Statement on The Class Action Crisis and S. 1712 -- "The Class Action Fairness Act"
Statement Submitted for the Record on The Class Action Crisis and S. 1712 – "The Class Action Fairness Act" to the United States Senate Committee on the Judiciary by the U.S. Chamber of Commerce and U.S. Chamber Institute for Legal Reform
July 31, 2002
Introduction
The U.S. Chamber of Commerce is the world's largest business federation, representing more than three million businesses and professional organizations of every size, sector, and region of the country. The central mission of the Chamber is to represent the interests of its members before Congress, the Administration, the independent agencies of the federal government, and the federal courts. The mission of the Institute for Legal Reform is to reform the nation's state and Federal civil justice systems to make them more predictable, fair and efficient while maintaining access to our courts for legitimate lawsuits.
Given the diversity of our membership, the U.S. Chamber of Commerce is well qualified to discuss this important topic. We are particularly cognizant of the problems that small businesses face in abusive class actions because more than 96 percent of our members are small businesses with 100 or fewer employees and 71 percent have 10 or fewer employees. We welcome this opportunity to discuss the critical issue of the class action crisis and the urgent need for Congress to pass S. 1712, the Class Action Fairness Act.
We would like to recognize the tremendous work on class action reform by Senators Grassley, Kohl, Hatch, Carper, Thurmond, Chafee, and Specter. We owe the Judiciary Committee a great debt of gratitude for its efforts to work with us to address the class action problem quickly, fairly and in a bipartisan manner. Finally, we would like to thank Chairman Leahy for holding this very important hearing.
The Class Action Problem
Class action litigation is a necessary part of our legal system because it can bring efficiency and fairness to situations involving many people with similar claims. Unfortunately, class action cases are becoming much more common and are being used in ways never envisioned or intended. In the recent past, there has been an explosion of class action cases in state courts. In essence, states with lax rules and procedures allow plaintiffs' attorneys to "game" the system in large interstate class actions by causing cases to remain in that state's courts rather than being heard in federal court. The result is that a complex, interstate legal dispute is heard in a state court that may not have the resources or expertise to appropriately manage such complex litigation. Even worse is the fact that some state courts are known to be hostile to out-of-state "deep pocket" defendant companies.
It is important to note that the framers of the Constitution created the concept of diversity jurisdiction to allow large cases with parties from different states to be heard in federal court. This was done to ensure that such cases were decided impartially, rather than allowing the "home field" litigant an unfair advantage. Today's class action system, however, encourages such an unfair advantage. All too often, massive nationwide class actions involving citizens and the laws of all fifty states are heard in one state court. This has resulted in a race to the bottom because of the potential reward for plaintiffs' attorneys and the prospect of "bet-the-company" litigation for defendants.
Furthermore, it is not just the defendant companies who fare poorly under the current system – plaintiffs also often bear the brunt of many abuses in today's class action environment. Under current law, potential class members are often unaware of their legal rights. They may receive complicated class action notices written in legalese and printed in small, unreadable font. This leaves them at a distinct disadvantage with a potential to have their rights harmed. Under the current system, many successful plaintiffs win only nominal awards in suits brought on their behalf while the attorneys walk away with fees that are astronomical, especially when compared to the amount of damages that the plaintiffs receive. In some instances, plaintiffs have actually lost money in order to pay attorneys' fees in successful class action cases. The system is wrought with abuse and the plaintiffs are often victimized by the very system that is designed to help them.
Even if a claim in a class action may be without merit, because the case is brought on behalf of thousands or millions of claimants, a defendant's liability exposure is potentially enormous. The result is that the class counsel can exert tremendous leverage on the defendant and coerce a settlement. These settlements frequently provide little to the class members and much more to the attorneys. A prime example of this is the Bank of Boston class action settlement where the class attorneys received an $8.5 million payment, but members of the class actually received a $91.13 debit to their mortgage escrow accounts (in other words, the class members actually ended up owing money).
The reason abusive class actions such as the one discussed above are allowed to proceed is because many interstate class actions cannot be heard in federal court. Before a class action can be heard in federal court, current law requires either that a federal question exists or that there is complete diversity between the parties. In the vast majority of cases, however, there is no federal question and the defendant's only hope to get into federal court is under the diversity statute. The complete diversity requirement means that all of the plaintiffs must be from different states from all of the defendants and each plaintiff's claim must be worth at least $75,000. Unfortunately, when defendants in a class action try to remove the case to federal court, their attempts often fail because of the complete diversity requirement.
Why is that so? Most removal efforts ultimately fail because of various pleading tricks that the class counsel uses to avoid federal jurisdiction. A good example of this is the way some attorneys plead restrictions on class claims to preclude removal. After it becomes too late to remove the claim, the attorney lifts the restrictions and reveals the true nature of the action.
Another example is "fraudulent joinder." In those cases, class counsel names defendants that are not really the target of the action merely to avoid removal (i.e., these defendants are citizens of the same state as some of the class members). Once it becomes too late to remove the case to federal court, those defendants are dropped from the action. A secondary problem with this technique is that these "extra" defendants still have to spend significant resources to hire legal representation and fight in court. They have no way of knowing whether they are going to be dropped from the case and have to do what they can to defend themselves. If the extra defendant happens to be a small business, the thousands of dollars in legal fees and lost time can be catastrophic to the business.
In short, the class action system is now so out of balance that litigation that seemed unthinkable a few years ago is now actually being filed. For example, a recently filed lawsuit in New York state court seeks damages from fast food chains because the plaintiff alleges that they are responsible for the plaintiffs' obesity and poor health. The lawyer for the plaintiff in that case has indicated that he wants to turn the case into a class action. Under the current system, all it takes is one state court judge to certify the class and that court will be making decisions affecting citizens of states nationwide.
S. 1712 Is the Solution
S. 1712 is a narrowly tailored and balanced solution to the class action problem. The legislation does not change the substantive rights of any plaintiff to bring a lawsuit, nor does it prohibit appropriate state court class actions from being heard in a state forum. This legislation simply clarifies that the federal diversity statute no longer requires complete diversity for large, interstate class actions. Instead this legislation allows a class action to be heard in federal court if there is "minimal diversity" between the parties. In essence, this means that so long as at least one plaintiff has a different state citizenship than at least one of the defendants and at least $2 million is in controversy, then, in most circumstances, the class action can be heard in federal court.
Under three exceptions, the bill specifically allows local and intrastate class actions to remain in state court. First, a federal judge can decline to hear local cases where a "substantial majority" of the class members and defendants are citizens of the same state and the case will be primarily governed by that state's law. Second, federal judges do not have to hear cases involving less than 100 class members. Third, when the case is against the state or state officials, the federal judge does not have to hear the case.
The legislation also closes several important loopholes that allowed class counsels to "game" the system. First, unnamed class members are allowed to remove the case to federal court within thirty days after they are formally notified about the class action. Second, any party may remove the case to federal court without seeking the other parties' permission. Third, the one-year limitation on removal will no longer apply to class actions. An exception is that a defendant must remove the case to federal court within thirty days after first becoming aware of federal jurisdiction.
If a case that is removed to federal court under minimal diversity is found not to meet federal class action requirements then the court has discretion to continue exercising jurisdiction over the case or to dismiss it without prejudice. As under current federal law, applicable statutes of limitations on the class members' claims do not run during the time the action was pending in federal court. If the federal judge dismisses or remands the claim, the plaintiffs will be permitted to refile or amend their claims without prejudice but the case could be removed to federal court again, if it is still subject to federal jurisdiction.
To combat the abuses that many plaintiffs face under the current system, S. 1712 strengthens consumer and plaintiff rights by including the Consumer Class Action Bill of Rights. Under the new legislation, consumers will be protected by a provision requiring that all settlement information be written in plain English. In addition, the legislation mandates specific information about the benefits of any proposed settlement. These notices must also explain how attorneys' fees will be calculated and funded.
S. 1712 will also protect consumers against unfair settlements through a provision requiring greater judicial scrutiny of coupon and other non-cash settlements. The new legislation also prevents discrimination against plaintiffs by prohibiting payment of undeserved and disproportionate bounties or awards to certain class members. Finally, S. 1712 protects plaintiffs against suffering a net loss in "successful" class action cases.
Conclusion
The Class Action Fairness Act will guarantee that many of the more abusive class actions that are now heard in state courts will be eligible for federal jurisdiction. The bill does not modify any plaintiff's substantive rights and is only procedural in nature. The legislation simply recognizes that certain large, interstate class actions more appropriately belong in federal court rather than state court. The legislation complies with federalism principles in that it seeks to prevent the exact problems recognized by the founders when they decided to provide diversity jurisdiction to the federal courts. Further, the legislation provides the explicit protections to consumers and plaintiffs in a manner that limits the worst practices of the current class action system. S. 1712 has broad bipartisan support as well as strong support from the entire business community. Its swift and favorable enactment into law is vitally important to America's businesses, shareholders and consumers.