Possible Unintended Consequences Of The Class Action Fairness Act

Friday, April 1, 2005 - 01:00

Since the Class Action Fairness Act of 2005 (Pub. L. No. 109-2) was enacted on February 18, 2005, many commentators have summarized the Act's operative provisions.This article does not repeat those efforts.This article instead focuses on some of the less obvious, and possibly unintended, effects the Act may have on parties litigating class actions under it.

The Act May Create New Federal Class Action "Magnet Courts"

The Class Action Fairness Act significantly expands federal jurisdiction to include class actions pleading state law claims in which (1) any class member is a citizen of a state different from any defendant and (2) the total amount in controversy exceeds $5 million.The Act is expected to cause many more class actions to be heard in federal courts.There is no guarantee, however, that this influx of class action cases will be distributed equally among the federal courts.In fact, experience with the state court "magnet courts," which in large part prompted Congress to pass the Act, suggests that this will not happen.Just as plaintiffs have done in state courts, they will quickly identify the federal courts they perceive as being most friendly to certification and bring their class actions in those courts.Plaintiffs thinking one step ahead may fix their gaze not so much on friendly trial courts as on friendly appellate courts.(This could mean fewer class actions filed in district courts within the Fourth, Fifth, and Seventh Circuits, which many perceive as hostile to class certification, and more in district courts within the Second and Ninth Circuits.)

The Act May Prompt Unexpected Legal Developments

The concentration of class action activity in certain federal courts that plaintiffs' counsel perceive to be friendly could potentially lead to significant judicial rulings in federal class action law.Plaintiffs may ultimately convince these friendly trial and appellate courts to create substantive law that favors class action plaintiffs.As circuit splits deepen, the Supreme Court may be forced to step in to resolve these issues of substantive law.When the Class Action Fairness Act was passed, no one anticipated that it might result in more Supreme Court pronouncements on substantive class action law.

The Act May Result In More Federal Multidistrict Litigation Proceedings

The Act may also substantially increase the number of cases transferred and coordinated by the federal Judicial Panel on Multidistrict Litigation.Certain class action plaintiffs' counsel previously avoided federal court because, among other reasons, they perceived federal courts as being less likely than some state courts to certify nationwide classes.Now that nationwide classes cannot be certified in state court (because, if pleaded, they are unlikely to remain in state court), plaintiffs may be less reluctant to sue in federal court.To increase their leverage, plaintiffs may adopt an entirely new strategy.They may file many single-state class actions in federal courts and then attempt to transfer and coordinate these cases through the multidistrict litigation process. See 28 U.S.C. § 1407.The resulting proceeding, which would assemble plaintiffs nationally and the defendant before a single judge, could give plaintiffs negotiating leverage akin to that offered by a nationwide class action.

The Act Highlights State Analogues To The Federal Multidistrict Litigation Process

In addition to increasing activity under the federal multidistrict litigation statute, the Class Action Fairness Act puts a new spotlight on comparable state statutes in its provisions governing a category of cases called "mass actions."A mass action is a case (other than a class action) in which "monetary relief claims of 100 or more people are proposed to be tried jointly on the ground that the plaintiffs' claims involve common questions of law or fact . . . .""[A] mass action shall be deemed to be a class action removable under" the provisions of the Class Action Fairness Act, except that federal jurisdiction exists only over those mass action plaintiffs whose claims individually exceed $75,000 in controversy.

One exception provides that there is no federal jurisdiction over mass actions involving claims consolidated or coordinated solely for pretrial proceedings.The applicability of this exception may depend (to many litigants' surprise) on the state law under which the individual claims constituting the mass action are consolidated or coordinated.Illinois, for example, permits cases to be consolidated for discovery and pretrial proceedings only; California and West Virginia, in contrast, coordinate cases for both pretrial and trial purposes. See Mark Herrmann, Geoffrey Ritts, and Katherine Larson, Statewide Coordinated Proceedings: State Court Analogues To The Federal MDL Process, 113, 249, 676 (2d ed. 2004).Claims coordinated to create an Illinois mass action would therefore not be subject to federal mass action jurisdiction, whereas claims coordinated for trial in California or West Virginia could be.

The Act May Reduce AppealsAccepted From ClassCertification Orders

The Class Action Fairness Act's focus on the scope of federal class action jurisdiction - including expanding the ability of federal appellate courts to review trial courts' jurisdictional determinations in class actions - may unexpectedly cause federal appellate courts to reduce their review of class certification orders.

The Act greatly expands parties' ability to seek and obtain appellate review of trial court rulings on motions to remand.Before the Act, orders granting remand motions were rarely reviewable on appeal. 28 U.S.C. § 1447(d).Orders denying remand could be appealed, but not until a final judgment had been entered.The Act provides that orders both granting and denying remand motions are promptly appealable.This increased federal appellate activity in class actions at the remand stage, however, may reduce the federal appellate courts' appetite for appeals from class certification orders under Federal Rule of Civil Procedure 23(f). The likely overall increase in class actions heard by federal courts under the Act certainly reduces the odds that an appellate court will accept review under Rule 23(f) in any particular case.

The Act Raises The Stakes For Language Defining A Class

The Class Action Fairness Act also places an unexpected importance on certain words class action plaintiffs use in their complaints.Diversity jurisdiction under the Act, as in all other cases, is based not on the parties' residency, but on their citizenship.For individuals, this is the state in which they are domiciled - "the place where a person has a fixed and permanent home to which he intends to return whenever he is absent therefrom." Schieszler v. Ferrum College , 236 F. Supp. 2d 602, 612-13 (W.D. Va. 2002).College students, for example, may reside during the school year in the state where their college is located, but "they are generally presumed to lack intention to remain in [that] state indefinitely." Id. at 613.By requiring only "minimal diversity" to create federal jurisdiction over class actions, the Act renders cases with broad class definitions removable.Defendants should therefore now read class definitions in complaints carefully to determine whether diversity of citizenship exists.Proposed classes including (whether intentionally or because of careless drafting) all residents of the defendant's home state will surely include citizens of other states, creating minimal diversity and an opportunity for removal.

The Act May Promote State Court Class Action Settlements

The Class Action Fairness Act imposes new rules on class action settlements in federal court.Congress plainly intended that the Act would bring more class actions into federal courts and subject more class action settlements to the increased scrutiny these new rules provide.In practice, the Act may have the opposite effect:It may encourage defendants to leave certain class actions in state court or to work with class action plaintiffs to engineer a state court, rather than a federal court, settlement.

Settlements of class actions brought on behalf of consumers sometimes include payments made with coupons rather than cash.In an attempt to restrict abuses in coupon settlements identified by Congress, the Act requires that any fee to class counsel in a class action settlement that is based on an award to class members of coupons rather than cash must be based on the value of the coupons actually redeemed, as opposed to the value of all coupons issued.The Act accordingly seems to preclude paying class counsel any fees based on an award of coupons to class members until the coupon redemption period ends and actual redemptions can be counted.Because of these new restrictions on fees in coupon settlements of class actions, plaintiffs' class action lawyers may refuse to agree to class action coupon settlements.

The Act also requires defendants settling a class action in federal court to notify state and federal officials before the settlement can be approved. This notification requirement raises the specter of federal or state regulators objecting to class action settlements that were agreeable to the defendants and class members.

These provisions apply to all class action settlements in federal court, whether or not the class action is subject to the Class Action Fairness Act's expanded diversity jurisdiction.

These new class action settlement rules may encourage class action defendants to keep some class actions in state courts.Defendants who may be interested in a prompt settlement (or a coupon settlement) should resist the reflexive urge to remove immediately, particularly for cases filed in states having an established body of law that does not generally favor class certification.Defendants who already are in federal court when they decide they want to settle might agree with class counsel to use a newly-filed state court nationwide settlement class action (which the defendants do not remove) as the vehicle for settlement.The risks and benefits of that approach will become more apparent over time.

The Act Is Prospective But May Nonetheless Apply To Some Cases Filed Before Its Enactment

The Act applies to "any civil action commenced on or after the date of enactment," which was February 18, 2005.The Act may nonetheless apply to certain cases filed before February 18.In some states, an action is not commenced until the summons is served on the defendant.Thus, class actions filed in those states' courts before February 18 would be subject to the Act if service of the summons were not effected until February 18 or later.

Conclusion

The Class Action Fairness Act expands federal jurisdiction over class actions that assert state law claims.Deciding whether to invoke the Act's expanded jurisdiction in any particular case requires foresight and a thorough understanding of theeffects - both intended and unintended - of the Act.Class action plaintiffs will surely consider those effects in deciding how to structure, and where to file, their complaints.Conversely, class action defendants should not avail themselves of the Act reflexively, but rather only after considering its unintended consequences.

Mark Herrmann is a Partner, and Pearson Bownas an Associate, resident in the Cleveland office of Jones Day.The views expressed in this article are those of the authors and not necessarily those of their clients or firm.

Please email the authors at mherrmann@jonesday.com or pnbownas@jonesday.com with questions about this article.