Arizona Effects of the Class Action Fairness Act

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1 24 A R I Z O N A AT T O R N E Y J A N U A R Y

2 Arizona Effects of the Class Action Fairness Act BY BRIAN CABIANCA On February 18, 2005, President George W. Bush signed into law the Class Action Fairness Act of 2005 ( CAFA or Act ), calling it a critical step toward ending the lawsuit culture in our country. 1 CAFA has dramatically altered class-action litigation by making several significant changes to current class-action procedure. Specifically, CAFA: expands federal court jurisdiction over class actions, expands authority for the removal to federal courts of class actions filed in state courts, and requires greater oversight over class-action settlements in federal courts.2 The Act applies to all class actions filed after February 18, 2005,3 and will have a significant impact on the litigation of class actions filed in Arizona. MAJOR CHANGES TO FEDERAL PROCEDURE Expansion of Diversity Jurisdiction One of the stated intents of CAFA is to limit forum shopping by placing more class actions within federal court jurisdiction and ensuring that class actions of a national scope are litigated in federal court.4 Prior to CAFA, federal courts generally had diversity jurisdiction over class actions only where (1) there existed complete diversity of citizenship (that is, no plaintiff and no defen- dant resided in the same state) and (2) a claim of at least one individual class member exceeded $75,000. Thus, class counsel often could defeat diversity jurisdiction by ensuring that at least one plaintiff and one defendant resided in the same state, or by expressly limiting the damages any one class member sought to less than $75,000. Under these prior jurisdictional requirements, class counsel frequently were able to defeat federal jurisdiction and litigate large, national class actions in certain state courts perceived to be plaintiff-friendly. As proof of this, critics of the prior jurisdiction requirements indicated that filings of class action in state Brian Cabianca is a litigation partner in the Phoenix office of Squire, Sanders & Dempsey, LLP, and frequently represents parties in class-action litigation. The author wishes to recognize the substantial contribution of Holly Appelgreen, a student at the Arizona State University College of Law. J A N U A R Y A R I Z O N A AT T O R N E Y 25

3 Arizona Effects of the Class Action Fairness Act courts increased by 1,000 percent over the last 10 years, which was well over three times the rate of increase for such filings in federal courts. 5 The increase in class-action filings in plaintiff-friendly state courts has been even more astounding. An often-cited magic or magnet jurisdiction for class actions has been the Circuit Court of Madison County, Illinois, a mostly rural county that covers 725 square miles and an otherwise improbable jurisdiction for class actions. Yet, from 1998 to 2003, the number of class actions filed per year in Madison County increased from two to Indeed, just prior to the enactment of CAFA, plaintiffs attorneys filed 20 class actions in one week in Madison County alone. 7 Lessening of Diversity Requirements CAFA seeks to limit such forum shopping by expanding diversity jurisdiction for class actions so that federal courts will now decide most interstate class actions. 8 CAFA does this by removing the complete-diversity impediment and imposing a lesser minimaldiversity requirement for federal jurisdiction over class actions. Under CAFA, the diversity requirement is now met where (1) any member of the proposed class is a citizen of a different state from any defendant and (2) the amount in controversy exceeds $5 million after aggregating claims of all purported class members, exclusive of interest and costs. 9 Thus, class counsel will no longer be able to defeat federal diversity jurisdiction by simply joining a non-diverse defendant. Moreover, unlike prior law, CAFA permits defendants to consider the citizenship of any member (rather than just the named members) of the proposed class in determining whether diversity exists. 10 Restrictions on Diversity Jurisdiction Remain Although CAFA expands federal jurisdiction to include most multistate class actions, federal diversity jurisdiction over class actions is of course not unlimited. The Act provides for certain circumstances under which the federal district courts either may or must decline to exercise federal jurisdiction over class actions. Specifically, CAFA requires district courts to abstain from exercising jurisdiction over predominantly intrastate disputes where more than two-thirds of the proposed class members are citizens of the original forum state, and either (1) the primary defendants are citizens of the original forum state, (2) at least one defendant whose conduct is a significant basis for the claims is a citizen of the original forum state, (3) the principal injuries from the conduct of each defendant were incurred in the original forum state, or (4) no other similar class action has been filed against any of the defendants during the preceding three years. 11 Likewise, where more than one-third (but less than two- thirds) of class members and the primary defendants are citizens of the original forum state, a district court may decline to exercise jurisdiction after considering an array of factors relating to the nexus between the forum state and the class action. 12 These factors include: whether the claims involve matters of national or interstate interest whether the claims will be governed by the laws of the state in which the action was filed, or by the laws of other states whether the class action was pled to avoid federal court jurisdiction the forum state s nexus to the class members, the alleged harm, or the defendants the number of class members from the forum state as compared to the number of class members from any other state, and the dispersion of the remaining class members the existence of any class actions raising similar claims within the preceding three years. 13 Thus, federal courts will have discretion to abstain from exercising jurisdiction over truly local controversies involving intrastate parties. Expansion of the Removal Statutes Before CAFA, defendants often had to overcome several obstacles to remove a case from state to federal court. One such obstacle was that class actions often could not be removed unless every defendant named in the suit agreed to the removal. Under CAFA, however, any single defendant may remove a case to federal court, and consensus among the defendants is no longer required. 14 Removal is also now permitted even where a defendant is a citizen of the forum state where the case was filed. 15 Thus, class counsel who file class actions in state court in an attempt to avoid the federal courts will find that their lawsuits are now more easily removed to federal court. Tightening Settlement Loopholes Prior to CAFA, another common complaint about class actions was that class members would often receive only coupons or other awards of little or no benefit, while their class attorneys collected exorbitant fees. In the infamous Bank of Boston case, for example, an Alabama state court awarded less than $8.76 to individual class members as a result of improper deductions from their escrow accounts. 16 Yet, class counsel received more than $8.5 million in fees from the settlement. To add insult to injury, the attorneys fees were paid by taking deductions from the class members escrow accounts. 17 One class member recalled in disbelief how she received $4 from the settlement, but an $80 miscellaneous deduction was taken from her escrow account, which she later 26 ARIZONA ATTORNEY JANUARY

4 Arizona Effects of the Class Action Fairness Act learned was used to pay her class counsel s $8.5 million fee. 18 In an effort to curb such abuses, CAFA includes a Consumer Class Action Bill of Rights. Under the CAFA Bill of Rights, federal courts are to give greater scrutiny to coupon settlements, and coupon settlements are prohibited absent written findings by the court that the settlement actually benefits class members. 19 The CAFA Bill of Rights also limits attorneys fee awards by requiring that all contingency fee awards based on coupon settlements be based on amounts that class members actually redeem, rather than the value of total coupons made available. 20 In some cases, expert testimony may be required to determine the value of the redeemed coupons. 21 If a settlement includes both a recovery of coupons and equitable relief, the portion of the attorney-fee award attributable to coupons must still be based on the number of coupons actually redeemed, while the portion of the fee attributable to the equitable relief must be based on the actual time expended on the case. 22 The Bill of Rights section of CAFA also places an added layer of review over class-action settlements in federal court. In this regard, the Act requires that all proposed class-action settlements be served upon the appropriate federal and state officials no later than 10 days after the proposed settlement is filed. 23 The designated official at the federal level is the U.S. Attorney General and at the state level is the state regulator or licensing authority with jurisdiction over the subject matter of the allegations in the complaint. 24 Where there is no such state official, the proposed settlement must be served on the state attorney general. 25 CAFA S ARIZONA IMPACT Despite its broad scope, CAFA does not apply to all actions filed in Arizona or other state courts. The Act will leave in state courts (1) class actions in which all plaintiffs and defendants are residents of the same state, (2) class actions with fewer than 100 plaintiffs, (3) class actions involving less than $5 million, (4) class actions in which a state government entity is the primary defendant, and (5) class actions brought against a company in its home state, in which Fewer class actions will likely be litigated in Arizona superior courts as a result of CAFA. Most out-of-state defendants are more comfortable in federal court, where they perceive less risk (real or imagined) of a local bias. 28 ARIZONA ATTORNEY JANUARY 2006 two-thirds or more of the class members are also residents. 26 As for the remaining cases which likely make up the majority of class actions filed in Arizona CAFA will have a significant impact. In particular, fewer class actions will likely be litigated in Arizona superior courts as a result of CAFA s expanded federal jurisdiction and removal provisions. One study indicates that nearly 50 percent of class actions litigated in state courts during a fiveyear period would have been removable to federal court under CAFA. 27 In some of the magnet jurisdiction where plaintiffs frequently file their class actions, more than 85 percent of the class actions would have been removable to federal court. 28 Along with a likely decrease in class actions litigated in Arizona superior courts, the federal courts in Arizona are likely to see an increase in the number of pending class actions. Although the superior court judges in Arizona have competently handled class actions (especially since the implementation of the complex case procedures), most outof-state defendants are more comfortable in federal court, where they perceive less risk (real or imagined) of a local bias. In that regard, the Congressional Budget Office predicts that CAFA will result in most class-action lawsuits being heard in federal district court rather than state court. 29 Moreover, although CAFA was designed to prevent forum shopping, it will likely just result in a different type of shopping. Class counsel eager to avoid litigating in federal court will shop for potential suits in key states where most potential class members live and where most of the injury was suffered. Likewise, class counsel will soon identify and file their class actions in the federal district courts they perceive as being most likely to certify a class. In addition, class counsel may shift their focus from friendly federal district courts to friendly federal appellate courts. In that regard, some commentators expect that more cases may be filed in the district courts here in the Ninth Circuit, and that fewer class actions will be filed in district courts within the Fourth, Fifth and Seventh Circuits. 30 Finally, class-action settlements in the federal district courts in Arizona will be subject to greater scrutiny. Every federal classwww.myazbar.org

5 action settlement is now subject to policing by federal and state officials, as well as more analysis by federal judges. This additional scrutiny creates an entirely new layer of discussion, analysis and negotiation. Defendants may soon be less willing (or unable) to settle frivolous federal class actions for nominal amounts and instead may be forced to incur the expense of litigating such cases to a conclusion. AZ AT endnotes 1. Press Release, White House, President Signs Class-Action Fairness Act of 2005 (Feb. 18, 2005) available at 02/ html. 2. Beth Boland, The 2005 Class Action Fairness Act: What It Does, What It Doesn t Do, and What It Means for the Future, MONDAQ BUS. BRIEFING, April 11, 2005, available at 2005 WLNR Class Action Fairness Act of 2005, Pub. L. No , 119 Stat Id S. REP. NO , at 14 (2005). 6. Id. 7. Press Release, supra note S. REP. NO , at 24 (2005). 9. Class Action Fairness Act Id. 11. Id. 12. Id. 13. Id. 14. Id Id. 16. S. REP. NO , at 16 (2005) (citing Kamilewicz v. Bank of Boston, 92 F.3d 506, 508 (7th Cir. 1960)). 17. Id. 18. Id. 19. Id. 20. Class Action Fairness Act Id. 22. Id. 23. Id. 24. Id. 25. Id. 26. S. REP. NO , at (2005). 27. Id. at Id. 29. Id. at Mark Herrmann & Pearson Bownas, Possible Unintended Consequences of the Class Action Fairness Act, METRO. CORP. COUNS., April 2005, at 5. JANUARY 2006 ARIZONA ATTORNEY 29