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GT Alert

New Federal Legislation: The Class Action Fairness Act of 2005

March 2005

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On February 18, 2005, President Bush signed into law the Class Action Fairness Act of 2005. This legislation is an attempt to reform an area of the law often perceived as a vehicle for abuse by attorneys. The Class Action Fairness Act represents an aggressive, but logical, series of provisions that are expected to curb the enormous legal fees often received by attorneys representing the plaintiff class, provide class action litigants (including defendants) with broader access to federal courts, and offer greater protection for the individual interests of the class members themselves. The Act amends both Rule 23 of the Federal Rules of Civil Procedure and 28 U.S.C. § 1332. This Alert briefly discusses the provisions of the Class Action Fairness Act and its potential impact on future class action litigation.

No Retroactivity

"The Class Action Fairness Act represents an aggressive, but logical, series of provisions that are expected to... provide class action litigants (including defendants) with broader access to federal courts..."

First, because the Class Action Fairness Act is not retroactive, it will take some time for its impact to be realized. The Act applies only to class actions filed on or after its enactment date of February 18, 2005, and will not apply to class action litigation already pending.

Limitations On Settlements

The Class Action Fairness Act contains a series of provisions aimed at protecting the interests of the individual class members in any proposed settlement. Those provisions are discussed below.

Coupon Settlements

The Act impacts the manner in which attorneys receive payment for their representation of a plaintiff class in any settlement where the class members receive coupons as compensation. Under the old system, an attorney representing the plaintiff class typically would receive a percentage of the gross settlement amount, regardless of whether that gross amount was actually redeemed by the plaintiff class members. The attorney’s recovery is now based on the amount of coupons that are actually redeemed by the class members.

In evaluating the value of coupons redeemed, Rule 23 is now amended to provide that, at the discretion of the court, the parties may present expert testimony as to the value of the coupons actually redeemed by class members. This allows the court to approve an accurate contingent fee arrangement without resort to guess work or speculation.

Furthermore, Rule 23 is amended to provide that, in a proceeding in which the class members will receive a distribution based on coupon settlements, the court must approve the settlement after notice and a hearing, thus satisfying any constitutional due process concerns associated with class action awards. The court is required to make written findings as to the fairness and adequacy of the proposed settlement. In addition, the court may require that any unredeemed coupons be given to charitable or governmental organizations, and the value of coupons distributed in that manner shall not be used to calculate the class attorney’s fee award.

Finally, if the class attorney’s compensation is not based on a contingency arrangement, the class attorney’s fees must be based on the time actually spent working on the case, and cannot be an arbitrary fee determined ad hoc by the attorney.

Protection Against Loss By Class Members

The Act bars a proposed settlement that would result in a net loss to the class members, unless the court makes a written finding that the non-monetary benefits to the class members substantially outweigh the monetary loss.

Protection Against Discrimination Based On Geographic Location

The Act prevents a court from awarding larger settlement sums to class members based on their geographic location. This provision is intended to eliminate any potential favoritism toward home state plaintiffs.

Notice To Appropriate Federal And State Officials

The Act amends Rule 23 to require notification to the appropriate state or federal officials to allow them to evaluate the fairness to all class members of a proposed class action settlement, as well as to assess compliance with applicable regulatory policies. “Appropriate State or Federal Officials” may include the Attorney General of the United States, state depository institutions, Secretaries of States, and State Attorney Generals, among others.

No later than 10 days after a proposed settlement is filed in court, the participating defendants must serve the proposed settlement on the appropriate state official of each state in which a class member resides. The notice must contain: 1) a copy of the complaint and any attached materials; 2) notice of any scheduled judicial hearing; 3) notice to any class members of their right to a) request exclusion from the class, or a statement that no such right exists, or b) agree to a proposed settlement of the class action; 4) any proposed or final class action settlement; 5) any settlement or other agreement contemporaneously made between class counsel and defense counsel; 6) any final judgment or notice of dismissal; 7) if feasible a) the names of class members residing within the forum state and their estimated proportional share of the settlement, or b) if not feasible a reasonable estimate of the number of class members residing in each state and an estimated proportional share of such members; and 8) any written or judicial opinion relating to paragraphs (3)-(6). The court may not issue a final settlement order until 90 days after the appropriate federal and/or state authorities are served. If the defendants do not comply with the notice provision, class members may refuse to be bound by the settlement agreement.

"The Act 'requires notification to the appropriate state or federal officials to allow them to evaluate the fairness to all class members of a proposed class action settlement, as well as to assess compliance with applicable regulatory policies.'"

Jurisdictional Provisions

In addition to the limitations the Class Action Fairness Act places on certain settlements, it also contains a number of provisions that provide litigants with increased access to the federal court system. Those provisions are discussed below.

Federal District Court Jurisdiction For Interstate Class Actions

28 U.S.C. § 1332 is amended to provide federal district courts with original jurisdiction of class actions in which: (A) any class member is a citizen of a state different from any defendant; (B) any member of the plaintiff class is a foreign state, or a citizen or subject of a foreign state, and any defendant is a citizen of a state; or (C) any member of the plaintiff class is a citizen of a state and any defendant is a foreign state or a citizen or subject of a foreign state; AND there are 100 or more class members AND the aggregate amount in controversy exceeds $5,000,000. This is in stark contrast to prior law, which required diversity of citizenship between every class representative and also required that every plaintiff seek damages in excess of $75,000. The prior system easily allowed plaintiffs to avoid federal court by including a single non-diverse class representative, or by limiting an individual plaintiff’s claims to under $75,000. The new system will provide greater access to federal court for class action litigation, which is a particularly desirable option for many defendants in class litigation.

The Class Action Fairness Act provides a discretionary level of federal jurisdiction and two mandatory levels dictating jurisdiction. A district court now has discretion to decline to exercise its original jurisdiction when greater than one-third, but less than two-thirds of the plaintiff class members and the primary defendants are citizens of the same state. In deciding whether to decline jurisdiction, the court utilizes the following factors: 1) whether the claims involve matters of national or international interest; 2) whether the claims asserted will be governed by the laws of the state in which the action was filed or by the laws of other states; 3) whether the class action has been pled in a manner that seeks to avoid federal jurisdiction; 4) whether the action was brought in a forum with a distinct nexus with the class members, defendants, or the alleged harm; 5) whether the number of citizens of the state in which the action was filed is a substantially larger portion than the class members from other states; and 6) whether one or more similar class actions have been filed during the three-year period prior to the class action being filed.

The two mandatory levels of jurisdiction apply when the case is filed in the home state of the primary defendant. If two-thirds of the plaintiff class members are residents of the primary defendant’s home state, then no federal jurisdiction will exist. In contrast, if less than one-third of the plaintiff class members are residents of the primary defendant’s home state, then the class action will be subject to federal jurisdiction.

In addition, there also is a two-thirds rule when the defendants are not residents of the forum state. If more than two-thirds of the class members are residents of the forum state, but the primary defendants are not, then the court will decline jurisdiction if: 1) at least one defendant is a defendant (a) from whom significant relief is sought, (b) whose alleged conduct forms the basis for the claims asserted by the class members, and (c) who is a citizen of the forum state; and 2) the principal injuries resulting from the alleged conduct were incurred in the forum state.

For all of these jurisdictional provisions, The Act dictates that citizenship of the proposed class members is determined as of the date of the filing of the complaint or the amended complaint. If the initial pleading is not subject to federal jurisdiction, then the citizenship of the class members will be determined on the date of service of a pleading, motion, or other paper that indicates the presence of federal jurisdiction.

"The Act 'provides a discretionary level of federal jurisdiction and two mandatory levels dictating jurisdiction.'"

Mass Actions

A mass action is a civil action similar to a class action. However, instead of having a few named plaintiffs and numerous class members, a mass action involves a large number of named plaintiffs who claim they share common questions of law and fact, but do not seek class certification. Under the Class Action Fairness Act, mass actions involving 100 or more plaintiffs will be treated in the same manner as class actions for jurisdictional purposes. However, certain exceptions apply. For instance, the federal court will only have jurisdiction over the plaintiffs who meet the current amount in controversy requirement - in excess of $75,000. In addition, the following mass actions will not be eligible for removal under the Class Action Fairness Act: mass actions in which 1) all of the claims arise out of an event or occurrence in the state where the suit is filed and the injuries were incurred in that state or contiguous states; 2) the claims are joined upon the defendant’s motion; 3) all of the claims in the action are asserted on behalf of the general public, and not the class members, pursuant to a state statute authorizing such an action; or 4) the claims have been consolidated or coordinated solely for pretrial purposes.

The statute of limitations for any mass action subject to jurisdiction under the Class Action Fairness Act is tolled while the case is pending in federal court.

Removal Of Class Actions

Class actions that qualify for federal jurisdiction under the Class Action Fairness Act may be removed to federal court. The current 30-day deadline for removal still applies, with a slight modification. Under prior law, a suit could not be removed more than a year after it was filed, regardless of whether grounds for removal subsequently arise. However, under the Class Action Fairness Act, there is no one-year limit on removing a class action. Furthermore, while the prior law prevented a defendant who was a resident of the forum state from removing a case, the Class Action Fairness Act removes that limitation and allows any defendant in a class action to remove the case without regard to citizenship. Additionally, any defendant may remove the class action without the consent of the other defendants.

Appeal Of Remand Rulings

The Class Action Fairness Act also provides a method of appealing the district court’s decision to grant or deny remand. The decision of the court of appeals to accept or deny an appeal is discretionary. The application for leave to appeal must be filed within seven days after the order to grant or deny remand is made. If leave is granted, the appellate court must provide a final decision within 60 days of the application, with one 10-day extension for good cause or if all parties agree. If final judgment is not issued within this timeframe, the appeal is denied.

Report On Class Action Settlements

The Class Action Fairness Act also includes an oversight provision. Within 12 months of the date of enactment of the Act, the Judicial Conference of the United States must prepare a report for the House and Senate Judiciary Committees on all class action settlements approved since the Act’s implementation. The report must contain: 1) recommendations on the best practices courts can use to ensure that class action settlements are fair to the class members that the settlements are supposed to benefit; 2) recommendations on the best practices that courts can use to ensure that (a) the fees and expenses awarded to class action counsel appropriately reflect the extent to which counsel succeeded in obtaining full redress for the injuries alleged and the time, expense, and risk that counsel devoted to the litigation, and (b) the class members on whose behalf the settlement is proposed are the primary beneficiaries of the settlement; and 3) the actions that the Judicial Conference has taken and intends to take towards implementing the recommendations in the report.

"... [T]here is no one-year limit on removing a class action."

Rulemaking Authority of The Supreme Court

Although the Class Action Fairness Act represents a significant change in the way class actions will be treated, both substantively and procedurally, the Act does not impede, in any way, the authority of the Federal Judicial Conference, nor the United States Supreme Court, to propose or amend the Federal Rules of Civil Procedure.

Conclusion

The Class Action Fairness Act was drafted and ultimately passed into law in response to a growing belief that class action lawsuits were nothing but vehicles for attorney abuse and large fees. Both its substantive and procedural provisions significantly change existing law as it applies to class action lawsuits. Specifically, the Act focuses on the rights of the individual class members, ensuring an objective assessment of the fairness of proposed settlements, and increasing all parties’ access to the federal court system. Perhaps most importantly, defendants in class actions now have increased opportunities to litigate in federal court. As these changes begin to impact newly filed class actions, and federal district and appellate courts begin to issue opinions applying the Act’s new provisions, we will be able to assess whether the ambitious goals of the Act are in fact being met.

 

This Alert was written by Ruth Bahe-Jachna, Frank Citera and Collin Williams, in the Chicago office. Please contact Ms. Bahe-Jachna, Mr. Citera or Mr. Williams at (312) 456-8400 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig


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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.