committee intends that this exemption be narrowly
construed. By corporate governance litigation, the Committee
means only litigation based solely on (a) state statutory law
regulating the organization and governance of business
enterprises such as corporations, partnerships, limited
partnerships, limited liability companies, limited liability
partnerships, and business trusts; (b) state common law
regarding the duties owed between and among owners and managers
of business enterprises; and (c) the rights arising out of the
terms of the securities issued by business enterprises.
This exemption would apply to a class action relating to a
corporate governance claim filed in the court of any state.
Consequently, it would apply to a corporate governance class
action regardless of the forum in which it may be filed, and
regardless of whether the law to be applied is that of the
State in which the claim is filed.
For purposes of this exemption, the phrase ``the internal
affairs or governance of a corporation or other form of
business enterprise'' is intended to refer to the internal
affairs doctrine defined by the U.S. Supreme Court as ``matters
peculiar to the relationships among or between thecorporation
and its current officers, directors and shareholders * * *.'' \119\ The
phrase ``other form of business enterprise'' is intended to include
forms of business entities other than corporations, including, but not
limited to, limited liability companies, limited liability
partnerships, business trusts, partnerships and limited partnerships.
---------------------------------------------------------------------------
\119\ Edgar v. Mite Corp., 457 U.S. 624, 645 (1982). See also
Draper v. Paul N. Gardner Defined Plan Trust, 623 A.2d 859, 865-66
(Del. 1993); McDermott v. Lewis, 531 A.2d 206, 214-15 (Del. 1987);
Ellis v. Mutual Life Ins. Co., 187 So. 434 (Ala. 1939); Amberjack,
Ltd., Inc. v. Thompson, 1997 WL 613676 (Tenn. App. 1997); NAACP v.
Golding, 679 A.2d 554, 559 (Ct. App. Md. 1996); Hart v. General Motors
Corp., 517 N.Y.S.2d 490, 493 (App. Div. 1987).
---------------------------------------------------------------------------
The subsection 1332(d)(8) exemption to new section 1332(d)
jurisdiction is also intended to cover disputes over the
meaning of the terms of a security, which is generally spelled
out in some formative document of the business enterprise, such
as a certificate of incorporation or a certificate of
designations. The reference to the Securities Act of 1933
contained in new subsection 1332(d)(8)(A) is for definitional
purposes only. Since that law contains an already well-defined
concept of a ``security,'' this provision simply imports the
definition contained in the Securities Act.
New subsection 1332(d)(9) provides that for purposes of
this new section and section 1453 of title 28, an
unincorporated association shall be deemed to be a citizen of a
state where it has its principal place of business and the
state under whose laws it is organized. This provision is added
to ensure that unincorporated associations receive the same
treatment as corporations for purposes of diversity
jurisdiction. The U.S. Supreme Court has held that ``[f]or
purposes of diversity jurisdiction, the citizenship of an
unincorporated association is the citizenship of the individual
members of the association.'' \120\ This rule ``has been
frequently criticized because often * * * an unincorporated
association is, as a practical matter, indistinguishable from a
corporation in the same business.'' \121\ Some insurance
companies, for example, are ``inter-insurance exchanges'' or
``reciprocal insurance associations.'' For that reason, federal
courts have treated them as unincorporated associations for
diversity jurisdiction purposes. Since such companies are
nationwide companies, they are deemed to be citizens of any
state in which they have insured customers.\122\ Consequently,
these companies can never be completely or even minimally
diverse in any case. It makes no sense to treat an
unincorporated insurance company differently from an
incorporated manufacturer for purposes of diversity
jurisdiction. New subsection 1332(d)(9) corrects this anomaly.
---------------------------------------------------------------------------
\120\ United Steelworkers of America v. Boulingy, Inc., 382 U.S.
145 (1965).
\121\ See, e.g., 3A J. Moore & J. Lucas, Moore's Federal Practice,
para.para. 17.25, 17-209 (1987 rev.) (``Congress should remove the one
remaining anomaly and provide that where unincorporated associations
have entity status under state law, they should be treated as analogous
to corporations for purposes of diversity jurisdiction.'').
\122\ See Tuck v. United Services Automobile Ass'n, 859 F.2d 842
(10th Cir. 1988); Baer v. United Services Automobile Ass'n, 503 F.2d
393 (2d Cir. 1974); Truck Insurance Exchange v. The Dow Chemical Co.,
331 F. Supp. 323 (W.D. Mo. 1971).
---------------------------------------------------------------------------
The definitional provisions of Section 4--as reflected in
the new section 1332(d)(1)--are self-explanatory. However, the
Committee notes that as with the other elements of section
1332(d), the overall intent of these provisions is to favor the
exercise of federal diversity jurisdiction over class actions.
In that regard, the Committee further notes that the definition
of ``class action'' is to be interpreted liberally. Its
application should not be confined solely to lawsuits that are
labeled ``class actions'' by the named plaintiff or the state
rulemaking authority. Generally speaking, lawsuits that
resemble a purported class action should be considered class
actions for the purpose of applying these provisions.
Section 5.--Section 5 establishes the procedures for
removal of interstate class actions over which the federal
court is granted original jurisdiction in new section 1332(d).
The general removal provisions currently contained in Chapter
89 of Title 28 would continue to apply to such class actions,
except where they are inconsistent with the provisions of the
Act. For example, like other removed actions, matters removable
under this bill may be removed only ``to the district court of
the United States for the district and division embracing the
place where such action is pending.'' \123\ However, the
general requirement contained in section 1441(b) that an action
be removable only if none of the defendants is a citizen of the
state in which the action is brought would not apply to the
removal of class actions under the jurisdictional provisions of
section 1332(d). Imposing such a restriction on removal of
class actions would subvert the intent of the Act because it
would essentially allow a plaintiff to defeat removal
jurisdiction by suing both in-state and out-of-state
defendants. Such a restriction on removal of class actions
would perpetuate the current ``complete diversity'' rule for
class actions that new section 1332(d) rejects. The Act does
not, however, disturb the general rule that a case can only be
removed to the district court of the United States for the
district and division embracing the place where the action is
pending.\124\ In addition, the Act does not change the
application of the Erie Doctrine, which requires federal courts
to apply the substantive law dictated by applicable choice-of-
law principles in actions arising under diversity
jurisdiction.\125\
---------------------------------------------------------------------------
\123\ See 28 U.S.C. Sec. 1441(a).
\124\ Id.
\125\ See Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).
---------------------------------------------------------------------------
New subsection 1453(b) would permit removal by any
plaintiff class member who is not a named or representative
class member of the action for which removal is sought.
Generally, removal of an action by the plaintiff is not
permissible, under the theory that as the instigator of the
lawsuit, the plaintiff had the choice of forum from the outset.
When a class action is filed, however, only the named
plaintiffs and their counsel have control over the choice of
forum, whereas the vast majority of the real parties in
interest--the unnamed class members on whose behalf the action
is brought and the defendants--have no voice in that decision.
By specifying that the provisions of section 1446(a) governing
the removal of a case by a defendant shall apply equally to
unnamed plaintiff class members, this provision gives unnamed
plaintiff class members the same flexibility as defendants to
choose the forum for a lawsuit.
In addition, new subsection 1453(b) provides that removal
may occur without the consent of any other party. This revision
to the removal rules will combat collusion between a corporate
defendant and a plaintiffs' attorney who may attempt to settle
on the cheap in a state court at theexpense of the plaintiff
class members. Similarly, this will prevent a plaintiffs' attorney from
recruiting a ``friendly'' defendant (e.g., a local retailer) who could
refuse to join in a removal to federal court and thereby thwart the
legitimate efforts of the primary corporate defendant to seek a federal
forum in which to litigate the pending claims. By this provision, it is
the Committee's intent to overrule caselaw developed by the federal
courts requiring the consent of all parties,\126\ to the extent that
such precedents might be applied to class actions subject to the
expanded jurisdictional and removal provisions of S. 274.
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\126\ See, e.g., Hewitt v. City of Stanton, 798 F.2d 1230 (9th Cir.
1986); Mitchell v. Kentucky-American Water Co., 178 F.R.D. 140, 142
(E.D. Ky. 1997).
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New subsection 1453(c) is intended to confirm that the
removal revisions are applicable to both pre- and post-
certification class actions.
New subsection 1453(d) states that the requirements of
section 1446, setting forth a 30-day filing period for removal
notices by defendants, shall apply to plaintiffs who seek to
remove a class action under Section 1453. In addition,
subsection 1453(d) makes an additional change to section
1446(b), which requires that removal occur within 30 days of
receipt of ``paper'' (e.g., a pleading, motion, order, or other
paper source) from which it may be ascertained that the case is
removable. Under the current statute, a defendant may remove an
action beyond the 30-day limit if it can prove that prior to
that time it had not received paper from which it could be
ascertained that the case was removable. Section 1453(d)
extends this provision to class members seeking removal, by
allowing them to file removal papers up to 30 days after
receiving initial written notice of the class action. The
Committee intends that the term ``initial written notice''
refer to the initial notice of the class action that is
disseminated at the direction of the state court before which
the action is pending. The Committee further intends that the
30-day period referenced by this section be deemed to run as to
each class member on the thirtieth day after dissemination of
notice to the class, as directed by the court, is completed.
New subsection 1453(e) provides that an order remanding a
class action to state court is reviewable by appeal or
otherwise. As a general matter, appellate review of orders
remanding cases to state court is not permitted, as specified
by 28 U.S.C. Sec. 1447(d). That prohibition on remand order
review was added to section 1447 after the federal diversity
jurisdictional statutes and the related removal statutes had
been subject to appellate review for many years and were the
subject of considerable appellate level interpretive law. The
Committee is concerned that if this prohibition on appellate
review is applied to remand orders issued under S. 274, the new
laws will never become the subject of appellate decisions that
would assist in guiding the district courts in interpreting
this new law. Thus, for that reason and in light of the high
stakes posed by class actions for both plaintiffs and
defendants, section 1453(e) is intended to leave no doubt that
orders remanding cases removed to federal court under the new
jurisdictional and removal provisions of S. 274 should be
subject to immediate, non-discretionary appellate review.
Normally the review of such jurisdictional provisions is de
novo, meaning that the lower court ruling is given no
deference.\127\ It is the Committee's intent that this standard
of review be applied in this setting, particularly in reviewing
any factual assessments underlying the district court's
jurisdictional determination.
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\127\ See, e.g., Jerome-Duncan, Inc. v. Auto-By-Tel, L.L.C., 176
F.3d 904 (6th Cir. 1999); Gould v. Mutual Life Ins. Co. of New York,
790 F.2d 769 (9th Cir. 1986).
---------------------------------------------------------------------------
In order to be consistent with the exceptions to federal
diversity jurisdiction granted under new section 1332(d), new
subsection 1453(f) provides that the class action removal
provisions shall not apply to claims involving covered
securities or corporate governance litigation. In addition,
claims concerning a covered security, as defined in section
16(f)(3) of the Securities Act of 1933 or section 28(f)(5)(E)
of the Securities Exchange Act of 1934, are excepted from the
class action removal rule as well. These are essentially claims
against the officers of a corporation for a precipitous drop in
the value of its stock, based on fraud. Because Congress has
previously enacted legislation governing the adjudication of
these claims,\128\ it is the Committee's intent not to disturb
the carefully crafted framework for litigating in this context.
Thus, claims involving covered securities are excluded from the
new section 1332(b) jurisdiction. The parameters of this
subsection are intended to be coterminous with new subsection
1332(d)(7).
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\128\ See Public Law 104-67, the ``Private Securities Litigation
Reform Act of 1995,'' and Public Law 105-353, the ``Securities
Litigation Uniform Standards Act of 1998.''
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Section 5 also amends Section 1446(b) to clarify that the
provisions in that section prohibiting the removal of cases
more than one year after their commencement do not apply to
class actions. Thus, removals taken under these revised
provisions for class actions may be taken more than one year
after an action's commencement. This change is intended to
prevent plaintiffs' attorneys from engaging in the type of
gaming that occurs under the current class action system. In
the most extreme example, a plaintiffs' attorney could file
suit under current law against a friendly defendant, triggering
the start of the one-year limitation after which removal may
not be sought under any condition. One year and one day after
filing suit, the plaintiff's attorney could then serve an
amended complaint on an additional defendant, at which time it
would be too late for that new defendant to remove the case to
federal court--regardless of whether diversity jurisdiction
exists and irrespective of the practical merits of the case.
The same unfair result would also occur if plaintiffs' counsel
dismisses non-diverse parties or increases the amount of
damages being pled after the one-year deadline. By allowing
class actions to be removed at any time when changes are made
to the pleadings that bring the case within section 1332(d)'s
requirements for federal jurisdiction, this provision will
ensure that such fraudulent pleading practices can no longer be
used to thwart federal jurisdiction. It is not the intention of
the Committee to change section 1446(b)'s requirements that an
action must be removed within thirty days of being served with
the initial pleading or thirty days after receipt of an amended
pleading, motion, order or other paper from which it may be
ascertained that the case is one which is or has become
removable.
Section 6.--Section 6 directs the Judicial Conference of
the United States, with the assistance of the Director of the
Federal Judicial Center and the Director of the Administrative
Office of the United States Courts, to prepare and transmit to
the Committees on the Judiciary of the Senate and House of
Representatives a report on class action settlements. The
report shall contain recommendations on the best practices that
courts can use to ensure that proposed classaction settlements
are fair to the class members that these settlements are supposed to
benefit. In addition, the report shall contain recommendations on the
best practices that courts can use to ensure that fees and expenses
awarded to attorneys in connection with a class action settlement
appropriately reflect the extent to which counsel obtained full redress
for the injuries alleged in the complaint, and the time, expense and
risk devoted to the litigation. Finally, the report shall identify the
actions that the Judicial Conference has taken and intends to take
toward having the federal judiciary implement the recommendations in
the report.
Section 6 contains a provision stating that nothing in the
Act shall be construed to alter the authority of the federal
courts to supervise the award of attorneys' fees. It is the
Committee's intent not to disrupt the federal courts' broad
discretion to approve attorneys' fees based on fairness
determinations, notwithstanding contractual arrangements
between attorneys and their clients.
Section 7.--Section 7 provides that the amendments made by
the Act shall apply to any civil action commenced on or after
the date of enactment.
VII. Critics Contentions and Rebuttals
Critics' Contention No. 1: S. 274 would transfer nearly
every class action from state to federal court and would add to
the overwhelming workload faced by our federal courts.
Response
During Committee debate on this and previous versions of
this bill, the most frequently expressed concern was that its
jurisdictional provisions would overload the federal judiciary.
That argument, however, ignores the fact that class actions
burden our entire national judicial system, which includes both
federal courts and state courts. In fact, many state courts,
where the critics apparently would like to confine all
interstate class actions, are just as burdened--if not more
so--than the federal courts, and are less equipped to deal with
complex cases like class actions. Indeed, many state courts
have comparatively crushing caseloads.
Civil filings in state trial courts of general jurisdiction
have been increasing rapidly, up 21 percent since 1984,
compared to only a four percent increase in the federal
courts.\129\ Most tellingly, in most jurisdictions, each state
court judge is assigned (on average) over 1,500 new cases each
year.\130\ The jurisdictions with these high case assignment
levels include California (average of 1,545 cases assigned to
each judge annually), District of Columbia (2,318 cases),
Florida (2,054 cases), Indiana (2,079 cases), New Jersey (2,653
cases), North Carolina (2,823 cases), South Carolina (3,833
cases), South Dakota (2,641 cases), Utah (3,124 cases), and
Vermont (2,081 cases). By contrast, each federal court judge
was assigned an average of 518 new cases during the twelve-
month period ending September 30, 2002.\131\
---------------------------------------------------------------------------
\129\ B. Ostrom, et al., Examining the Work of State Courts 12
(Court Statistics Project 2001).
\130\ Id. at 12-13
\131\ See Administrative Office of the U.S. Courts, 2002 Federal
Court Management Statistics 167 (2003).
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The median time for final disposition of a civil claim
filed in federal court is 8.7 months, and the median time to
trial in a civil matter in federal court is 21.8 months.\132\
The record reflects no hard evidence that on average, state
courts proceed more quickly.
---------------------------------------------------------------------------
\132\ See Administrative Office of the U.S. Courts, Judicial
Business of the United States Courts 2002, at 159, 172 (2003).
---------------------------------------------------------------------------
Critics of the bill also ignore the fact that many state
courts are tribunals of general jurisdiction--they hear all
sorts of cases, including divorce matters, custody disputes,
name change petitions, traffic violations, small claims
contract disputes, minor misdemeanors, and major felonies.
Thus, when a class action is filed before those courts, it
diminishes the court's ability to provide a broad array of very
basic legal services for the local community. The judges
presiding over those state courts often have far fewer
resources for dealing with huge, complex cases, like class
actions. Federal court judges usually have two or three law
clerks; state court judges often have none. And federal court
judges usually can delegate aspects of their cases (e.g.,
discovery issues) to magistrate judges or special masters;
state court judges typically lack such resources.
Critics also overlook the fact that even if both court
systems were similarly burdened, federal courts could still
deal with class actions more efficiently for two reasons.
First, federal courts can coordinate ``copy cat'' or
overlapping class actions. The record before the Committee
indicates that it is not uncommon to see twenty, thirty, or
even 100 class actions filed on the same subject matter.
Sometimes, competing lawyers file these cases; other times,
they are filed by the same lawyers who are simply forum-
shopping for the most receptive judge. When these similar,
overlapping class actions are filed in state courts of
different jurisdictions, there is no way to consolidate or
coordinate the cases. The result is enormous waste, to say
nothing of the unfairness to both defendants and plaintiffs.
Defendants are forced to defend the same case in many different
courts. Class members are harmed because the various different
class counsel compete with each other to achieve the best
settlement for the lawyers. By contrast, if overlapping or
similar class actions are filed against the same defendant in
two or more different federal courts, the multidistrict
litigation process (established by 28 U.S.C. Sec. 1407) permits
the transfer to and consolidation of those cases with a single
judge. The federal court multidistrict litigation system
regularly consolidates multiple overlapping class actions in
this manner, preventing the waste that occurs in state courts.
Second, federal judges generally have greater resources for
dealing with huge, complex cases, like class actions. As stated
previously, federal court judges usually have two or three law
clerks, while state court judges often have none. Federal court
judges usually can delegate certain aspects of their cases to
magistrate judges or special masters, while state court judges
often lack such resources.
Finally, those expressing workload concerns also ignore the
fact that S. 274 does not require that interstate class actions
be heard in federal courts. It simply provides the option for
either side to litigate in federal court if appropriate and it
so desires. Just as defendants choose to leave many cases in
state court that would be subject to proper removal, there is
no reason to believe that all class actions will be moved to
federal court. By the same token, under S. 274, plaintiffs'
counsel would no longer have an incentive to file large numbers
of class actions in a small number of ``magnet'' courts. Thus,
any burden posed by class actions would be more evenly
distributed among the different federal and state courts.
Class action filings in state courts have increased far
more rapidly than they have in federal courts. According to
recent studies, federal class action filings over the past ten
years have increased by more than 300%, while class action
filings in state courts have increased by more than
1,000%.\133\ As the number of class action lawsuits continues
to grow, state courts typically do not have the resources,
procedural mechanisms or expertise to handle them effectively.
Because the federal judiciary has more personnel and other
resources, it is more likely that class actions will be
resolved more quickly in federal court than in state court.
---------------------------------------------------------------------------
\133\ See Class Action Litigation--A Survey, Class Action Watch, at
5 (Vol. 1, No. 1 1998); Deborah Hensler, et al., Class Action Dilemmas:
Pursuing Public Goals for Private Gain 19 (1999) (executive summary).
---------------------------------------------------------------------------
Further, federal courts regularly decide cases involving
difficult conflict of law questions, and are frequently
required to apply different states' laws in complex cases--not
just class actions. Indeed, it is fair to say that this is
``standard fare'' for the federal courts. On the other hand,
state courts are not as familiar with these kinds of issues and
have been known to avoid applying different state laws by
simply--and improperly--imposing their own state law on a
nationwide case. Removal of more class actions to the federal
courts can only benefit the appropriate handling of these
cases, as well as improve the fairness of class action
decisions to both plaintiffs and defendants.
Critics who focus on the federal courts' workload are
missing the point--class actions are precisely the kind of
cases that should be heard in federal court. Class actions
usually involve the most people, most money, and most
interstate commerce issues. They also usually involve issues of
nationwide implications. Interstate class actions are certainly
no less deserving of a federal forum than the 5,212 cases to
recover a few thousand dollars in defaulted student loans, the
41,135 product liability actions (typically one-person injury
case), the 17,862 federal personal injury cases (e.g., single
person medical malpractice cases), or 23,863 civil habeas
corpus cases filed last year in federal court.\134\ Indeed, it
is noteworthy that there were almost twenty times as many
product liability and federal personal injury cases (normally
one-person claims) filed in federal court last year (58,997) as
there were class actions (2,916).\135\ Ultimately, regardless
of the impact on the federal court caseload, large interstate
class actions belong in federal court.
---------------------------------------------------------------------------
\134\ See Judicial Business, at 130-31.
\135\ Id. at 394.
Critics' Contention No. 2: Abuses of class actions exist in
both federal and state courts, and therefore, allowing more
interstate class actions to be heard in federal court will not
solve any problems.
Response
At congressional hearings on the subject of class actions,
witness after witness provided compelling evidence that serious
abuses of the class device are primarily occurring in state
courts.\136\
---------------------------------------------------------------------------
\136\ See generally Class Action Lawsuits: Examining Victim
Compensation and Attorneys' Fees, Hearings Before the Subcommittee on
Administrative Oversight and the Courts of the Senate Committee on the
Judiciary, 105th Cong. (1997); Hearings on Mass Torts and Class Actions
Before the Subcommittee on Courts and Intellectual Property of the
House Committee on the Judiciary, 105th Cong. (1998); Hearing on H.R.
1875, The Class Action Jurisdiction Act of 1999 Before the House
Committee on the Judiciary, 106th Cong. (1999).
---------------------------------------------------------------------------
Moreover, several studies also indicate that the class
action abuse problem, particularly with respect to class
settlements, is primarily a state court issue. For example, a
detailed Federal Judicial Center study concluded that ``[i]n
most [class actions handled by federal courts subject to the
study], net monetary distributions to the class exceeded
attorneys' fees by substantial margins.'' \137\ In stark
contrast, an Institute for Civil Justice/RAND study indicated
that in state court consumer class action settlements not
involving personal injuries, class counsel typically walk off
with more money than all of the class members combined.\138\
The ICJ/RAND study offered three compelling rationales for
allowing more interstate class actions to be heard by federal
courts:
---------------------------------------------------------------------------
\137\ Federal Judicial Center, Empirical Study of Class Actions in
Four Federal District Courts 68-69 (1996).
\138\ Deborah R. Hensler, et al., Class Action Dilemmas: Pursuing
Public Goals for Private Gain 19 (1999) (executive summary).
---------------------------------------------------------------------------
(1) ``federal judges scrutinize class action
allegations more strictly than state judges, and deny
certification in situations where a state judge might
grant it improperly;''
(2) ``state judges may not have adequate resources to
oversee and manage class actions with a national
scope;'' and
(3) ``if a single judge is to be charged with
deciding what law will apply in a multistate class
action, it is more appropriate that this take place in
federal court than in a state court.'' \139\
---------------------------------------------------------------------------
\139\ Id. at 28.
---------------------------------------------------------------------------
While some abuses do occur in federal court, the extent to
which they take place in no way even approaches the level of
abuse evidencing itself in state court. Indeed, it is
interesting that while few state court systems have attempted
to address class action abuses, the federal court system, which
has far less of a problem in the first place, has invested
considerable effort in developing new rules reflecting best
practices that courts should follow in handling
classlitigation, particularly in the settlement context. Those
revisions to Rule 23 have been approved by the U.S. Supreme Court and
forwarded to Congress for consideration pursuant to the Rules Enabling
Act.\140\ Those rule changes will dovetail with the ``consumer bill of
rights'' provisions in S. 274 to bolster federal court safeguards in
the proper handling of class action cases.
---------------------------------------------------------------------------
\140\ See Amendments to Federal Procedural Rules, 71 U.S.L.W. 4253,
4254-55 (U.S. Apr. 1, 2003) (Supreme Court order amending rules
pursuant to Rules Enabling Act).
Critics' Contention No. 3: To date, the only mechanism that
has been successful in imposing liability on some industries,
such as the tobacco or firearms industries, has been class
action lawsuits. Allowing removal of state class actions to
federal court will destroy the impact that class actions are
having on these socially irresponsible businesses. Therefore,
we should exempt certain industries from the diversity and
removal provisions of S. 274.
Response
Opponents of S. 274 seek to prohibit federal courts from
exercising jurisdiction over those class actions brought
against certain industries, including HMOs, tobacco companies,
nursing homes, and firearms manufacturers. In addition,
opponents have suggested that claims arising from state
consumer protection statutes or state environmental protection
laws should be exempt from the bill as well.
However, industry-specific exemptions from federal
jurisdiction make no sense. Like bills of attainder, such
exemptions irrationally single out a specific industry and slam
the federal courthouse door in its face. The proposal to carve
out certain legitimate, yet presently unpopular, industries
contradicts the constitutional purposes of federal diversity
jurisdiction--to allow interstate businesses to have claims
against them heard in federal court under diversity so as to
avoid local biases and to promote and enhance, rather than
hamper, interstate commerce. The notion that certain industries
are less entitled to federal court protection is utterly
inconsistent with the purpose and goals of diversity
jurisdiction. Simply put, there should not be one set of rules
for one category of defendants and another for another group of
defendants.
Moreover, there is no evidence that plaintiffs will be less
successful in litigating their class action claims in federal
court.\141\ Class actions against unpopular corporate
defendants, such as the firearms and tobacco industry have
successfully proceeded in Federal court, and have resulted in
beneficial judgments and settlements for the plaintiff classes.
For example, the class action that is touted as the only real
success the class counsel have had against the firearms
industry \142\ turns out to be a federal court class
action.\143\ Assuming that a case is a meritorious class action
asserting meritorious claims, there is no reason to believe
such a case heard by a federal court would have an outcome
different from a state court case, particularly given that the
federal court normally would apply the same state substantive
law as a state court considering the same case.
\141\ Indeed, there is no evidence that plaintiffs' counsel believe
that they must file in state court in order to succeed. Tobacco class
actions prove this point. Of the purported class actions on tobacco
issue, many were originally filed in federal courts. Moreover, there is
no evidence that classes are more likely to be certified in state
courts. The reality is that the vast majority of courts--both federal
and state courts--that have considered the issue have denied
certification of proposed tobacco classes. The state court
certification denials include: In re Tobacco Cases II, No. JCCP-4042,
slip op. (Md. Ct. App. May 16, 2000); Reed v. Philip Morris, Inc., No.
96-5070, slip op. (D.C. Super. Ct. July 23, 1999); Philip Morris, Inc.
v. Angeletti, No. 961450501 CE212596, slip op. (Md. Ct. App. May 16,
2000); Taylor v. American Tobacco Co., No. 97715975, slip op. (Mich.
Cir. Ct. Jan. 20, 2000); Constentino v. Philip Morris, Inc., No. MID-L-
5135-97, slip op. (N.J. Super. Ct. Oct. 26, 1998); Small v. Lorilard
Tobacco Co., 679 N.Y.S.2d 593 (App. Div. 1998), aff'd, 698 N.Y.S.2d 615
(1999); and Geiger v. American Tobacco Co., 696 N.Y.S.2d 345 (1999). At
least three federal courts have certified tobacco-related classes: In
re Simon II Litig., 211 F.R.D. 86 (E.D.N.Y. 2002) (certifying
nationwide punitive damages class of smokers' claims against tobacco
companies); Iron Workers Local Union No. 17 Insurance Fund v. Philip
Morris, Inc., 182 F.R.D. 523 (N.D. Ohio 1998); Northwest Laborers-
Employers Health & Security Trust Fund v. Philip Morris, Inc., 1997
U.S. Dist. LEXIS 21299 (W.D. Wash. Dec. 24, 1997). In addition, a U.S.
Magistrate Judge recommended certification of a class in Oregon
Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc.,
188 F.R.D. 365 (D. Or. 1998), but that recommendation was never acted
upon by the district court judge. Three state courts (two in Florida
and one in Louisiana) have certified tobacco-related classes: R.J.
Reynolds Tobacco Co. v. Engle, 672 So.2d 39 (Fla. Ct. App. 1996)
(affirming the trial court's certification of tobacco class); Broin v.
Philip Morris Cos., 641 So.2d 888 (Fla. Ct. App. 1994) (ordering trial
court to certify tobacco class); Scott v. American Tobacco Co., 725
So.2d 10 (La. Ct. App. 1998) (affirming trial court certification of
tobacco class). However, a Florida appeals court recently decertified
the Engle class. See Liggett Group, Inc. v. Engle, 28 Fla. L. Weekly
D1219 (Fla. Ct. App. May 21, 2003). Thus, the scorecard is basically
even; there is no evidence that class members will be treated
differently in state court.
While critics have pointed to the two Florida tobacco class actions
as evidence that state courts will somehow be tougher on the tobacco
industry, there is no real support for this contention. In the first
tobacco class action to reach conclusion after a class was certified
and the matter was tried (Broin, a Florida state court case), the
matter ultimately settled. But the class members received no money at
all. Under the terms of the settlement, they obtained only a ``right to
sue'' individually. Meanwhile, the class counsel were awarded $49
million (on the basis of a medical research contribution made by
defendants). Counsel for one of the class members who protested the
settlement reportedly commented: ``Its mind-boggling that a court would
permit this kind of settlement to go ahead. What is the class getting
out of this? Nothing.'' The Legal Intelligencer, Sept. 22, 1999, at 4.
The second case, Engle v. T.J. Reynolds Tobacco Co., received a lot of
publicity because the jury awarded a $145 billion verdict to the class
of Florida smokers. However, the verdict was recently vacated, after an
appeals court found that trying the plaintiffs' claims on a classwide
basis was improper. Engle, 28 Fla. L. Weekly D1219 (Fla. Ct. App. May
21, 2003).
Moreover, there is no evidence that tobacco cases would be tried
more quickly in state courts. It took six years to get the first
tobacco class action to trial in state court; the second took more than
four years. The average time to trial in federal court civil cases is
shorter.
Finally, it is clear that certain opponents of the bill are trying
to single-out certain unpopular industries, such as the firearms
industry, because they are unpopular. But that is exactly what the
Framers of the Constitution were trying to avoid. They were trying to
ensure a fair, even-handed federal court forum for defendants that may
otherwise be haled into a local court less concerned about protecting
the rights of an out-of-state company.
\142\ 145 Cong. Rec. H8577 (Sept. 23, 1999) (floor debate on H.R.
1789) (Rep. Nadler asserting that a ``1995 class action against
Remington Arms * * * settled for $31.5 million * * * [and] led to the
implementation of greater safety protections for owners of shotguns'').
\143\ See Garza v. Sporting Goods Properties, Inc., 1996 U.S. Dist.
LEXIS 2009 (W.D. Tex. Feb. 6, 1996) (approving class settlement).
Critics' Contention No. 4: S. 274 should exclude civil
rights cases, in order to ensure that civil rights plaintiffs
have maximum access to our courts.
Response
First, critics who would exclude civil rights cases from
the scope of S. 274 have it backwards. An amendment that would
affirmatively exclude civil rights cases from federal
jurisdiction would be contrary to a long tradition of
encouraging the availability of our federal courts to address
civil rights claims. Indeed, Congress has already enacted
several statutes that are intended to ensure that civil rights
cases can be heard in federal courts. For example, one statute
permits removal to federal court of a broad range of civil
rights actions.\144\ More importantly, one general jurisdiction
statute--28 U.S.C. Sec. 1343--provides broad federal
jurisdiction over a whole host of civil rights claims (e.g.,
any action ``for injury to person or property or because of the
deprivation of any right or privilege of a citizen of the
United States,'' any action ``to recover damages or to secure
equitable or other relief under any Act of Congress providing
for the protection of civil rights''). Indeed, that section
provides original federal jurisdiction over any action ``to
redress the deprivation, under color of any State law, statute,
ordinance, regulation, custom or usage, of any right,
privilege, or immunity secured by the Constitution of the
United States or by any Act of Congress providing for equal
rights of citizens.''
---------------------------------------------------------------------------
\144\ 28 U.S.C. Sec. 1443.
---------------------------------------------------------------------------
Second, the assumption of the amendment that federal courts
are clogged and unable to handle civil rights cases has no
basis. Indeed, the federal court workload issue is overblown,
and ignores the burdens that class actions place on ill-
equipped state courts. Several of our federal judicial
districts may need additional resources. Wherever that need has
been confirmed, additional resources have been provided (as
they were in 1999 and again last year, when new permanent and
temporary federal district court judgeships were added). But
those spot shortages are no excuse for continuing to deny both
consumers and corporations their due process rights by keeping
interstate class actions a state court monopoly.
Finally, contrary to the position of the amendment's
proponents, the bill will not impose new, burdensome and
unnecessary requirements on civil rights litigants and the
federal courts. A major complaint about class actions is that
the unnamed class members--the persons on whose behalf the
actions are brought--are not adequately informed about how
their rights are being affected by the class litigation. The
notice provisions in the bill are simply an effort to make sure
that the claimants are provided communications in ``plain
English.'' Moreover, providing notice to state attorneys
general and other regulatory bodies only increases protections
for class plaintiffs. The bill does not require that additional
or more expensive communications be provided beyond what is
already mandated by existing law.
Critics' Contention No. 5: S. 274 would unfairly tilt the
playing field by providing an advantage to defendant
corporations at the expense of consumers.
Response
This concern mischaracterizes the content and intent of the
bill. S. 274 would simply allow federal courts to handle more
interstate class actions. It makes no changes in substantive
law whatsoever. Critics of S. 274 erroneously argue that the
bill would reverse the ordinary presumption that a plaintiff
chooses his or her own court. Yet, in this context, there is no
such presumption. In fact, the whole purpose of diversity
jurisdiction is to preclude any such presumption by allowing
state-law based claims to be removed from local courts to
federal courts, so as to ensure that all parties can litigate
on a level playing field and thereby protect interstate
commerce interests.\145\
---------------------------------------------------------------------------
\145\ See, e.g., Pease v. Peck, 59 U.S. (18 How.) 595, 599 (1856).
---------------------------------------------------------------------------
Article III of the Constitution ensures that there will be
a fair, uniform, and efficient forum--a federal court--for
adjudicating interstate commercial disputes, so as to nurture
interstate commerce. Some scholars have persuasively argued
that diversity jurisdiction, of all the powers exercised under
the Constitution, has had the greatest influence in melding the
United States into a single nation, by fostering interstate
commerce, communication and the uninterrupted flow of capital
for investment into various parts of the Union, and sustaining
the public credit and the sanctity of private contracts.\146\
---------------------------------------------------------------------------
\146\ See John J. Parker, The Federal Constitution and Recent
Attacks Upon It, 18 A.B.A. J. 433, 437 (1932).
---------------------------------------------------------------------------
S. 274 promotes these important constitutional norms. The
statutory ``gatekeeper'' for federal diversity jurisdiction--28
U.S.C. Sec. 1332--generally allows federal courts to hear cases
that are large (cases with large ``amounts in controversy'')
and that have interstate implications (cases involving citizens
from multiple jurisdictions). These requirements were intended
to ensure that diversity jurisdiction is preserved for those
cases with significant interstate and economic impacts. Class
actions would normally satisfy these requirements because they
usually involve big dollar amounts and parties from multiple
jurisdictions. Yet, because section 1332 was enacted prior to
the existence of the modern-day class action, it does not take
into account the unique circumstances presented by class
actions. Consequently, section 1332, in current law, tends to
exclude the overwhelming majority of class actions from federal
courts, while inviting into federal courts much smaller single-
plaintiff cases having few (if any) interstate ramifications.
Such a result is inconsistent with the federal judiciary's
proper jurisdictional role. S. 274 would correct this technical
problem and thereby promote the underlying goals of diversity
jurisdiction.
As former Clinton Administration Acting Solicitor General
Walter Dellinger has testified in congressional hearings, if
Congress were to now re-write the federal diversity
jurisdiction statute, interstate class actions undoubtedly
would be one of the first categories of cases to be included
within the scope of the statute.\147\ This makes plain sense
insofar as class action lawsuits typically involve more people,
more money, and more interstate commerce issues than any other
type of case. S. 274 will simply fix the technical problem in
section 1332 and judicial interpretation of the diversity
requirements that keep most class actions in state court.
---------------------------------------------------------------------------
\147\ See Hearings on H.R. 1875, statement of Walter E. Dellinger.
Critics' Contention No. 6: S. 274 will result in delays for
injured consumers.
Response
This criticism stems from baseless concerns about the
federal courts' caseload and the possible impact of this
legislation on the ability of the federal courts to resolve
these cases in a timely manner. For all of the reasons set
forth previously, there is no basis for arguing that S. 274
would overwhelm the federal courts with class action cases and
thereby adversely affect the ability of consumers to find
timely redress for their injuries in federal court.
Opponents of the bill have presented no data whatsoever
that judicial overload would occur. When Congress has expanded
federal court jurisdiction in other respects, it normally has
not (at least in recent years) had the benefit of any hard data
indicating the likely impact on federal court workload. For
example, the Y2K Act (P.L. 106-37) expanded federal
jurisdiction over Y2K class actions in almost precisely the
same manner as proposed in S. 274. Congress enacted that change
without knowing its likely judicial workload impact. Likewise,
the Securities Litigation Reform Act of 1998 (P.L. 105-353)
contained provisions moving virtually all securities class
actions from state courts into the federal courts. Once again,
Congress enacted that expansion of federal jurisdiction without
knowing the precise effects on federal court workload. In the
past, when the case has been made that federal court
jurisdiction should be expanded, Congress has simply enacted
the expansion with the understanding that any resulting
judicial workload problems could be addressed later.
In sum, there simply is no basis to the claims that
consumers will be worse off in federal court, or that the
resolution of class actions will be delayed because of the
federal judiciary's workload.
Critics' Contention No. 7: S. 274 will trample on the
rights of states to manage their legal systems, thus
undermining the principles of federalism that our system of
government is built upon.
Response
While some critics have alleged that this bill will somehow
undermine federalism principles, exactly the opposite is true.
S. 274 has been carefully crafted to correct a problem in the
current system that does not promote traditional concepts of
federalism. In fact, it is the current system and the wave of
state court class actions that has trampled on the rights of
states to manage their legal systems by allowing state court
judges to interpret and apply the laws of multiple
jurisdictions. When state courts preside over class actions
involving claims of residents of more than one state, they
frequently dictate the substantive laws of other states,
sometimes over the protests of those other jurisdictions (as
discussed previously). When that happens, there is little those
other jurisdictions can do, since the judgment of a court in
one state is not reviewable by the state court of another
jurisdiction.
It is far more appropriate for a federal court to interpret
the laws of various states (a task inherent in the
constitutional concept of diversity jurisdiction), than for one
state court to dictate to other states what their laws mean or,
even worse, to impose its own state law on a nationwide case.
Why should a state court judge elected by the several thousand
residents of a small county in Alabama tell New York or
California the meaning of their laws? Why should an Illinois
state court judge interpret decisions by Virginia or Wisconsin
courts? Why should a state court judge be able to overrule
other state laws and policies? Why should state courts be
setting national policy?
In short, contrary to critics' contentions, the real harm
to federalism is the status quo--leaving the bulk of class
action cases in state court. Federal courts are the appropriate
forum to decide interstate class actions involving large
amounts of money, many plaintiffs and interstate commerce
disputes, and these matters of interstate comity are more
appropriately handled by federal judges appointed by the
President and confirmed by the Senate. S. 274 simply restores
this proper balance by resolving an anomaly of diversity
jurisdiction. True to the concept of federalism, S. 274
appropriately leaves certain ``intrastate'' class actions in
state court: cases involving small amounts in controversy;
cases with a class of 100 plaintiffs or less; cases involving
plaintiffs, defendants and governing law all from the same
state; cases against states and state officials; and certain
securities and corporate governance cases. S. 274 also
incorporates the concept of balanced diversity, leaving in
state court cases in which more than \2/3\ of the plaintiffs
and the primary defendants are residents of the forum state, as
well as certain cases in which between \1/3\ and \2/3\ of the
plaintiffs are residents of the forum state as are the primary
defendants, subject to a set of factors to be applied by the
court. As such, S. 274 promotes the concept of federalism and
protects the ability of states to determine their own laws and
policies for their citizens.
Critics' Contention No. 8: S. 274 assumes that federal
courts will not engage in the same ``false federalism'' that
state courts are accused of fostering. There really is no
evidence that in the class action context, federal courts will
intrude less on the states' rights to interpret their own laws
than have state courts.
Response
A principal purpose of the Class Action Fairness Act is to
correct what former Acting Solicitor General Walter Dellinger
has labeled a wave of ``false federalism.'' As he testified
before the Senate Judiciary Committee last July, the problem is
that ``many state courts faced with interstate class actions
have undertaken to dictate the substantive laws of other states
by applying their own laws to * * * other states, resulting in
a breach of federalism principles * * *.''
As discussed previously, a prime example of this situation
is the Avery case,\148\ in which defendant State Farm allegedly
breached auto insurance policies nationwide by requiring the
use of less expensive non-original equipment manufacturer parts
(``non-OEM parts'') in repairing accident-damaged vehicles. The
Illinois state court certified a nationwide class, and at
trial, a jury rendered a $1.3 billion verdict against State
Farm.
---------------------------------------------------------------------------
\148\ Avery v. State Farm Auto Insurance Cos., 746 N.E.2d 1242,
1254 (Ill. Ct. App. 2001).
---------------------------------------------------------------------------
The case is noteworthy on the ``false federalism'' issue
because the court applied Illinois consumer protection law to
all class claims in the case. It did so even though Illinois
law on this subject contravened the laws and policies of other
states in which some class members lived--laws and policies
encouraging (or even requiring) insurers to use less expensive,
non-OEM parts in making accident repairs as a means of
containing auto insurance costs. In affirming the verdict, an
Illinois state appellate court acknowledged that it had
disregarded ``state insurance commissioners [who] testified
that the laws in many of our sister states permit and in some
cases * * * [even] encourage'' usage of non-OEM parts. \149\
The New York Times reported that the decision effectively
``overturn[ed] insurance regulations * * * in New York,
Massachusetts, and Hawaii, among other places'' establishing
``what amounts to a national rule on insurance.'' \150\ As
discussed previously, Avery is not an isolated occurrence.
Numerous state courts have trampled on these federalism
principles, all in an effort to certify classes that should not
be certified. \151\
---------------------------------------------------------------------------
\149\ Id. at 1254.
\150\ See Matthew J. Wald, Suit Against Auto Insurer Could Affect
Nearly All Drivers, N.Y. Times, Sept. 27, 1998, Sec. 1, at 29.
\151\ See, e.g., Ysbrand v. DaimlerChrysler Corp., 2003 Okla. LEXIS
17 (Okla. 2003) (affirming certification of nationwide product
liability class, applying the law of one state to all claims); Peterson
v. BASF Corp., 2003 Minn. App. LEXIS 275 (Minn. Ct. App. March 11,
2003) (affirming nationwide consumer protection act case, applying the
law of one state to all claims).
---------------------------------------------------------------------------
A premise of the Class Action Fairness Act is that this
problem can be corrected by expanding federal jurisdiction over
interstate class actions, the theory being that federal courts
will not engage in ``false federalism'' games. But what proof
is there that the federal courts will not similarly botch these
critical choice-of-law issues?
In reality, there is ample evidence that the federal courts
will not engage in the ``false federalism'' that is so rampant
in state court class actions. To start, it should be noted that
the lead federal court--the U.S. Supreme Court--has repeatedly
warned that courts should not attempt to apply the laws of one
state to behaviors that occurred in other jurisdictions:
``Laws have no force of themselves beyond the
jurisdiction of the State which enacts them, and can have
extra-territorial effect only by the comity of the other
States.'' Huntington v. Attrill, 146 U.S. 657, 669 (1892).
``[I]t would be impossible to permit the statutes
of [one State] to operate beyond the jurisdiction of that State
* * * without throwing down the constitutional barriers by
which all the States are restricted within the orbits of their
lawful authority and upon the preservation of which the
Government under the Constitution depends.'' New York Life Ins.
Co. v. Head, 234 U.S. 149, 161 (1914).
``A state does not acquire power or supervision
over the internal affairs of another State merely because the
welfare and health of its own citizens may be affected when
they travel to that state.'' Bigelow v. Virginia, 421 U.S. 809,
824 (1975).
States should not apply their own laws to matters
with which they have no significant contact. Philips Petroleum
Co. v. Shutts, 472 U.S. 797, 821-22 (1985).
Most recently, on April 7, 2003, the U.S. Supreme Court
again warned state courts on this issue, striking down one
state's effort to apply its laws to conduct that occurred
elsewhere: ``A basic principle of federalism is that each State
may make its own reasoned judgment about what conduct is
permitted or proscribed within its borders, and each State
alone can determine what measure of punishment, if any, to
impose on a defendant who acts within its jurisdiction.'' \152\
---------------------------------------------------------------------------
\152\ State Farm Mut. Auto. Ins. Co. v. Campbell, 2003 WL 1791206
(U.S. Apr. 7, 2003).
---------------------------------------------------------------------------
Unlike many state courts, federal courts have consistently
heeded the Supreme Court's admonitions. The record shows that
in the class action context, federal courts have been extremely
respectful of the interests of each state in having its laws
applied (as appropriate) to its own residents, particularly in
recognizing the substantial variations of those laws in the
class action context.
In recent years, numerous federal courts (applying the
choice-of-law doctrines of various jurisdictions) have
considered which laws should apply in proposed nationwide class
actions asserting state law-based claims. Those courts have
consistently concluded that in a nationwide or multi-state
class action, the choice-of-law rules of the state in which the
action was originally filed must be applied. \153\ Further,
they have consistently concluded that those choice-of-law rules
must be applied to ``each plaintiff's claims.'' \154\ Based on
those principles, federal courts have consistently concluded
that the laws of all states where purported class members were
defrauded, injured, or purchased the challenged product or
service must come into play. \155\ And in those very few
instances in which a federal district court has toyed with the
idea of engaging in ``false federalism'' (i.e., applying a
single state's law to all asserted claims), that notion has
been reversed on appeal almost immediately. \156\
---------------------------------------------------------------------------
\153\ See, e.g., In re Bridgestone/Firestone, Inc. Prods. Liab.
Litig., 288 F.3d 1012 (7th Cir. 2002).
\154\ See, e.g., Georgine v. Amchem Prods., 83 F.3d 610, 627 (3d
Cir. 1996), aff'd sub nom. Amchem Prods. v. Windsor, 521 U.S. 591
(1997).
\155\ See, e.g., Georgine, 83 F.3d at 627; Zinser v. Accufix
Research Inst., Inc., 253 F.3d 1180, 1187-90 (9th Cir. 2001); Zapka v.
Coca-Cola Co., No. 99 CV 8238, 2000 U.S. Dist. LEXIS 16552, at *11-13
(N.D. Ill. Oct. 26, 2000); Fisher v. Bristol-Myers Squibb Co., 181
F.R.D. 365, 369 (N.D. Ill. 1998); Dhamer v. Bristol-Myers Squibb Co.,
183 F.R.D. 520, 532-34 (N.D. Ill. 1998); Jones v. Allercare, Inc., 203
F.R.D. 290, 307 (N.D. Ohio 2001); In re Ford Motor Co. Ignition Switch
Prods. Liab. Litig., 174 F.R.D. 332, 346-54 (D.N.J. 1997); Marascalco
v. Int'l Computerized Orthokeratology Soc'y, Inc., 181 F.R.D. 331, 338-
39 (N.D. Miss. 1998); In re Ford Motor Co. Bronco II Prods. Liab.
Litig., 177 F.R.D. 360, 369-71 (E.D. La. 1997); In re Stucco Litig.,
175 F.R.D. 210, 214, 215-217 (E.D.N.C. 1997); Ilhardt v. A.O. Smith
Corp., 168 F.R.D. 613, 619-20 (S.D. Ohio 1996); Harding v. Tambrands
Inc., 165 F.R.D. 623, 629-30, 631-32 (D. Kan. 1996); Walsh v. Ford
Motor Co., 130 F.R.D. 260, 271-75 (D.D.C. 1990); Feinstein v. The
Firestone Tire & Rubber Co., 535 F. Supp. 595, 608 (S.D.N.Y. 1982).
\156\ See, e.g., In re Bridgestone/Firestone, Inc., 288 F.3d at
1024; Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 674-75 (7th
Cir. 2001); Spence v. Glock, GES.m.b.H, 227 F.3d 308, 313-15 (5th Cir.
2000); In re Am. Med. Sys., 75 F.3d 1069, 1085 (6th Cir. 1996); Castano
v. American Tobacco Co., 84 F.3d 734, 741-43, 749-50 (5th Cir. 1995);
In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1302 (7th Cir. 1995);
Walsh v. Ford Motor Co., 807 F.2d 1000, 1017-19 (D.C. Cir. 1990).
---------------------------------------------------------------------------
The bottom line is that over the past ten years, the
federal court system has not produced any final decisions
applying the law of a single state to all claims in a
nationwide or multi-state class action. And there are hundreds
of federal court decisions (examples of which are set forth
above) which flatly reject arguments using such a ``false
federalism'' choice-of-law approach and applying the laws of a
single state to all claims in a multi-state case. That is the
record that confirms that the passage of the Class Action
Fairness Act will end the ``false federalism'' game that is
occurring in the state court class action arena.
Critics' Contention No. 9: S. 274 could deny plaintiff
class members any meaningful ability to recover damages for
their injuries.
Response
In arguing that this bill would hurt consumers, some
opponents have gone so far as to list several state court class
actions which supposedly have served consumers well, inferring
that removal of such cases to federal court is tantamount to a
denial of justice. This argument assumes that the federal
courts are inferior to state courts--that a federal court
cannot arrive at a just outcome. If the cases cited by S. 274's
opponents would not have had the same outcome in federal court
as they did in state court, it is because the federal courts
may have been more careful to avoid the abuses of the system
that occur in state courts. The only thing that would be denied
when an interstate class action is removed to federal court is
the plaintiffs' lawyers' ability to strike it rich on class
actions that should not be certified by any court because they
do not meet the requirements of a proper class.
Moreover, the claim that federal courts never certify class
actions is unfounded. While opponents of the bill cite cases
that allegedly achieved greater justice in state court than
they would have received if they had been removed to federal
court, it is clear that this is pure speculation. In fact,
federal courts have certified hundreds of cases for class
treatment in recent years,\157\ and the rules governing the
decision of whether cases may proceed as class actions are
basically the same in federal and state courts. Further, under
the Erie doctrine, federal courts apply state substantive law
in diversity cases. Consequently, a removed class action should
have the same substantive law applied to it, regardless of
whether it is in federal or state court.
---------------------------------------------------------------------------
\157\ See Responses To Written Questions From Senators Orrin G.
Hatch and Charles E. Grassley to Walter Dellinger, Attachment A (list
of exemplar cases in which federal courts have certified classes since
2001).
---------------------------------------------------------------------------
Additionally, strict analysis by courts in deciding whether
a group of plaintiffs can proceed on a class basis should be
encouraged, rather than discouraged. The purpose of the current
requirements in Rule 23 and similar state court class action
rules is to protect the due process rights of both plaintiffs
and defendants. When judges indiscriminately certify class
actions, unnamed plaintiffs lose important legal rights and can
be denied appropriate awards for their injuries, and defendants
become more vulnerable to frivolous and unjustifiably magnified
class actions.
Allowing individual states to certify classes for their own
citizens on particular issues could result in a denial of
relief for the citizens of other states, particularly given the
limited resources available to some defendants to satisfy all
pending claims. For example, some hailed the now reversed
punitive damages verdict in the Engle tobacco class action that
continues to proceed in Florida state court. There, a Florida
jury awarded $135 billion in punitive damages to a class of
Florida residents. But if that verdict had been upheld,
citizens of other states might have been denied any relief
whatsoever on their claims against tobacco companies because
the Florida residents (through their single state class action)
would have taken all available money to pay their punitive
damages claims. In short, Florida residents would have received
billions of dollars in excess of what they claim for their real
personal injury damages, while residents of all other states
would not have even received what they claim to be owed for the
basic personal injuries that they allege. As one commentator
has noted,
This is what fuels the [state court class action]
litigation lottery. If you are the first in line to
demand punitive damages, you may receive awards in the
billions. Injured parties in later [class actions] are
likely to receive less. * * * They may receive nothing
if the first award killed the company or the industry.
None of this makes much sense. There is no reason why
one group of litigants should, solely on the basis of
residency in a particular state, receive the lion's
share of damages to the deprivation of hundreds of
thousands of other injured parties. Moreover, there is
no reason why one state should be able to impose this
result on other states when a problem and its victims
are shared by the nation as a whole. \158\
---------------------------------------------------------------------------
\158\ Jonathan Turley, A Crisis of Faith: Tobacco and the
Madisonian Democracy, 37 Harv. J. on Legis. 433, 475 (2000).
Of course, this situation would not arise if S. 274 were
passed, since all qualifying interstate class actions on a
particular subject could be removed to federal court and
consolidated before a single federal court judge under the
multidistrict litigation mechanism described previously. That
judge would be able to manage the proceeding to ensure that no
group of litigants gained advantage over the others by virtue
of their residency (or any other irrelevant factor).
Finally, a large quantity of class actions in state court,
like the Broin tobacco case in Florida, results in millions of
dollars for plaintiffs' counsel but nothing of any value for
plaintiffs. An Institute for Civil Justice/RAND study has
confirmed this pattern, finding that class counsel in state
court consumer class action settlements typically walk off with
more money than all of theclass members combined.\159\ The ICJ/
RAND study provides three compelling rationales for allowing more
interstate class actions to be heard by federal courts: (1) ``federal
judges scrutinize class action allegations more strictly than state
judges, and deny certification in situations where a state judge might
grant it improperly;'' (2) ``state judges may not have adequate
resources to oversee and manage class actions with a national scope;''
and (3) ``if a single judge is to be charged with deciding what law
will apply in a multistate class action, it is more appropriate that
this take place in federal court than in a state court.'' \160\ S. 274
would help assure fairer settlements by allowing the federal courts to
review more class action lawsuits, as well as by providing notice to
state Attorneys General so they can better protect their citizens
against unfair settlement agreements.
---------------------------------------------------------------------------
\159\ See Class Action Dilemmas, at 23.
\160\ Id. at 28.
Critics' Contention No. 10: S. 274 provides that if a
federal district court determines that a class action lawsuit
removed to that court does not satisfy applicable prerequisites
for certifying a class action, the court shall dismiss the
case. The case may be altered and refiled in state court, but
if that amended case still meets federal jurisdictional
prerequisites, it may be removed again to federal court. This
results in a ``merry-go-round,'' whereby defendants can
endlessly remove the class action to federal court.
Response
Critics of S. 274's remand provisions would alter the bill
so that any time a case brought in or removed to a federal
court is dismissed for failing to meet the requirements of Rule
23, a state court could then certify the case and allow it to
proceed as a class action under the state's class action law.
In short, these critics would guarantee that even though a
federal court has determined that a case cannot be certified as
a class action, a state court could essentially consider all
class issues anew.
Altering S. 274 in this manner would defeat a primary
purpose of the bill--to allow the removal of more interstate
class actions to federal courts, where they are more
appropriately heard. The revision suggested by critics would
effectively write that change out of the statute. Under the
proposed revision, if a federal district court determines that
a removed case should not be afforded class treatment, a state
court (upon remand of the case) would be free to ``overrule''
the federal court's ruling that class treatment would be
inappropriate. Thus, in interstate class actions, state
courts--not federal courts--would become the final arbiters of
what should proceed as a class action in our judicial system.
This would essentially be a declaration that in interstate
class actions, the federal courts are inferior to state courts.
This result runs counter to generally accepted concepts of
federalism.
Furthermore, altering S. 274 in this manner would only
aggravate the class action abuse already occurring in state
courts. When a federal district court denies class
certification in a case, it is typically because litigating the
case on a class basis would likely result in a denial of the
purported class members' or the defendants' due process rights
or run counter to basic fairness principles. This revision to
the bill would invite state courts to overrule such federal
court determinations and, instead, advance class actions which
have already been determined to deny due process rights or to
be unfair to unnamed class members and/or defendants.
In short, this proposed change to the bill would cause S.
274 to preserve the status quo instead of improving it. In
fact, the revision would create even more inefficiencies; even
if a defendant were to defeat class certification and win in
federal court, the defendant could turn around and mount the
fight all over again in state court.
Indeed, the proposed fix to the so-called ``merry-go-
round'' problem would specifically authorize an activity that
even Public Citizen (which has expressed opposition to the
bill) believes to be unethical. In correspondence with the
House Judiciary Committee discussing an amendment to the
parallel House class action bill, Public Citizen stated that
``if a federal judge were to deny class certification in a case
that had been properly removed to federal court, it is clear
that the same class allegations could not be reasserted in
state court.'' \161\ Public Citizen went on to say that ``a
plaintiff's lawyer who attempted that type of circumvention of
the federal court certification process would likely be subject
to significant sanctions, which would include payment of
defendants' attorneys' fees.'' \162\ In short, the proposed
change would expressly bless activity that a court would--and
should--find sanctionable.
---------------------------------------------------------------------------
\161\ Letter to House Judiciary Committee Members from Messrs.
Clemente and Vladeck of Public Citizen Litigation Group (dated Aug. 3,
1998), at 1.
\162\ Id.
---------------------------------------------------------------------------
Ultimately, concerns that a ``merry-go-round'' situation
will arise because of the way S. 274 is drafted are simply an
exaggeration. The Committee strongly believes that no judge--
federal or state--would allow such a situation to take place,
and that a court would stop such bad faith tactics. If this
were to actually occur, it is more conceivable that a court
would dismiss the complaint with prejudice and sanction the
offending attorney.
Critics' Contention No. 11: S. 274 will cause delay and
mass confusion because of (a) the difficulty of assessing
compliance with jurisdictional requirements at the outset and
(b) the potential that class membership and definitions will
change over time.
Response
The contention that S. 274 (particularly its differing
treatment of categories of cases when a suit is filed in the
defendant's home state) would complicate and delay the final
resolution of jurisdictional inquiries is absolutely
groundless. In reality, the jurisdictional standards in S. 274
will simplify--not complicate--a court's jurisdictional
inquiries. Under the current standards, many (and possibly
most) newly-filed state court class actions are removed to
federal court to test whether the class counsel's efforts to
evade federal jurisdiction have been successful (even
thoughthose removal attempts normally fail and the cases are remanded
to state court). Those inquiries are often quite complicated and can
create significant delays.
For example, as noted previously, counsel often include in
their complaint extraneous parties in order to prevent the
complaint from complying with the current ``complete
diversity'' requirement. The federal courts have ruled that
those arguably extraneous parties can be ignored in the
jurisdictional analysis if their claims are meritless,\163\ and
quite frequently, the claims of those parties are challenged in
class actions as part of the jurisdictional analysis, requiring
the court to take time to engage in the complicated process of
assessing the merits of their claims. Under current law, this
time-consuming ``fraudulent joinder'' issue arises in many
purported class actions that are removed to federal court.\164\
---------------------------------------------------------------------------
\163\ See, e.g., Whitaker v. American Telecasting, Inc., 261 F.3d
196, 207 (2d Cir. 2001) (`` `In order to show that naming a non-diverse
defendant is a `fraudulent joinder' effected to defeat diversity
[jurisdiction], the defendant must demonstrate, by clear and convincing
evidence, either that there has been outright fraud committed in the
plaintiff's pleadings, or that there is no possibility, based on the
pleadings, that the plaintiff can state a cause of action against the
non-diverse defendant in state court.' '') (citations omitted); Morris
v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001)
(``Joinder of a non-diverse defendant is deemed fraudulent, and the
defendant's presence in the lawsuit is ignored for purposes of
determining diversity, `[i]f the plaintiff fails to state a cause of
action against a resident defendant, and the failure is obvious
according to the settled rules of the state.' '') (citations omitted);
Tillman v. R.J. Reynolds Tobacco, 253 F.3d 1302, 1305 (11th Cir. 2001)
(``it is appropriate for a federal court to dismiss * * * a [non-
diverse] defendant and retain diversity jurisdiction if the complaint
shows that there is no possibility that the plaintiff can establish any
cause of action against [the] defendant''); Heritage Bank v. Redcom
Laboratories, Inc., 250 F.3d 319 (5th Cir. 2001) (to similar effect).
\164\ In just the past year, many federal courts have been required
to address fraudulent joinder issues in the context of class actions
removed to federal court. See, e.g., Jamison v. The Purdue Pharma Co.,
2003 U.S. Dist. LEXIS 4439 (S.D. Miss. Feb. 5, 2003) (mass action
matter); Hardy v. Ducote, 2003 U.S. Dist. LEXIS 2940 (E.D. La. Jan. 20,
2003); Burns v. Friedli, 241 F. Supp. 2d 519 (D. Md. 2003); Moore v.
Wyeth-Ayerst Labs., 236 F. Supp. 2d 509 (D. Md. 2002); Shields v.
Bridgestone/Firestone, Inc., 232 F. Supp. 2d 715 (E.D. Tex. 2002);
Little v. Purdue Pharma, L.P., 227 F. Supp. 2d 838 (S.D. Ohio 2002); In
re: Diet Drugs Prods. Liab. Litig., 220 F. Supp. 2d 414 (E.D. Pa.
2002); Doherty v. Aventis Pasteur, Inc., 2002 U.S. Dist. LEXIS 9596
(N.D. Cal. May 15, 2002); Garcia v. Aventis Pasteur, Inc., 2002 U.S.
Dist. LEXIS 15122 (W.D. Wash. Apr. 22, 2002); Ohler v. Purdue Pharma,
L.P., 2002 U.S. Dist. LEXIS 2368 (E.D. La. Jan. 22, 2002); Mead v.
Aventis Pasteur, Inc., 2002 U.S. Dist. LEXIS 25645 (D. Ore. Jan. 7,
2002).
---------------------------------------------------------------------------
Similarly, the process of assessing whether a class action
complies with the current jurisdictional amount requirement is
also often ``an expensive and time consuming process,'' \165\
requiring discovery on the nature and value of the named
plaintiffs' claims. As noted previously, in some federal
Circuits, the jurisdictional amount requirement in a class
action is satisfied by showing that any member of the proposed
class is asserting damages in excess of $75,000, and in other
Circuits, the question is whether each and every member of the
putative class has individually an amount in controversy
exceeding $75,000.\166\ Again, this time-consuming issue, often
requiring significant amounts of record review and fact-
finding, is litigated very frequently in the many class actions
that are removed to federal court under current law.\167\
---------------------------------------------------------------------------
\165\ See C.A. Wright, A.R. Miller, et al., Federal Practice and
Procedure Sec. 3707, at 225 (1998).
\166\ Id. Sec. 3705, at 65 (2003 Supp.).
\167\ In the past year alone, many federal courts have had to
resolve jurisdictional amount issues in resolving motions to remand
class actions. See, e.g., In re Bridgestone/Firestone, Inc. Tires
Prods. Liab. Litig., 2003 U.S. Dist. LEXIS 6225 (S.D. Ind. Apr. 11,
2003); Adams v. Nationwide Mutual Ins. Co., 2003 U.S. Dist. LEXIS 4973
(N.D. Tex. Mar. 31, 2003); Carrick v. Sears, Roebuck and Co., 2003 U.S.
Dist. LEXIS 4167 (M.D. Pa. Mar. 17, 2003); Dash v. Firstplus Home Loan
Trust, 2003 U.S. Dist. LEXIS 3706 (M.D.N.C. Mar. 6, 2003); Harris v.
Physicians Mut. Ins. Co., 240 F. Supp. 3d 715 (N.D. Ohio 2003); Radlo
v. Rhone-Poulenc, S.A., 241 F. Supp. 2d 61 (D. Mass. 2002); Mentzel v.
Comcast Cable Communications, 222 F. Supp. 2d 923 (E.D. Mich. 2002);
Tremblay v. Philip Morris, Inc., 231 F. Supp. 2d 411 (D.N.H. 2002).
---------------------------------------------------------------------------
In sum, S. 274 will make the resolution of class action
jurisdictional issues easier--not harder. The need to deal with
the bona fides of counsel's efforts to use dubious parties to
avoid diversity will evaporate. In short, it will be much
easier to figure out whether any class member is diverse as to
any defendant (the ``minimal diversity'' inquiry established by
S. 274) than resolving the fraudulent joinder issues regularly
presented under the current rule (``complete diversity'').
Likewise, it will be much easier to determine whether the
amount in controversy presented by a purported class as a whole
(that is, in the aggregate) exceeds $5 million than it is to
assess the value of the claim presented by each and every
individual class member, as is required by the current
diversity jurisdictional statute.
The critics' concerns that events might occur after a
complaint is filed or removed that would either create federal
jurisdiction in a way never intended or would remove federal
jurisdiction in an arbitrary manner are similarly unfounded.
While questions regarding events occurring after a complaint is
filed or removed to federal court will, of course, arise under
S. 274, those same (or, at least, very similar) questions arise
in current practice on jurisdictional issues. Well-established
law exists to resolve these questions, and S. 274 does not
change--or even complicate--the answers to these questions. In
short, the ``rules of the road'' on such issues are already
established, and S. 274 does not change them.
Under existing law (which S. 274 would not change),
``diversity'' of citizenship between the parties must exist
both at the time a complaint is filed and at the time a
complaint is removed to federal court.\168\ For this reason,
the federal court would generally only need to measure the
diversity of the parties at the outset of the litigation. For
example, in a case filed on behalf of a class of California
citizens against a California company, there would be no
minimal diversity when the case was filed--and thus the case
could not be removed simply because one named plaintiff or
class member later moved to Nevada. Similarly, if a class
action against a California company were filed in California
and more than 66% of the class members were California citizens
at the time the case was filed, changes in those class members'
residences would not alter the jurisdictional analysis. In
other words, no court would be required to engage in a
residency play-by-play after the time the complaint was filed.
---------------------------------------------------------------------------
\168\ Coury v. Prot, 85 F.3d 244, 249 (5th Cir. 1996); Kanzelberger
v. Kanzelberger, 782 F.2d 774, 776 (7th Cir. 1986).
---------------------------------------------------------------------------
If, however, the plaintiff in the above example of his or
her own volition filed an amended complaint in state court that
added Nevada plaintiffs (or that brought the percentage of
Nevada plaintiffs above 33% in a suit in the defendant's home
state), jurisdiction would exist at the time that complaint was
filed. Accordingly, as dictated by current law, the defendant
could remove the case to federal court.\169\
---------------------------------------------------------------------------
\169\ See Caterpillar, Inc. v. Lewis, 519 U.S. 61, 69 (1996) (``In
a case not originally removable, a defendant who receives a pleading or
other paper indicating the postcommencement satisfaction of federal
jurisdictional requirements--for example, by reason of the dismissal of
a nondiverse party--may remove the case from federal court within 30
days of receiving such information'').
---------------------------------------------------------------------------
Current law (that S. 274 does not alter) is also clear
that, once a complaint is properly removed to federal court,
the federal court's jurisdiction cannot be ``ousted'' by later
events. Thus, for example, changes in the amount in controversy
after the complaint has been removed would not subject a
lawsuit to be remanded to state court. The Supreme Court
established this principle in St. Paul Mercury Indem. Co. v.
Red Cab Co.,\170\ stating that ``events occurring subsequent to
removal which reduce the amount recoverable, whether beyond the
plaintiff's control or the result of his volition, do not oust
the district court's jurisdiction once it has attached.'' The
same would be true if a case was removed to federal court
because minimal diversity existed at the time and, because of a
later event, minimal diversity was eliminated. This would occur
if, for example, the federal court dismissed the claims of out-
of-state plaintiffs, leaving only the claims of in-state
plaintiffs against an in-state defendant intact. ``It uniformly
has been held that in a suit properly begun in federal court
the change of citizenship does not oust the jurisdiction. The
same rule governs a suit brought in a state court and removed
to federal court.'' \171\
---------------------------------------------------------------------------
\170\ 303 U.S. 283, 293 (1938).
\171\ Id.at 294-95.
---------------------------------------------------------------------------
Sound policy reasons support this rule. If a federal
court's jurisdiction could be ousted by events occurring after
a case was removed, plaintiffs who believed the tide was
turning against them could simply always amend their complaint
months (or even years) into the litigation to require remand to
state court. ``If the plaintiff could, no matter how bona fide
his original claim in the state court, reduce the amount of his
demand to defeat federal jurisdiction the defendant's supposed
statutory right of removal would be subject to the plaintiff's
caprice. The claim, whether well or ill founded in fact, fixes
the right of the defendant to remove, and the plaintiff ought
not to be able to defeat that right and bring the cause back to
the state court at his election.'' \172\ Similarly, a defendant
prevailing on the merits always shows that the amount in
controversy, at the end of the day, is zero. Thus, if
subsequent events could unravel a federal court's jurisdiction,
a defendant could prevail on the merits, only to have the
federal court conclude that it lacks jurisdiction to enter a
judgment.\173\
---------------------------------------------------------------------------
\172\ Id. at 294.
\173\ Herremans v. Carrera Designs, Inc., 157 F.3d 1118, 1121 (7th
Cir. 1998) (holding that the jurisdictional test is ``not whether the
plaintiff is actually entitled'' to $75,000, ``[o]therwise every
diversity case that a plaintiff lost on the merits would be dismissed
for lack of federal jurisdiction'').
---------------------------------------------------------------------------
It is also clear under existing law that even if a case is
not originally removable, it can become removable because of
subsequent events (other than changes in the citizenship of the
original parties, which, as noted above, do not effect
jurisdiction). Thus, as applied under S. 274, if a plaintiff,
through amendment or otherwise, increased the amount in
controversy, created minimal diversity, or changed the class
definition in a case filed in the defendant's home state to
include more than 33% of out-of-state plaintiffs, a complaint
filed in state court--and previously not subject to federal
jurisdiction--could properly be removed.\174\ Otherwise, the
plaintiff could simply file a complaint not subject to removal
and then later amend it, thereby circumventing federal
jurisdiction. Similarly, if a plaintiff defines a class so as
to allow diverse parties to become members of a class as the
case proceeds, removal may be appropriate if diverse parties
actually enter the class. For example, if a class action is
filed in state court against an Indiana company on behalf of
all persons affected by a chemical spill and it is initially
thought that all class members are Indiana citizens, the case
may become removable later in the litigation if it emerges that
citizens of other states fall within the class definition or
have become members of the class as the effects of the chemical
spill spread. If this were not the rule, major interstate
controversies could evade federal jurisdiction because counsel
filed a class action before the parameters of the controversy
were fully developed. Any alternative rule would allow class
counsel to urge rejection of federal jurisdiction on the
grounds that only non-diverse Indiana citizens were in the
class and then turn around months later and purport to
represent thousands of persons residing outside of Indiana. It
should be noted that class counsel can limit the potential for
removal as the case proceeds by defining the class to encompass
only parties that were injured as of the date on which the
action was filed or only parties who are citizens of a certain
state.
---------------------------------------------------------------------------
\174\ See Caterpillar, Inc., 519 U.S. at 69.
Critics' Contention No. 12: S. 274's provisions expanding
federal jurisdiction over class actions are invalid because
they exceed the jurisdictional authorization of Article III of
the Constitution.
Response
This concern lacks merit. As viewed by many Circuits, a
federal court may exercise diversity jurisdiction over a
purported class action only if none of the plaintiffs named in
the complaint share state citizenship with any defendant. In
other words, no named plaintiff may be a citizen of the same
state as any defendant. This so-called ``complete diversity''
prerequisite for federal jurisdiction is wholly a policy
creation of Congress, establishing a scope of federal diversity
jurisdiction narrower than what is authorized by Article
III.\175\ Broader definitions of diversity jurisdiction would
be wholly consistent with Article III. ``[I]n a variety of
contexts, [federal courts] have concluded that Article III
poses no obstacle to the legislative extension of federal
[diversity] jurisdiction * * * so long as any two adverse
parties are not co-citizens.'' \176\
---------------------------------------------------------------------------
\175\ See Strawbridge v. Curtis, 3 Cranch 267 (1806) (complete
diversity requirement derives from ``[t]he words of the act of
Congress,'' not the Constitution).
\176\ State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31
(1967) (citing Am. Fire & Cas. Ca. v. Finn, 341 U.S. 6, 10 n.3 (1951);
Wichita R.R. & Light Co. v. Pub. Util. Comm'n, 260 U.S. 48 (1922);
Barney v. Latham, 103 U.S. 205, 213 (1881)).
---------------------------------------------------------------------------
Critics suggest that S. 274 is constitutionally suspect
because it would authorize federal jurisdiction over purported
class actions in which there is ``minimal (but not complete)
diversity''--that is, cases in which any member of the
purported class (whether or not explicitly named in the caption
of the complaint) has state citizenship that differs from any
defendant (using the definitions already in 28 U.S.C.
Sec. 1332). Citing no precedents whatsoever, the critics allege
that there is an absolute bar on considering unnamed class
members to be ``parties'' to a purported class action. They
contend that those unnamed persons must be ignored completely
in determining whether the two sides meet the applicable
diversity requirement.
But the premise of this challenge--that unnamed class
members cannot be deemed parties to an action--is flatly
inconsistent with the fact that in a variety of contexts over
the years, federal courts have treated unnamed class members as
parties to class actions. For example:
In Zahn v. International Paper Co,\177\ the U.S.
Supreme Court considered whether federal diversity jurisdiction
existed over a purported Rule 23(b)(3) class that had not been
certified. The district court declined to exercise federal
jurisdiction (or to allow the matter to proceed as a class
action) because even though ``[t]he claim of each of the named
plaintiffs was found to satisfy the * * * jurisdictional
amount,'' ``not every individual owner in the class has
suffered * * * damages in excess of'' the amount-in-controversy
threshold.\178\ The Supreme Court concurred, holding that in
determining whether the amount-in-controversy prerequisite for
diversity jurisdiction is satisfied, a trial court is obliged
to look at whether each purported claimant, even if unnamed,
meets the $75,000 jurisdictional amount requirement.\179\ Thus,
in this respect, the federal courts have for many years treated
unnamed class members as ``parties.''
---------------------------------------------------------------------------
\177\ 414 U.S. 291 (1973),
\178\ Zahn v. International Paper Co., 53 F.R.D. 430 (D. Vt. 1971).
\179\ Zahn v. International Paper Co., 414 U.S. at 301 (``Each
plaintiff in a Rule 23(b)(3) class action must satisfy the
jurisdictional amount, and any plaintiff who does not must be dismissed
from the case--`one plaintiff may not ride in on another's coattails.'
'').
---------------------------------------------------------------------------
Similarly, in Devlin v. Scardelletti,\180\ the
Supreme Court recently held that unnamed class members are
considered ``parties'' for purposes of mounting an appeal.
Thus, Devlin rejects the contention that unnamed class members
cannot be considered ``parties'' to the litigation.
---------------------------------------------------------------------------
\180\ 536 U.S. 1 (2002).
---------------------------------------------------------------------------
Earlier, the Supreme Court ruled that normally,
the filing of a class action immediately tolls the statute of
limitations as to all unnamed class members.\181\ In short, all
unnamed class members are treated as parties--treated as if
they had filed the litigation themselves. Significantly, the
American Pipe Court declared that ``the claimed members of the
class stood as parties to the suit until and unless they
received notice thereof and chose not to continue.'') \182\
---------------------------------------------------------------------------
\181\ See, e.g., American Pipe & Construction Co. v. Utah, 414 U.S.
538 (1974).
\182\ Id. at 550 (emphasis added).
---------------------------------------------------------------------------
Along these same lines, many courts have held that
under Fed. R. Civ. P. 23(e), a court must ensure that unnamed
class members' interests are protected if class claims are
dismissed.\183\ In other words, the court is obliged (at least
at some level) to treat the unnamed class members as parties to
the litigation.
---------------------------------------------------------------------------
\183\ See Diaz v. Trust Territory of the Pacific Islands, 876 F.2d
1401, 1408 (9th Cir. 1989); Glidden v. Chromalloy American Corp., 808
F.2d 621, 626-28 (7th Cir. 1986).
---------------------------------------------------------------------------
S. 274 proposes that Congress declare unnamed class members
to be ``parties'' to the litigation for purposes of the
``minimal diversity'' jurisdictional requirement. As evidenced
by the foregoing examples, such a congressional determination
about who is a class action ``party'' would be wholly
consistent with long-standing practice. For years, Congress and
the courts have made practical determinations about how various
categories of parties should be treated in assessing compliance
with diversity jurisdiction prerequisites and specifically
about the circumstances in which unnamed class members should
be treated as parties to a lawsuit. The enactment of the
``minimal diversity'' provisions of S. 274 would be merely
another such practical determination--a determination that for
purposes of the ``minimal diversity'' jurisdictional inquiry
established by the legislation, unnamed class members (as well
as any named class members) shall be considered ``parties.''
Congress is certainly empowered to establish such a definition
in this instance.
The Committee also notes that the exercise of this expanded
jurisdiction can be grounded on a Commerce Clause rationale as
well. In that regard, the Committee notes that the legislation
contains findings that the state court class action abuses
identified in the record before the Committee are having a
serious adverse effect on interstate commerce and that the
legislation (particularly its jurisdictional provisions) is
intended to ameliorate those adverse effects.
VIII. Congressional Budget Office Cost Estimate
S. 274--Class Action Fairness Act of 2003
S. 274 would expand the types of class-action lawsuits that
would be initially heard in federal district courts. CBO
estimates that implementing the bill would cost the federal
district courts about $6 million a year, subject to
appropriation of the necessary funds. The bill would not affect
direct spending or revenues. S. 274 contains no
intergovernmental mandates as defined in the Unfunded Mandates
Reform Act (UMRA) and would impose no costs on state, local, or
tribal governments. S. 274 would impose private-sector
mandates, as defined in UMRA, but CBO estimates that the direct
cost of the mandates would fall below the annual threshold
established by UMRA ($117 million in 2003, adjusted annually
for inflation).
Under S. 274, most class-action lawsuits would be heard in
a federal district court rather than a state court. Therefore,
CBO estimates that the bill would impose additional costs on
the federal district court system. While the number of cases
that would be filed in federal court under this bill is
uncertain, CBO expects that a few hundred additional cases
would be heard in federal court each year. According to the
Administrative Office of the United States Court, class-action
lawsuits tried in federal court cost the government, on
average, about $21,000. That figure includes salaries and
benefits for clerks, rent, utilities, and associated overhead
expenses, but excludes the costs of the salaries and benefits
of judges. CBO estimates that implementing S. 274 would cost
about $6 million annually.
CBO also estimates that enacting this bill could increase
the need for additional district judges. Because the salaries
and benefits of district court judges are considered mandatory,
adding more judges would increase direct spending. However, S.
274 would not--by itself--affect direct spending because
separate legislation would be necessary to authorize an
increase in the number of district judges. In any event, CBO
expects that enacting the bill would not require a significant
increase in the number of federal judges, so that any potential
increase in direct spending from subsequent legislation would
probably be less than $500,000 a year.
S. 274 would require the Judicial Conference of the United
States to transmit a report on class action settlements to the
Congress no later than one year after the bill's enactment. CBO
estimates that this provision would cost less than $500,000 in
2004.
S. 274 would impose a private-sector mandate by requiring
any notice concerning a proposed settlement of a class action
provided to the class members through the mail or in printed
media contain specific information in plain, easily understood
language and in a specific format. The bill also would require
any notice to inform class members of their right to be
excluded from a class action or from a proposed settlement
provided through television or radio contain information in
plain, easily understood language. According to the Association
of Trial Lawyers of America, such notices are currently
provided, but are not always in plain English language and
tabular format as required by the bill. Therefore, CBO
estimates that the direct cost, if any, to comply with those
mandates would be minimal.
In addition, S. 274 would impose a private-sector mandate
on defendants participating in a proposed class action
settlement. The bill would require defendants to make certain
notifications and disclosures to the appropriate state official
of each state in which a classmember resides and the
appropriate federal official within 10 days after a proposed
settlement is filed in court. The bill defines a proposed
settlement as an agreement regarding a class action that is
subject to court approval and would be binding on the class.
The required notices and disclosures would include a copy of
the suit, a copy of the proposed settlement, a statement of
class-members' rights, and certain other materials. In effect,
the defendants would have to provide copies of documents and
materials related to information that they usually already
possess about the case. Further, the provision would allow for
the use of the Internet in making such disclosures. Thus, CBO
estimates that the costs of complying with this mandate would
be small.
The CBO staff contacts for this estimate are Lanette J.
Walker (for federal costs) and Paige Piper/Bach (for the
private-sector impact). This estimate was approved by Peter H.
Fontaine, Deputy Assistant Director for Budget Analysis.
IX. Regulatory Impact Statement
In compliance with paragraph 11(b)(1), rule XXVI of the
Standing Rules of the Senate, the Committee, after due
consideration, concludes that S. 274 will not have a
significant regulatory impact.
X. MINORITY VIEWS OF SENATORS LEAHY, KENNEDY, BIDEN, FEINGOLD, SCHUMER,
DURBIN, AND EDWARDS
I. INTRODUCTION
We strongly oppose S. 274, the ``Class Action Fairness Act
of 2003.'' Although the legislation is described by some of its
proponents as a simple procedural fix, it represents a radical
revision of the class action rules and diversity jurisdiction
requirements. In fact, we believe it would bar most state class
actions from being heard in state courts. S. 274 is opposed by
the Federal \1\ and state \2\ judiciaries, and by a multitude
of civil justice, consumer, environmental and public interest
advocates.\3\
---------------------------------------------------------------------------
\1\ See Letter from Leonias Ralph Mecham, Secretary, Judicial
Conference of the United States (March 26, 2003) [hereinafter Judicial
Conference letter] (stating that on March 18, 2003, the Conference
voted to express its opposition to the jurisdictional provisions in S.
274, as it had in the earlier version of this legislation, because the
provisions ``would add substantially to the work of the Federal courts
and are inconsistent with principles of Federalism''); Letter from
Anthony J. Scirica, Committee on Rules of Practice and Procedure of the
Judicial Conference of the United States (May 12, 2003) [hereinafter
Scirica letter] (requesting that the Judiciary Committee withdraw the
notice provisions of the bill because they conflict with Rule 23 of the
Federal Rules of Civil Procedures and are inconsistent with the Rules
Enabling Act ).
\2\ See Letter from Annice M. Wagner, President, Conference of
Chief Justices (March 28, 2002). The Conference of Chief Justices wrote
to Congress regarding an earlier version of this legislation: ``Absent
hard evidence of the inability of the state judicial systems to hear
and decide fairly class actions brought in state courts, we do not
believe that such a procedure is warranted.''
\3\ See Letters to Committee Members in opposition to S. 274 from
the AARP, Alliance for Justice, Alliance for Retired Americans,
American Association of People with Disabilities, American Cancer
Society, American Heart Association, American Lung Association,
Campaign For Tobacco-Free Kids, Center for Disability and Health, Clean
Water Action, Coalition to Stop Gun Violence, Consumer Federation of
America, Consumers for Auto Reliability and Safety, Consumers Union,
Disability Rights Education Fund, Earthjustice, Environmental Working
Group, Families USA, Friends of the Earth, Gray Panthers, Greenpeace,
Homeowners Against Deficient Dwellings, Lawyers Committee For Civil
Rights Under Law, Leadership Conference on Civil Rights, Mexican
American Legal Defense and Educational Fund, Mineral Policy Center,
National Asian Pacific Legal Consortium, National Consumers League,
National Council of La Raza, National Employment Lawyers Association,
National Partnership for Women and Families, National Resources Defense
Council, National Workrights Institute, National Women's Health
Network, National Women's Law Center, NOW Legal Defense Fund, People
for the American Way, Public Citizen, Service Employees Union
International, Sierra Club, Tobacco Control Resource Center, Tobacco
Products Liability Project, United Policyholders, U.S. Action, U.S.
Public Interest Research Group, Women Employed, and Violence Policy
Center.
---------------------------------------------------------------------------
By providing plaintiffs access to the courts in cases where
a defendant may have caused small injuries to a large number of
persons, class action procedures have traditionally offered a
valuable mechanism for aggregating small claims that otherwise
might not warrant individual litigation. This legislation will
undercut that important principle by making it far more
burdensome, expensive, and time-consuming for groups of injured
persons to obtain access to justice. Thus, it would be more
difficult for citizens to seek redress for violations of civil
rights, employment discrimination, and consumer health, safety
and environmental laws, to name but a few important laws. The
legislation goes so far as to prevent state courts from
considering class action cases which involve solely violations
of state laws, such as state consumer protection laws.
``The Class Action Fairness Act of 2003'' will force most
state class action cases into Federal courts. It will provide
automatically for both original jurisdiction and the removal of
state class action claims to Federal court at the request of
either party in cases involving violations of state law if any
member of the plaintiff class and at least one primary
defendant are citizens of different states.\4\
---------------------------------------------------------------------------
\4\ S. 274, Sec. Sec. 4-5. Current law requires complete diversity
before a state law case is eligible for removal to Federal court,
meaning all of the defendants must be citizens residing in different
states than the plaintiffs. See Strawbridge v. Curtiss, 7 U.S. (3
Cranch) 267 (1806). In Snyder v. Harris, 394 U.S. 332 (1969), the
Supreme Court held that the court should only consider the citizenship
of named plaintiffs for diversity purposes, and not the citizenship of
absent class members.
---------------------------------------------------------------------------
As part of the expanded diversity jurisdiction, the bill
also provides for the removal of state class actions to Federal
court at the request of either party if fewer than one-third of
the plaintiff class members are citizens of a different state
than any primary defendant, even if the primary defendant
conducts substantial business in that state.\5\ The legislation
would allow removal of a class action to Federal court in cases
where between one-third and two-thirds of the plaintiffs are
citizens of the same state as the primary defendants.\6\
---------------------------------------------------------------------------
\5\ S. 274, Sec. Sec. 4-5.
\6\ S. 274, Sec. 4. The bill is silent as to when the percentage of
the class members is to be measured during the litigation for removal
purposes. Typically, the membership of a class will change during
different stages of the litigation depending on the discovery and
settlement process. As a result, parties in a given class action might
spend years litigating the proper venue for the case rather than
arguing the merits of their case if S. 274 becomes law.
---------------------------------------------------------------------------
Under the legislation, Federal courts are directed to
abstain from hearing a class action only where (1) more than
two-thirds of the plaintiffs are citizens of the same state as
the primary defendant; (2) the matters in controversy are less
than $5,000,000 or the membership of the proposed class is less
than 100; or (3) the primary defendants are states, state
officials, or other government entities against whom the
district court may be foreclosed from ordering relief.\7\
---------------------------------------------------------------------------
\7\ S. 274, Sec. 4. The legislation also excludes securities-
related and corporate governance class actions from coverage and makes
a number of other procedural changes, such as easing the procedural
requirements for removing a class action to Federal court (i.e.,
permitting removal to be sought by any plaintiff or defendant and
eliminating the one-year deadline for filing removal actions) and
tolling the statute of limitation periods for dismissed class actions.
---------------------------------------------------------------------------
This bill also contains a ``Consumer Class Action Bill of
Rights.'' This ``bill of rights'' includes some safeguards that
we agree will improve class action litigation for all parties,
such as protection against a proposed settlement that would
result in a net loss to a class member and protection against
discrimination based on geographic location. But this ``bill of
rights'' also fails to address the greatest consumer abuses in
class action cases such as worthless coupon settlements \8\ and
``sweetheart'' deals which pay off one class in order to
eradicate future claims which had not even been before the
court.\9\
---------------------------------------------------------------------------
\8\ Indeed, S. 274 merely requires the judge to scrutinize coupon
settlements as ``fair, reasonable and adequate''--an action that the
judge is already obligated to do under existing law. See Part III of
these views for more details about coupon settlements.
\9\ These include collusive settlements, in which the parties agree
to a far broader settlement than was originally sought in order to
insulate defendants from other liability. See Part III of these views
for more details about collusive settlements.
---------------------------------------------------------------------------
Furthermore, in the event that a district court determines
that the action subject to its jurisdiction does not satisfy
the requirements of Federal Rule of Procedure 23, under S. 274,
the court must dismiss the action.\10\ This would have the
effect of ending the class action claim. And while the action
may be refiled in state court, it will likely be removed again
to the Federal court, and dismissed again, resulting in a
fruitless ``merry-go-round'' effect.\11\
---------------------------------------------------------------------------
\10\ S. 274, Sec. 4. Under current law, the case would be remanded
to state court, not dismissed.
\11\ While the class action may be refiled again, any such refiled
action may also be removed again if the district court has jurisdiction
under S. 274.
---------------------------------------------------------------------------
We object to the fact that the bill is written in a one-
sided manner favoring defendants at the expense of harmed
victims. As Senator Biden eloquently stated during Committee
consideration of the bill, S. 274 will make it ``far less
likely that class actions will be brought, far less likely that
corporations will be deterred from taking action contrary to
the public interest, and far less likely that businesses will
redress injuries their products have inflicted. Consumers will
suffer the consequences.'' \12\
---------------------------------------------------------------------------
\12\ Written statement of Senator Biden, executive business meeting
of the Committee, April 3, 2003.
---------------------------------------------------------------------------
Before even considering S. 274, the Committee and the full
Senate should insist on receiving objective and comprehensive
data justifying such a dramatic intrusion into state court
prerogatives. Nothing in the way of such information now
exists. Before the Committee considered this bill, six Members
of the Committee wrote to Chairman Hatch, respectfully
requesting a hearing on class action litigation to help the
Committee develop consensus reforms to better serve both
defendants and plaintiffs before the Committee proceeded to a
markup on S. 274.\13\ Unfortunately, that request was ignored
and the letter went unanswered.
---------------------------------------------------------------------------
\13\ See March 25, 2003 letter from Senators Leahy, Kennedy, Biden,
Feingold, Durbin, and Edwards to Chairman Hatch.
---------------------------------------------------------------------------
We had hoped that the Committee would undertake a
deliberate and careful review of information from parties
actually involved in class action litigation to provide a
realistic picture of the benefits and problems with class
actions. But, instead, the Committee has proceeded with one-
sided legislation that has repeatedly failed to pass the Senate
in recent years.
We recognize that class action litigation has genuine
problems that should be addressed by Federal legislation for
the benefit of both defendants and plaintiffs. This
legislation, however, is heavily biased in favor of defendants.
Rather than address the system's real failings, S. 274 will
make it more difficult for the vast majority of legitimate,
well-intentioned class actions to move forward, by placing
cumbersome restrictions on citizens' rights to seek redress for
their injuries.
In short, we agree with the position of the National
Conference of State Legislatures: ``Anecdotal evidence of abuse
might highlight a need for reform in a particular jurisdiction,
reform that can and has been addressed outside the nation's
capitol. Such anecdotes, however, are grossly insufficient
reasons for a wholesale Federal takeover of class action
litigation. Lawsuits based on questions of state law should be
decided in state courts by the judges who are best qualified to
interpret and apply the laws of that state.'' \14\
---------------------------------------------------------------------------
\14\ Letter from Representative Kip Holden, Louisiana House of
Representatives, Chair, National Conference of State Legislatures, AFI
Law and Justice Committee, dated June 21, 2000, to Senator Leahy.
---------------------------------------------------------------------------
For these and other reasons set forth herein, we strongly
oppose S. 274.
II. S. 274 WILL DAMAGE THE FEDERAL AND STATE COURT SYSTEMS
By expanding Federal class action jurisdiction to include
most state class actions, S. 274 will inevitably result in a
significant increase in the Federal courts' workload. In its
letter to the Judiciary Committee concerning a prior version of
this bill, the Judicial Conference warned that:
[T]he effect of the class action provisions of [S.
353] would be to move virtually all class action
litigation into the Federal courts, thereby offending
well-established principles of Federalism [and] * * *
hold[ing] the potential for increasing significantly
the number of [class action] cases currently being
litigated in the Federal system.\15\
---------------------------------------------------------------------------
\15\ See Judicial Conference letters of July 26, 1999 and August
23, 1999.
The Judicial Conference reaffirmed its opposition to this
effect of S. 274 in its recent letter, stating that the
Conference's position on S. 274 ``makes clear that such
opposition continues to apply to similar jurisdictional
provisions.'' \16\
---------------------------------------------------------------------------
\16\ See Judicial Conference Letter, supra note 1.
---------------------------------------------------------------------------
In addition to overwhelming the Federal courts with new
time-intensive class actions, S. 274 will undermine state
courts' independent authority. Recently, several state
Attorneys General wrote to Senate leaders objecting to this
``federalizing'' of most class actionsunder this legislation:
The fundamental flaw in S. 274 is that all class
actions brought against a defendant who is not a
``citizen'' of the state will be removed to federal
court, no matter how substantial a presence the
defendant has in the state or how much harm the
defendant has caused in the state. Most class actions
will be transferred to federal court, even where the
majority of class members are from a single state.\17\
---------------------------------------------------------------------------
\17\ June 11, 2003, letter from Eliot Spitzer, Attorney General of
the State of New York, and W.A. Drew Edmondson, Attorney General of the
State of Oklahoma, on behalf of the Attorneys General of the States of
Ilinois, Maryland, Minnesota, Missouri, Montana, New Mexico, New York,
Oklahoma, and West Virginia to Majority Leader Frist and Minority
Leader Daschle.
In cases that are removed to the Federal courts but not
certified, S. 274 will prevent the state courts from hearing
cases as class actions, even though the claims are based in
state law. It is important to recall the context in which this
legislation arises--a class action has been filed in state
court involving state law claims, which if filed by individuals
would not be subject to Federal jurisdiction (either because
the parties do not meet the current Federal diversity
requirements or the amount in controversy for each claim does
not exceed $75,000). When these class actions are dismissed by
the Federal courts, thousands of individual actions may be
unleashed on the state courts.\18\
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\18\ To counter this problem, Senator Feingold offered an amendment
at the Judiciary Committee markup of S. 274 which provided that if
after removal, the Federal court determines that no aspect of an action
that is subject to its jurisdiction may be maintained as a Federal
class action, the court shall remand the action to the state court
without prejudice. This amendment would respond to the most serious
complaint leveled by class action defendants by allowing the Federal
court the first opportunity to certify the class action but it would
not deny the state court jurisdiction over the class action if it did
not meet the Federal requirements. The amendment was defeated by a vote
of 7-11.
---------------------------------------------------------------------------
Even more troublesome than these potential workload
problems, S. 274 raises serious constitutional issues by
challenging the vision of our founders and the intent of the
Constitution. This legislation undermines James Madison's
vision of a Federal government ``limited to certain enumerated
objects, which concern all the members of the republic.'' \19\
---------------------------------------------------------------------------
\19\ Federalist No. 14.
---------------------------------------------------------------------------
This bill does not merely operate to preempt state laws;
rather, it unilaterally strips the state courts of their
ability to use the class action procedural device to resolve
state law disputes. As the Lawyers' Committee for Civil Rights
Under Law observes, citing Bank of the United States v.
Deveaux:
For over 200 years, Federal diversity jurisdiction
has been exercised with care and hesitation,
demonstrating that Congress believed, with few
exceptions ``tribunals of the state * * * administer
justice as impartially as those of the nation, to
parties of every description.'' \20\
---------------------------------------------------------------------------
\20\ See April 9, 2003, letter from Lawyers' Committee for Civil
Rights Under Law, quoting Bank of the United States v. Deveaux, 5
Cranch 61, 87 (U.S. 1809); see also City of Indianapolis v. Chase Nat'l
Bank, 314 U.S. 63, 76 (1941).
The courts have previously found that efforts by Congress
to dictate such state court procedures implicate important
Tenth Amendment Federalism concerns and should be avoided. For
example, in Fielder v. Casey \21\ the Supreme Court observed
that it is an ``unassailable proposition * * * that States may
establish the rules of procedure governing litigation in their
own courts.'' Similarly, in Johnson v. Fankell \22\ the Court
reiterated what it termed ``the general rule `bottomed deeply
in belief in the importance of State control of State judicial
procedure * * * that Federal law takes State courts as it finds
them' '' \23\ and observed that judicial respect for the
principal of Federalism ``is at its apex when we confront a
claim that Federal law requires a State to undertake something
as fundamental as restructuring the operation of its courts''
and ``it is a matter for each State to decide how to structure
its judicial system.'' \24\
---------------------------------------------------------------------------
\21\ 487 U.S. 131, 138 (1988) (finding Wisconsin notice-of-claim
statute to be preempted by 42 U.S.C. Sec. 1983, which holds anyone
acting under color of law liable for violating constitutional rights of
others).
\22\ 520 U.S. 911 (1997) (holding that Idaho procedural rules
concerning appealability of orders are not preempted by 42 U.S.C.
Sec. 1983).
\23\ Id. at 919 (quoting Henry M. Hart, Jr., The Relations Between
State and Federal Law, 54 Colum. L. Rev. 489, 508 (1954).
\24\ Id. at 922. See also Howlett v. Rose, 296 U.S. 356, 372 (1990)
(quoting Henry M. Hart, Jr., The Relations Between State and Federal
Law, 54 Colum. L. Rev 489, 508 (1954) for the proposition that Federal
law should not alter the operation of the state courts); New York v.
United States, 505 U.S. 144, 161 (1992) (stating that a law may be
struck down on Federalism grounds if it ``commandeer[s] the legislative
processes of the States by directly compelling them to enact and
enforce a Federal regulatory program'').
---------------------------------------------------------------------------
These same constitutional concerns were highlighted by
Professor Laurence Tribe in his testimony regarding the
constitutionality of a proposed Federal class action rule
applicable to state courts included in tobacco legislation
proposed during the 105th Congress. Professor Tribe observed:
``[f]or Congress directly to regulate the procedures used by
state courts in adjudicating state-law tort claims--to forbid
them, for example, from applying their generally applicable
class action procedures in cases involving tobacco suits--would
raise serious questions under the Tenth Amendment and
principles of Federalism.'' \25\
---------------------------------------------------------------------------
\25\ The Global Tobacco Settlement: Hearings Before the Senate
Comm. on the Judiciary, 105th Cong., (1997) (statement of Laurence H.
Tribe, Tyler Professor of Law, Harvard Law School). Indeed, Chairman
Hatch recently praised Professor Tribe at the Committee's June 4, 2003,
hearing on asbestos litigation as ``known here and throughout the
country as one of the most respected constitutional scholars and
practitioners.''
---------------------------------------------------------------------------
The Supreme Court's most recent decisions further indicate
that S. 274 is an unacceptableinfringement upon state
sovereignty. In United States v. Morrison,\26\ the Court invalidated
parts of the Violence Against Women Act, claiming that Congress
overstepped its specific constitutional power to regulate interstate
commerce. Despite vast quantities of data illustrating the effects that
violence against women has on interstate commerce, the Court
essentially warned Congress not to extend its constitutional authority
to ``completely obliterate the Constitution's distinction between
national and local authority.'' S. 274, introduced without a hearing
and without any convincing data, ignores the Court's admonitions and
subverts the Federal system by hindering the states' ability to
adjudicate class actions involving important and evolving questions of
state law. S. 274 not only obliterates the distinction between national
and local authority, it effectively annihilates local authority over
state class actions.
---------------------------------------------------------------------------
\26\ 120 S. Ct. 1740 (2000).
---------------------------------------------------------------------------
Responding to these significant constitutional concerns,
proponents of this legislation argue that state courts will not
give fair hearings to out-of-state defendants, but support for
their assertion is bereft of evidence. First, the Supreme Court
has already made clear that the state courts are
constitutionally required to provide due process and other
fairness protections to the parties in class action cases. In
Phillips Petroleum Co. v. Shutts,\27\ the Supreme Court held
that in class action cases, state courts must ensure that: (1)
the defendant receives notice plus an opportunity to be heard
and participate in the litigation; \28\ (2) an absent plaintiff
must be provided with an opportunity to remove himself or
herself from the class; (3) the named plaintiff must at all
times adequately represent the interests of the absent class
members; and (4) the forum state must have a significant
relationship to the claims asserted by each member of the
plaintiff class.\29\
---------------------------------------------------------------------------
\27\ 472 U.S. 797 (1985).
\28\ See id at 812 (stating that the notice must be the ``best
practicable, reasonably calculated, under all the circumstances, to
apprize interested parties of the pendency of the action and afford
them an opportunity to present their objections.'') (quoting Mullane v.
Central Hanover Bank & Trust Co., 339 U.S. 306, 314-315 (1950)).
\29\ See id. at 806-810. These findings were reiterated by the
Supreme Court in 1995 in Matshusita Elec. Indust. Co. v. Epstein, 516
U.S. 367 (1995) (holding that state class actions are entitled to full
faith and credit so long as, inter alia: the settlement was fair,
reasonable, adequate and in the best interests of the settlement class;
notice to the class was in full compliance with due process; and the
class representatives fairly and adequately represented class
interests).
---------------------------------------------------------------------------
Secondly, as fears of local court prejudice have subsided
and concerns about diverting Federal courts from their core
responsibilities have increased, the policy trend in recent
years has been towards limiting Federal diversity
jurisdiction.\30\ For example, Congress enacted the Federal
Courts Improvement Act of 1996,\31\ which increased the amount
in controversy requirement needed to remove a diversity case to
Federal court from $50,000 to $75,000. This statutory change
was based on the Judicial Conference's determination that fear
of local prejudice by state courts was no longer relevant \32\
and that it was important to keep the Federal judiciary's
efforts focused on Federal issues.\33\
---------------------------------------------------------------------------
\30\ Ironically, during the 104th Congress, the Republican Party
was extolling the virtues of state courts in the context of their
efforts to limit habeas corpus rights, which permit individuals to
challenge unconstitutional state law convictions in Federal court.
\31\ 28 U.S.C Sec. 1332(a) (West Supp. 1998).
\32\ See Judicial Conference of the United States, Long Range Plan
for the Federal Courts, Recommendation 7 at 30 (1995).
\33\ See id.
---------------------------------------------------------------------------
One encouraging note was struck in the mark-up of S. 274,
when Senators Feinstein and Specter joined together to craft an
amendment to strike the provisions in S. 274 which treated
suits by private attorneys general, and mass tort suits, as if
they were class actions. As introduced, S. 274 would have
created Federal jurisdiction not only for true class actions,
but also for private attorney general actions brought by any
organization or citizen, as well as for groups of cases in
which 100 or more individuals seeking monetary relief seek to
try any common legal or factual issue together (i.e., ``mass
torts'').\34\ As Senator Feinstein explained, that provision
was ``a direct strike against State law in a way that puts a
whole category of actions that are not now class actions into
the class action arena.'' \35\ Senator Specter echoed that
understanding, pointing out that, ``This is a class action bill
* * * but these provisions do not relate to class actions.''
\36\ As Chairman Hatch conceded, ``these are representative
actions that are a little different from class actions,'' \37\
and the Committee accepted the Specter-Feinstein amendment
without objection.
---------------------------------------------------------------------------
\34\ Transcript of executive business meeting of the Senate
Judiciary Committee, April 11, 2003, p. 24-31.
\35\ Statement of Senator Feinstein, executive business meeting of
the Senate Judiciary Committee, April 11, 2003, p. 26.
\36\ Statement of Senator Specter, executive business meeting of
the Senate Judiciary Committee, April 11, 2003, p. 28.
\37\ Statement of Senator Hatch, executive business meeting of the
Senate Judiciary Committee, April 11, 2003, p. 26.
---------------------------------------------------------------------------
III. S. 274 WILL HURT CONSUMERS, VICTIMS, AND THE ENVIRONMENT
Proponents of this legislation claim that S. 274 will
protect consumers while remedying the worst abuses of the class
action system, yet consumer advocates overwhelmingly oppose
these alleged ``reforms.'' \38\ There can be little doubt that
S. 274 will have a serious adverse impact on the ability of
consumers and victims to obtain compensation in cases involving
widespread harm. At a minimum, the legislation will force most
state class action claims into Federal courts where it is
generally more expensive for plaintiffs to litigate cases and
where defendants could force plaintiffs to travel long
distances to attend proceedings.
---------------------------------------------------------------------------
\38\ See Letter in Opposition to S. 274, February 5, 2003, from the
Consumer Federation of America, Consumers Union, and U.S. Public
Interest Research Group.
---------------------------------------------------------------------------
It is also typically more difficult and time consuming to
certify a class action in Federal court. Fourteen states,
representing nearly one-third of the nation's population,\39\
have adopted different criteria for class action rules than
Rule 23 of the Federal Rules of Civil Procedure.\40\ In
addition, with respect to those states which have enacted an
analog to Rule 23, the Federal courts are likely to represent a
more difficult forum for class certification to occur. This
ratcheting up of the standard is the result of a series of
adverse Federal precedents, such as Castano v. American Tobacco
Co.,\41\ In re Rhone-Poulenc Rorer, Inc.,\42\ In re American
Medical Systems, Inc.,\43\ Georgine v. Amchem Products,
Inc.,\44\ Broussard v. Meineke Discount Mufflers,\45\ and Ortiz
v. Fibreboard,\46\ which have made it more difficult to
establish the ``predominance requirement'' necessary to
establish a class action under the Federal rules.
---------------------------------------------------------------------------
\39\ Three states still use their common law rules, rather than
statutes, to permit class actions (Mississippi, New Hampshire, and
Virginia); four states use Field Code-based rules based on the
``community of interest'' test (California, Nebraska, South Carolina,
and Wisconsin); and seven states use class action rules modeled on the
original Federal Rule 23 (1938) which creates a distinction among class
members which depends on the substantive character of the right
asserted (Alaska, Georgia, Louisiana, New Mexico, North Carolina, Rhode
Island, and West Virginia). See 3 Herbert B. Newberg and Alba Conte,
Newberg on Class Actions Sec. 13.04 (3d ed.1992 & Supp. 1997).
\40\ Rule 23(a) states four factual prerequisites that must be met
before a court will certify the lawsuit as a class action: (1) size--
the class must be so large that joinder of all of its members is not
feasible; (2) common questions--there must be questions of law or fact
common to the class; (3) typical claims--the claims or defenses of the
representatives must be ``typical'' of those of the class; and (4)
representation--the representatives must fairly and adequately
represent the interests of the class.
\41\ 84 F.3d 734 (5th Cir. 1996) (preventing the certification of a
nationwide class action brought by cigarette smokers and their families
for nicotine addiction where there was found to be too wide a disparity
between the various state tort and fraud laws for the class action
vehicle to be superior to individual case adjudication).
\42\ 51 F. 3d 1293 (7th Cir. 1995) (decertifying, under the Erie
doctrine, a nationwide negligence class action brought on behalf of
hemophiliacs infected with the AIDS virus through use of defendants'
blood clotting products because of diversity of state laws).
\43\ 75 F.3d 1069 (6th Cir. 1996) (decertifying a proposed
plaintiff settlement class comprising all U.S. residents implanted with
defective or malfunctioning inflatable penile prostheses that were
manufactured, developed, or sold by defendant company because common
questions of law or fact did not predominate the action to such an
extent that warranted class certification).
\44\ 521 U.S. 591 (1997) (overturning consensual settlement between
a class of workers injured by asbestos and a coalition of former
asbestos manufacturers because of disparate levels of the class
members' knowledge of their injuries and class members' large amount at
stake in the litigation).
\45\ 155 F.3d 331 (4th Cir. 1998) (rejecting class certification
brought by Meineke franchisees alleging violations of franchise, tort,
unfair trade, and other laws).
\46\ 119 S.Ct. 2295 (1999). The Court found that mandatory limited
fund class treatment under Rule 23(b)(1)(B) is not appropriate unless
the maximum funds available are clearly inadequate to pay all claims.
---------------------------------------------------------------------------
A. Removal abuses and the effects of the judicial ``merry-go-round''
``The Class Action Fairness Act of 2003'' also creates
unique risks and obstacles to plaintiffs not present in the
current system. A particularly troubling aspect of S. 274 is
that it allows removal of a case at any time. The possibilities
for abusing this provision are obvious, and worth noting. As
more than a hundred law professors noted in a letter to
Senators Frist and Daschle:
This would give a defendant the power to yank a case
away from a state-court judge who has properly issued
pretrial rulings the defendant does not like, and would
encourage a level of forum-shopping never before seen
in this country. Moreover, this provision would allow
an unscrupulous defendant, anxious to put off the day
of judgment so that more assets can be hidden, to
remove a case on the eve of a state-court trial,
resulting in an automatic delay of months or even years
before the case can be tried in Federal courts.\47\
---------------------------------------------------------------------------
\47\ Letter from 106 professors of constitutional law and civil
procedure to Senators Frist and Daschle, June 3, 2003, p. 2.
Equally worrisome is the fact that, under S. 274, if the
Federal district court determines that an action does not
satisfy the requirements of Federal Rule of Civil Procedure 23,
the court must dismiss the action. This has the effect of
striking the class action claim, and may have the long term
result of federalizing all state class action standards. While
the class action may be refiled in state court, any such
refiled action may be removed again to Federal court.
Therefore, even if a state court subsequently certifies the
class, it could be removed again and again, creating a
revolving door between Federal and state court--hardly a just
outcome for all parties.
Added to the ``merry-go-round'' provision of the
legislation are the hurdles established by Senator Feinstein's
amendment to S. 274. While undoubtedly well-intentioned, the
amendment sets up cumbersome requirements for determining
whether an action will be heard in state or Federal court.\48\
The result is a bill that will cause unnecessary and expensive
litigation that favors corporate defendants at the expense of
harmed victims. As Senator Feingold stated during the April 10,
2003, mark-up of this legislation:
---------------------------------------------------------------------------
\48\ The Feinstein amendment provides that a Federal judge may use
five factors in deciding jurisdiction of a class action where between
one-third and two-thirds of the plaintiffs are from the same state as
the primary defendants: (1) whether the claims involve matters of
national or interstate interest; (2) whether the claims will be
governed by laws other than those of the forum state; (3) whether the
case has been pleaded in a manner that seeks to avoid Federal
jurisdiction; (4) whether the number of citizens from the forum state
is substantially larger than the number of citizens from any other
state and the citizenship of the members is dispersed among a
substantial number of states; and (5) whether one or more class actions
asserting the same or similar claims on behalf of the same or other
person have been or may be filed. These five factors are not defined in
S. 274.
The two-thirds requirement is a hard and fast rule
that will allow defendants to argue the case should be
removed as long as the class composition doesn't exceed
the magic 66.67 percent * * * The [resultant]
procedural hurdles in [this legislation] make it more
difficult for plaintiffsto proceed in either state or
Federal court due to the legal maneuvering over which forum is
appropriate * * * Justice delayed is justice denied.\49\
---------------------------------------------------------------------------
\49\ Statement of Senator Russell Feingold in opposition to Senator
Feinstein's amendment to S. 274, executive business meeting of the
Senate Judiciary Committee, April 11, 2003.
Moreover, given that membership in class actions frequently
change, the two-thirds requirement, and the ``middle-third''
provision (subject to judicial discretion) would open up the
process to legal gamesmanship. Considering the vast resources
of defendants in many class actions, as compared to the
plaintiffs, this will only make it more difficult for class
members to ever have a final ruling on the merits of their
case.
Attempting to address this misgiving constructively,
Senator Feingold introduced a modest amendment to S. 274 that
would have prevented ``endless rounds of removals, dismissals,
and remands.'' \50\ The Feingold amendment would have required
that class actions that were removed to Federal court and
unable to satisfy the Rule 23 class certification requirements
be remanded to state court, as is the case under current law.
If the claims before the state court were substantially
identical to the original action, the case could not be removed
again under the amendment. This amendment would have alleviated
some of the unacceptable delays S. 274 would create for class
action litigation. Unfortunately, the majority voted down this
amendment to improve the bill.\51\
---------------------------------------------------------------------------
\50\ See Transcript of April 11, 2003, Executive Business Meeting
at 52-53.
\51\ At the April 11, 2003, executive business meeting of the
Committee, Senators Leahy, Kennedy, Biden, Feingold, Schumer, Durbin,
and Edwards voted for the amendment. All other members voted in
oppossiton, with Senator Specter passing.
---------------------------------------------------------------------------
B. Barriers to justice for consumers
This legislation will also severely limit the ability of
consumers to pursue class actions in state court, even when
state consumer protection laws are implicated. Consumers pay
the price when Federal courts dismiss a case rather than
remanding the suit to state court where a state might certify
the action. When this occurs, consumers are left with two
equally unattractive options: ``A consumer could bring the
claim in state court as an individual action. However,
individual cases would be impractical to litigate, would not
have the same deterrent effect, and would have the potential to
overwhelm state courts. In the alternative, consumers could re-
file an amended class certification in state court. This re-
filing again opens the door created by S. 274 for the defendant
to remove the case to Federal court.'' \52\
---------------------------------------------------------------------------
\52\ See Letter from the Consumer Federation of America, Consumers
Union, and U.S. PIRG, February 5, 2003.
---------------------------------------------------------------------------
Even if consumers get their day in Federal court under this
legislation, consumer advocates argue that just outcomes are
unlikely. Federal court decisions will likely be narrowly
tailored, without establishing legal precedent for future state
court cases of the particular law in question. Because of this,
S. 274 ``will slow--and in some cases thwart--the continual
interpretation of state law.'' \53\
---------------------------------------------------------------------------
\53\ Ibid.
---------------------------------------------------------------------------
Once again, S. 274 raises serious concerns about
Federalism. Senator Feingold, in introducing an amendment that
would keep consumer protection class actions in state courts,
made the point: ``* * * Federal courts interpret State law on a
regular basis, but I do not believe that we should be setting
up a system where the State courts will virtually never
interpret and apply their own laws to significant cases of
first impression * * * That just seems to be a result as far
removed from any reasonable interpretation of our Federal
system as I can imagine.'' \54\ And Senator Feingold is not
alone in criticism of S. 274 in this regard. Indeed, the
American Bar Association Task Force on Class Action
Legislation's recent report noted that ``any expansion [of
Federal court jurisdiction] should preserve a balance between
legitimate state-court interests and Federal-court
jurisdictional benefits.'' \55\ The current legislation clearly
fails this test.
---------------------------------------------------------------------------
\54\ April 11, 2003, executive business meeting, at 61.
\55\ See April 2, 2003 letter in opposition to S. 274, ``Opposition
to S. 274, `The Class Action Fairness Act of 2003,' '' from the
Consumers Union.
---------------------------------------------------------------------------
Senator Feingold's amendment would have ensured that state
consumer protection cases are kept where they belong--in state
courts. If his amendment had been approved, citizens would have
been able to seek remedies in their own states in cases
relating to ``consumer fraud, consumer loans, consumer credit
sales, deceptive trade practices, unlawful trade practices, or
unfair and deceptive practices.'' The only exception to this
would be in class actions where there is a complete diversity
among the parties (the current standard).\56\ The Committee
failed to approve this important amendment by a vote of 7 yeas
to 11 nays.\57\
---------------------------------------------------------------------------
\56\ See Feingold Amendment to S. 274, April 11, 2003, executive
business meeting, at 63-64.
\57\ April 11, 2003 executive business meeting at 75. The amendment
was defeated by 7 yeas to 11 nays. Senators Leahy, Kennedy, Biden,
Feingold, Schumer, Durbin, and Edwards voted in favor of the amendment.
All of the other Committee members voted against, with Senator Specter
passing.
---------------------------------------------------------------------------
Nor does S. 274's provision for ``notice requirements'' to
class members improve current law. In fact, S. 274 contains a
long, detailed notice provision that would actually confuse
consumers--not help them. According to the Judicial Conference
Rules Committee, these notice requirements would have
``undermine[d] the bill's stated objectives by requiring
notices so elaborate that most class members [would] not even
attempt to read them.'' \58\ Indeed, members of the House
Judiciary Committee, when considering similar legislation,
unanimously accepted an amendment conforming the notice
requirements to the Federal Rules of Civil Procedure.
---------------------------------------------------------------------------
\58\ Scirica letter, p. 3.
---------------------------------------------------------------------------
This legislation as originally introduced went so far as to
federalize nearly all consumer protection actions, regardless
of whether or not they involve large classes of nationwide
plaintiffs, or even a class of plaintiffs at all. For instance,
some states have laws that protect consumers by prohibiting
deceptive business practices.\59\ These laws may be enforced by
the State Attorney General or, if the State Attorney General
does not act, the state citizens may act as private attorneys
general. This legislation, as introduced, would have forced
these cases into Federal court because these private citizens
also represent the interests of the ``general public,'' which
the bill explicitly grouped with class actions. Fortunately,
Senator Specter and Senator Feinstein offered an amendment to
strike this subsection of S. 274, which was accepted by a voice
vote.
---------------------------------------------------------------------------
\59\ Michigan and California are two states that allow ``private
attorney general'' suits.
---------------------------------------------------------------------------
The net result of these various changes is that under the
proposed legislation, it will be far more difficult for
consumers and other injured individuals to obtain justice in
class action cases at the state or Federal level.
C. Special protections for the tobacco and gun industries
``The Class Action Fairness Act of 2003'' will have the
effect of giving special protections to two industries
undeserving of special treatment--the tobacco industry and the
gun industry. Because of the special legal protections in S.
274, the tobacco and firearms industries may be able to avoid
accountability for their products. For example, the reported
bill's ``\1/3\-\1/3\-\1/3\'' requirement virtually guarantees
that tobacco-related cases will end up in Federal court since
the major tobacco companies are all headquartered in only one
or two states while tobacco victims are nationwide. In effect,
cigarette makers will be able to ``forum shop'' to the Federal
courts where they prefer to litigate, since the rules for
certifying class actions are often stricter.\60\
---------------------------------------------------------------------------
\60\ See Letter in Opposition to S. 274, March 10, 2003, from
Campaign for Tobacco Free Kids, the American Heart Association, and the
American Lung Association.
---------------------------------------------------------------------------
Such special protection is particularly inappropriate for
an industry that has ``lied to Congress and the American
people'' for decades.\61\ Citing a recent class action victory
in the state of Illinois, Senator Durbin notes that ``if the
class action fairness law were law today, this case would not
have come to trial in Illinois courts and most likely would not
have come to trial at all. This bill could insulate Philip
Morris and other tobacco companies from class action suits
which are finally bringing to the public eye the deception
which they have practiced on America for over half a century.''
\62\
---------------------------------------------------------------------------
\61\ Statement of Senator Durbin, April 11, 2003, Executive
Business Meeting at 19.
\62\ Ibid. at 22.
---------------------------------------------------------------------------
Proposing an amendment to S. 274, Senator Durbin sought to
ensure that companies like Philip Morris cannot violate the
rights of citizens as guaranteed by their states, and then
choose Federal court as a friendlier venue merely because they
are not incorporated in the state where they committed their
misdeeds. The amendment would have carved out tobacco suits as
inappropriate for class action reform legislation, but this
amendment failed a Committee vote.\63\
---------------------------------------------------------------------------
\63\ At the April 11, 2003, Executive Business Meeting, the
amendment failed by a vote of 8-11, with Senators Leahy, Kennedy,
Biden, Feingold, Schumer, Durbin, Edwards and DeWine in Favor of the
amendment, and Senator Specter passing.
---------------------------------------------------------------------------
Similarly, Senator Kennedy sought an amendment that would
exempt from S. 274 lawsuits dealing with firearms. As Senator
Kennedy said:
[It] is wrong to oppose needed gun safety legislation
such as the closing of the gun show loophole. It is
wrong to have fought to keep guns exempt from Federal
safety regulation, and it is wrong to have failed to
use technology to make guns safer * * * it would be
wrong for Congress to impose yet another obstacle in
[the way of Americans]. S. 274 should not apply to gun
lawsuits.\64\
---------------------------------------------------------------------------
\64\ Transcript of April 11, 2003 executive business meeting of the
Senate Judiciary Committee at 46.
Class actions are often the only method to force
manufacturers of defective firearms to make guns safer because
firearms are exempt from consumer safety laws. For example, in
the 1990s, firearms consumers filed a class action lawsuit in
Texas against Remington Arms. Facing allegations that their gun
barrels were prone to explode, Remington settled the dispute
for $31 million and agreed to upgrade the steel used in
shotguns.\65\ Unfortunately, Senator Kennedy's amendment was
defeated by the majority as well.\66\
---------------------------------------------------------------------------
\65\ ``Remington Settles Class-Action Suit over Shotgun Barrels,''
The Austin American-Statesman, October 1, 1995, page B7.
\66\ At the April 11, 2003, executive business meeting of the
Committee, the amendment failed by a vote of 7-11, with Senators Leahy,
Kennedy, Biden, Feingold, Schumer, Durbin, and Edwards in favor of the
amendment, and Senator Specter passing.
---------------------------------------------------------------------------
D. Special punishment for the environment and civil rights
While this legislation offers special protections to gun
manufacturers and cigarette makers, S. 274 offers no such
beneficial provisions to protect the environment and Americans'
civil rights. By removing many important environmental class
actions from state to Federal court, S. 274 not only denies to
state courts the opportunity to interpret their own state's
environmental protection laws, it hampers and deters plaintiffs
from pursuing important environmental litigation. The well-
documented backlog in the Federal courts and the need for
attorneys to engage in choice of law debates will significantly
increase the time and cost of environmental litigation.
Ultimately, environmental class actions may not get litigated
and the incentive polluters have to keep our environment clean
will be reduced.
At the April 11, 2003, executive business meeting of the
Committee, Senator Leahy offered an amendment to S. 274 that
would carve out claims arising under state environmental
protection laws, given the evolving nature of State law and the
importanceof maintaining efficient litigation to protect our
environment. Unfortunately, the majority defeated this amendment.\67\
---------------------------------------------------------------------------
\67\ At the April 11, 2003, executive business meeting of the
Committee, Senators Leahy, Kennedy, Biden, Feingold, Schumer, Durbin,
and Edwards voted for the amendment. All other members of the Committee
voted against the amendment, with Senator Specter passing.
---------------------------------------------------------------------------
Moreover, by failing to carve out an exception in S. 274 to
protect the environment, the majority ignores the advice of the
Judicial Conference of the United States, chaired by Chief
Justice Rehnquist. In its March 26, 2003, letter, the Judicial
Conference noted that even if the Congress adopts class action
removal legislation, there should be certain exceptions such as
``a class action in which plaintiff class members suffered
personal injury or physical property damage within the state,
as in the case of a serious environmental disaster.'' \68\
---------------------------------------------------------------------------
\68\ See Judicial Conference Letter, supra note 1.
---------------------------------------------------------------------------
Just as S. 274 turns a blind eye toward the environment and
a cold shoulder to the advice of Chief Justice Rehnquist, the
proposed legislation will make it much more difficult to use
class actions as a means of protecting civil rights. Several
civil rights organizations have argued that S. 274 and its
``additional, substantial and costly noticing requirements and
built-in delays are not a matter of due process, but are overly
burdensome and improperly assume that Federal and state
officials have proper interest in, and a capacity to respond
to, each and every class action.'' \69\
---------------------------------------------------------------------------
\69\ See Letter in Opposition to S. 274, March 20, 2003, from the
Leadership Conference on Civil Rights, Alliance for Justice, Lawyers'
Committee for Civil Rights Under Law, Mexican American Legal Defense
and Educational Fund, National Asian Pacific Legal Consortium, National
Partnership for Women and Families, National Workrights Institute,
National Women's Law Center, People for the American Way, and Women
Employed.
---------------------------------------------------------------------------
Indeed, class action litigation has been essential to
vindicating basic civil rights through our courts. For example,
the landmark Supreme Court decision in Brown v. Board of
Education was the culmination of appeals from four class action
cases, three from Federal court decisions in Kansas, South
Carolina and Virginia and one from a decision by the Supreme
Court of Delaware. Only the Supreme Court of Delaware, the
state court, got the case right by deciding for the African-
American plaintiffs. The state court justices understood that
they were constrained by the existing Supreme Court law, but
nonetheless held that the segregated schools of Delaware
violated the Fourteenth Amendment. Before any Federal court did
so, a state court rejected separate and unequal schools.
S. 274 sets up several new hurdles for plaintiffs who file
class actions. These requirements would be especially
burdensome on many civil rights claimants.
The bill's requirement to provide ``notice'' to state
officials, such as a state attorney general, would certainly
lead to delays in the proceedings. As a result, some of the
critical evidence of malice or discriminatory intent required
to prevail in civil rights and discrimination cases could be
lost while this additional step is taken. In addition, this
added hurdle will likely be redundant because many of these
plaintiffs will have already gone through an administrative
proceeding before being allowed to file a discrimination claim
in Federal court.
Moreover, the requirement prohibiting named plaintiffs from
receiving additional benefits--even when they were often the
ones who already lost their jobs or homes due to discriminatory
practices--is patently unfair. These lead plaintiffs deserve
the ``additional benefits'' of being reinstated in their jobs
or homes if they prevail at trial. Clearly, the defendants are
seeking to deter plaintiffs from taking the lead in class
actions by denying them any additional remedies.
A particularly worrisome provision of S. 274 prohibits
``the payment of bounties,'' which is harmful to civil rights
cases. In an employment discrimination case, there may be fewer
employment slots denied than there are qualified applicants. A
plaintiff filing an individual action may obtain an order
placing him or her in the job denied and receives back pay.
Such a remedy would, of course, be appropriate under current
law for a named plaintiff in a class action. However, S. 274
would bar such a remedy for named plaintiffs unless each and
every other class member also receives the same. This may well
be impossibility and will certainly act as a deterrent to civil
rights class actions in general, and becoming a class
representative in particular.
Thomas Henderson, Chief Counsel of the Lawyers Committee
for Civil Rights, testified before the House of Representatives
as to the damage this bounty provision would do to civil rights
cases:
The prohibition on approving settlements that involve
named plaintiffs receiving amounts different from other
members of the class is not a reasonable or practical
limitation in all instances. In many employment
discrimination cases there are fewer employment
opportunities denied because of discrimination than
there are qualified potential claimants. In those
situations, a person who sues as an individual can
receive a full award of back pay and in a proper case
can obtain an order placing him or her in the job
denied because of discrimination. A class member in
such a situation must share in the total back pay
award, and has only an opportunity to be one of the
persons selected for hire or promotion because not all
can be selected. If the price of trying to protect
others is that he or she must also lose the full
measure of individual relief and take only the same
percentage share as those who never took any action to
challenge the employer, individuals would be deterred
from becoming a class representative. Thus, rather than
a reform, this provision would hinder civil rights
class actions.\70\
---------------------------------------------------------------------------
\70\ Class Action Fairness Act of 2003: Hearings on H.R. 1115
before the House Comm. on the Judiciary, 108th Cong. (2003) (written
testimony of Thomas Henderson, Chief Counsel, Lawyers' Committee for
Civil Rights Under Law).
As a result of the assault that S. 274 would launch on the
defense of civil liberties, manycivil rights advocates--
including the Lawyers' Committee for Civil Rights Under Law, the
Leadership Conference on Civil Rights, the Mexican American Legal
Defense and Education Fund, and the National Asian Pacific Legal
Consortium--have concluded that this legislation ``would discourage
civil rights class actions, impose substantial barriers to settling
class actions and render Federal courts unable to provide swift and
effective administration of justice.'' \71\
---------------------------------------------------------------------------
\71\ See Letter in Opposition to S. 274, March 20, 2003, from the
Leadership Conference on Civil Rights, Alliance for Justice, Lawyers'
Committee for Civil Rights Under Law, Mexican American Legal Defense
and Educational Fund, National Asian Pacific Legal Consortium, National
Partnership for Women and Families, National Workrights Institute,
National Women's Law People for the American Way, and Women Employed.
---------------------------------------------------------------------------
For these reasons, Senator Kennedy introduced an amendment
that would create a carve-out in S. 274 relating to civil
rights class actions. Senator Kennedy emphasized that such a
provision is particularly important for the many ``good actor''
states, such as Wisconsin, North Carolina, California, and
Massachusetts, which have civil rights laws that provide
protections and remedies distinct from the Federal laws. The
majority, however, voted against this amendment.\72\
---------------------------------------------------------------------------
\72\ At the April 11, 2003, executive business meeting this
amendment failed by a vote of 7-11. Senators Leahy, Kennedy, Biden,
Feingold, Schumer, Durbin, and Edwards voted in favor of the amendment.
All the other members of the Committee voted against, with Senator
Specter passing.
---------------------------------------------------------------------------
III. S. 274 FAILS TO ACHIEVE MEANINGFUL REFORM
Not only does the legislation limit the rights of Americans
to pursue class action litigation in their own states, ``The
Class Action Fairness Act of 2003'' fails to provide meaningful
reform. The minority recommend several steps for those
lawmakers who earnestly desire real change for the better.
First and foremost, we believe the Committee should have
held a hearing on this important legislation. Given the scope
of the proposed changes and the impact that they will have on
our state and Federal courts, we believe that at least one fair
and balanced hearing would have been essential for the
Committee to develop consensus reforms to better serve
defendants and plaintiffs.
Similarly, the Committee should have taken the opportunity
to consider other approaches to the problems of class action
litigation, most particularly and obviously the suggestions
outlined by the Judicial Conference in its March 26, 2003,
letter. The Judicial Conference offered a coherent and sensible
distinction between ``significant multi-state class action
litigation'' and those suits that properly belong in state
courts. Highlighting the need to respect the basic principles
of Federalism that assign different responsibilities to the
state and Federal courts, the Judicial Conference recommended
reserving Federal court jurisdiction for only those cases that
truly implicate regional or national interests--cases in which
a single state might well not be the appropriate venue for
decision. The Judicial Conference is also uniquely well-
situated to address the concerns that will arise from
overburdening the already busy Federal judiciary, and the
Committee failed to heed those cautions as well. It is most
unfortunate that in the rush to legislate, the Committee has
failed not only to consider seriously the alternative proposal
to class action litigation reform presented by the Judicial
Conference, but even to take advantage of the experience of the
members of the Conference to comment upon and improve S. 274.
Second, S. 274 does nothing to deal with the problems of
collusive settlements which protect defendants from future
liability. Serious concerns have been raised about these
abusive settlements where counsels for both parties agree to a
far broader settlement than was originally sought in order to
insulate defendants from future liability.\73\ This practice is
far too common in class action cases, but S. 274 completely
ignores this class action abuse.
---------------------------------------------------------------------------
\73\ See Nat'l Super Spuds v. New York Mercantile Exchange, 660
F.2d 9, 17-18 (2d Cir. 1981) (rejecting potato futures class action
settlement in which parties sought to release claims for which they
were not authorized to represent class members).
---------------------------------------------------------------------------
Third, S. 274 fails to adequately address the class action
practice of worthless coupon settlements, which provide little
or no tangible benefits to plaintiffs. Typically, these
collusive settlements involve an agreement by plaintiffs' and
defendants' counsel that fully pay for the attorney fees and
expenses of the plaintiffs' counsel while class members are
left holding coupons to buy the defendants' products. For
example, in a Federal class action case alleging a price-fixing
conspiracy between major airlines, class members were awarded
$400 million in flight coupons. However, the coupons were
restricted to certain dates and small increments of travel
making them virtually unusable to consumers.\74\
---------------------------------------------------------------------------
\74\ See In re Domestic Air Transportation Antitrust Litigation,
137 F.R.D. 677 (N.D. Ga. 1991).
---------------------------------------------------------------------------
In another Federal class action, distributors of Amway
products sought relief after being taken for thousands of
dollars by the company. It was alleged that Amway had
``misrepresented the nature and characteristics of Amway
distributorships and of motivational materials or training
materials they published, produced, distributed or sold.'' A
Federal district court judge approved a settlement where Amway
agreed to coupons for class members for exactly the same
products that they had allegedly misrepresented in the first
place.\75\
---------------------------------------------------------------------------
\75\ See Hanrahan v. Britt, 174 F.R.D. 356 (E.D. Pa. 1997).
---------------------------------------------------------------------------
But S. 274 merely requires the judge to make a finding that
these coupon settlements as ``fair, reasonable and adequate''--
an action that the judge is already obligated to do under
existing law. Instead, reforms with real teeth are needed to
end worthless coupon settlements in class action cases.\76\
---------------------------------------------------------------------------
\76\ See also In re General Motors Corporation Pick-up Truck Fuel
Tank Products Liability Litigation, 55 F. 3d 768 (3d Cir. 1995)
(overturning a lower Federal court's approval of a settlement awarding
class members a $1,000 coupon toward future purchases of the
defendant's cars); In re Ford Motor Co. Bronco II Products Liability
Litigation, 1995 U.S. Dist. Lexis 3507 (E.D. La. 1995) (awarding
plaintiffs only a package of videos, stickers, and flashlights); and
Hanlon v. Chrysler Corp., 1998 WL 296890 (9th Cir. June 9, 1998)
(awarding plaintiffs no monetary compensation and essentially no more
than Chrysler's promise to conform with its obligation to the Federal
regulators).
---------------------------------------------------------------------------
IV. CONCLUSION
Contrary to the supporters' assertions, S. 274's provisions
are much broader than merely prohibiting nationwide class
actions from being pursued in state court. In fact, this bill
seeks to override the current state laws governing class
actions in the fifty states. And, in practice, it would bar
many, if not most, state class actions filed solely on behalf
of residents of a single state, solely involving matters of
that state's law from being heard in that state court, so long
as one plaintiff or one defendant is a citizen of a different
state. This is clearly an extreme and distorted change to the
diversity standards and would not apply in any other legal
proceeding.
As a result, these drastic changes to longstanding Federal
procedural rules would make it harder for citizens to protect
themselves against violations of state civil rights, consumer,
health, and environmental protection laws by forcing these
class action cases out of convenient state courts into Federal
courts, with significant new barriers and burdens on
plaintiffs.
In conclusion, we agree with Senator Kennedy's comments at
the Committee markup of this legislation:
The bill before us reflects a one-sided approach of a
difficult problem, and ignores the pleas of the
Judicial Conference * * * If we could genuinely work
together, we could probably reach a consensus; make
needed improvements in class action cases * * * in a
matter of days.\77\
---------------------------------------------------------------------------
\77\ Transcript of executive business meeting, April 10, 2003, at
77-78.
Until we reach consensus on improvements to class action
litigation for the benefit of defendants and plaintiffs, we
remain strongly opposed to S. 274.
Patrick J. Leahy.
Edward Kennedy.
Joe Biden.
Russ Feingold.
Charles E. Schumer.
Dick Durbin.
John Edwards.
XI. Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 274, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
UNITED STATES CODE
* * * * * * *
TITLE 28--JUDICIARY AND JUDICIAL PROCEDURE
Part Section
ORGANIZATION OF COURT............................................1
* * * * * * *
PARTICULAR PROCEEDINGS........................................2201
Part I--Organization of Courts
Chapter Section
1. Supreme Court.................................................. 1
* * * * * * *
Part IV--Jurisdiction and Venue
81. Supreme Court................................................. 1251
* * * * * * *
85. District Courts; Jurisdiction................................. 1331
* * * * * * *
CHAPTER 85--DISTRICT COURTS; JURISDICTION
Sec.
1330. Actions against foreign states.
1331. Federal question.
1332. Diversity of citizenship; amount in controversy; costs.
* * * * * * *
Sec. 1332. Diversity of citizenship; amount in controversy; costs
(a) The district courts shall have original jurisdiction of
all civil actions where the matter in controversy exceeds the
sum or value of $75,000, exclusive of interest and costs, and
is between--
* * * * * * *
(c) For the purposes of this section and section 1441 of
this title--
(1) a corporation shall be deemed to be a citizen of
any State by which it has been incorporated and of the
State where it has its principal place of business,
except that in any direct action against the insurer of
a policy or contract of liability insurance, whether
incorporated or unincorporated, to which action the
insured is not joined as a party-defendant, such
insurer shall be deemed a citizen of the State of which
the insured in a citizen, as well as of any State by
which the insurer has been incorporated and of the
State where it has its principal place of business; and
(2) the legal representative of the estate of a
decedent shall be deemed to be a citizen only of the
same State as the decedent, and the legal
representative of an infant or incompetent shall be
deemed to be a citizen only of the same State as the
infant or incompetent.
(d)(1) In this subsection--
(A) the term ``class'' means all of the class members
in a class action;
(B) the term ``class action'' means any civil action
filed under rule 23 of the Federal Rules of Civil
Procedure or similar State statute or rule of
judicialprocedure authorizing an action to be brought by 1 or more
representative persons as a class action;
(C) the term ``class certification order'' means an
order issued by a court approving the treatment of some
or all aspects of a civil action as a class action; and
(D) the term ``class members'' means the persons
(named or unnamed) who fall within the definition of
the proposed or certified class in a class action.
(2) The district courts shall have original jurisdiction of
any civil action in which the matter in controversy exceeds the
sum or value of $5,000,000, exclusive of interest and costs,
and is a class action in which--
(A) any member of a class of plaintiffs is a citizen
of a State different from any defendant;
(B) any member of a class of plaintiffs is a foreign
state or a citizen or subject of a foreign state and
any defendant is a citizen of a State; or
(C) any member of a class of plaintiffs is a citizen
of a State and any defendant is a foreign state or a
citizen or subject of a foreign state.
(3) A district court may, in the interests of justice,
decline to exercise jurisdiction under paragraph (2) over a
class action in which greater than one-third but less than two-
thirds of the members of all proposed plaintiff classes in the
aggregate and the primary defendants are citizens of the State
in which the action was originally filed based on consideration
of the following factors:
(A) Whether the claims asserted involve matters of
national or interstate interest.
(B) Whether the claims asserted will be governed by
laws other than those of the State in which the action
was originally filed.
(C) 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.
(D) 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 citizens from any other
State, and the citizenship of the other members of the
proposed class is dispersed among a substantial number
of States.
(E) 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.
(4) Paragraph (2) shall not apply to any class action in
which--
(A) two-thirds or more of the members of all proposed
plaintiff classes in the aggregate and the primary
defendants are citizens of the State in which the
action was originally filed;
(B) the primary defendants are States, State
officials, or other governmental 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.
(5) In any class action, the claims of the individual class
members shall be aggregated to determine whether the matter in
controversy exceeds the sum or value of $5,000,000, exclusive
of interest and costs.
(6) This subsection shall apply to any class action before
or after the entry of a class certification order by the court
with respect to that action.
(7)(A) A district court shall dismiss any civil action that
is subject to the jurisdiction of the court solely under this
subsection if the court determines the action may not proceed
as a class action based on a failure to satisfy the
prerequisites of rule 23 of the Federal Rules of Civil
Procedure.
(B) Nothing in subparagraph (A) shall prohibit plaintiffs
from filing an amended class action in Federal court or filing
an action in State court, except that any such action filed in
State court may be removed to the appropriate district court if
it is an action of which the district courts of the United
States have original jurisdiction.
(C) In any action that is dismissed under this paragraph
and is filed by any of the original named plaintiffs therein in
the same State court venue in which the dismissed action was
originally filed, the limitations periods on all reasserted
claims shall be deemed tolled for the period during which the
dismissed class action was pending. The limitations periods on
any claims that were asserted in a class action dismissed under
this paragraph that are subsequently asserted in an individual
action shall be deemed tolled for the period during which the
dismissed action was pending.
(8) Paragraph (2) shall not apply to any class action that
solely involves a claim--
(A) concerning a covered security as defined under
16(f)(3) of the Securities Act of 1933 and section
28(f)(4)(E) of the Securities Exchange Act of 1934;
(B) that relates to the internal affairs or
governance of a corporation or other form of business
enterprise and that arises under or virtue of the laws
of the State in which such corporation or business
enterprise is incorporated or organized; or
(C) that relates to the rights, duties (including
fiduciary duties), and obligations relating to or
created by or pursuant to any security (as defined
under section 2(a)(1) of the Securities Act of 1933 and
the regulations issued thereunder).
(9) For purposes of this subsection and section 1453 of
this title, an unincorporated association shall be deemed to be
a citizen of the State where it has its principal place of
business and the State under whose laws it is organized.
(9)(10)(A) For purposes of this action and section 1453 of
this title, a civil action that is not otherwise a class action
as defined in paragraph (1)(B) shall nevertheless be deemed a
class action if--
``(i) the named plaintiff purports to act for the
interests of its members (who are not named parties to
the action) or for the interests of the general public,
seeks a remedy of damages, restitution, disgorgement,
or any other form of monetary relief. and is not a
State attorney general; or
``(ii) monetary relief claims in the action are
proposed to be tried jointly in any respect with the
claims of 100 or more other persons on the ground that
the claims involve common questions of law or fact.
(B)(i) In any civil action described under paragraph
(A)(i), the persons who allegedly were injured shall be treated
as members of a proposed plaintiff class and the monetary
relief that is sought shall be treated as the claims of
individual class members.
(ii) Paragraph (7) of this subsection and subsections
(b)(2) and (d) of section 1453 shall not apply to any civil
action described under subparagraph (A)(i).
(ii) Paragraph (7) of this subsection, and subsections
(b)(2) and (d) of section 1453 shall not apply to any civil
action described under subparagraph (A)(ii).
[(d)] (e) The word ``States'', as used in this section,
includes the Territories, the District of Columbia, and the
Commonwealth of Puerto Rico.
* * * * * * *
Sec. 1335. Interpleader
(a) The district courts shall * * *
(1) Two or more adverse claimants, of diverse
citizenship as defined in section 1332(a) or (d) of
this title, are claiming or may claim to be entitled to
such money or property, or to any one or more of the
benefits arising by virtue of any note, bond,
certificate, policy or other instrument, or arising by
virtue of any such obligation; and if (2) the plaintiff
has deposited such money or property or has paid the
amount of or the loan or other value of such instrument
or the amount due under such obligation into the
registry of the court, there to abide the judgment of
the court, or has given bond payable to the clerk of
the court in such amount and with such surety as the
court or judge may deem proper, conditioned upon the
compliance by the plaintiff with the future order or
judgment of the court with respect to the subject
matter of the controversy.
* * * * * * *
CHAPTER 89--DISTRICT COURTS: REMOVAL OF CASES FROM STATE COURTS
Sec.
1441. Actions removable generally.
* * * * *
1452. Removal of claims related to bankruptcy cases.
1453. Removal of class actions.
* * * * * * *
Sec. 1446. Procedure for removal
(a) A defendant or defendants * * *
(b) The notice of removal of a civil action or proceeding
shall be filed within thirty days after the receipt by the
defendant, through service or otherwise, of a copy of the
initial pleading setting forth the claim for relief upon which
such action or proceeding is based, or within thirty days after
the service of summons upon the defendant if such initial
pleading has then been filed in court and is not required to be
served on the defendant, whichever period is shorter.
If the case stated by the initial pleading is not
removable, a notice of removal may be filed within thirty days
after receipt by the defendant, through service or otherwise,
of a copy of an amended pleading, motion, order or other paper
from which it may first be ascertained that the case is one
which is or has become removable, except that a case may not be
removed on the basis of jurisdiction conferred by section
1332(a) of this title more than 1 year after commencement of
the action.
* * * * * * *
Sec. 1452. Removal of claims related to bankruptcy cases
(a) A party may remove any claim or cause of action in a
civil action other than a proceeding before the United States
Tax Court or a civil action by a governmental unit to enforce
such governmental unit's police or regulatory power, to the
district court for the district where such civil action is
pending, if such district court has jurisdiction of such claim
or cause of action under section 1334 of this title.
(b) The court to which such claim or cause of action is
removed may remand such claim or cause of action on any
equitable ground. An order entered under this subsection
remaining a claim or cause of action, or a decision to not
remand, is not reviewable by appeal or otherwise by the court
of appeals under section 158(d), 1291, or 1292 of this title or
by the Supreme Court of the United States under section 1254 of
this title.
Sec. 1453. Removal of class actions
(a) Definitions.--In this section, the terms ``class'',
``class action,'' ``class certification order'', and ``class
member'' shall have the meanings given such terms under section
1332(d)(1).
(b) In General.--A class action may be removed to a
district court of the United States in accordance with this
chapter, without regard to whether any defendant is a citizen
of the State in which the action is brought, except that such
action may be removed--
(1) by any defendant without the consent of all
defendants; or
(2) by any plaintiff class member who is not a named
or representative class member without the consent of
all members of such class.
(c) When Removable.--This section shall apply to any class
action before or after the entry of a class certification order
in the action.
(d) Procedure for Removal.--Section 1446 relating to a
defendant removing a case shall apply to a plaintiff removing a
case under this section, except that in the application of
subsection (b) of such section the requirement relating to the
30-day filing period shall be met if a plaintiff class member
files notice of removal within 30 days after receipt by such
class member, through service or otherwise, of the initial
written notice of the class action.
(e) Review of Orders Remanding Class Actions to State
Courts.--Section 1447 shall apply to any removal of a case
under this section, except that notwithstanding section
1447(d), an order remanding a class action to the State court
from which it was removed shall be reviewable by appeal or
otherwise.
(f) Exception.--This section shall not apply to any class
action that solely involves--
(1) a claim concerning a covered security as defined
under section 16(f)(3) of the Securities Act of 1933
and section 28(f)(5)(E) of the Securities Exchange Act
of 1934;
(2) a claim that relates to the internal affairs or
governance of a corporation or other form of business
enterprise and arises under or by virtue of the laws of
the State in which such corporation or business
enterprise is incorporated or organized; or
(3) a claim that relates to the rights, duties
(including fiduciary duties), and obligations relating
to or created by or pursuant to any security (as
defined under section 2(a)(1) of the Securities Act of
1933 and the regulations issued thereunder).
* * * * * * *
CHAPTER 97--JURISDICTIONAL IMMUNITIES OF FOREIGN STATES
Sec.
1602. Findings and declaration of purpose.
1603. Definitions.
* * * * * * *
Sec. 1603. Definitions
For purposes of this chapter--(a) A ``foreign state'',
except as used in section 1608 of this title, includes a
political subdivision of a foreign state or an agency or
instrumentality of a foreign state as defined in subsection
(b).
(b) An ``agency or instrumentality of a foreign state''
means any entity--
(1) which is a separate legal person, corporate or
otherwise, and
* * * * * * *
(3) which is neither a citizen of a State of the
United States as defined in section 1332(c) and [(d)]
(e) of this title, nor created under the laws of any
third country.
* * * * * * *
Part V--Procedure
Chapter Section
111. General Provisions........................................... 1651
113. Process...................................................... 1691
114. Class Actions................................................ 1711
* * * * * * *
CHAPTER 114--CLASS ACTIONS
Sec.
1711. Definitions.
1712. Judicial scrutiny of coupon and other noncash settlements.
1713. Protection against loss by class members.
1714. Protection against discrimination based on geographic location.
1715. Prohibition on the payment of bounties.
1716. Clearer and simpler settlement information.
1717. Notifications to appropriate Federal and State officials.
Sec. 1711. Definitions
In this chapter:
(1) Class.--The term ``class'' means all of the class
members in a class action.
(2) Class action.--The term ``class action'' means
any civil action filed in a district court of the
United States under rule 23 of the Federal Rules of
Civil Procedure or any civil action that is removed to
a district court of the United States that was
originally filed under a State statute or rule of
judicial procedure authorizing an action to be brought
by 1 or more representatives as a class action.
(3) Class counsel.--The term ``class counsel'' means
the persons who serve as the attorneys for the class
members in a proposed or certified class action.
(4) Class members.--The term ``class members'' means
the persons (named or unnamed) who fall within the
definition the definition of the proposed or certified
class in a class action.
(5) Plaintiff class action.--The term ``plaintiff
class action'' means a class action in which class
members are plaintiffs.
(6) Proposed settlement.--The term ``proposed
settlement'' means an agreement regarding a class
action that is subject to court approval and that, if
approved, would be binding on some or all class
members.
Sec. 1712. Judicial scrutiny of coupon and other noncash settlements
The court may approve a proposed settlement under which the
class members would receive noncash benefits or would otherwise
be required to expend funds in order to obtain part or all of
the proposed benefits only after a hearing to determine
whether, and making a written finding that, the settlement is
fair, reasonable, and adequate for class members.
Sec. 1713. Protection against loss by class members
The court may approve a proposed settlement under which any
class member is obligated to pay sums to class counsel that
would result in a net loss to the class member only if the
court makes a written finding that nonmonetary benefits to the
class member substantially outweigh the monetary loss.
Sec. 1714. Protection against discrimination based on geographic
location
The court may not approve a proposed settlement that
provides for the payment of greater sums to someclass members
than to others solely on the basis that the class members to whom the
greater sums are to paid are located in closer geographic proximity to
the court.
Sec. 1715. Prohibition on the payment of bounties
(a) In General.--The court may not approve a proposed
settlement that provides for the payment of a greater share of
the award to a class representative serving on behalf of a
class, on the basis of the formula for distribution to all
other class members, than that awarded to the other class
members.
(b) Rule of Construction.--The limitation in subsection (a)
shall not be construed to prohibit a payment approved by the
court for reasonable time or costs that a person was required
to expend in fulfilling the obligations of that person as a
class representative.
Sec. 1716. Clearer and simpler settlement information
(a) Plain English Requirements.--Any court with
jurisdiction over a plaintiff class action shall require that
any written notice concerning a proposed settlement of the
class action provided to the class through the mail or
publication in printed media contain--
(1) at the beginning of such notice, a statement in
18-point or greater bold type, stating ``LEGAL NOTICE:
YOU ARE A PLAINTIFF IN A CLASS ACTION LAWSUIT AND YOUR
LEGAL RIGHTS ARE AFFECTED BY THE SETTLEMENT DESCRIBED
IN THIS NOTICE.''; AND
(2) a short summary written in plain, easily
understood language, describing--
(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 action;
(D) if the notice is informing class members
of a proposed settlement agreement--
(i) the benefits that will accrue to
the class due to the settlement;
(ii) the rights that class members
will lose or waive through the
settlement;
(iii) obligations that will be
imposed on the defendants by the
settlement;
(iv) the dollar amount of any
attorney's fee class counsel will be
seeking, or if not possible, a good
faith estimate of the dollar amount of
any attorney's fee class counsel will
be seeking; and
(v) an explanation of how any
attorney's fee will be calculated and
funded; and
(E) any other material matter.
(b) Tabular Format.--Any court with jurisdiction over a
plaintiff class action shall require that the information
described in subsection (a)--
(1) be placed in a conspicuous and prominent location
on the notice;
(2) contain clear and concise headings for each item
of information; and
(3) provide a clear and concise form for stating each
item of information required to be disclosed under each
heading.
(c) Television or Radio Notice.--Any notice provided
through television or radio (including transmissions by cable
or satellite) to inform the class members in a class action of
the right of each member to be excluded from a class action or
a proposed settlement, if such right exists shall in plain
easily understood language--
(1) describe the persons who may potentially become
class members in the class action; and
(2) explain that the failure of a class member to
exercise his or her right to be excluded from a class
action will result in the person's inclusion in the
class action.
Sec. 1717. Notifications to appropriate Federal and State officials
(a) Definitions.--
(1) Appropriate federal official.--In this section,
the term ``appropriate Federal official'' means--
(A) the Attorney General of the United
States; or
(B) in any case in which the defendant is a
Federal depository institution, a State
depository institution, a depository
institution holding company, a foreign bank, or
a nondepository institution subsidiary of the
foregoing (as such terms are defined in section
3 of the Federal Deposit Insurance Act (12
U.S.C. 1813)), the person who has the primary
Federal regulatory or supervisory
responsibility with respect to the defendant,
if some or all of the matters alleged in the
class action are subject to regulation or
supervision by that person.
(2) Appropriate state official.--In this section, the
term ``appropriate State official'' means the person in
the State who has the primary regulatory or supervisory
responsibility with respect to the defendant, or who
licenses or otherwise authorizes the defendant to
conduct business in the State, if some or all of the
matters alleged in the class action are subject to
regulation by that person. If there is no primary
regulator, supervisor, or licensing authority, or the
matters alleged in the class action are not subject to
regulation or supervision by that person, then the
appropriate State official shall be the State attorney
general.
(b) In General.--No later than 10 days after a proposed
settlement of a class action is filed in court, each defendant
that is participating in the proposed settlement shall serve
upon the appropriate State official of each State in which a
class member resides and the appropriate Federal official, a
notice of the proposed settlement consisting of--
(1) a copy of the complaint and any materials filed
with the complaint and any amended complaints (except
such materials shall not be required to be served if
such materials are made electronically available
through the Internet and such service includes notice
of how to electronically access such material);
(2) notice of any scheduled judicial hearing in the
class action;
(3) any proposed or final notification to class
members of--
(A)(i) the members' rights to request
exclusion from the class action; or
(ii) if no right to request exclusion exists,
a statement that no such right exists; and
(B) a proposed settlement of a class action;
(4) any proposed or final class action settlement;
(5) any settlement or other agreement
contemporaneously made between class counsel and
counsel for the defendants;
(6) any final judgment or notice of dismissal;
(7)(A) if feasible, the names of class members who
reside in each State and the estimated proportionate
share of the claims of such members to the entire
settlement to that State's appropriate State official;
or
(B) if the provision of information under
subparagraph (A) is not feasible, a reasonable estimate
of the number of class members residing in each State
and the estimated proportionate share of the claims of
such members to the entire settlement; and
(8) any written judicial opinion relating to the
materials described under subparagraphs (3) through
(6).
(c) Depository Institutions Notification.--
(1) Federal and other depository institutions.--In
any case in which the defendant is a Federal depository
institution, a depository institution holding company,
a foreign bank, or a non-depository institution
subsidiary of the foregoing, the notice requirements of
this section are satisfied by serving the notice
required under subsection (b) upon the person who has
the primary Federal regulatory or supervisory
responsibility with respect to the defendant, if some
or all of the matters alleged in the class action are
subject to regulation or supervision by that person.
(2) State depository institutions.--In any case in
which the defendant is a State depository institution
(as that term is defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813)), the notice
requirements of this section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)), the notice
requirements of this section are satisfied by serving
the notice required under subsection (b) upon the State
bank supervisor (as that term is defined in section 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813))
of the State in which the defendant is incorporated or
chartered, if some or all of the matters alleged in the
class action are subject to regulation or supervision
by that person, and upon the appropriate Federal
official.
(d) Final Approval.--An order giving final approval of a
proposed settlement may not be issued earlier than 90 days
after the later of the dates on which the appropriate Federal
official and the appropriate State official are served with the
notice required under subsection (b).
(e) Noncompliance if Notice Not Provided.--
(1) In general.--A class member may refuse to comply
with and may choose not to be bound by a settlement
agreement or consent decree in a class action if the
class member demonstrates that the notice required
under subsection (b) has not been provided.
(2) Limitation.--A class member may not refuse to
comply with or to be bound by a settlement agreement or
consent decree under paragraph (1) if the notice
required under subsection (b) was directed to the
appropriate Federal official and to either the State
attorney general or the person that has primary
regulatory, supervisory, or licensing authority over
the defendant.
(3) Application of rights.--The rights created by
this subsection shall apply only to class members or
any person acting on a class member's behalf, and shall
not be construed to limit any other rights affecting a
class member's participation in the settlement.
(f) Rule of Construction.--Nothing in this section shall be
construed to expand the authority of, or impose any
obligations, duties, or responsibilities upon, Federal or State
officials.
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