New Federal Legislation: The Class Action Fairness Act of 2005
View or download the PDF version of this Alert.
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.
|"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.
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
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.'"
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
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.
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
This Alert was written by
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
For more information, please review our Litigation Practice description,
or feel free to contact one of our attorneys.
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.