PREPARED STATEMENT OF JOHN H. BEISNER, ESQ.,
O’MELVENY & MYERS
BEFORE THE COMMITTEE ON THE JUDICIARY,
HEARING ON H.R. 2341
“THE CLASS ACTION FAIRNESS ACT OF 2001”
Thank
you for the opportunity to testify about the abuses of class actions that are
presently occurring in our judicial system and about why enactment of H.R. 2341
would constitute an important step toward halting those abuses, which are
challenging the basic legitimacy of the class action device.
My
testimony today is based primarily on my experiences as an “in-the-trenches”
class action litigator. Over the past
two decades, I have defended more than 400 class action lawsuits on a wide
variety of subjects in federal and local courts in 37 states. In the course of that work, I have observed
the soaring numbers of class actions in state courts and the increasing abuse
of the class action device, particularly in certain state court settings. I have also personally witnessed the enormous
economic waste that this inexplicable situation imposes on targeted companies,
diverting attention and resources from job-creating innovation efforts and
diluting the profits available for shareholders, including both pension funds
and individual investors. Today, I would
like to share with you some thoughts about what has led to this class action
crisis – and why H.R. 2341 would be a positive, effective response to these
problems.
My testimony today is not a new song; it is an old
refrain. Over the last several years,
most policymakers – and indeed most Americans – have read or heard about the
explosion in state court class actions and have developed at least a passing
familiarity with the abuses occurring in many of those cases.
The problem is not new, and
it is not going away. Congress has been
considering legislation to address these problems for several years. But in each year that Congress has failed to
act, the problem has worsened, creating a vicious cycle. As more and more interstate class actions are
being filed in state courts, abuses are increasing. And as class action abuse becomes more
prevalent, more lawyers seek to bring even more class actions in state
court. As the Washington Post bluntly editorialized several months ago, “No
portion of the American civil justice system is more of a mess than the world
of class actions. None is in more
desperate need of policymakers’ attention.”[1]
Over the years, several studies have attempted to
quantify the growth of state court class actions. None, however, has been totally comprehensive
because state courts do not keep accurate records of class action filings; it
would be impossible to conduct a full statistical analysis of class action
filings in the courts of all 3,066 counties nationwide. Still, despite these limitations, several
studies have painted a reasonably clear picture of a growing problem that is
concentrated in certain state courts.
For example:
·
A preliminary report on a major empirical research project by
RAND’s Institute for Civil Justice (“ICJ”) observed that over a several year
period, there was a “doubling or tripling of the number of putative class
actions” that was “concentrated in the state courts.”[2]
·
Another survey indicated that while federal court class
actions had increased by 340 percent over the past decade, state court class action
filings had increased 1,315 percent.[3] Typically, the new state court filings were
on behalf of proposed nationwide or multi-state classes.[4]
·
A study submitted to the House Judiciary Committee in 1999
indicated that the local courts of six small, rural
·
The final report on the RAND/ICJ study on class actions
concluded that class actions “were more prevalent” in certain states “than one
would expect on the basis of population.”[6]
Recently, I co-authored an
analysis of newer state court class action data yielded by research undertaken
by the Center for Legal Policy at the Manhattan Institute.[7] That analysis, which will be published
shortly in the Harvard Journal for Law
and Public Policy, examined data gleaned from the class action dockets
of three state courts – Madison County, Illinois;
Among the study’s most
significant findings were the following points:
·
Class actions increased
substantially during the survey period in each of the three counties. [9] The most dramatic increase occurred in
·
The number of class actions
filed in each county was clearly disproportional to the size of the counties in
the survey. In order to understand the significance of
the data collected in the three counties, the Manhattan Institute study
considered the per capita filing
rates for class actions in each of the three courts. Its findings were telling: if class actions were filed throughout the
country at the same per capita rates
as
A comparison with the
federal court system is similarly revealing.
Only about 2,000 class actions are filed in the entire federal court
system each year.[13] That amounts to a per capita rate of about 7.6 class actions for every million
residents. In
·
The majority of class
actions in all three counties were brought on behalf of nationwide classes. [15] In
·
The class actions filed in
the three counties sought to challenge a broad array of industry practices that
touch on most Americans’ everyday lives. [16] In Madison County, lawyers have sought to
certify classes over the last three years that included: (1) all Sprint customers nationwide who have
ever been disconnected on a cell phone call; (2) all RotoRooter customers
nationwide whose drains were repaired by allegedly unlicensed plumbers; (3) all
consumers who purchased “limited edition” Barbie dolls that were later
allegedly offered for a lower price elsewhere; and (4) private owners of wells
in 16 states where a gasoline additive may have seeped into the
groundwater. In Jefferson County, the
proposed classes included: (1) all
individuals nationwide who have paid late fees for video rentals from
Blockbuster; (2) all individuals nationwide who have purchased a computer from
the Best Buy retail chain with an extended warranty; and (3) all individuals
who sought reimbursement for medical expenses or wrecked vehicles from a number
of insurance companies that use a common method of assessing such claims (there
were a number of similar, overlapping class actions involving these insurance
practices in Madison County as well). In
Palm Beach County, the proposed classes included: (1) all individuals nationwide who purchased
a dietary supplement that the company claimed would eliminate cellulite; (2)
all healthcare providers and consumers nationwide who participate in United
HealthCare health plans based on the company’s interpretation of “medically necessary”
treatment; and (3) all holders of seasons tickets to the Florida Marlins who
were allegedly defrauded when the team owner reneged on his promise to field a
“World Class Baseball Team.” Thus, these
three county courts have been asked to adjudicate cases that could affect the
daily of lives of millions of Americans throughout the country – from what
water they drink to how much they pay for their next insurance policy or
telephone bill.
·
The class action dockets of
the three county courts are monopolized by a small cadre of out-of-county
plaintiffs’ counsel.[17] In
·
Many of the class actions in
the three counties were clearly initiated by creative lawyers, not injured
consumers.[18] This was best evidenced by the large number
of “cut-and-paste” complaints in which attorneys brought numerous, nearly
identical complaints against a number of different defendants in the same
industry, criticizing standard industry practices. For example, within a one-week period early
this year, six law firms filed nine nearly identical class actions in Madison
County, alleging that the automobile insurance industry is defrauding Americans
in the way that it calculates claims rates for “totaled” vehicles.[19] Another group of law firms filed two class
actions against automobile insurers (one of which lists 20-plus defendants)
involving reimbursement for replacement vehicle parts.[20] A third group of lawyers filed five class
actions in Palm Beach County challenging companies that sell interests in the
life insurance policies of critically ill patients (in one of these “viatical
settlement” class actions, the plaintiffs’ firm was also the named plaintiff).[21] Needless to say, when large numbers of very
similar lawsuits attacking many players in the same industry coalesce before
the same court and involve the same counsel, the situation does not appear to
be mere happenstance. Consistent with
this finding, the St. Louis Post Dispatch
interviewed named plaintiffs in a number of Madison County class actions
last year and found that for the most part, their lawyers found them – and not
vice versa. One named plaintiff in a
case against an insurance company said, “I didn’t know anything about it until
they came to me.”[22] According to a recent Washington Post editorial, the “clients” in many class actions are
“something of a fiction” because the lawyers are essentially “representing
themselves;” this lack of accountability, the Post opined, is one of the reasons that “class actions are
unusually prone to abuse.”[23]
In this regard, it is
instructive to glance at some of the web sites of the plaintiffs’ counsel
involved in the cases included in the Manhattan Institute study. One firm boasts on its website that it has
filed 24 nationwide class actions in
·
The vast majority of the
cases had no real nexus to the county in which they were brought.[26] For example, in
·
Many of the county court
cases were “copy cat” class actions, duplicative of other pending litigation.[28] As both the Senate and House Judiciary
Committees have noted in recent reports, the jump in the number of state court
class actions has resulted in part from the increasingly common practice of
filing “copy cat” class actions – duplicative class actions that assert the
same claims on behalf of essentially the same people in a number of different
courts.[29] Sometimes these class actions are brought by
attorneys vying to take the lead role in any potential lucrative settlement
with the defendant. In other cases, the
strategy is to go fishing in a number of ponds – to file many identical
lawsuits before many different courts, hoping to land the big one with a
favorable judge somewhere. Not
surprisingly, all of the counties surveyed in the study were sites for “copy
cat” class actions. There were even
“copy cat” cases within the survey itself.
For example, a number of automobile insurance cases filed in
In sum, the Manhattan Institute study found that a
small cadre of plaintiffs’ counsel are bringing an increasing number of
nationwide class actions against a wide range of industries in a small number
of courts where they believe that they possess a tactical advantage. These facts tend to confirm what has long
been suspected – that the impetus for filing class actions often comes from
lawyers eager for substantial attorneys’ fees and not individual consumers
seeking redress for what they perceive to be real grievances.
While the abuses that
draw plaintiffs’ counsel to state court are numerous and are documented at
great length in the report issued by the Senate Judiciary Committee last year,
I would like to focus today on the two forms of abuse that in my view are the
most dangerous.
The most dangerous trend in state court class actions
– and one that has had the biggest impact on the proliferation of “nationwide”
lawsuits – is that many state courts are “federalizing” class actions. When I say “federalizing” I am talking about
“false federalism” – the current situation in which one state court goes around
telling the other 49 state courts what their laws should be. When state courts preside over class actions
involving claims of residents of more than one state (especially nationwide
class actions) as they are increasingly inclined to do, they often end up
dictating the substantive laws of other states, sometimes over the protests
of officials in those other jurisdictions.
The best-known example of this is the case of Avery v. State Farm Mut. Auto Ins. Cos.,
which involved allegations that an automobile insurance company had breached
its contracts with all of its policyholders nationwide by requiring the use of
less expensive non-original equipment manufacturer parts – a standard industry
practice.[30] In that case, an
The impact of the Avery
decision is already apparent in the growing number of class actions that
have been filed in
All
told, the Manhattan Institute study turned up 26 nationwide class action law
suits in
The danger posed by these efforts to federalize state
law extend far beyond insurance. The
dockets of the three surveyed counties in the Manhattan Institute study
included numerous cases in which plaintiffs’ counsel sought to have locally
elected judges in county courts set policies in areas as diverse as warranties,
land use rights, plumbing licenses, environmental protection, advertising
campaigns, bank billing practices, employee investment plans, and numerous
other broad-ranging issues for 49 other states – and 3,065 counties – in
addition to their own. While some of the
class actions pending in these jurisdictions may seem trivial (e.g., movie rental late fees, the price
of Barbie dolls), even these cases (particularly if they are decided
incorrectly) could have a dramatic impact on commerce by limiting how companies
can market and charge for their products.
The resulting question is a simple one: Who should be charged with responsibility for
handling such types of large-scale, interstate class actions involving issues
with significant national commerce implications – federal judges who are
selected by the President and confirmed by the U.S. Senate or state court
judges who are elected by a few thousand voters in a rural county? As the Senate Judiciary Committee has noted,
“[c]learly, a system that allows State court judges to dictate national policy
from the local courthouse steps is contrary to the intent of the Framers when
they crafted our system of federalism.”[34]
In addition to federalizing substantive law, state
courts are also federalizing procedural class action law. Even though only a minority of state courts
are routinely failing to exercise sound judicial judgment on class action issues,
those courts have become magnets for a wildly disproportionate share of the
interstate class actions that are filed.
In short, attorneys file their class actions in the minority of courts
that are most likely to have a laissez-faire
attitude toward the class device. By
establishing themselves as the lowest common denominator, that distinct
minority of state courts are essentially setting the national norm; they are
effectively dictating national class action policy.
A dramatic example of this phenomenon was provided in
the testimony of Dr. John B. Hendricks at the March 1998 House hearing. He offered a docket study of state court
class actions in one jurisdiction showing (a) that class actions had become
disproportionately large elements of the dockets of some county courts, (b)
that many of the class actions were against major out-of-state corporations
lacking any connection with the forum county, and (c) that the proposed classes
in those cases typically were not limited to in-state residents and often
encompassed residents of all 50 states.
Dr. Hendricks identified one state court judge who had granted class
certification in 35 cases over the preceding two years. As Dr. Hendricks stated, “[t]hat’s a huge
number of cases when one considers that during 1997, all 900 federal district
court judges in the
A second form of abuse that has resulted from the
explosion in state court class actions is the approval of settlements that
provide only nominal benefits to the people who are ostensibly being
represented – the class members themselves – while offering a bonanza in
attorneys’ fees for the plaintiffs’ lawyers.
According to the Institute for Civil Justice/RAND study, class counsel
in state court consumer class action settlements (i.e., non-personal injury monetary relief cases) frequently walk
off with more money than all of the class members combined.[36] Last year, an editorial in the Tampa Tribune referred to this
phenomenon as “jackpot justice” – settlements that provide little, if any
relief, to the class members, make their lawyers rich, and ultimately result in
higher prices for consumers.[37]
In the now infamous Bank of Boston settlement,[38]
an
While the Bank
of Boston settlement is the best-known (and perhaps the most egregious)
example, other settlements that provided millions to the lawyers – but only
pennies to the class members – abound:
·
In a case in
·
The settlement in a suit involving souvenirs and merchandise
sold at NASCAR Winston Cup stock car races gave consumers coupons toward the
purchase of more merchandise; their lawyers were eligible to receive more than
$2 million.[41]
·
In a
·
Customers in a suit against a telephone company in
One of the cases cited in the Manhattan Institute
study involved a recent settlement in a case alleging that a video rental
company improperly assessed late fees.
Under the proposed settlement (which has reportedly received preliminary
approval from the
A report about the video rental settlement in the Washington Post prompted the following
letter to the editor from one reader:
[This] class-action
settlement illustrates the need for common-sense legal reform in our country,
particularly in regard to class-action lawsuit abuse . . .
What a sham! Class action lawsuits have
become a cottage industry for personal injury lawyers looking to make millions
in legal fees, on behalf of consumers who receive token damages as best. From cases involving video rentals to managed
care, consumers are being used simply as pawns in big-money schemes by some
sanctimonious, greedy lawyers.
It is far past time to curb the abuses of class-action lawsuits.[48]
While the growing number of state court class actions
and the related increase in class action abuse have raised serious and
troubling questions for our nation’s economy and judicial system, a key source
of the problem – the exclusion of most class actions from federal court – is
quite easily remedied. Currently, class
actions are excluded from the category of so-called “diversity” cases – cases
involving citizens from different states and substantial sums of money – that
are included in the jurisdiction of federal courts. As a result, most class actions are relegated
to state court even though they are subject to the same prejudices and have the
same economic significance as other large commercial cases that are afforded
the protections of federal court. By
correcting this anomaly, Congress could ensure that interstate class actions
receive the same protections as other cases implicating interstate commerce – i.e., that they are adjudicated by
federal judges who “operate[] according to reasonable rules and [are]
accountable to the entire country.”[49] That is the aim of H.R. 2341 – and why it is
an important step toward class action reform.
Article III of the U.S. Constitution establishes that
federal courts can hear not only cases presenting federal law issues (that is,
lawsuits asserting constitutional or federal statutory claims, or involving the
federal government as a party), but also so-called “diversity” cases, defined
as suits “between Citizens of different States.” In establishing such “diversity”
jurisdiction, the Framers sought to address concerns that local biases would
infect state courts proceedings involving disputes between in-state plaintiffs
and out-of-state defendants.[50] In short, they feared that non-local
defendants might be “hometowned.”
Diversity jurisdiction was designed not only to diminish this risk, but
also “to shore up confidence in the judicial system by preventing even the
appearance of discrimination in favor of local residents.”[51] The Framers reasoned that some state courts
might discriminate against interstate commerce activity and out-of-state
businesses engaged in such activity and that federal courts therefore should be
allowed to hear diversity cases so as to ensure the availability of a fair,
uniform and efficient forum for adjudicating interstate commercial disputes.[52] Thus, since the nation’s inception, diversity
jurisdiction has served to guarantee that parties of different state
citizenship have a means of resolving their legal differences on a level
playing field in a manner that nurtures interstate commerce. Constitutional scholars have argued that
“[n]o power exercised under the Constitution . . . had greater influence in
welding these United States into a single nation [than diversity jurisdiction];
nothing has done more to foster interstate commerce and communication and the
uninterrupted flow of capital for investment into various parts of the Union,
and nothing has been so potent in sustaining the public credit and the sanctity
of private contracts.”[53]
Class
actions are a type of lawsuit strongly implicated by these concerns, since
they: (1) typically involve interstate
commerce; (2) clearly have strong national economic implications; and (3) are
particularly vulnerable to local prejudice.
However, the law governing diversity jurisdiction, 28 U.S.C. § 1332, has
been interpreted by courts in two ways that have essentially eliminated the
exercise of such jurisdiction over the vast majority of class actions.
First, as applied to class actions, the “diversity”
element of Section 1332 has been interpreted to require “complete diversity” – i.e., to bar federal jurisdiction over
class actions if any of the named plaintiffs are citizens of the same state as
any of the named defendants. Thus,
plaintiffs’ counsel often seek to keep their cases out of federal court by
finding a plaintiff who comes from the state where a defendant corporation is
incorporated or has its main place of business, or by suing one local
subsidiary or retailer to defeat the complete diversity requirement. It is not atypical, for example, to come
across nationwide class actions against major automobile manufacturers that
also name as a defendant one individual automobile dealer in the state where
the plaintiff is suing.
Second, the “amount-in-controversy” threshold of
Section 1332 has been traditionally interpreted to require that each
and every member of the proposed class assert separate and distinct
claims exceeding $75,000.[54] Although some federal courts have questioned
the breadth and current vitality of this rule (suggesting that only one
plaintiff must meet the $75,000 minimum),[55]
this difficult-to-satisfy prerequisite still bars most interstate class actions
from federal court. This too has led to
careful pleading by plaintiffs’ lawyers to stay out of federal court.
Not
surprisingly, the Manhattan Institute study found that most of the complaints
in the three counties surveyed were carefully drafted to take advantage of
these two loopholes and thereby evade federal jurisdiction. For example, a number of complaints sought to
cap damages for the class members at $74,999 each. (These kinds of “claims-shaving” tactics
raise disturbing issues of adequacy-of-representation and due process. While a single plaintiff suing in his own
name may limit his claims in order to stay in state court, counsel seeking to
represent a class have a fiduciary obligation to the absentee member of the
class, making it improper to unilaterally “waive” claims with no authorization
from the claimants.)
Other
complaints brought against out-of-state defendants used the tactic I mentioned
previously – naming one in-state dealer or subsidiary in order to defeat the
complete diversity requirement. The
inherently fraudulent nature of this tactic is obvious: although all putative
class members may conceivably have a claim against the defendant corporation,
few (if any) of the putative class members have had any dealings with the token
in-state defendant(s), meaning that there is no basis for a classwide judgment
against those defendants. The
corporation is the only real defendant; the others are there simply to prevent
removal of the action to federal court.
In
short, the combination of the “complete diversity” and “amount in controversy”
limitations on diversity jurisdiction have been interpreted in a way that keeps
class actions out of federal courts while allowing in smaller cases with far
fewer repercussions on interstate commerce.
As the Senate Judiciary Committee observed last year, the current state
of the law
leads to the
nonsensical result under which a citizen can bring a “federal case” by claiming
$75,001 in damages for a simply slip-and-fall case against a party from another
State, while a class of 25 million people living in all 50 States and alleging
claims against a manufacturer that are collectively worth $15 billion must
usually be heard in State court (because each individual class member’s claim
is for less than $75,000). Put another
way, under the current jurisdictional rules, Federal courts can assert
diversity jurisdiction over a run-of-the-mill State law-based tort claim
arising out of an auto accident between a driver from one State and a driver
from another, or a typical trespass claim involving a trespasser from one State
and a property owner from another, but they cannot assert jurisdiction over
claims encompassing large-scale, interstate class actions involving thousands
of [claimants] from multiple States, and hundreds of millions of dollars –
cases that have significant implications for the national economy.[56]
Over
the last few years, there has been a growing recognition that the
jurisdictional laws that are keeping most class actions out of federal court
should be corrected:
·
The leading treatise on federal civil procedure has declared
that current principles governing federal diversity jurisdiction over class
actions make no sense: “The
traditional principles in this area have evolved haphazardly and with little
reasoning. They serve no apparent policy
. . . .”[57]
·
In a 1999 decision, the U.S. Court of Appeals for the
Eleventh Circuit “apologi[zed]” for its “seemingly arbitrary” and “anomal[ous]”
ruling sending a large interstate class action back to state court, noting that
“an important historical justification for diversity jurisdiction is the
reassurance of fairness and competence that a federal court can supply to an
out-of-state defendant facing suit in state court.”[58] Observing that the out-of-state defendant in
that case was confronting “a state court system [prone to] produce[] gigantic
awards against out-of-state corporate defendants,” the court stated that “[o]ne
would think that this case is exactly what those who espouse the historical
justification for section 1332 would have had in mind.”[59]
·
In that same case, Judge John Nangle, for many years the
chair of the federal Judicial Panel on Multidistrict Litigation,
concurred: “Plaintiffs’ attorneys are
increasingly filing nationwide class actions in various state courts, carefully
crafting language . . . to avoid . . . the federal courts. Existing federal precedent . . . [permits]
this practice . . . , although most of these cases . . . will be disposed of
through “coupon” or “paper” settlements. . . . virtually always accompanied by
munificent grants of or requests for attorneys’ fees for class counsel. . . . [T]he present [jurisdictional] case law does
not … accommodate the reality of modern class action litigation and
settlements.”[60]
·
Similarly, in an opinion by Judge Anthony Scirica (chairman
of the federal Judicial Conference’s Standing Committee on Rules and
Procedure), the U.S. Court of Appeals for the Third Circuit observed that “national
(interstate) class actions are the paradigm for federal diversity jurisdiction because,
in a constitutional sense, they implicate interstate commerce, foreclose
discrimination by a local state, and tend to guard against any bias against
interstate enterprises,” but that “at least under the current jurisdictional
statutes, such class actions may be beyond the reach of the federal courts.”[61]
·
In 1999, former Solicitor General Walter Dellinger testified
before the House Judiciary Committee, if Congress were to start over and write
a new federal diversity jurisdiction statute, interstate class actions would be
the first category of cases to be included within the scope of the statute.[62]
·
Even attorneys and scholars associated with the plaintiffs’
bar have voiced support for expanding federal court jurisdiction over class
actions. For example, at the March 1998
House hearing, Prof. Susan Koniak of the Boston University School of Law stated
that such a move would be “a good idea. . . . Often these [state] courts are
picked, and they are in the middle of nowhere.
You can’t have access to the documents, and I don’t think it’s a full
answer, but I think it should be done.” [63] Similarly, Elizabeth Cabraser, a leading
plaintiffs’ class action attorney, opined that “much of the confusion and lack
of consistency that is currently troubling practitioners and judges and the
public in the class action area could be addressed through the exploration, the
very thoughtful exploration, of legislation that would increase federal
diversity jurisdiction, so that more class action litigation could be brought
in the federal court.”[64]
* *
*
There
are several bases for the conclusion reached by all of these authorities– that
more interstate class actions should be subject to federal court diversity
jurisdiction.
First, because these cases clearly have significant
interstate commerce ramifications, federal supervision and management of such
cases is desirable. As Chief Justice
Marshall recognized, the Commerce Clause reflects the substantial federal
interest in regulating “that commerce which concerns more States than one” (as
opposed to “the exclusively internal commerce of a State”).[65] Clearly, that federal interest is implicated
by interstate class actions, which typically involve more money, more people in
more states, and more interstate commerce ramifications than any other type of
lawsuit.
Second, the rationales underlying the constitutionally
established concept of diversity jurisdiction apply fully to interstate class
actions. Such cases typically involve
in-state plaintiffs suing out-of-state defendants, thereby raising the specter
of local court biases against the out-of-state defendant.
Third, unlike state court judges who are elected to office and
subject to political pressure, federal judges are selected by the President of
the United States and are constitutionally insulated from political pressure
because of their tenure and salary protection.
Consider this: In the most recent
judicial election in Jefferson County, approximately 55,000 people voted for
the judge who was elected to the 60th Judicial District.[66] That amounts to just one-tenth of one percent
of the 50.4 million people who voted for the President who was elected in the
same election[67]
and who is responsible – under the U.S. Constitution – for nominating judges to
the federal bench. While the Jefferson
County judge will face re-election in just four years, the federal judge has
tenure and salary protection for life.
Which of these judiciaries should be charged with responsibility for
handling large-scale, interstate class actions involving issues with
significant national commercial implications?
Fourth, on the whole, federal courts are better equipped to
deal with the substantial burdens of presiding over the sprawling, complex
proceedings that are often triggered by the filing of an interstate class
action. While our federal courts are
facing substantial burdens, state courts are as well. The civil caseload in state courts has grown
much more rapidly than the federal court civil caseload.[68] Federal courts have more resources to meet
this challenge.[69] Virtually all federal court judges have two
or three law clerks on staff; state court judges often have none.[70] Federal court judges are usually able to
delegate some aspects of their class action cases (e.g., discovery issues) to magistrate judges or special masters;
such personnel are usually not available to state court judges. And federal courts are authorized to transfer
and consolidate similar class actions from various states before a single judge
in the interest of efficiency;[71]
state courts lack such consolidation authority and therefore must engage in the
wasteful exercise of separately handling such overlapping cases.
Fifth, federal courts have significant institutional
advantages over state courts in adjudicating interstate class actions. For example, both the Senate and House
Judiciary Committees have noted in recent reports that the jump in the numbers
of state court class actions has resulted in part from the increasingly common
practice of filing “copy cat” class actions – duplicative class actions that
assert the same claims on behalf of essentially the same people in a number of
different courts.[72] Sometimes these class actions are brought by
attorneys vying to take the lead role in any potential lucrative settlement
with the defendant. In other instances,
the “copy cat” cases are part of a strategy is to go fishing in a number of
ponds – to file many identical lawsuits before many different courts, hoping to
land the big one with a favorable judge somewhere. When such “copy cat” class actions are filed
in federal courts, the federal judiciary can address this problem by establishing
a multi-district litigation (“MDL”) proceeding pursuant to 28 U.S.C. § 1407;
however, there is no analogous multi-state procedure to address the duplication
and waste caused by multiple class action filings in different states.
Similarly, the congressional record reflects cases in
which counsel have effectively asked state courts to overrule the denial of
class certification by federal courts.[73] This strategy, which takes forum shopping to
the extreme, is generally unavailable to the extent that class actions are
pending in the federal courts because, as noted previously, “competing federal
court class actions can be consolidated for pretrial purposes by the Judicial
Panel on Multidistrict Litigation.”[74]
Sixth, federalism principles dictate that interstate class
actions be heard by federal courts because it is far more appropriate for a
federal court to interpret the laws of various states (a task inherent in the
constitutional concept of diversity jurisdiction). What business does a state court judge
elected by the several thousand residents of a small county in Illinois have in
telling the state of Massachusetts what its laws mean? Why should a Jefferson County state court
judge be rendering interpretations of Massachusetts law that are binding on Massachusetts
residents and that cannot be appealed to or reviewed by Massachusetts
courts? Such matters of interstate
comity are more appropriately handled by federal judges appointed by the
President and confirmed by the Senate.
Further, federal courts have the authority (which they frequently
exercise[75])
to use “certified questions” to ask state courts to advise how their laws
should be applied in uncharted situations.
Finally, as I noted previously,
some state courts have shown a tendency to approve settlements that generously
compensate the class counsel while giving little or nothing to the people on
whose behalf the action supposedly was brought – the unnamed class members.[76] In contrast, a Federal Judicial Center study
found that “[i]n most [class actions handled by federal courts], net monetary
distributions to the class exceeded attorneys’ fees by substantial margins.”[77] In this same vein, the Senate Judiciary
Committee report documented numerous problems that it identified with the
adjudication of interstate class actions in state courts (not federal courts) –
including the failure to carefully apply class certification requirements (some
of which have due process underpinnings), the use of the class device as
“judicial blackmail” (giving class counsel leverage to obtain unwarranted
settlements), and denials of defendants’ due process rights (denying the
opportunity to contest plaintiffs’ claims).[78]
H.R.
2341 offers a simple, commonsense solution to the jurisdictional anomaly that
prevents federal courts from hearing most class actions, and the continued and
growing class action abuse that is taking place in a number of state
courts. Moreover, as drafted in H.R.
2341, this solution would be implemented without undesirable side effects. The bill would not alter any party’s
substantive legal rights. The bill would
not permit removal of truly local disputes; such matters would remain within
the exclusive purview of the relevant state courts. And the bill would not preempt state courts’
authority to hear class actions of any sort; if the parties prefer to litigate
a particular interstate class action before an appropriate state court, they
may do so.
Instead, H.R. 2341 would simply amend current law by
extending federal diversity jurisdiction to cover any class action that
involves a substantial amount of money (i.e.,
with an aggregate amount in controversy in exceeding $2 million) in which there
exists “partial diversity” between plaintiffs (including all unnamed members of
any plaintiff class) and defendants – an approach wholly consistent with
Article III of the Constitution and one that would enable federal courts to
hear class actions that are truly interstate in nature.[79] This expanded jurisdiction would not
encompass disputes that are not interstate in nature – cases in
which a class of citizens of one state sue one or more defendants that are
citizens of that same state would remain subject to the exclusive jurisdiction
of state courts. Further, federal
courts would be required to abstain from hearing certain local cases and state
action cases. Thus, contrary to what
has been argued by some critics, the bill would not move all class actions into
federal court. Consistent with existing
diversity jurisdiction precepts, it would preserve exclusively to state court
jurisdiction what are primarily local controversies.
H.R.
2341 would also amend the laws governing removal of cases to federal court to
enable the removal of any purported class action that falls within the
additional grant of federal diversity jurisdiction over class actions described
above – and to prevent plaintiffs’ counsel from trying to game the system in
order to stay out of federal court. To
that end, the bill would:
·
Amend 28 U.S.C. § 1441(b)
to confirm defendants’ ability to remove all purported class actions qualifying
for federal jurisdiction under the revised section 1332 (as discussed above)
regardless of the state in which the action was originally brought;
·
Amend 28 U.S.C. § 1446(b) to provide that a defendant could
remove a putative class action at any time (even at a date more than one year
after commencement of the action), so long as the action is removed within 30
days after the date on which the defendants may first ascertain (through a
pleading, amended pleading, motion order or other paper) that the action
satisfies the jurisdictional requirements for class actions (as set forth in
the proposed section 1332(b)). This
provision is intended to prevent parties from filing cases as individual
actions and then recasting them as purported class actions (or as broader class
actions) after the one-year deadline for removal has passed;
·
Amend 28 U.S.C. § 1446(a) to allow any class action defendant
to remove an action. At present, an
action typically may be removed only if all defendants concur. This provision is intended to address
situations in which local defendants with little at risk or defendants
“friendly” to the named plaintiffs may preclude other defendants with
substantial exposure from gaining access to federal court; and
·
Authorize unnamed class members (not just
defendants) to remove cases. This
even-handed change would allow class members to move cases to federal court
(within a reasonable time after notice is given) if they are concerned that the
state court has not or will not adequately protect the absent class members’
interests.
To avoid leaving cases in federal
court that do not warrant the attention of the federal judiciary, the
legislation would also require a federal court to dismiss any case (that is in
federal court solely due to the expanded diversity jurisdiction provisions)
that it has determined may not be afforded class treatment. However, the bill specifies that an amended
action may be refiled in state court.
Further, the bill also protects the interests of the unnamed class
members by specifying that federal tolling law will apply to the limitations
periods on the claims asserted in the failed class action.
In addition to these jurisdictional provisions, the bill also
contains a “consumer class action bill of rights,” which seeks to help
consumers understand their rights when they become members of a class action
and to protect consumers from abusive settlements. Under this section of the bill:
·
Written notice of a proposed federal court class action
settlements would have to be provided to class members in a clearer, simpler
format.
·
A federal court could not approve a coupon or other non-cash
settlement unless it first holds a hearing and makes a written finding that the
settlement is fair, reasonable and adequate.
·
A federal court could not approve a settlement that results
in a net loss for the class members unless it makes a written finding that
non-monetary benefits to the class members outweigh any loss precipitated by
the terms of the settlement.
·
A federal court could not approve a settlement that: (1) provides greater sums of money to certain
class members because they are located in closer proximity to the court, or (2)
provides a bounty to the class representatives.
In urging Congress to enact legislation to address the
class action problem, a recent Washington
Post editorial stated:
The
focus of tort reform should be to inject the world of class actions with more
accountability to real clients and with some consequences to lawyers who file
frivolous claims. The first step is to
make it easier to shift state court cases into the federal system. This would ensure that national classes get
handled by a court system that operates according to reasonable rules and is
accountable to the entire country. A
bill to do that is pending in Congress.
Passing it would be a place to start.[80]
The bill
referred to in that editorial is, of course, H.R. 2341. I respectfully add my voice to that of the Washington Post and numerous others in
urging this Committee to act favorably on the bill and in urging Congress to
pass it forthwith.
[1] Actions Without Class, Wash. Post, August 27, 2001, at A14.
[2] Deborah Hensler, et al., Preliminary Results of Rand Study Of Class Action Litigation (1997).
[3] Analysis: Class Action Litigation, Class Action Watch, Spring 1999, at 3 (Figure 2), available at www.fed-soc.org/classaction1-2.pdf.
[4] Id. at 2 (Figure 1).
[5] Mass Torts and Class Action Lawsuits: Hearing Before the Subcomm. on Courts and Intellectual Property of the House Comm. on the Judiciary, 105th Cong. (1998) (“1998 House Hearing”), at 140-53.
[6] Deborah R. Hensler, et al., Class Action Dilemmas: Pursuing Public Goals for Private Gains (Executive Summary 1999) (“ICJ/RAND Study”) at 7.
[7] See John H. Beisner and Jessica Davidson Miller, They’re Making A Federal Case Out Of It…In State Court, Civil Justice Report No. 3, Sept. 2001 (“Manhattan Institute Study”).
[8] As detailed below, the researchers also looked at cases filed during the early months of calendar year 2001, to the extent possible.
[9] Manhattan Institute Study at 7-12.
[10] See Michael Shaw and Jim Getz, Filing Of Class Action Suits Surges In Metro East Area; Tactics For Finding Clients Are Assailed, St. Louis Post-Dispatch, June 19, 2000.
[11] Manhattan Institute Study at 8-9.
[12] Id. at 9.
[13] See Manhattan Institute Study at 9 (citing L.H. Mecham, Judicial Business of the United States Courts: 2000 Report of the Director 405 (2001) (Administrative Office of the U.S. Courts).
[14] Manhattan Institute Study at 9.
[15] Id. at 12, 19.
[16] Id. at 13-25.
[17] Id. at 10-11.
[18] Id. at 10.
[19] Schoenleber v. Prudential Prop. & Cas. Ins. Company, No. 01-L-99 (filed Jan. 18, 2001); Lancey v. Country Mut. Ins. Co., No. 01-L-113 (filed Jan. 29, 2001); Richardson v. Progressive Premier Ins. Co. of Illinois, No. 01-L-149 (filed Feb. 6, 2001); Edwards v. Mid-Century Ins. Co., No. 01-L-151 (filed Feb. 6, 2001); Knackstedt v. St. Paul Fire and Marine Ins. Co., No. 01-L-153 (filed Feb. 6, 2001); Bordoni v. CGU Ins. Group, No. 01-L-157 (filed Feb. 6, 2001); Huff v. Hartford Ins. Co. of Illinois, No. 01-L-158 (filed Feb. 6, 2001); Billups v. GEICO Gen. Ins. Co., No. 01-L-159 (filed Feb. 6, 2001); Moore v. Shelter Ins. Co., No. 01-L-160 (filed Feb. 6, 2001).
[20] Hobbs v. State Farm Mut. Ins. Co., No. 99-L-1068 (filed Nov. 2, 1999); Kelly v. Progressive Premier Ins. Co., No. 00-L-277 (filed Apr. 3, 2000).
[21] Schachter v. Mut. Benefits Corp., No. 98-4490 AI (filed July 28, 1998); Thum v. Accelerated Benefits Corp., No. 98-9389 AN (filed Oct. 21, 1998); Schwartz v. Dedicated Res., Inc., No. 98-9393 AD (filed Oct. 21, 1998); Chancellor v. Future First Fin’l Group, Inc., No. 99-4429 AE (filed May 6, 1999); Brackman v. Dedicated Res., Inc., No. 99-9361 (filed Sept. 30, 1999).
[22] See Filing Of Class Action Suits Surges In Metro East Area, supra n.10.
[23] See Actions Without Class, supra n.1.
[24] See The Lakin Law Firm, Class Actions, at http://www.weblinecommunications.com/practice/ class-action/index.htm.
[25] Berman DeValerio Pease Tabacco Burt & Pucillo: About Class Action Lawsuits: FAQ, at http://www.bermanesq.com/content/classaction-faq.asp (cases filed by Burt & Pucillo prior to merger).
[26] Manhattan Institute Study at 9.
[27] Actions Without Class, supra n.1.
[28] Manhattan Institute Study at 11.
[29] The Class Action Fairness Act of 2000, S. Rep. No. 106-420, 106th Cong. (2000) (“Senate Report”) at 19 (“Yet another common abuse [of the class action device in state courts] is the filing of ‘copy cat’ class actions (i.e., duplicative class actions asserting similar claims on behalf of essentially the same people).”). As noted in the Senate Report, “sometimes these duplicative actions are filed by lawyers who hope to wrest the potentially lucrative lead role away from the original lawyers, [and] in other instances, the ‘copy cat’ class actions are blatant forum shopping – the original class lawyers file similar class actions before different courts in an effort to find a receptive judge who will rapidly certify a class.” Id. When these cases are filed in state courts, there is no way to coordinate or consolidate the cases; the cases must be litigated in an “uncoordinated, redundant fashion.” Id. “The result is enormous waste – multiple judges of different courts must spend considerable time adjudicating precisely the same claims asserted on behalf of precisely the same people.” Id. at 19-20. “As a result, State courts and class counsel may ‘compete’ to control the cases, often harming all the parties involved.” Id. See also Interstate Class Action Jurisdiction Act of 1999, H.R. Rep. No. 106-320 (1999) at 9.
[30] 746 N.E.2d 1242 (Ill. Ct. App. 2001).
[31] Id.at 1254.
[32] Id.
[33] See Matthew J. Wald, Suit Against Auto Insurer Could Affect Nearly All Drivers, N.Y. Times, Sept. 27, 1998, § 1, at 29.
[34] Senate Report at 20.
[35] The Alabama Supreme Court finally issued several rulings in 1999 that have dampened this behavior, and the Alabama legislature has established restrictions as well. But when such action is taken in one state, counsel simply move the class action show to another jurisdiction where the courts have shown a lax attitude toward regulating the class device; many believe that is why so many class actions are sprouting in Jefferson County, Texas and Madison County, Illinois.
[36] ICJ/RAND Study at 21-22.
[37] Patrick Slevin, Class-Action Lawsuit Abuse Threatens Quality Of Life For All Floridians, Tampa Tribune, Sept. 16, 2000.
[38] Kamilewics v. Bank of Boston, 92 F.3d 507 (7th Cir. 1996).
[39] “Class Action Lawsuits: Examining Victim Compensation and Attorneys’ Fees: Hearings Before the Subcommittee on Administrative Oversight and the Courts of the Senate Committee on the Judiciary,” 105th Cong. (1997) (statement of Martha Preston).
[40] Final Order of Settlement, Unfried v. Charter Communications, Inc., No 99-L-48 (granted December 21, 2000).
[41] Robert D. Mauk, Lawyers Win Big In Class-Action Suits: Is It Justice Or Greed?, Charleston Daily Mail, June 19, 2001
[42] Jerry Heaster, Enough Already With Lawsuits, Kansas City Star, July 10, 1999, at C1.
[43] Editorial, We All Pay Dearly For Costly Class Actions, Corpus Christi Caller-Times, January 8, 2001.
[44] See David Koenig, Blockbuster tried to settle class-action lawsuits over late fees, Associated Press, June 6, 2001.
[45] Wendy Wilson, Blockbuster to settle suits on late fees, Daily Variety, June 4, 2001, at 10.
[46] Cynthia Corzo, Blockbuster Settles Class-Action Lawsuit in a Smart Business Move, Miami Herald, June 10, 2001.
[47] Monica Roman, A Blockbuster of a Legal Bill, Bus.Week, June 18, 2001, at 46.
[48] Phillip D. Bissett, Letter to the Editor, Wash. Post, June 8, 2001, at A28.
[49] Actions Without Class, supra n.1.
[50] See Barrow S.S. Co. v. Kane, 170 U.S. 100, 111 (1898) (“The object of the [diversity jurisdiction] provisions . . . conferring upon the [federal] courts … jurisdiction [over] controversies between citizens of different States of the Union . . . was to secure a tribunal presumed to be more impartial than a court of the state in which one litigant[ ] resides.”); Pease v. Peck, 59 U.S. (18 How.) 518, 520 (1856); Martin v. Hunter’s Lessee, 14 U.S. (1 Wheat) 304, 307 (1816). See also The Federalist No. 80, at 537-38 (Alexander Hamilton) (Jacob E. Cooke ed. 1961) (“[I]n order to [ensure] the inviolable maintenance of that equality of privileges and immunities to which the citizens of the union will be entitled, the national judiciary ought to preside in all cases in which one state or its citizens are opposed to another state or its citizens. To secure the full effect of so fundamental a provision against all evasion and subterfuge, it is necessary that its construction should be committed to that tribunal which, having no local attachments, will be likely to be impartial between the different states and their citizens, and which, owing its official existence to the union, will never be likely to feel any bias inauspicious to the principles [up]on which it is founded.”).
[51] See The Class Action Fairness Act of 1999: Hearing before the Subcomm. On Administrative Oversight and the Courts of the Senate Comm. on the Judiciary, S. Hrg. No. 106-465, 106th Cong. (1999) at 100 (prepared statement of Prof. E. Donald Elliott, Yale Law School). See also James William Moor & Donald T. Weckstein, Diversity Jurisdiction: Past, Present and Future, 43 Tex L. Rev. 1, 16 (1964). See also Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87 (1809) (Marshall, C.J.) (“[Even if] tribunals of states will administer justice as impartially as those of the nation, to the parties of every description, . . . the Constitution itself . . . entertains apprehensions of the subject . . . , [such] that it has established national tribunals for the decision of controversies between . . . citizens of different states.”).
[52] John P. Frank, Historical Bases of the Federal Judicial System, 13 Law & Contemp. Probs. 3, 22-28 (1948); Henry J. Friendly, The Historic Bases of Diversity Jurisdiction, 41 Harv. L. Rev. 483 (1928).
[53] John J. Parker, The Federal Constitution and Recent Attacks Upon It, 18 A.B.A. J. 433, 437 (1932).
[54] See, e.g., Zahn v. International Paper Co., 414 U.S. 291 (1973).
[55] See, e.g. Rosmer v. Pfizer Corp., 263 F.3d 110, 114-18 (4th Cir. 2001); Gibson v. Chrysler Corp., 261 F.3d 927 (9th Cir. 2001); In re Abbott Labs., 51 F.3d 524, 526-27 (5th Cir. 1995), aff’d sub nom., Free v. Abbott Labs., 120 S. Ct. 1578 (2000) (per curiam; affirmance on tied vote); Stromberg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928, 930-34 (7th Cir. 1996).
[56] Senate Report at 14.
[57] 14B Charles A. Wright, et al., Federal Practice and Procedure, § 3704, at 127 (3d ed. 1998) (emphasis added).
[58] See Davis v. Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 797 (11th Cir. 1999) (emphasis added).
[59] Id.
[60] Id. at 798-99 (emphasis added).
[61] In re Prudential Ins. Co. America Sales Practice Litig., 148 F.3d 283, 305 (3d Cir. 1998) (emphasis added). Agreement with this view can also be found in Cohen v. Office Depot, Inc., 204 F.3d 1069, 1079 (11th Cir. 2000) (noting that there are “persuasive reasons” for viewing the class action in its totality for purposes of determining the existence of federal jurisdiction).
[62] The Interstate Class Action Jurisdiction Act of 1999: Hearing on H.R. 1875 and H.R. 2005 Before the House Comm. on the Judiciary, 106th Cong. (1999) (statement of Hon. Walter E. Dellinger), available at http://www.house.gov/judiciary/dell0721.htm.
[63] See Federal News Service Transcript, Mass Torts and Class Actions: Hearing before the Subcomm. on Intellectual Property and the Courts, House Comm. on the Judiciary (March 9, 1998), at 19 (“FNS Transcript”).
[64] Id. at 33-34.
[65] Gibbons v. Ogden, 22 U.S. (9 Wheat) 1, 194-195 (1824).
[66] Jefferson County Election Results, available at www.co.jefferson.tx.us/cclerk/election_2000.htm.
[67] 2000 Official Presidential General Election Results, available at http://fecweb1.fec.gov/pubrec/ 2000presgeresults.htm.
[68] Civil filings in state trial courts of general jurisdiction have increased 28 percent since 1984 (versus an increase of only 4 percent in the federal courts). See B. Ostrom & N. Kauder, Examining the Work of State Courts, State Justice Institute, 1997, at 15 (Court Statistics Project 1998). Most tellingly, in most jurisdictions, each state court judge is assigned an average of 1,000 to 2,000 new cases each year. Id. In contrast, each federal court judge was assigned an average of 500 cases last year. See L.H. Mecham, Judicial Business of the United States Courts: 2000 Report of the Director 20, 22 (2001) (Administrative Office of the U.S. Courts) The federal court trend is downward. Since 1997, there has been an eight percent decrease in the number of pending civil cases in our federal courts nationwide. Id. at 22.
[69] Senate Report at 16.
[70] Id.
[71] See 28 U.S.C. § 1407.
[72] Senate Report at 19 (“Yet another common abuse [of the class action device in state courts] is the filing of ‘copy cat’ class actions (i.e., duplicative class actions asserting similar claims on behalf of essentially the same people).”). As noted in the Senate Report, “sometimes these duplicative actions are filed by lawyers who hope to wrest the potentially lucrative lead role away from the original lawyers, [and] in other instances, the ‘copy cat’ class actions are blatant forum shopping – the original class lawyers file similar class actions before different courts in an effort to find a receptive judge who will rapidly certify a class.” Id. When these cases are filed in state courts, there is no way to coordinate or consolidate the cases; the cases must be litigated in an “uncoordinated, redundant fashion.” Id. “The result is enormous waste – multiple judges of different courts must spend considerable time adjudicating precisely the same claims asserted on behalf of precisely the same people.” Id. at 19-20. “As a result, State courts and class counsel may ‘compete’ to control the cases, often harming all the parties involved.” Id. See also House Report at 9.
[73] Senate Report at 21.
[74] Advisory Comm. Memo at 14.
[75] See American Judicature Society (State Justice Institute), Certification of Questions of Law: Federalism in Practice 28, 34-35 (1995) (noting that over a several year period, federal appeals and trial courts had certified hundreds of state law questions to state appellate courts for resolution).
[76] See Senate Report at 16-17 (citing numerous examples).
[77] Federal Judicial Center, Empirical Study of Class Actions in Four Federal District Courts 68-69 (1996).
[78] Senate Report at 15-22.
[79] See, e.g., State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967) (“in a variety of contexts, [federal courts] have concluded that Article III poses no obstacle to the legislative extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are not co-citizens”). In State Farm, the Court noted that the concept of “minimal diversity” providing the basis for diversity jurisdiction in the class action context had already been discussed in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). On several subsequent occasions, the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction where there is less than complete diversity among the parties is wholly consistent with Article III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 199-200 (O’Connor, J., dissenting) (“Complete diversity . . . is not constitutionally mandated.”); Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826 (1989) (“The complete diversity requirement is based on the diversity statute, not Article III of the Constitution.”); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978) (“It is settled that complete diversity is not a constitutional requirement.”); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity).
[80] Actions Without Class, supra n.1.