Executive Overview
Proposed legislation aimed at "cracking down on abuses of the class action lawsuit system" and "ensuring consumers’ interests are protected in class action lawsuits" fell one vote shy to overcome a Senate filibuster, apparently killing the legislation for this legislative session.
Dubbed "The Class Action Fairness Act of 2003," the proposed bill would have shifted many more class action lawsuits from state courts to federal courts, allow for immediate appeal of class certification orders, abolish "bounties" for class representatives, prohibit settlements that reward certain class members based solely on geography, and require closer scrutiny of coupon and other non-monetary class settlements.
On October 22, the Senate voted 59-39 to allow a vote on the bill, one vote shy of avoiding a filibuster by Senate Democrats. In June, the House had passed the legislation 253 to 170. This update is a follow-up to a previous client memorandum we sent in June (http://www.gcd.com/db30/cgi-bin/pubs/PropFedLegis.pdf.)
Legislation Sought to Curb Perceived Abuses
According to proponents of the legislation, over the past decade there have been abuses of class action lawsuits that have harmed class members and legitimate businesses, adversely affected interstate commerce, and undermined public respect for the judicial system in the United States. H.R. 1115 listed the abuses as including "plaintiffs’ lawyers receiving large fees, while class members are left with coupons or other awards of little or no value," "unjustified rewards being made to certain plaintiffs at the expense of other class members," the "publication of confusing notices that prevent class members from being able to fully understand and effectively exercise their rights," and using "artful pleading" to force businesses and other organizations to defend interstate class action lawsuits in county and State courts, where less scrutiny may be given to the merits of the case and defendants are effectively forced into settlements "in order to avoid the possibility of huge judgments that could destabilize their companies."1
Key Provisions of Proposed Legislation
Expansion of the Jurisdiction of Federal Courts. While federal courts already have jurisdiction over many types of class actions, particularly class actions involving alleged violations of the federal Constitution and federal statutes, the legislation would have provided federal courts with jurisdiction over all plaintiffs’ class action lawsuits not involving federal laws if (1) any defendant and member of the plaintiffs’ class are citizens of different states, (2) the aggregate claims of the members of the proposed class exceed $5 million, exclusive of interest and costs, and (3) the plaintiffs’ class exceeds 100 members.2 Exceptions include class actions against States or State officials, and class actions where two-thirds or more of the proposed plaintiffs’ class and the primary defendants are citizens of the State in which the action was filed.3
This was the most controversial provision in the proposed legislation.
Right of Immediate Appeal from Class Certification Orders. In order for a case to proceed as a class action in federal district court, the court must "certify" that the case meets the standards for maintaining a class action. The certification standards are set forth in Rule 23 of the Federal Rules of Civil Procedure. All federal class actions must meet the requirements of Rule 23(a) of the Federal Rules of Civil Procedure, which requires a finding that (1) the class is so numerous that joining all of the members would be 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 the claims or defenses of the class, and (4) the representatives will fairly and adequately protect the interests of the class.4 In addition, the federal district court must find that the case satisfies one of the criteria of Rule 23(b).5
Whether the case meets the standards for class certification is a pivotal and sometimes hotly contested issue that can have important ramifications for both plaintiffs and defendants alike. On the one hand, the plaintiffs’ individual claims may sometimes be too small to pursue economically on an individual basis. On the other hand, even class action suits that are weak on the merits can have a significant impact on the business ofa corporate defendant, which must incur substantial costs in defense, and face substantial disruption to its business to defend the case. Because plaintiffs’ class action cases often have the potential for large monetary recoveries against the defendants, cases are sometimes settled prior to trial for amounts that are larger than the merits of the case would justify.
The legislation would have provided for the right of immediate appeal from an order of the district court granting or denying class certification.6 This would be a change from the present rule, which provides that the court of appeals "may" in "its discretion" permit an appeal from an order of a district court granting or denying class certification.7
Scrutiny of Coupon and Other Types of Non-Cash Settlements. The proposed legislation provided for scrutiny of proposed settlements that provide non-cash benefits to class members or require class members to expend funds in order to obtain part or all of the proposed benefits of the settlement. These types of settlements often involve coupons for discounts on products or services offered by the defendant corporation. The legislation would have required the court to hold a hearing on the fairness of the settlement and make a written finding that the settlement is "fair, reasonable, and adequate for class members."8 The requirement that the district court find that the settlement is "fair, reasonable, and adequate" for class members is not significantly different than the rule that already applies to all settlements in class actions pending in federal court. Rule 23(e) of the Federal Rules of Civil Procedure provides that a class action "shall not be dismissed or compromised without the approval of the court." Furthermore, in evaluating class settlements, federal courts will determine whether they are fair, reasonable and adequate for class members.9
Footnotes
1 H.R. 1115, 108 th Cong., § 2(a) (2003). The Senate Bill was S.1751.
2 Id. § 4. H.R. 1115 would have amended 28 U.S.C. § 1332, which pertains to federal court jurisdiction in diversity of citizenship cases.
3 Id.
4 Fed. R. Civ. P. 23(a).
5 In cases where the class members seek primarily damages, the case must satisfy the requirements of Rule 23(b)(3), which requires that the court find 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." Fed. R. Civ. P. 23(b)(3). See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231 (1997).
6 H.R. 1115 would have amended 28 U.S.C. § 1292(a), which provides for the right of immediate appeal from certain interlocutory orders, to include the right of appeal from any order granting or denying certification of a class. The proposed change stated, in relevant part, "the courts of appeals shall have jurisdiction of appeals from . . . (4) Orders of the district courts of the United States granting or denying class certification under rule 23 of the Federal Rules of Civil Procedure, if notice of appeal is filed within 10 days after entry of the order."
7 Fed. R. Civ. P. 23(f).
8 H.R. 1115, 108 th Cong. § 3.
9 See Manual for Complex Litigation (Third) § 30.42 at 238 (1995); Thomas v. Albright, 139 F.3d 227, 231 (D.C. Cir. 1998); Isby v. Bayh, 75 F.3d 1191, 1196 (7th Cir. 1996) (In approving a proposed class settlement, a district court is to inquire "whether the proposed settlement is lawful, fair, reasonable, and adequate").
Copyright 2003 Gardner Carton & Douglas
This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.