Class Action Toolkit
The following is a summary of key provisions in S.5, The Class Action Fairness Act of 2005:
- Federal District Court Jurisdiction for Interstate Class Actions: The act creates federal jurisdiction over class actions in which the aggregate amount in controversy exceeds $5,000,000, and any member of a plaintiff class is a citizen of a different state from any defendant. The bill also treats certain mass actions with more than 100 plaintiffs as class actions for purposes of jurisdiction (as long as each plaintiff seeks $75,000 in relief).
- Home State Exception: This provision applies in cases where a defendant is sued in its home state. In such cases, if two-thirds or more of the class members are from the defendants' home state, the case would remain in state court. Conversely, if less than one-third of the class members are citizens of that home state, the case would be subject to federal jurisdiction. For the middle tier (class actions where 33%-66% of the class members share state citizenship with all defendants), federal courts would decide whether to exercise jurisdiction based on six specified factors that analyze the relationship between the case and the state where it was brought.
- Local Controversy Exception: This exception governs class actions involving local controversies in which more than two-thirds of the proposed class members are citizens of the state in which the action was filed. Under this provision, such cases would stay in state court as long as:
- The plaintiffs have sued at least one in-state defendant whose conduct forms a significant basis of their claims
- The principal injuries occurred in the state where the suit is brought
- No class action has been filed alleging the same claims against any of the defendants in the last three years
- Removal Provisions: The current prohibition on any removals of diversity cases more than one year after filing will not apply to class actions. In addition, defendants may remove their cases to federal court without regard to whether any defendant is a citizen of the state in which the action was filed. Remand orders would be subject to discretionary appellate review with tight deadlines.
- Report on Class Action Settlements: The bill requires the Federal Judicial Conference to prepare a report for the House and Senate Judiciary Committees on class action settlements within 12 months containing recommendations on best practices for courts to ensure that proposed class actions settlements are fair to the class members.
- Consumer Class Action Bill of Rights: The bill requires federal courts to issue written fairness decisions before approving coupon settlements or "net loss" settlements (like the notorious Bank of Boston case). The bill also requires that fees in coupon settlements be based on the value of coupons actually redeemed or the amount of time class counsel expended working on the action. The bill does not prohibit use of a multiplier.
- Notice to Public Officials of Proposed Settlements: The public official notification provision requires the defendant to provide notice to a responsible state and/or federal official about any proposed class action settlement so that public officials can react if the settlement appears unfair to some or all class members or inconsistent with applicable regulatory policies.
Class Action Commonly Asked Questions about Class Action Fairness Act of 2005 (S.5)
Why do we need this new law?
The past few years have witnessed an explosion of interstate class actions being filed in state court, particularly in certain “magnet” jurisdictions. These “magnet” courts have been rife with class action abuses:
- They have routinely approved settlements in which the lawyers receive large fee awards and the class members receive virtually nothing
- They have decided the claims of other states' citizens under their own law
- They have employed litigation models that deny both consumers' and defendants' due process rights
- The result has been a growing number of class actions that are losing propositions for everyone involved except the lawyers who brought them.
- A recent survey found that state court class action filings have increased by 1,315 percent over the last decade. A number of other studies have exposed certain “magnet county courts” where the number of class actions were growing exponentially, including the most notorious county, Madison County, Illinois, where class action filings increased by more than 5,000 percent between 1998 and 2003.
- Newspapers around the country - and from all sides of the political spectrum - have called for class action reform and endorsed the legislation, including:
- Washington Post
- Chicago Tribune
- St. Louis Post-Dispatch
- Wall Street Journal.
All told, there have been more than 100 editorials in daily newspapers endorsing The Class Action Fairness Act. According to the Washington Post, “[n]o portion of the American civil justice system is more of a mess than the world of class actions.”
Won't the Class Action Fairness Act actually make it harder for consumers to have their day in court?
No. The Class Action Fairness Act merely ensures an evenhanded forum for bringing large, interstate class actions. It doesn't change any of the laws that determine whether a consumer prevails in a case or not.
Moreover, studies have shown that consumers fare better in federal court class actions. In a study conducted by the Federal Judicial Center, the average recovery per class member was higher in federal court: $517 vs. $350 (Federal Judicial Center, April 2004).
The bottom line is that federal courts invented class actions and have led the way in using the device to redress grievances, particularly in the civil rights and consumer protection context.
Many states have enacted tort reform. If the problem is in state courts, why can the states not fix it?
Most states that have recently enacted litigation reforms have not addressed the subject of class action reform at all. Rather, these reforms have been principally focused on capping damages, including non-economic and punitive damages, especially in the area of medical malpractice.
State legislative class action reform would be unhelpful in any event. Even if some states attempt to reform their class action devices, class action lawyers are eternally looking for nascent "magnet courts." For this reason, even if it were advisable for Congress to do nothing but wait for particular state legislatures to respond to class action abuses within their states by enacting reform efforts, class action lawyers would simply move their cases to another jurisdiction they perceived as the “next best” one.
How can Congress tell state court judges what to do? Isn't that unconstitutional?
The Class Action Fairness Act does not tell state court judges what to do. Rather, it simply changes the federal jurisdiction statute to allow federal judges to hear more class actions.
If cases subject to that broader jurisdictional grant are removed to federal court (or brought there in the first place), it is, of course, permissible for Congress to regulate the procedures used by federal courts to resolve such cases.
Indeed, if Congress cannot specify laws and procedures to be used by federal courts, then all of the federal rules of civil procedure (which are transmitted to Congress for final approval) would be unconstitutional.
Federal courts are notoriously slower than state courts. By removing class actions from state court, won't the Class Action Fairness Act delay justice for hundreds of thousands of injured consumers?
There is no evidence that federal courts are slower than state courts in resolving large, complex cases like class actions. To the contrary, a Federal Judicial Center study found that state courts are far more likely than federal courts to let class actions linger without ruling on class certification.
Moreover, the median time for final disposition of a civil claim filed in federal court is just 9.3 months, and the median time to trial in a civil matter in federal court is 22.5 months (Administrative Office of the U.S. Courts, 2004). There is no evidence that on average, state courts proceed more quickly, even though most state court cases are less complicated than federal court cases.
Class Action Fast Facts
On February 18, 2005 President Bush signed into law the Class Action Fairness Act of 2005. The law addresses longstanding abuses of the legal system by providing both a mechanism for high-damage class action claims involving a diverse plaintiff class to be removed to federal courts and for the review of settlements involving coupon compensation for plaintiffs.
The Class Action Problem
- Class action plaintiffs’ lawyers have commonly launched predatory assaults on businesses and large institutions, often in the name of clients who do not even know they are being represented. The end result has been huge fees for the lawsuit industry—an average of over $1,000 per hour according to Class Action Reports—but relatively tiny awards for individual plaintiffs. [Trial Lawyers Inc., The Manhattan Institute Center for Legal Policy, 2003; Class Action Reports, March-April 2003]
- Plaintiffs’ lawyers often charge contingent fees as high as 40 percent or more, plus litigation expenses, even for mass-produced claims that may have taken as little as 10 minutes to prepare.
- Roughly 60 million voters in this country have been asked to participate in a class action lawsuit, and for those who did, the majority did not feel that the system worked for them. [Mark Penn, President of Penn, Schoen & Berland Associates, which conducted the research for the U.S. Chamber’s Institute for Legal Reform, statement from March 5, 2003]
- In asbestos claims, often handled as mass torts, it has been estimated that more than $28.5 billion has been spent on claims where the alleged injuries are questionable, and more than $10 billion of this has gone to plaintiff’s lawyers. [“On the Theory Class’s Theories of Asbestos Litigation: The Disconnect Between Scholarship and Reality,” by Lester Brickman, Cardozo Law School of Yeshiva University for The Pepperdine Law Review, January 2004]
- The personal injury lawyers themselves say that some local jurisdictions, where many class action lawsuits typically have been filed, are imbalanced and unfair. “[W]hat I call the ‘magic jurisdiction’… [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected… it’s almost impossible to get a fair trial if you’re a defendant in some of these places… The cases are not won in the courtroom. They’re won on the back roads long before the case goes to trial. Any lawyer fresh out of law school can walk in there and win the case, so it doesn’t matter what the evidence or the law is.” [Statement by personal injury lawyer Dickie Scruggs, Trial Lawyers Inc., The Manhattan Institute Center for Legal Policy, 2003]
- Despite federal reforms passed, many plaintiffs’ lawyers still view class action lawsuits as a financial opportunity and class action lawsuit abuse is a continuing problem that can impact the nation’s economy, as well as American workers and their families.