Class Action Fairness Act Becomes A Law
March 4, 2005
On Friday, February 18, 2005, President Bush signed into law the Class Action Fairness Act of 2005 (“Act”). This legislation follows overwhelming and bipartisan Congressional adoption of class action reform after years of attempts. Intended to restrict forum shopping by plaintiffs who seek to have their lawsuits heard in state courts perceived to be sympathetic to their complaints, the Act also adopts new standards for the review of class action settlements. The Act will make it easier for defendants to remove large, multi-state class action cases from state to federal courts, but also may make some class actions more difficult to settle.
Removing Cases from State to Federal Courts
Before the Act, most courts applied traditional rules regarding diversity jurisdiction to class actions. As such, cases could not be removed from state to federal courts on the basis of diversity jurisdiction if the amount sought by each individual plaintiff was less than $75,000, and if any one plaintiff and any one defendant were from the same state. Of course, while any one plaintiff might have a small individual claim, the total amount at issue in any particular class action is often substantial, and state courts often presided over high-stakes class action litigation with a potential nationwide impact.
The Act recognizes the unfairness associated with this construction of diversity jurisdiction, and is premised on the notion that the Framers of the Constitution did not intend cases of national importance to be kept out of federal court. The Act addresses the concerns that some plaintiffs’ attorneys abuse class action procedures and gained inordinate compensation at the expense of injured plaintiffs, all in the backyards of small counties around the country known to foster plaintiff-friendly courts.
The main feature of the Act is the creation of federal jurisdiction over class action suits when two criteria are met:
(1) the total amount in dispute exceeds $5,000,000; and
(2) any one plaintiff lives in a different state than any one defendant.
The Act also alleviates some of the procedural hurdles that sometime frustrate a defendant’s ability to remove cases to federal court, such as the presence of a one-year time limitation to seek removal as well as the requirement of consent among all the defendants prior to removal.
Despite this new grant of jurisdiction, there remain certain circumstances where federal district courts are required to decline jurisdiction, or alternatively, may elect to decline jurisdiction in the interests of justice. Class action suits either in excess of $5 million or with parties in different states that must remain in state court include those in which:
(i) (a) at least one significant defendant and more than two thirds of the plaintiffs are citizens of the state where the suit was originally filed, (b) the principal injuries resulting from the alleged conduct were incurred in the state, and (c) during the three-year period preceding filing, no other class action has been filed asserting the same or similar factual allegations against any of the defendants; OR
(ii) two thirds or more of the plaintiffs, and the primary defendants, are citizens of the state where the suit was originally filed.
The Act provides that district courts may decline to exercise jurisdiction over a class action in which more than one third but less than two thirds of the plaintiffs, and the primary defendants, are citizens of the state in which the suit was originally filed, based on consideration of whether:
(i) the claims involve matters of national or interstate interest;
(ii) the claims will be governed by laws of the state where the action was originally filed;
(iii) the class action has been pled in a manner that seeks to avoid federal jurisdiction;
(iv) the district court has a distinct nexus with the class members, the alleged harm, or the defendants;
(v) the plaintiffs who are citizens of the state in which the suit was originally filed substantially outnumber the plaintiffs from other states, and the other plaintiffs are geographically dispersed; and
(vi) during the three-year period preceding filing suit, one or more other class actions asserting the same or similar claims on behalf of the same persons have been filed.
Settlement Scrutiny
Part of the Act addresses class action settlements, and, in particular, settlements involving coupons. These provisions articulate additional requirements that now must be followed in the review of class action settlements. For example:
* a judge may approve a settlement in which plaintiffs receive a non-cash benefit only after a hearing and a written finding that such relief is fair, reasonable, and adequate to all class members;
* a judge may not approve a class action settlement where the class member will pay attorney’s fees that would result in a net loss to the class member, absent a written finding; and
* defendants must notify the appropriate state and federal official (i.e., the Attorney General of any state or federal regulators with authority over a defendant in the state in which the settlement is reached) and, the Act delays the effective date of the settlement until 90 days after notification.
Mass Actions
The Act permits many cases that are not filed pursuant to Rule 23 of the Federal Rules of Civil Procedure (the class action rule) to be treated as class actions if monetary relief is sought on behalf of 100 or more plaintiffs. However, in an attempt to ensure that actions lacking in national scope and importance remain in state courts, certain safeguards remain:
* If two thirds or more of the proposed plaintiffs’ class reside in the same state as the primary defendants, the action remains in state court.
* If the primary defendants are states, state officials, or other entities of the state over which the federal courts have no authority, the action remains in state court.
* If the proposed plaintiffs’ class is in the aggregate less than 100, the action remains in state court.
Immediate and Future Impact
The Act is not retroactive, and a flurry of state court class action complaints have been filed in the last few days. While it is expected that Congress may address additional litigation and tort reform subjects in the present term, class action reform activities continue under way in many States. Sonnenschein, for example, is leading an effort to reform the Illinois class action rules and procedures. This effort is presently pending review and decision by the Illinois Supreme Court.
* * *
We hope that this brief overview of the Class Action Fairness Act of 2005 provides you a resource for understanding the purposes and implications of this new law. It will affect the way class action litigation is handled in our judicial system, and therefore it can have a profound effect on your business. As always, SONNENSCHEIN NATH & ROSENTHAL LLP is available to answer all of your questions and respond to any of your concerns. We look forward to the opportunity to assist you with your business’s legal needs.
If you have any questions about the Class Action Fairness Act of 2005 please contact the following individuals:
Chicago: Robert C. Johnson 312-876-8155 or rjohnson@sonnenschein.com
Jeffrey P. Lennard 312-876-8152 or jlennard@sonneschein.com
Kansas City: Jerome T. Wolf 816-460-2420 or jwolf@sonnenschein.com
Los Angeles: Robert F. Scoular 213-892-5003 or rscoular@sonnenschein.com
New York: Reid L. Ashinoff 212-768-6730 or rashinoff@sonnenschein.com
Michael H. Barr 212-768-6788 or mbarr@sonnenschein.com
San Francisco: Paul E.B. Glad 415-882-5001 or pglad @sonnenschein.com
St. Louis: Roger K. Heidenreich 314-259-5805 or rheidenreic@sonnenschein.com
Washington, DC: Caryl A. Potter 202-408-6340 or cpotter@sonnenschein.com
<< Back
