Testimony of Peter N.
Detkin
Vice President, Assistant
General Counsel, Intel Corporation
Before the Committee on the Judiciary,
Chairman Sensenbrenner, Congressman Conyers, and distinguished members of the House Judiciary Committee, thank you for inviting me to testify before you today on behalf of Intel Corporation and the Semiconductor Industry Association (SIA), on the subject of class action litigation reform. My name is Peter Detkin, and I am Vice President and Assistant General Counsel at Intel Corporation.
For more than three decades, Intel Corporation has developed technology contributing to the computer and Internet revolution that has changed the world. Founded in 1968 to build semiconductor memory products, Intel introduced the world’s first microprocessor in 1971. Today, Intel supplies chips, boards, systems, software, networking and communications equipment, and services that comprise the building blocks of the Internet. Intel's mission is to be the preeminent building block supplier to the worldwide Internet economy.
The Semiconductor Industry
Association is the premier trade association representing the
Intel, the SIA, and much of the rest of the technology community are hopeful that you will act during this Congress to address a growing problem in our legal system: abusive class action litigation. Recently, a broad array of technology companies, including Intel and other members of the SIA, came together as signatories of an open letter to members of Congress, encouraging your support for H.R. 2341, the Class Action Fairness Act of 2001. I want to thank Congressman Goodlatte and Congressman Boucher for sponsoring this bill, as well as its many Republican and Democratic cosponsors. The technology community supports H.R. 2341 because we believe that it represents a good faith, bipartisan approach to preserving what is useful and effective about the class action mechanism, while at the same time discouraging abuse and improving the class action process to make it simpler, fairer, and faster for all parties involved.
The class action device is intended to promote more efficient resolution of suits involving multiple plaintiffs or defendants with very similar claims. It can enable plaintiffs of limited means to pursue small but nonetheless significant claims. It also may, in rare cases, be the only practical method of litigating and resolving important social issues.
In recent years, however, there has been an increase in the number of abusive class action lawsuits filed in state courts. Of particular concern, we are seeing an aggressive move by a limited number of plaintiffs’ attorneys to file class actions against technology companies in areas such as allegedly defective products. It is obvious that many of these suits are brought as class actions because the injury alleged is either trivial, highly speculative, or wholly nonexistent.
As most of you are aware, technology companies have long been a prime target in securities litigation. Quite often, these private securities suits are without merit and are designed simply to coerce settlements out of deep-pocketed defendants. Many of you joined to support enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA) and later the Securities Litigation Uniform Standards Act of 1998 (SLUSA), to address this problem. These narrowly tailored laws were designed to weed out frivolous “strike” securities suits without unduly impeding the ability of shareholders with legitimate claims to seek relief in federal court. The record suggests that a similar response is now needed to address other forms of abusive class action litigation.
I. The Problem
Until the last
decade, virtually all national class actions were filed in federal court. In recent years, however, we have seen an
explosion of class action filings in state court. Although the absence of centralized data-keeping
in the state courts makes it impossible to quantify the problem precisely, the
available empirical and anecdotal evidence leaves no doubt in my mind that state court class actions against
out-of-state defendants have increased many-fold since 1990. This point is not controversial. The migration of national class actions to
state courts has been acknowledged by leading plaintiffs’ lawyers,[1]
noted by federal judges,[2]
demonstrated by empirical studies,[3]
and widely reported in the press. In
fact, the Washington Post recently ran an editorial entitled “Actions without
Class,”[4]
which highlighted the seriousness of the problem.
The growing class action abuse
phenomenon has had a number of serious, adverse consequences. The most troubling of these are:
increased forum shopping; manipulation of procedural rules to avoid
federal diversity jurisdiction; displacement of the laws of some states by
local judges in other states; the resolution of class action cases by
ill-equipped state courts; “strike” suits intended to coerce quick settlements
from defendants; collusive settlements, where plaintiffs’ lawyers receive large
fees while accepting settlements of little or no value to class members; and
grossly inflated “bounties” being paid to lead plaintiffs. I’ll address some of these problems that we
have seen at Intel.
Forum
Shopping
Lax enforcement of certification rules in a few jurisdictions allows plaintiffs bringing national class actions to shop around for the most favorable forum, even when that jurisdiction has little connection to the underlying dispute. As a result, a few states – and a few local jurisdictions within those states – receive a disproportionate share of class action filings. Furthermore, if one of these states happens to crack down on class action abuses, the lawyers simply shift their business to other jurisdictions.
Intel has had first-hand experience
with this phenomenon. In one instance,
thirteen class actions were filed in a three-week period in state courts in
In both of these litigation “clusters,” the plaintiffs simultaneously pursued motions in several state courts, all of them seeking to certify a nationwide class. The cases were settled before any of the courts certified a class. Had this not been done, the decision as to where the class action would have been prosecuted and tried would have been decided on the basis of this unseemly race to the courthouse, and not based on traditional notions of judicial administration such as the convenience of the parties, the ability to compel testimony of witnesses, and the location of documentary and physical evidence.
Manipulation
of the Rules to Avoid Federal Diversity Jurisdiction
Lawyers are
often able to keep national class actions in federal court by manipulating the
rules that govern federal jurisdiction.
Under current law, a case may be removed from state to federal court if
all of the plaintiff class representatives are citizens of a different state
than all of the defendants, and if each plaintiff is seeking more than $75,000
in damages. To prevent removal, the
class counsel may include a named plaintiff that has the same citizenship as
one of the defendants, or may name a local “straw defendant” that has the same
citizenship as one of the plaintiffs, or may “shave” claims by forgoing damages
for class members in excess of $74,999.[5] These tactics may cause considerable expense
and inconvenience for local defendants, and may severely disadvantage the class
members whose lawyers have surrendered valuable claims.
Displacement
of State Law
State courts
hearing national class actions sometimes apply the law of the forum state to
govern the claims of all class members, even when many members of the class
live in states whose laws differ dramatically.
A local court entertaining a national class action against an auto
insurer, for example, recently held that the defendant insurance company acted
illegally in using “non-OEM” parts (i.e., parts not produced by the original
equipment manufacturer) in preparing estimates for repairs – even though most
states permit (and some states require) use of non-OEM parts in an
effort to benefit consumers by keeping down repair costs.[6] In cases like this, local courts effectively override the
considered policy choices of other states.
Moreover, idiosyncratic local rules
also sometimes allow plaintiffs’ counsel to manipulate the system to the
disadvantage of the out-of-state defendant.
We experienced that problem in a case in the
In addition, many state courts have neither sufficient experience nor resources to handle complex class actions. They also lack any mechanism to consolidate related class suits that are brought in other jurisdictions, meaning that defendants often are required to defend against multiple class actions filed in state courts across the country. Intel has experienced this problem first-hand; as I mentioned earlier, more than once we have been forced at substantial expense to defend identical suits in jurisdictions from coast to coast. Federal courts, in contrast, have the expertise and resources necessary to deal adequately with multi-party litigation, and existing procedures allow related class actions to be consolidated into a single proceeding for pretrial purposes. At the same time, there is little doubt that local courts sometimes give favorable treatment to local plaintiffs, at the expense of out-of-state class action defendants; indeed, the Framers of the Constitution provided for diversity jurisdiction in the federal courts to guard against precisely that danger of bias against out-of-state parties.
“Strike
Suits”
Class action litigation often involves lawyer-generated suits challenging asserted misconduct that caused no real injury. Although the amounts at stake in these cases for individual class members are small, the enormous size of the classes, along with the unpredictability of juries in some jurisdictions, makes such suits “bet the company” propositions for the defendant. This reality, combined with the substantial expense of litigating a massive class action (often on several fronts), can place significant pressure on the defendant to settle, regardless of the merits.
Intel has had experience with this problem. For example, one of the sets of suits I mentioned earlier involved Intel’s original PentiumÒ processor. Despite extensive pre-production testing by Intel and major computer manufacturers, the initial version of the PentiumÒ processor contained an undetected flaw. Intel's scientists determined that the problem would arise approximately once in every nine billion random division operations, which was tantamount to once in 27,000 years for the average spreadsheet user. In fact, after millions of processors were shipped, there was only one confirmed instance of a user encountering the flaw: a mathematics professor who was doing theoretical analysis of prime numbers noticed reduced precision at the 9th place to the right of the decimal in specific, rare circumstances. His observation was posted on the Internet, drawing public attention in early November 1994.
On
On December 2 – the day after Intel announced its lifetime replacement policy – the class action complaints began to appear[7]. In all, thirteen class actions were filed in a three week-period in state courts in Chicago, Detroit, Denver, Camden, New Jersey, and San Jose, California, as well as in the federal district courts in Colorado and California, all alleging the same facts, all asserting essentially the same claims, and all purporting to be class actions on behalf of the same nationwide class of consumers. When these multiple class actions were settled in March 1995, Intel confirmed only that it would continue to offer free replacements, maintain the service centers, operate the toll-free telephone numbers, and provide the diagnostic computer programs – all of which Intel was doing before the settlement. The plaintiffs’ lawyers, meanwhile, received fees of $4,272,969 (in addition to costs of approximately $127,000). These sums do not include Intel’s expenses in defending the litigation.
A similarly abusive set of class actions was triggered by an Intel press release, issued on January 5, 1996, announcing that, as a result of a single error in a pre-release (“beta”) version of compiler software (the error essentially being one misplaced parenthesis among hundreds of thousands of lines of programming code), the results of one particular “benchmark” test on 100, 120 and 133 MHz PentiumÒ processors were incorrect. The performance yardstick affected was not widely used and was almost certainly not used by consumers in making purchase decisions. The erroneous benchmark results were never available in any consumer publication or on Intel's Web site, and at all times Intel’s web site provided dozens of other benchmarks that were accurate and were of more relevance to consumers. A small article appeared in the New York Times on January 6, quoting an independent expert as saying that “[i]t was an innocent mistake.”
Two business days later,
however, the first class action was filed alleging that Intel had engaged in
false and misleading advertising by releasing erroneous test results. Ultimately, seven class actions were filed,
including five in a nine-day period, in the state courts in
Confusing Class
“Opt-Out” Notices
Because class members are
bound by the terms of a class settlement unless they affirmatively “opt out” of
the class, it is essential that all members of the class receive a description
of the settlement that is intelligible and comprehensive. Yet class members often are sent notices that
are easily mistaken for junk mail and that, on examination, are virtually
incomprehensible. I don’t think I
exaggerate when I say that most of us in this room have received such notices,
and that many recipients find the notices impossible to understand. For example, if any of you rent movies at Blockbuster,
you probably were handed a two-foot long receipt full of legalese at some point
advising you of the proposed terms of a class action coupon settlement in
If the proposed settlement is approved, class members will receive compensation in the form of certificates to be used toward certain rentals or non-food purchases, including some or all of: (1) $1.00 off any rental or non-food purchase; (2) free “Blockbuster Favorites” and five-day rentals; and (3) rent-one-get-one-free rentals. If class members paid extended viewing fees between April 1, 1999 and April 1, 2001 in an aggregate amount (1) equal to or lesser than $30; (2) between $30 and $60; or (3) over $60, they will receive certificates worth approximately $9, $13, and $20, respectively, upon the submission of a valid Class Settlement Claim Form (available at www.blockbuster.com or by calling 1.800.224.2703) by December 15, 2001 or upon the completion of a transaction in a Blockbuster company-owned or participating franchise store during the Certificate Period, which shall be a 120-day period to occur within 12 months of a final nonappealable judgment. Settlement Class members who did not pay extended fees to Blockbuster between March 1, 1998 and November 15, 2000 must submit a valid Class Settlement Claim Form by December 15, 2001, to receive certificate consideration. Class members must also submit a Class Settlement Claim Form to receive certificate compensation for fees paid to Blockbuster for the nonreturn of rental items. Nonreturn fees shall be treated as extended viewing fees for the purpose of determining which of the three certificate levels a class member will receive. Members may use the certificates during the Certificate Period.
Although the notice advised customers “[t]his notice may affect your rights, please read carefully,” I wonder how many ordinary Americans waded through it. I suspect a significant number did not. In fact, after receiving my receipt from Blockbuster, I posted it outside my office and challenged Intel’s lawyers to try to understand it.
Disproportionate
“Bounties” for Lead Plaintiffs
The class action problem is magnified by the growing practice of giving enhanced payments (or “bounties”) to class representatives, offering them a share of the settlement award that is disproportionately larger than that provided to other class members. Such settlements lead to a divergence of interests between the class representatives – who will receive the bounty only if the settlement is approved – and the absent class members, who receive no bounty at all.[8] In such circumstances, class representatives cannot be expected to look out for the interests of other members of the class.
II. The Solution
Most of these problems could be either avoided altogether or substantially ameliorated if national class actions were moved to the federal courts, where uniform procedures that protect the rights of the parties could be applied; judges and their staffs would be, on the whole, better able to deal with complex, nationwide cases; and the courts could take steps to avoid duplicative litigation. We believe that H.R. 2341 goes a long way towards addressing all of the problems that I have mentioned.
H.R. 2341 Would Move Large, Interstate Class Actions to Federal Court, Where They Belong.
As I mentioned earlier, current law provides that federal diversity jurisdiction for class actions does not exist unless every member of the class is a citizen of a different state than every defendant, and unless each individual class member is seeking damages in excess of $75,000. To move the largest and most complex class actions into federal court, the bill would change the law to provide that federal jurisdiction exists whenever any member of a plaintiff class is a citizen of a different state than any defendant, so long as the aggregate amount at issue in the suit exceeds $2 million. The bill contains exceptions to keep class actions in state court when they primarily involve matters of local concern.
H.R. 2341 Would Establish Needed Consumer/ Plaintiff Protections.
H.R. 2341 provides a number of new protections for plaintiff class members. It would establish a “plain English” requirement assuring that notices sent to class members are written in plain, easily understood language and present essential information in an easily digestible tabular format. The bill also seeks to address coupon settlements that are unfair or abusive: judicial scrutiny would be required for settlements that provide class members only coupons or other noncash benefits as relief for their injuries. The bill would bar approval of settlements in which class members suffer a net loss. It likewise addresses lead plaintiff “bounties” by precluding their payment when it would result in the interests of class representatives significantly diverging from those of absent class members. Finally, the bill provides assurance that out-of-state class members are not disadvantaged by settlements that award some class members a larger recovery simply because those class members live closer to the state court.
H.R. 2341 Would Establish Improved Pleading
Requirements.
Before
an action could be maintained as a class action, H.R. 2341 would require that
the complaint specify the nature and amount of relief sought, the nature of
injury to class members, and, if the
defendant allegedly acted with a particular state of mind, the facts that will
demonstrate that state of mind. The bill
also would stay discovery during the pendency of a motion to dismiss on the
pleadings. A similar pleading requirement was enacted as
part of both the Private Securities Litigation Reform Act of 1995 and the Y2K
Act.
H.R. 2341 Would Permit Interlocutory Appeal of Class Certification Decisions.
Because the court’s certification decision often is decisive – as a decision to certify may place insurmountable pressure on the defendant to settle, while a refusal to certify may force the plaintiffs to abandon their claims – the bill would permit immediate interlocutory appeal of certification decisions as a matter of right. This would help to stop strike suits based on insubstantial claims, while allowing legitimate class action litigation to proceed.
* * * *
We should be clear on precisely what is at stake in this legislation. Intel and the SIA believe that the class action device is an essential part of the legal system, and one that has valuable uses. But the existence of serious abuses in the class action process is inarguable. Frivolous class action lawsuits impose substantial expense on defendants, sapping resources that could be used for productive purposes. They clog the judicial system. And they provide no real relief to consumers. Intel and the SIA therefore strongly support H.R. 2341 because it is thoughtfully crafted, taking a fair and balanced approach to fixing class action litigation for all parties involved.
I am happy to answer any questions that members of Committee may have. Thank you.
[1] See E.J. Cabraser, Life After Amchem: The Class Struggle Continues, 13 Loy. L.A.L.Rev. 373, 368 (1998) (“[i]t is no secret that class actions – formerly the province of federal diversity jurisdiction – are being brought increasingly in state courts”).
[2] See David v. Carl Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 798 (11th Cir. 1999) (Nangle, J., concurring) (“[p]laintiffs’ attorneys are increasingly filing nationwide class actions in various state courts”).
[3] See J. Beisner & J. Miller, They’re Making a Federal Case Out of It … In State Court, Civil Justice Rep’t No. 3 (Sept. 2001), to be reprinted in Harv. J. L. & Pol. (2001/2002).
[4] See Actions
Without Class,
[5] See David v. Carl Cannon Chevrolet-Olds, Inc., 182 F.3d 792, 793-794 (11th Cir. 1999).
[6] See Snider v. State Farm Mut. Auto. Ins. Co.,
No. 97-L-114 (
[7] One class action was filed on November 29, but was withdrawn almost immediately on plaintiff’s own accord and was not refilled. Thus, the class actions that were involved in the eventual settlement were all filed after the replacement policy was already announced.
[8] See Benedict & Seidel, Special Compensation to Named Plaintiffs in Securities Class Actions, 24 Rev. of Sec. & Commodities Reg. 195, 200 (Nov. 13, 1991); Krislov, Scrutiny of the Bounty: Incentive Awards for Plaintiffs in Class Litigation, 18 Ill. B.J.286 (1990) (“[m]any commentators have said that awarding representatives any more than their proportionate amount of the class recovery creates unacceptable conflict between the class and representatives”).