PUBLIC CITIZEN LITIGATION GROUP
1600 20TH STREET, N.W.
WASHINGTON, D.C. 20009
(202) 588-1000
A Section-by-Section Analysis of the Class Action Fairness Act of 2005
By Public Citizen Litigation Group
Introduction and Offer of Assistance
Ironic is too kind a word to describe the title of the Class Action "Fairness" Act of
2005. But like it or not (and we don't), the Act has become law, and we need to learn
how to deal with it. Here, at Public Citizen Litigation Group, we felt that before plaintiffs'
lawyers begin trying to minimize the Act's adverse impact on their clients, they
must first fully understand what it provides. Thus, in the pages that follow, we provide a
section-by-section analysis of the bill, with as little editorial commentary as possible
(though it was hard to resist at times).
Along with Public Citizen's lobbying arm, Congress Watch, the Litigation Group
has been fighting the class action bill since it first reared its ugly head in the late 1990's.
For an example of our congressional testimony opposing the legislation, see
http://www.citizen.org/documents/ACF69D3.pdf. We have also worked extensively both
as class counsel and as counsel for objectors to unfair class action settlements. Given our
long involvement regarding the now-enacted legislation and in class actions more generally,
we believe we have the knowledge and experience to produce this analysis with an
eye toward its potential impact on consumer class action litigation.
For many years, Litigation Group litigators have teamed with members of the private
bar on class action issues. We would like to continue and expand that association,
and we urge you to contact us if you would like our assistance on litigation arising under
the Class Action "Fairness" Act or on class action issues more generally. If you are interested
in collaborating or simply have further questions, please contact Scott Nelson-
the principal author of this Article-at snelson@citizen.org, or Brian Wolfman at
brian@citizen.org.
Legislative Background
What a difference an election makes. Last summer, the Republican Senate leadership
brought to the floor a class action bill that had been carefully tweaked and massaged
to obtain the support needed to overcome a filibuster that had blocked Senate passage in
October 2003. But even though the bill needed to pick up only one vote to kill the filibuster,
its backers' plans went seriously awry. Senate Majority Leader Frist's effort to restrict
debate and amendments and ram the bill through the Senate in the limited time
available before the 2004 summer recess met resistance on both sides of the aisle, and, on
July 8, 2004, the bill fell 16 votes shy of the 60 needed to end the filibuster.
Then came the November election. The election further consolidated Republican
control over the Senate and left intact the solid Republican majority in the House of Representatives
(which had already voted to pass a class action bill in prior years, including
2003). Republicans still lack the 60 votes needed to overcome a filibuster without the assistance
of Democratic Senators, but with a substantial number of Senate Democrats already
on record as favoring class action legislation - and a President certain to sign any
class action bill sent his way - the election results made class action legislation a virtual
certainty.
This time, the Senate was the first to act. On January 25, Senator Grassley introduced
S. 5, the Class Action Reform Act of 2005 - a bill virtually identical to the one
that failed the previous July, and largely the same as the one blocked by a filibuster in
October 2003. Apparently, though, with legislation as with everything else, the third
time's a charm. Barely a week after it was introduced, the bill cleared the Senate Judiciary
Committee without amendment, and without a written report to slow its momentum.
A week later, the Senate acted on the bill. Democratic attempts at floor amendments
failed and the filibuster melted away. The final vote for passage was 72-26, with a startling
18 Democrats voting for the bill.
After the easy Senate triumph of the bill, passage in the House was a forgone conclusion.
House Republicans had long favored an even more pro-defendant bill, but in the
interest of finally passing class action legislation, the House leadership had announced
that if the Senate passed the Grassley bill without amendment, the House would do likewise.
On February 17, 2005, a week after the Senate acted, the House leaders made good
on their promise. Bypassing the formality of a report by the House Judiciary Committee,
the House considered the bill under a rule allowing barely more than two hours of debate
and permitting only one amendment to be offered, in the form of a (doomed) Democratic
substitute bill. Following the truncated debate, the House vote was nearly as lopsided as
the Senate's, with the bill passing by 279-149.
Wasting no time, the President arranged to sign the bill on Friday, February 18 -
the day after the House acted. The law is now in effect. Class action "reform" is here. But
what does it mean?
In a nutshell, the Act has two principal parts. One set of provisions establishes new
procedural and substantive standards applicable to class action settlements. Some of these
duplicate (or add little to) existing practice under the Federal Rules of Civil Procedure,
but others - such as new limitations on attorneys' fees in coupon settlements and requirements
that government officials be notified whenever a class action settles - are
brand new.
The other, more important, set of provisions casts aside traditional principles of
statutory diversity jurisdiction and provides for both original federal jurisdiction and removal
of state-law based class actions that until now could be filed only in state courts.
The provisions are complex and require detailed explication. Fundamentally, however,
the Acts makes the ordinary requirement of "complete diversity" of citizenship inapplicable
to class actions, and, subject to narrow exceptions, provides federal jurisdiction
when any class member and any defendant are citizens of different states. It also eliminates
the principle that the claims of class members cannot be aggregated to meet the
amount-in-controversy requirement, and provides for federal jurisdiction when the total
amount in controversy in a class action exceeds $5 million. The effect is to allow most
class actions with classes or defendants including citizens of more than one state to be
filed in or removed by defendants to federal court.
The Act is complicated, and the jurisdictional provisions in particular have a number
of exceptions. A detailed analysis of its provisions is essential to understanding its
effect on class action practice.
The Act's Provisions
1. Effective Date
The most pressing, immediate question a practitioner may have is whether the Act
applies to a particular case. That key question is addressed in the very last section of the
Act, section 9, which provides: "The amendments made by this Act shall apply to any
civil action commenced on or after the date of enactment of this Act." In short, the Act
applies to class actions filed on or after Friday, February 18, 2005. It does not apply to
actions already pending on that date. Significantly, the effective date provision applies to
all of the changes made by the Act, including the provisions on settlements.
The bottom line is that cases already filed in state court are not subject to removal
under the Act, which presumably will elicit a sigh of relief from plaintiffs' lawyers with
pending state-court class actions. But because the drafters of the Act chose a uniform,
bright-line approach to the effective date for all provisions of the new law, settlements of
class actions in federal courts for years to come will be subject to two different sets of
procedures, depending on the date of filing of the action. Thus, the effective date provision
simplifies everyone's life insofar as it applies to the jurisdictional and removal provisions,
but will be an ongoing source of complication for settlements.
2. Jurisdictional Provisions
a. The Basic Rules
The Act's provisions for original jurisdiction and removal jurisdiction over multistate
class actions are its most important features. They are the means by which the Act's
backers seek to achieve their purported aim of removing "frivolous" class actions from
state-court "hellholes," as well as their real objective of shunting meritorious state-law
cases into federal courts that may be more hostile to certification of classes in those cases.
Moreover, as we know from experience, federal courts may be considerably more receptive
than state courts to defenses such as federal preemption and more conservative in
construing state-law causes of action, particularly in the consumer protection area. The
jurisdiction and removal provisions are also the most fundamental changes made by the
Act to the status quo, and will have the broadest impact.
Understanding the significance of the changes worked by the Act requires a basic
understanding of the law as it stood before the Act's passage. Class actions raising federal
claims could be freely brought in or removed to federal court by virtue of the broad
grant of federal question jurisdiction in 28 U.S.C. ? 1331. But most class actions raising
only state-law claims could reach federal court only if they satisfied the requirements for
diversity jurisdiction under 28 U.S.C. ? 1332. Section 1332 posed two significant obstacles
to federal jurisdiction over such class actions: The "complete diversity" rule and the
amount-in-controversy requirement.
For class actions, the "complete diversity" requirement, as created and refined in
judicial decisions, was that all named class representatives and all defendants had to be
citizens of different states. If any named plaintiff and any named defendant were from the
same state, the action could not be filed in or removed to federal court. See Strawbridge
v. Curtiss, 7 U.S. 267 (1806); Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921).
As for the amount-in-controversy requirement, in most cases the claims of class members
could not be aggregated to satisfy the $75,000 jurisdictional amount in diversity cases.
See Snyder v. Harris, 394 U.S. 332 (1969). Thus, at least one class member had to have a
claim for more than $75,000; and, under the Supreme Court's decision in Zahn v. International
Paper Co., 414 U.S. 291 (1973), all class members had to have claims exceeding
$75,000.1 Importantly, both the "complete diversity" requirement and the amount-incontroversy
are purely statutory; Congress has constitutional authority under Article III
to create diversity jurisdiction as long as there is "minimal diversity" between some
plaintiffs and some defendants, and it need not create amount-in-controversy requirements
at all.
Because Congress had not exercised the full scope of its authority to create diversity
jurisdiction, the combined effect of the statutory requirements was to keep many
class actions based on state law claims out of federal court. All a plaintiff had to do was
avoid pleading a federal claim, and name at least one non-diverse plaintiff or defendant
or name only class representatives whose claims did not reach $75,000, which is usually
possible in consumer class actions. Absent special circumstances (such as state-law
claims that were completely preempted by federal law, or fraudulent joinder), such class
actions could not be removed by defendants to federal court. Thus, state consumer-law
class actions were often litigated in state courts-the courts with the most experience in
interpreting state consumer protection laws.
1 There is a split in the Circuits over whether Zahn is still valid in light of the supplemental jurisdiction
statute, 28 U.S.C. ? 1367, and the Supreme Court has granted certiorari to resolve it in Exxon Corp.
v. Allapattah Services, No. 04-70 (argued March 1, 2005). However, all the Circuits have agreed that, regardless
of Zahn's survival, at least one named plaintiff in a class action had to meet the jurisdictional
amount requirement.
The new Act changes all that. It amends both the diversity statute (28 U.S.C.
? 1332) and the removal laws (28 U.S.C. ?? 1441 et seq.) to provide for federal jurisdiction,
at the election of either the plaintiff or the defendant, over class actions that do not
satisfy the traditional "complete diversity" and amount-in-controversy requirements. The
basic innovation of the new law (subject to important exceptions to be described later) is
that it establishes federal jurisdiction over any action in which any one member of the
class (named or not) has diverse citizenship from any one defendant, and where the aggregate
amount in controversy exceeds $5 million. 28 U.S.C. ? 1332(d)(2).2
To take a concrete example, suppose a class with 10,000 members sues GM and
one of its dealerships located in Illinois, raising state-law fraud claims. The named class
representatives all reside in Illinois, but some class members live in Wisconsin, Iowa,
Missouri, Indiana, and Michigan. The individual class members' claims average $600,
and no class member has a claim exceeding $2,000. Under the law as it stood before the
Act's passage, the class action could not be brought in or removed to federal court, both
because there was not complete diversity between the named class representatives and the
defendants (one defendant was a citizen of the same state as the plaintiffs) and because
no individual plaintiff's claim exceeded the jurisdictional amount. Under the new law, the
case could be filed in or removed to federal court because of the diversity of citizenship
between the named representatives (Illinois) and GM (Michigan) - not to mention that
between some non-named class members (various states) and both defendants - and because
the total amount in controversy ($6 million) exceeds the jurisdictional amount.
The same would be true if the named class representatives all lived in Michigan
and the Illinois defendant were omitted: The diversity between some non-named class
members and GM would still suffice to permit federal jurisdiction (assuming the case did
not fall into one of the statutory exceptions).
The elimination of the complete diversity requirement and the provision for aggregation
of claims to meet the amount-in-controversy requirement will mean that many
cases that formerly could not be brought in federal court are now subject to federal jurisdiction.
Most class actions can at least be argued to involve an aggregate amount in controversy
of $5 million or more, and classes that don't involve some out-of-state members
(or some defendants from different states) are rare.
b. Removal
The removal provisions of the new act are coextensive with the original jurisdiction
provisions, so any class action that fits within the new diversity provisions can be
removed to federal court. See 28 U.S.C. ?1453 (newly added by the Act). The new removal
provisions for class actions generally incorporate the standard removal requirements
and procedures set forth in 28 U.S.C. ?? 1441 and 1446, with a couple of impor-
2 Cites to 28 U.S.C. are to provisions as amended or added by the Act. Only where a provision of the
Act is not codified in 28 U.S.C. will the section of the Act be cited.
First, in most cases where removal is based on the existence of diversity jurisdiction
under ? 1332, removal is only permitted if no defendant is a citizen of the forum
state. 28 U.S.C. ? 1441(b). The Act removes this requirement for class actions, providing
specifically that an action may be removed "without regard to whether any defendant is a
citizen of the State in which the action is brought." It also provides that any defendant
may remove without the consent of other defendants. 28 U.S.C. ? 1453(b), which is required
in non-class cases under the so-called "rule of unanimity." See 16 Moore's Federal
Practice ? 107.11[1][c] (3d ed.1999).
Second, 28 U.S.C. ? 1446(b) generally provides that a removal petition in a diversity
case may not be filed more than one year after an action is commenced, even if the
facts showing that the case is removable are first revealed after the end of the one-year
period. The Act removes this one-year limitations period for class actions. 28 U.S.C.
? 1453(b). Thus, under the Act, a removal petition may be filed within 30 days of the first
pleading or paper filed in any state-court class action from which a defendant can ascertain
that the action falls within the scope of federal jurisdiction under new 28 U.S.C.
? 1332(d), even if that occurs more than a year after the action was filed.
Third, existing law generally provides that when a federal district court determines
that removal is not proper and remands to the state court, the remand order cannot be reviewed
on appeal. 28 U.S.C. ? 1447(d). The Act, however, provides that a court of appeals
may (not must) accept an appeal of an order either granting or denying a motion to
remand, if an application for permission to appeal is filed within seven days of the order.
If a court of appeals accepts such an appeal, it must decide it within 60 days, unless all
parties agree to an extension of no more than 10 days. If the court of appeals does not decide
the case within the time limit, the appeal is denied. Such a binding requirement on a
court of appeals to complete its deliberations so quickly or be deemed to have affirmed is,
to say the least, a sharp departure from any known provision of federal law and may raise
constitutional concerns. Notably, however, although the provision may prevent a court of
appeals from delaying a decision once it has agreed to accept an appeal, it does not require
the appellate court to act promptly on the request for permission to appeal. Thus,
the provision, however novel, would be ineffective to prevent delays of remand appeals if
courts of appeals were to sit on applications for permission to appeal. However, such applications,
such as those under Rule 23(f), are generally ruled on promptly, and if a court
of appeals were to slow-roll applications for permission to appeal remand decisions under
the Act, it would undermine Congress's purpose in preventing delay in such appeals.
c. The Exceptions
The new jurisdictional provisions for class actions are very broad, but there are
exceptions, some of which are complicated. As a general matter, however, they are intended
to keep the following kinds of cases out of federal court: class actions that generally
involve both class members and defendants who are citizens of the forum state; class
actions against state government defendants; class actions with fewer than 100 class
members; and shareholder class actions or derivative suits based on state corporation law.
First, a federal court may not exercise diversity jurisdiction over a class action (or
accept removal jurisdiction) if two thirds of all class members in a class action are citizens
of the forum state, and either "the primary defendants" are residents of the same
state, or at least one defendant from whom "significant relief" is sought and whose conduct
is a "significant basis" of the claims asserted is a resident of the forum state. In the
latter instance, the bar to federal jurisdiction applies only if the "principal injuries" from
the conduct of "each defendant" were suffered in the forum state, 28 U.S.C. ? 1332(d)(4),
and no other "similar" class actions have been filed within the past three years. Together
these provisions allow some class actions to proceed in state court where the great majority
of the class and one or more significant defendants reside in the forum state.
Second, a federal court is permitted to decline jurisdiction where the primary
defendants and between one third and two thirds of the class members are citizens of the
forum state. 28 U.S.C. ? 1332(d)(3). In deciding whether to exercise its power to decline
jurisdiction, the court must consider the "interests of justice" and "the totality of the
circumstances," including whether the claims involve matters of national interest,
whether they involve the application of the law of states other than the forum state,
whether the class action was pleaded in an effort to avoid federal jurisdiction, whether
there is a "distinct nexus" between the case and the forum state, whether the class
members residing in the forum state substantially predominate over residents of other
states, and whether similar class actions have been brought within the past three years.
Presumably, a district court's balancing of these factors can be reviewed on appeal either
if it declines to exercise jurisdiction over a case originally filed in federal court (in which
case its decision is appealable as of right), or if it remands a case that was removed by a
defendant (in which case the permissive appeal provisions of 28 U.S.C. ? 1453 apply).
Third, a class action based on state law may not be filed in or removed to federal
court if the primary defendants are states, state officials, or "other governmental entities
against whom the district court may be foreclosed from ordering relief." 28 U.S.C.
? 1332(d)(5)(A). Federal courts are generally barred by the Eleventh Amendment from
hearing state-law claims against either state governments or state government officials
(see Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89 (1984)), so it would be
bizarre to provide for federal jurisdiction over class actions involving such defendants.
Fourth, a non-federal question class action is not subject to the new provisions for
diversity jurisdiction or removal if the total number of class members is less than 100. 28
U.S.C. ? 1332(d)(5)(B). However, if such an action met the preexisting requirements for
diversity jurisdiction (that is, there was complete diversity and the amount in controversy
without aggregation exceeded $75,000) it could still be filed in or removed to federal
court under statutory provisions predating the Act.
Finally, the Act excludes from its coverage certain actions involving securities and
corporate governance claims. The most important of these exclusions (sometimes referred
to as the "Delaware carve-out") applies to actions that solely involve claims relating to "the internal affairs or governance of a corporation or other form of business enterprise
and that aris[e] under or by virtue of the laws of the State in which such corporation
or business enterprise is incorporated or organized." 28 U.S.C. ? 1332(d)(9)(B); see also
28 U.S.C. ? 1453(d)(2). The effect of this exclusion is to prevent shareholder derivative
actions or other representative actions involving state corporation-law issues from being
heard in federal court, a result that most corporations (not to mention the Delaware Chancery
Court) would not favor.3
It is hard to generalize about the effect of the various exceptions. Some, like the
exclusions of state-law corporate governance claims and actions against states, define
classes of cases that are completely outside the central concerns of the Act. Others, like
the exclusion of classes of fewer than 100 members, seem likely to have minimal impact.
The provisions involving classes whose members are concentrated in the forum
state - the two thirds/one third provisions - are harder to evaluate. Some supporters of
the Act view them as preserving state-court authority over significant numbers of cases.
But their effect is limited by their applicability only where the major defendants are being
sued in their own home states. In most state-court class actions potentially subject to removal,
that will not be the case. The number of cases where the class definition will be
such as to call the two-thirds and one-third provisions into play also seems unclear. Outside
of cases where a class is defined to include only residents of a particular state, there
may be few cases where class members will be so concentrated in individual states that
the two-thirds requirement could be met. Moreover, in cases where the two-thirds/onethird
provisions may potentially apply, it is likely to be extremely difficult, at the outset
of a case, to determine whether they do. Satellite litigation over the number of class
members who are residents of the forum state may be the result. Another fertile source of
litigation relating to these provisions may be the meaning of the undefined term "primary
defendants."
d. What Is a "Class Action," Anyway?
The discussion so far of the jurisdictional and removal provisions has begged the
question of what is a "class action" - a critical issue because jurisdiction under new section
1332(d) and removal under new section 1453 depend on whether a case is a class action.
The basic definition, for purposes of both original and removal jurisdiction, is that
"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 judicial procedure authorizing an action
to be brought by 1 or more representative persons as a class action." 28 U.S.C. ?
3 The same paragraph of new ? 1332(d) that contains the carve-out for state corporate governance
cases also excludes from coverage certain claims relating to securities as defined by federal law. The purpose
of this exclusion seems to be to make clear that the Act is not supposed to displace the Private Securities
Litigation Reform Act, 15 U.S.C. ? 78u-4, which already created new procedures applicable to federal
securities class actions. The exclusion seems largely superfluous, however, since such actions are
generally subject to federal question jurisdiction, and the new diversity principles set forth in ? 1332(d)
thus would not affect them anyway.
1332(d)(1)(B). That seems simple enough. Indeed, if the statute stopped there, it would
appear that the jurisdictional and removal provisions would not apply to any case that
was not actually called a class action either under Rule 23 or under its state-law analogs.
But the Act doesn't stop there. It also provides that a "mass action shall be deemed
to be a class action." 28 U.S.C. ? 1332(d)(11)(A). What, one might ask, is a "mass action"?
Well, it is any civil action other than a class action "in which monetary relief
claims of 100 or more persons are proposed to be tried jointly on the ground that the
plaintiffs' claims involve common questions of law and fact." 28 U.S.C.
? 1332(d)(11)(B)(i). That may encompass a number of different kinds of cases, but it
seems especially aimed at "joinder" and "consolidation" cases under Mississippi and
West Virginia procedure, in which large numbers of distinct individual claims are proposed
to be tried together.4
The "mass action" provision, however, has some significant limitations. First, it
provides for jurisdiction only over those individual claimants whose claims meet the jurisdictional
amount limitation of 28 U.S.C. ? 1332(a) - that is, $75,000. See 28 U.S.C.
? 1332(d)(11)(B)(i). Except for those not meeting the requirement of "complete diversity"
under preexisting law, such claims would already be within the scope of federal jurisdiction.
Second, the law does not permit federal jurisdiction over "mass actions" involving
an "event or occurrence" that took place within the forum state and caused injury in that
state and contiguous states. 28 U.S.C. ? 1332(d)(11)(B)(ii)(I).5
Third, there is no federal jurisdiction under the Act over a "mass action" if it is the
result of a defendant's motion for joinder; thus, a defendant can't get individual claims
filed against it in state court into federal court by having the state court consolidate them
and then removing the case as a "mass action." 28 U.S.C. ? 1332(d)(11)(B)(ii)(II).
Fourth, and of considerable importance, a "mass action" does not include private
attorney general actions (or, in the words of the Act, claims "asserted on behalf of the
general public (and not on behalf of individual claimants or members of a purported
class) pursuant to a State statute specifically authorizing such action"). 28 U.S.C.
? 1332(d)(11)(B)(ii)(III). Thus, claims under California Business & Professions Code
? 17200 will not be affected unless they are specifically pleaded as class actions. (In the
last election, however, section 17200 itself was narrowed by California's voters).
Finally, and redundantly, the Act provides that "mass actions" do not include
claims that are consolidated for pretrial purposes only. 28 U.S.C.
4 Because of "tort reform" legislation in Mississippi and recent Mississippi decisions limiting the application
of that state's joinder doctrines, see MS Life Ins. Co. v. Baker, No.2003-IA-01149-SCT, 2005
WL 67522 (Miss.2005), and Harold's Auto Parts, Inc. Mangialardi, 889 So.2d 493 (Miss.2004), Mississippi
practice may no longer be as great a concern to defendants regardless of the Act..
5 The conditions under which there is federal jurisdiction over such "mass accident" claims are already
set forth in 28 U.S.C. ? 1369.
? 1332(d)(11)(B)(ii)(IV). Such claims would not meet the basic definition of a "mass action"
anyway because they are not proposed to be "tried jointly."
The "mass action" provisions may prove to have relatively little effect. They can
be evaded by simply not joining more than 99 individual claims. Moreover, to the extent
one purpose of the Act is to bring state-court class actions into federal court where they
may be subject to more stringent certification requirements, that purpose will not necessarily
be served by removal of a "mass action." In such a case, the plaintiffs will not need
to seek certification because it was never intended to be a class action, and the federal
court will have to deal with the individual claims of all of the "mass action" plaintiffs regardless
of whether the case could qualify for class certification under Rule 23.6
e. Effect on Jurisdiction if Class Not Certified
An earlier version of the Act passed by the House (but not the Senate) in 2003
would have provided that if a federal court denied class certification in a case where federal
jurisdiction depended on the new class action jurisdiction/removal provisions, the
court was required to dismiss the action. (The action could then be refiled in state court,
but it would again be subject to removal, denial of class certification, and dismissal by
the federal district court.)
As enacted, the Act contains no such provision. Presumably, since diversity jurisdiction
ordinarily depends on the facts at the time of filing and is not affected by subsequent
events, see Grupo Dataflux v. Atlas Global Group, LP, 541 U.S. 567 (2004), the
district court would retain jurisdiction over an action brought in or removed to federal
court under the Act even after it denied class certification. Any individual claims of the
named class representatives, therefore, would remain to be decided by the federal court
after a denial of class certification, even if there would have been no arguable basis for
federal jurisdiction over them if they had originally been filed as part of a non-class action.
In such a case, however, a plaintiff who preferred that her individual claim be heard
in state court could dismiss the case in federal court and file a non-class-action in state
court (assuming the filing would still be timely under state statutes of limitations and tolling
principles), which would not be removable. Of course, in many such cases, it will not
be economical to pursue individual claims in either federal or state court.
3. The Settlement Provisions
In addition to its jurisdictional and removal sections, the Class Action Fairness Act
adds a new Chapter 114 to Title 28 of the United States Code setting forth a number of
requirements applicable to the settlement of class actions in federal courts. Some of the
new requirements are wholly or largely duplicative of existing practice under Rule 23,
but some represent substantial changes. All of the provisions are applicable only to class
6 Indeed, the Act contains a provision that may discourage plaintiffs' counsel in a "mass action" from
seeking class certification if the action is removed: It provides that mass actions are exempt from being
transferred for multidistrict litigation proceedings under 28 U.S.C. ? 1407 unless the plaintiffs seek class
certification. 28 U.S.C. ? 1332(d)(11)(C).
actions, narrowly defined as cases filed in federal court under Rule 23 or filed as class
actions in state court and removed to federal court. 28 U.S.C. ? 1711(2).
a. Coupon Settlements
Supporters of the Act aimed a great deal of their rhetoric a coupon settlements,
usually described as settlements where class members get coupons of dubious value
while class counsel get cash. Given the degree to which coupon settlements were mentioned
in connection with the need for "reform," a person reading the Act for the first
time might be surprised at how little it says about them. Indeed, limits on attorneys' fees
in coupon settlements were added to the legislation reluctantly by business interests under
pressure from advocacy groups, particularly Public Citizen, because corporations generally
like inexpensive coupon settlements. In essence, the Act adds one section to the U.S.
Code, 28 U.S.C. ? 1712, which addresses two aspects of coupon settlements: their overall
fairness, and the award of attorneys' fees in coupon settlements.
As to the basic fairness of coupon settlements, the Act provides that a court may
approve a class action settlement involving coupons "only after a hearing to determine
whether, and making a written finding that, the settlement is fair, reasonable and adequate
for class members." 28 U.S.C. ? 1712(e). Of course, Rule 23 already provides exactly
that; indeed, this standard has been applied by federal courts to class action settlements
for at least 30 years. Courts that have found coupon settlements fair, reasonable and adequate
under existing law are unlikely to change their view in light of the new statutory
provision.
Section 1712(e) does go beyond existing law in one minor respect: It explicitly
provides that a court has discretion to require that in a coupon settlement, some portion of
the value of unclaimed coupons be distributed to charity (and it forbids an award of attorneys'
fees based on the value of the contribution of unclaimed coupons). It seems doubtful
that this provision would materially change the terms of any settlement that a court
would have approved under Rule 23 before the Act's passage. The provision may, however,
encourage parties to include cy pres provisions in more settlements, and some
judges may feel more comfortable approving such provisions in light of the Act's express
recognition of them.
The provisions regarding the award of attorneys' fees in coupon cases, by contrast,
work an important change in existing law. New section 1712(a) sets forth the basic rule
that in a coupon settlement, "the portion of any attorney's fee award to class counsel that
is attributable to the award of the coupons shall be based on the value to class members
of the coupons that are redeemed." In other words, attorneys will no longer be able to receive
fees based on the gross amount of coupons awarded, or even upon predictions of
how many coupons will be redeemed. Any percentage-based fee can be awarded only on
the basis of the value of coupons actually redeemed.7
In cases where a settlement involves both coupons and injunctive relief, the Act
provides that any portion of the fee attributable to coupons shall be calculated on the basis
of the coupons actually redeemed, while any fee attributable to the equitable relief
shall be determined on the basis of the hours expended - i.e., a "lodestar" basis, with a
multiplier if the court deems it appropriate. 28 U.S.C. ? 1712(c).
What if a settlement includes both coupons and cash? Here the statutory language
is, to put it charitably, opaque. The situation is governed by 28 U.S.C. ? 1712(b), which
provides that in such cases, "if a portion of the recovery of the coupons is not used to
determine the attorney's fee to be paid to class counsel, any attorney's fee award shall be
based upon the amount of time class counsel reasonably expended working on the action."
This language is so unclear that courts will undoubtedly face some difficulty in
dealing with it, but it appears to mean that part of the fee can be based on the value of the
coupons redeemed, but the fee for the cash portion of the settlement must be calculated
on a lodestar basis. If this is what the language means, it would be a substantial departure
from current practice, where the trend favors percentage-based fees in settlements involving
cash payments.
b. Other "Protections" for Class Members
New section 1713 of Title 28 provides that a court may approve a settlement in
which class members incur out-of-pocket losses to compensate class counsel "only if the
court makes a written finding that nonmonetary benefits to the class member substantially
outweigh the monetary loss." New section 1714 prohibits class settlements that provide
payment of greater amounts to some class members "solely on the basis that the class
members to whom the greater sums are to be paid are located in close geographic proximity
to the court."
These provisions are, to put it mildly, inconsequential. Settlements that put class
members out-of-pocket to pay class counsel are extremely rare (backers of the bill cited
only one example), and, under Rule 23, would likely be approved by a court as fair only
if the class received significant nonmonetary benefits even without this new statute. Thus,
the statute permits settlements to put plaintiffs out-of-pocket under the same circumstances
that they might already be put out-of-pocket under Rule 23; sadly, it may even
slightly encourage such settlements by expressly authorizing them. As for geographic
proximity, a settlement that accorded benefits solely on that basis could not conceivably
pass muster under Rule 23. There is probably little that is objectionable about the new
provisions, but they hardly seem worth writing into the United States Code.
7 The Act further provides that expert testimony on the value to class members of the coupons that are
redeemed is admissible in the discretion of the court, 28 U.S.C. ? 1712(d), but the basic standard under
the Act will still be actual redemption, not redemption rates as predicted by experts.
c. Notifications to Federal and State Officials
In a major departure from existing practice, the Act creates 28 U.S.C. ? 1715,
which requires that notice of any settlement of a class action in federal court be provided
to "appropriate" federal and state officials. For all settlements, the Attorney General of
the United States is an "appropriate federal official," 28 U.S.C. ? 1715(a)(1)(A), while
the term "appropriate state official" means either a state official who has regulatory authority
over matters at issue in the case, or, if there is no such official, the attorney general
of any state in which any class member lives. 28 U.S.C. ? 1715(a)(2). In cases involving
regulated financial institutions, the federal officials who must be notified also include
whoever has primary regulatory authority over the institutions at issue (e.g., the
FDIC).
The notice to be provided must be sent no more than 10 days after a proposed settlement
is filed in federal court, and it must include: the complaint; notice of any scheduled
hearing; copies of notices to class members informing them of opt-out rights and/or
of the settlement; copies of the settlement itself and any side agreements; copies of any
(proposed) final orders or judgments; and copies of related judicial opinions. In addition,
the notice must, to the extent possible, inform the appropriate state officials of the identities
and/or numbers of class members residing in their states. 28 U.S.C. ? 1715(b). Responsibility
for providing the required notice falls on "each defendant." Id.
Whether the huge volume of paperwork that these provisions entail will benefit
anyone is not entirely clear. Perhaps the authors of the Act took the view that the U.S. Attorney
General does not receive enough junk mail. Presumably, however, the thought is
that federal and state officials will do something to police the fairness of the resulting settlements.
Nowhere, however, does the Act require the Attorney General or other "appropriate
federal officials" to do anything with the notices they will receive, and it would
likely be unconstitutional for Congress to attempt to require "appropriate state officials"
to take any action.
Ironically, the one federal agency that does have an active program of reviewing
the fairness of consumer class action settlements - the Federal Trade Commission -
will not receive notices under the Act. Perhaps the Justice Department will respond to the
notices by instituting a program of reviewing class action settlement fairness (though in
light of the Department's focus on the war on terrorism, on top of its other traditional responsibilities,
a major new undertaking in the area of class action settlement review
seems unlikely). Or perhaps the Justice Department will pass some or all of the notices it
receives on to the FTC to bolster its existing Class Action Fairness Project. And it does
seem likely that some enterprising state attorneys general will make use of the material to
subject questionable settlements to increased scrutiny. The provisions may also create a
repository of information on settlements that will be subject to the federal Freedom of Information
Act and its state counterparts, permitting private watchdog groups greater access
to the terms of settlements.
d. Miscellaneous Provisions
Finally, section 6 of the Act requires the Judicial Conference, within one year of
the Act's passage, to report to Congress on class action settlements, and on best practices
to ensure their fairness and to award appropriate fees to class counsel. The section further
provides that it does not in any way diminish the courts' authority to supervise the award
of fees. Section 7 of the Act goes on to provide (anachronistically) that the changes to
Rule 23 promulgated by the Supreme Court in March 2003 shall go into effect upon passage
of the Act or December 1, 2003, whichever comes sooner. (This is a survivor from
the 2003 version of the Act, and it has no effect because the amended Rule 23 already
went into effect on December 1, 2003.) Finally, Section 8 of the Act preserves the Supreme
Court's authority to prescribe rules of civil procedure governing class actions.
4. Some Provisions That Were Not Enacted
The version of the Class Action Fairness Act passed by the House of Representatives
in 2003 included several provisions that prompted broad criticism and were omitted
from the law as ultimately enacted. Most prominent among these was a provision that
would have made all decisions on class certification - up or down - immediately appealable
as a matter of right. The Judicial Conference, in particular, objected to the impediment
that such a rule would create to the prompt administration of justice. The final
version of the Act contains no such provision, leaving appeals of certification decisions
subject to the discretionary review provision of Rule 23(f).
The 2003 House bill also would have provided for removal of state class actions at
the behest not only of defendants, but also of plaintiff class members, and would have
allowed class members to remove following a state-court class certification decision
(which in most cases would occur long after the defendants' time to remove had expired).
Such a provision would arguably create some possibilities for mischief, allowing defendants
who had forgone removal rights to find a dissident class member to act for them if
they later changed their minds. It would also have had the potentially beneficial effect of
allowing class members who feared a state court would approve an unfair settlement to
remove to federal court where they might have greater protection under the terms of Rule
23. (Indeed, under the removal standards of the Act, it may be that almost the only cases
that defendants will not immediately remove will be those where a settlement is filed at
the same time as the class complaint in a court viewed as likely to approve the settlement,
and in those cases allowing class members to remove could have been quite significant.)
Under the law as enacted, however, only defendants may remove.
Also omitted from the Act was a provision in the House bill that would prohibit
payment of "bounties" to class representatives, which drew objection from, among others,
the civil rights plaintiffs' bar. On the whole, however, the Act conforms to the pattern
laid out in the draft bills of 2003, and its key provisions on jurisdiction and removal are
quite similar to those proposed at that time.
Conclusion
The Class Action Fairness Act marks the first major success of the Bush Administration's
efforts to enact pro-defendant civil justice legislation. Although the Act's provisions
concerning the fairness of class action settlements seem likely to have but limited
effect on the substance of class action settlements, its jurisdictional and removal provisions
will substantially change class action practice in the United States. Large numbers
of cases that formerly could not be filed in or removed to federal court will now be removable,
at the election of defendants.
Whether broadened federal jurisdiction over state-law based class actions will
have its intended effect of limiting the types and numbers of cases that are able to proceed
as class actions, of course, remains to be seen. In the meantime, however, we can
expect to see defendants vigorously exercise the removal provisions while plaintiffs seek
to work around them, testing the scope of the two-thirds/one third provisions and experimenting
with new ways to bring "mass actions" that avoid the effect of the law.
For everyone involved, a clear understanding of the terms of this complicated statute
will be essential.
