An Assessment Of CAFA And The Future Of Class Action Reform

Friday, December 21, 2012 - 09:48

The Lawyers for Civil Justice November 29-30 Membership Meeting in New York featured a panel discussion of distinguished corporate and defense counsel who are currently members of  LCJ’s Task Force on Class Actions. Many of the members of this panel are also involved in developing a position paper on class actions for the organization. Their panel, entitled “An Assessment of CAFA and the Future of Class Action Reform,” evaluated the benefits of CAFA (Class Action Fairness Act) and identified areas of class action litigation that may be ripe for additional reform at the federal and state level. As leaders of American companies and the defense bar, they provided a bird’s eye view of the issues under exploration by the new LCJ Class Actions Committee, including issues related to appeals, cy-près and duplicative classes.

Highlights of the panel featured remarks by: Jeffrey W. Jackson, Senior Vice President and General Counsel, State Farm Mutual Automobile Insurance Company; Daniel L. Gardner, Corporate Litigation Supervisor, Corporate Legal Department, Farmers Group, Inc.; Kymberly Kochis, Nelson, Levine, de Luca & Hamilton, LLC; and E. Berton Spence, Rumberger, Kirk & Caldwell. The panel was moderated by Mary Massaron Ross, Plunkett Cooney, P.C.

Ross: I think we all know from experience and from simply reading the legal news that the class action mechanism and the world of litigation involving class actions are not balanced. So, LCJ has created a committee to start looking at that. Some of the discussion from the panel today comes out of the work of that committee, on which I have been privileged to serve.

The LCJ class action committee has been focusing on both rule-making and legislative reforms to the current class action procedures. And we have identified a number of important issues to the defense bar, including proposals for mandatory appeal provisions from decisions relating to class action certification, limiting cy-près settlements or fluid-class recoveries, insuring that putative class members have a meaningful right to select their own lawyers, and confirming the authority of the courts to preclude overlapping and duplicative class actions in re-enforcing the Wal-Mart standards.

LCJ has formed special teams to look at those issues. Those teams, which have begun to piece  together an integrated package, have produced a significant body of work so far that has been recently circulated and approved by the LCJ Class Action Committee, but that is still in a very early stage of development.

At the same time, the Federal Civil Rules Advisory Committee has created a sub-committee to look at the area of class actions, and that group is exploring possible amendments to the rules governing class actions. The sub-committee is still setting its agenda. They are looking to hear from the bar regarding how the rules operate as they currently exist – and what has been the experience of the bench and the bar in the wake of the enactment of CAFA almost seven years ago. This gives us the opportunity to identify the most important issues to the defense bar so that we can submit a major comment to the Rules Committee before its April 2013 meeting.

Jeff, you've been a leader in reform efforts in helping to gather that kind of evidence and data. Please give us a corporate perspective from State Farm's experience with class actions in the pre- and post-CAFA environment.

Jackson: When we talk about class actions from my company's perspective, there's a little bit of background that we want to make sure we keep in our mind. If your company is regulated, parallel proceedings are more likely. Another issue is whether you are a public or a private company. We're not a public company. Like some other major companies in the mid-to-late '90s, State Farm experienced a significant run-up in class actions. Many of these were filed in magnet courts in the states that we viewed as judicial hell holes, which had what we thought of as drive-by certifications. Ninety percent of our class actions were in the state courts.

At the class action high water mark, we had 26 multi-state or national class actions. Our pending class actions peaked in June of 2003 at 59 open class actions. We need to peel back the onion a bit when we are looking at our historical experience in the class action arena and focus on two developments.

One of them was Campbell v. State Farm, which was an institutional bad-faith case that came out of Utah that was tried in 1995 and resulted in a $145 million verdict. That was reduced at the post-trial level, reinstated in 2001 and reversed by the U.S. Supreme Court in 2003.

The other significant development was Avery v. State Farm, a 48-state class action that involved our company's practice of specifying non-original parts in a repair of motor vehicles. That ended-up in a judgment of $1.2 billion. It was eventually overturned on appeal in August of 2005.

Most of our cases included allegations of fraud under Consumer Fraud Statutes, such as Section 17200 in California and the Illinois Consumer Fraud Act in my home state. We had a lot of copy-cat cases, seemingly everywhere. "What happens in Vegas stays in Vegas" doesn't apply to our class action experience. Technology developments and increased networking among the plaintiffs' bar and the class action bar probably played a role in the proliferation of suits against us.

Reform efforts were agonizingly slow. We did get FRCP Rule 23(f), but until CAFA, class actions were a growing problem for our company. Our class actions peaked in June of 2003.

President Bush signed CAFA on February 18th of 2005. And in that same month, Avery got reversed. The legislative history of CAFA reflects that our two cases – Campbell and Avery – were cited in justifying the need for CAFA.

After CAFA, we started seeing a drop-off in newly filed cases. From June of 2003 until yesterday, our pending class actions have dropped by two-thirds if we back out the class actions that we're defending in Florida, which are primarily a result of a change in law – namely the PIP Statute enacted in Florida in 2007 and then reenacted in 2008 after it had been sunsetted. If we take those out of the mix just for the sake of conversation, our pendings are 80 percent down from our high water mark. So, CAFA has been a very important development for us. At one time, we had 26 national class actions. We are down to six of those today. Our inventory of cases has seemingly stabilized over the last 36 months. So, I don't know whether we can go much lower, but we are at a very good number in being under 50. We can always do better, I guess

But despite this positive story, there are some things that still trouble us. One of them is that we can't get an automatic appeal of certifications. We have four pending certified class actions, two of them coming out of federal court. In both instances, we haven't been able to get them heard on appeal.

One of them is particularly troubling, just in terms of exposure. So, I think there would be a great interest in changing the rule to provide for mandatory appeal. Wal-Mart v. Dukes clarified the notion that judges can actually look at the merits when looking at class certification. However, I don't know that this approach has been universally adopted by judges across the country.

Another item I want to note (at the risk of stating the obvious) is the assumption that it is preferred to have class actions heard in federal court. And I'm not saying it isn't; 30 percent of our cases are now in federal court. But we've got some really tough federal judges that are trigger-happy when it comes to certifying class actions.

The last I checked there are 66 district court vacancies and 15 circuit court vacancies, and we have just re-elected the President. So, I'm guessing that over the course of the next four years, we're going to see some additional appointments. And with any luck, we'll get some really good middle-of-the-road judges.

The last piece is that we still get cases in state courts. And if we look at the compensation of state judges, it's deplorable. I know that the states are hurting financially, but I have some serious concerns about our justice system if the state judiciary is not strong.

But, at the end of the day, we are seeing continuing improvement. With LCJ moving forward on class action issues, I think we can even get a stronger sense of justice and balance in this arena.

Ross:  Dan, can we also draw from your current experience, which brings us a corporate perspective, particularly focusing on the possibility of appealing an adverse decision? How do states address the issue of interlocutory appeals from class action orders?

Gardner: Thank you, Mary. Nine states appear to allow for an immediate interlocutory appeal from a class certification order issued by the trial court. These are Alabama, Arkansas, Georgia, Iowa, Louisiana, North Dakota, Ohio, Oklahoma and Texas.

Two states, perhaps speaking to the strength of the plaintiffs' bar in those states, seem to allow for an immediate interlocutory appeal from trial court orders denying class certification. But they don't allow for an immediate appeal from orders granting class certification under the articulated theory that the trial court can always correct any error in having granted class certification in the first place. Their reasoning is that it is better to go ahead and do a trial on the merits and then address the certification issue, if necessary, after the trial.

Eight states allow for discretionary interlocutory appeal of class certification orders, not unlike Federal Rules of Civil Procedure, Rule 23(f). Those are Colorado, Illinois, Kansas, Minnesota, Missouri, New Mexico, Oregon, Tennessee and Vermont. The remaining 31 states do not allow, from what I can tell, any interlocutory appeal from a class certification order.

Ross: Is the discretionary appeal provision that we have in Rule 23(f) actually helping us? 

Gardner: I am aware of a couple of studies that look at the post Rule 23(f) history. One study is by Barry Sullivan and Amy Kobelski Trueblood 246 F.R.D. 277, entitled “Rule 23(f): A Note on Law and Discretion in the Courts of Appeals.” They looked at the docket sheets for each of the 12 Circuits to identify instances where Rule 23(f) petitions got filed in the first place. After screening for the Rule 23(f) petitions that either were withdrawn or were dismissed for one reason or another, there were 476 petitions for review that were ruled on. Of those 476, 64 percent were denied. So, under Rule 23(f), it appears that two-thirds of the petitions for interlocutory review that get filed are denied.

Now, that's not true for every circuit. I think for the Ninth Circuit, where I'm located, the denial rate would be higher than 64 percent. However, the good news is that in the 36 percent of the cases where review was afforded, 70 percent of those resulted in a ruling that was favorable to the defense. So, the story seems to be that it's a tough row to hoe to get your Rule 23(f) petition granted. But, from the defense perspective, if you're able to overcome that hurdle, you have a pretty good shot at getting some affirmative relief on the merits with respect to the Rule 23(f) appeal of a class certification decision.

Ross: One of the other things that was really interesting about the Sullivan/Trueblood study was their observation that the outcomes differ so much from circuit to circuit. It seems to me that one of the issues you always have when you're drafting a rule or any kind of legislation is whether it should be a bright-line rule or a standard. If the rule is framed as a standard, it allows for a lot more leeway, both at the trial court level and at the appellate level.

I think it's fair to say that Rule 23(f) gives about as much leeway as possible, and maybe more, in a system that purports to be consistent with the rule of law – because it essentially provides no standard. If that standardless approach is resulting by and large in a consistent outcome, maybe it's not a problem. But if that standardless approach is allowing for judges with their own agendas to lean one way or the other, depending either on what panel you draw or on what federal circuit you are in, then it's a major problem for the system – and certainly can't be squared with the notion of a fair and balanced system. Instead, it becomes completely unpredictable.

Gardner: Exactly.

Ross: So, what are your comments on the impact when an interlocutory appeal is pursued but the appellate court declines to consider the case at the early juncture?

Gardner: As Jeff said, with respect to his few cases that have been certified and no Rule 23(f) petition granted, the results are, in many cases, very costly to a deep-pocket defendant. And in the argument earlier this month in the Amgen case, Justice Scalia made the following observation: "There's enormous pressure to settle once the class is certified. In most cases, that's the end of the lawsuit." No one took issue with him on that statement.

I think even the most adamant advocate for the plaintiffs' bar would agree that, in most situations, once you are a plaintiff and you are successful at the class certification stage, it's often just a question of how much in settlement dollars you can squeeze out of the target defendant. However, once the parties are on the eve of a class action trial and they and the trial judge have a fuller appreciation of the magnitude of the task that's ahead of them, everyone tends to take a more realistic view, I would suggest, of whether or not class certification should have been afforded. At that time, trial judges can sometimes be persuaded to change their minds about the wisdom of class certification in the first place.

But if you are a target defendant facing a merits judgment of tens or hundreds of millions of dollars, and in some cases billions of dollars, do you really want to roll the dice and hope this trial judge is either going to be reversed on appeal, which happens from time to time, or change his or her mind about certification before commencement of trial? There's enormous pressure to settle. And the risk of taking the case to trial, even if you’re a corporate counsel and you're convinced that that class certification decision was wrong, is often immense.

If you lose the case on the merits, you end up with a huge judgment against you. I admire Jeff for these two cases where tremendous monetary judgments were taken against his company, and he was able to get them turned around. But during those intervening years when you've got huge judgments outstanding against you, you probably have some restless nights.

Jackson: I’d really like to follow up one thing that Dan just said when he was talking about the historical experience in courts accepting or denying these interlocutory appeals. We had a case where it was not certified two different times. Then Ninth Circuit took it both times and reversed both times, and now we've gotten a third order failing or refusing to grant class certs. And then one of the circuits that didn't take one of our larger potential exposure cases was the Ninth Circuit. So, there's got to be some improvement here.

Gardner: The Ninth Circuit is where I spent a lot of my time dealing with cases. So, not to belabor perhaps the obvious, but if you've got a huge judgment against you on the merits, you have to bond that judgment while you are appealing because interest accrues on the judgment, which is sometimes many thousands of dollars a day. It’s just very risky.

Ross: Kymberly, please discuss the controversy surrounding Rule 23(b)(3) and the use of a default opt-out mechanism as opposed to an opt-in mechanism.

Kochis: As most of you know, Rule 23(b)(3) was part of the 1966 Amendments to the Federal Rules. As we sit here in 2012 today, the 1966 Amendments just aren’t applicable to the reality of where we are today. There’s just no way that the drafters in 1966 could have anticipated the cottage industry that class actions would become. And particularly the abuse of the (b)(3) opt-out class action mechanism.

So, I think this is a very important issue for LCJ to be looking at and for all practitioners to be thinking about. And it would be a great issue for the defense bar to unify around. I think that one of the solutions to the (b)(3) opt-out class is to amend the rules to have (b)(3) be an opt-in class.

There is significant benefit to having opt-in versus an opt-out class. From my own experience with litigating as a defense counsel in these types of actions, I know that when I receive these notices in the mail about class actions, I might read through it to see what sort of interesting procedural mechanisms are contained within it, but do not bother to fill out the forms or consider the fact that I am now represented by counsel.

“Opt out” has  become this passive way to create an artificial attorney-client relationship between an attorney and a stranger who receives some sort of notice in the mail, someone who may or may not read it, may or may not receive it, may or may not want to be part of this litigation.

In these circumstances, the easiest thing to do is to be passive and not react. And that's really where we are today with these massive (b)(3) classes that create a false or fake attorney-client relationship between an unknown class member and an attorney. And it's really time to start thinking about changing this process, making the members of the class make a conscious decision to pursue the litigation, to opt into a class and to select their attorney.

These are all important due process considerations that we should all be worried about. We've also got these inherent conflicts between the lawyer who is representing a class and his class. The lawyer wants to maximize his fees, while the participants want to get as big an award as they can at the end of the day. Is this really an effective model when you have the attorney and class members that are at odds with each other?

Obviously, a better process would be to have individuals opt in to a class and be able to elect their representative and participate more fully in the process. If you have an opt-in model, there's more of a chance that the members will actually participate in the litigation rather than just be inactive, passive bystanders allowing plaintiffs' counsel to dictate a settlement that may not be good for a class.

You've got settlements that may not be beneficial to the members of the class and coupon-type settlements that have been limited by CAFA, though they still exist. You've got all different sorts of interesting tricks that plaintiffs' counsel can play with in the (b)(3) context, with the result that the class members really aren't getting the benefit of the class action vehicle.

There are too many invitations for abuse in the current (b)(3) model, whereas if we amend the rules to have a more of an opt-in type class, there are countless benefits. You will inevitably decrease the number of class actions filed, and there is no incentive for plaintiffs to file frivolous class actions.

If it's a frivolous class action and there’s a likelihood that members are not going to opt in, and if members don't opt in, then attorney's fees will be low at the end of the day. And it's unlikely that litigation is going to survive. Plaintiffs' counsel will probably and invariably let it go.

Overall, you're unlikely to have the frivolous lawsuits that are currently pending that insurance companies frequently settle just to avoid the extraordinary costs associated with defending a class action today.

In an opt-in arrangement, you’ve got class members who will be more anxious to participate in the process and to create a more transparent attorney-client relationship. You also have the possibility of plaintiffs' counsel becoming more competitive with one another. Members of the class may actually start looking for plaintiffs' counsel, who may take lower attorney's fees that are better for the class in general.

The changes in technology make this the time for opt-in litigation. It's a lot easier to communicate with a large number of people in a more cost-effective way. And I think that changing or trying to initiate change from the 23(b)(3) opt-out process to the opt-in process is really going to be better, certainly for the defense bar. But in general, it's going to make the process more streamlined, more pure for everyone involved in class action litigation.

I believe the largest unintended consequence is that you end up with a situation in which it is better to fully litigate a class action than settle. The plaintiffs do not have an incentive to settle because they may not have the number of members that they would in an opt-out class. And corporations may not be ready to settle as quickly because they may not have the peace of mind that the class action settlements and the opt-out world provide them.

Ross: The LCJ Class Action Committee has also discussed the problems created through cy-près settlements and fluid-class recoveries. Those devices are used to essentially unhinge the damages from any particular plaintiff.

Traditionally, to bring suit for recovery, the law requires a litigant to demonstrate actual injury and to connect that injury to the defendant. And yet in the class action context, a cy-près settlement or fluid-class recovery allows recovery without that showing. It has been criticized because it allows for the recovery to go to some charity – perhaps the judge’s pet charity or that of one of the lawyers. And it dramatically expands and alters the nature of the litigation.

There are a lot of problems connected with this approach, and that’s something we need to consider as we think about solving the problems in the area of class actions.

Bert, can you offer an overview of the current state of the law in terms of dealing with multiple and duplicative class actions?

Spence: The issue of overlapping and duplicative class actions is daunting. This is because the Holy Grail here is a federal court injunction against the end-run around CAFA, namely the duplicative state court action. I guess the prototype is you've got this class action where it began, at least nominally in an honest fashion, and so it was removable under CAFA. But now that certification isn't forthcoming, they blame it on the judge they don't like, and then you begin to see the scenario where you've got these very carefully tailored state court actions that are right within the letter of non-removability under CAFA.

So, you want the federal court to be able to say, "Stop. You can't do that. You know I've already decided this class shouldn't be certified, and my judgment should prevail." But getting there from here is enormously difficult because of numerous constitutional impediments, such as Article III problems; issues surrounding case or controversy; and due process problems. Are you asking the federal court to get involved in something that has different parties in it who aren't represented in the federal action? You've got general concepts of federalism and comity, which in general are good things from our point-of-view.

Most of the time, we like federalism, i.e., keeping the federal government out of issues that should be handled at a state level. If you apply the “throwing the baby out with the bath water” analogy, that's the baby. The bath water is the duplicative class action, but we don't necessarily want to sacrifice those other principles.

And then, of course, you've got the biggie, which is the Anti-Injunction Act. While it nominally preserves the ability of federal courts to enjoin state court proceedings that threaten the federal court's jurisdiction or threaten the effectuation of its judgments, in practice it has been defined by the case law to pretty much bar that ability in the class action context. It's an incredibly difficult to get a federal court's supervision of something going on in a state court.

Ross: Well, now that you've outlined all of the overwhelming problems, are there any solutions that we can find to address these problems?

Spence: One thing that we initially looked at is the Anti-Injunction Act, not to explicitly authorize federal court injunctions, but merely to remove the judicially created interpretation of the Anti-Injunction Act. Next we looked at whether there's any way to tweak the rules. And, of course, that's going to be difficult because the rules really can't do anything that's contrary to the constitutional principles we talked about, and decisions to change the rules can't conflict with the Anti-Injunction Act. But we're going to explore whether there are some places around the edges to help. I go back to Mary's situation involving multiple state court end-runs, each of which is numerically limited to stay away from CAFA, possibly consolidating numerous actions, and attempt to say that the consolidation order is what gives rise to removal. Maybe that's an area that can be looked at.

I’ll just mention one more thing. There is a general doctrine against duplicative litigation in the federal courts. It's a two-edge sword in this context. I got some news yesterday that I'd gotten a class action dismissed on a 12(b) motion. It was an odd procedural thing that involved an entirely duplicative action filed on behalf of the same people to try to sort of play games with the statute of limitations.

There is a Colorado River Doctrine against duplicative litigation, both cases pending in separate federal courts and in federal and state courts. It's a two-edge sword because it is often a vehicle by which the federal court abstains in favor of the state court. While there are places that we can look to resolve these issues, I freely acknowledge that it will be a hard hill to climb.

Ross: The sub-committee of the Federal Civil Rules Advisory Committee that is looking at the whole topic of class actions has identified quite a list of issues. Some they have put on the front burner; some they have put on the back burner. It’s a very fluid situation right now in terms of where the Rules Committee is looking. We expect to continue through LCJ’s Class Action Committee to evaluate the experience with the class action mechanisms as they now exist and to develop proposals to improve the rules. We will then be able to submit those through comments to the Federal Civil Rules Advisory Committee for consideration.