The 2005 Class Action Fairness Act: What It Does, What It Doesn t Do, And What It Means For The Future

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1 Class Action Litigation The 2005 Class Action Fairness Act: What It Does, What It Doesn t Do, And What It Means For The Future On February 18, 2005, President Bush signed into law the Class Action Fairness Act of 2005 ( CAFA ), calling it a practical way to begin restoring common sense and balance to America s legal system. CAFA is effective immediately, and will apply to all civil actions filed on or after its enactment. CAFA changes the current law in three ways: CAFA is effective immediately, CAFA is effective and will apply immediately, to all civil and actions will apply filed to on all or civil after actions its filed enactment. on or after its enactment. (1) It expands federal diversity jurisdiction to include cases where plaintiffs seek at least $5 million in damages, and where there is diversity between any putative class member and any defendant; (2) It adopts special rules for removal of class actions to allow removal at any time during the litigation and to allow immediate appeal of remand orders; and (3) It creates a Consumer Class Action Bill of Rights, which attempts to increase the fairness of class settlements by limiting attorneys fees for coupon settlements and by requiring that governmental authorities be notified of any proposed class settlements. By providing federal jurisdiction over certain class actions previously brought in state courts, CAFA is designed to prevent forum-shopping into state courts which have little connection with the dispute but which may still certify nationwide classes. At the same time, CAFA allows state courts to retain jurisdiction if both the primary defendants and a substantial percentage of the plaintiff class are located in the forum state. The novelty and extensiveness of the new rules will have significant ripple effects into the foreseeable future, including: Increasing the consistency of consumer class action jurisprudence by increasing the number of class actions adjudicated in federal, rather than in state, court; Increasing the amount of threshold litigation over jurisdictional issues; Increasing the influence of class action law in the most populous states; Increasing the likelihood that companies headquartered or incorporated in populous states will be named as defendants in class actions filed there; Increasing the amount of federal multidistrict litigation; Increasing the involvement of regulatory authorities in private class action settlements; and Decreasing the likelihood that coupons or other in-kind consideration will be included in class action settlements. What CAFA Does, and What It Does Not Do Expansion Of Federal Diversity Jurisdiction: The Three-Tier Test CAFA confers federal jurisdiction under 28 U.S.C. 1332(d)(1)(D) over any class action if (a) the putative class consists of at least 100 members; (b) the value of claims of all plaintiffs, considered in the aggregate, exceeds $5 million; and (c) at least one member of the putative class is a citizen of a state different from that of any defendant. This minimal diversity standard differs from existing practice by (a) increasing the jurisdictional minimum amount from $75,000 to $5 million; (b) allowing aggregation of plaintiffs

2 claims to meet this threshold; and (c) eliminating the complete diversity requirement so that diversity between any class member not just class representatives and any defendant will constitute the requisite diversity. CAFA then limits the general rule of minimal diversity by creating a three-tier system based on the composition of the class. First Tier: Mandatory Federal Jurisdiction. If fewer than one-third of the class members are citizens of the forum state, the rule of minimal diversity applies without exception, and the federal district court must exercise jurisdiction. In a single-defendant suit, CAFA virtually immunizes out-of-state corporations from being sued in state courts other than those of their principal place of business or state of incorporation. Second Tier: Discretionary Federal Jurisdiction. If more than one-third but fewer than twothirds of the class members are citizens of the forum state, and the primary defendants are citizens of the forum state, the federal district court may decline jurisdiction after considering a range of factors, including whether the action was pleaded in a manner that seeks to avoid federal jurisdiction, and whether one or more class actions asserting the same or similar claims on behalf of the same or other persons have been filed in the preceding three years. Third Tier: No Federal Jurisdiction. The federal court must remand the action in the following two circumstances: Test #1: if two-thirds or more of the class members, and the primary defendants, are citizens of the forum state; or Test #2: if more than two-thirds of the class members are citizens of the forum state, and if at least one defendant is a defendant: (1) from whom significant relief is sought; (2) whose conduct forms a significant basis for the claims; and (3) who is a citizen of the forum state. In addition, the principal injuries stemming from the defendants conduct must have occurred in the forum state. Thus, in a single-defendant suit, CAFA virtually immunizes out-of-state corporations from being sued in state courts other than those of their principal place of business or state of incorporation. Moreover, a defendant will generally be subject to no more than two class action lawsuits in two state courts for the same subject matter. Exemptions. CAFA exempts from its reach several areas regulated by separate federal and state statutes, such as claims involving (a) securities; (b) internal corporate affairs and fiduciary duties; and (c) government defendants. Special Rules For Mass Torts. CAFA does not substantively affect mass tort actions or the ability of states to adjudicate them when there are less than 100 plaintiffs. The new rules, however, do apply if monetary relief is sought on behalf of 100 or more persons and there are allegedly common questions of law or fact. And, rather than aggregating plaintiffs potential damages, each mass tort plaintiff must meet the current $75,000 jurisdictional threshold. 2. Special Rules For Removal Of Class Actions CAFA also adopts a variety of new removal procedures: One-Year Removal Deadline Eliminated. While CAFA does not amend the general rule that cases be removed to federal court within 30 days from the point when removal may first be ascertained, it eliminates the hard-and-fast one-year deadline imposed on other actions by 28 U.S.C. 1446(b). Now, removal is possible even after trial Consent Of All Defendants Not Required. CAFA lifts, for class actions, the general rule under 28 U.S.C. 1446(b) that all defendants must join in a notice of removal: an action may be removed by any defendant without the consent of all defendants.

3 Forum State Defendant Rule Inapplicable. CAFA also exempts class actions from the requirement under 28 U.S.C. 1441(b) that a removing defendant may not be a citizen of the forum state. Remand Orders Immediately Appealable And Quickly Reviewable. Under CAFA, any ruling on a remand motion whether it be a grant or a denial is appealable within seven days of such ruling. The court of appeals may accept such appeal, and, if it does, it must render judgment within 60 days. If a decision is not rendered within 60 days and an extension is not granted which can be sought upon agreement by all parties, or for good cause shown for up to ten days the appeal is automatically denied. 3. The Consumer Class Action Bill Of Rights CAFA also creates a Consumer Class Action Bill of Rights which takes aim at a variety of settlement practices that Congress deemed unfair to class members. Judicial Scrutiny Of Coupon And Other Settlements. CAFA does not prohibit coupon settlements, but does create incentives which may significantly reduce their usage. Specifically, CAFA provides that any award of plaintiffs attorneys fees attributable to the value of coupons must be based on the value to class members of the coupons that are redeemed, as opposed to the value of total coupons available. Although CAFA provides that the value of unclaimed coupons may be distributed to charitable organizations, plaintiffs attorneys fees may not be based upon the value of such unclaimed funds. The Bill of Rights also prohibits settlements that provide greater benefits to class members located near the forum state, and limits the circumstances in which plaintiffs can accept a settlement which results in a net loss for some plaintiffs. Notification Of State And Federal Officials Of Prospective Settlements. Within ten days of filing a proposed class action settlement in court, defendants participating in the settlement must notify appropriate federal and state officials of each State in which a class member resides of the prospective settlement. The default official at the federal level is the U.S. Attorney General; at the state level it is the state regulator or licensing authority with jurisdiction over the subject matter of any of the allegations of the complaint (or the state Attorney General, in the absence of such a regulator or authority). The court cannot approve a proposed settlement until 90 days after such notification, and a settlement is not binding on class members if proper notification of the officials is not made. Defendants may thus tend to err on the side of over-notification, albeit with the risk that state regulators may be spurred to take action that they might not otherwise have undertaken had no notice been given. What Does CAFA Mean For The Future? We anticipate the passage of CAFA will spawn extensive litigation over both its constitutionality and its application. While the larger conceptual issues may garner more immediate media attention, some of the more important practical changes in CAFA such as the rules regarding out-of-state defendants will shape the strategic thinking of class action lawyers for years to come. Key Substantive Issues Will Be Addressed Early In The Litigation. Under CAFA, courts may be required to determine a number of substantive issues during the removal process, before the answer/motion to dismiss is even filed: How many plaintiffs are in the putative class; Where do the class members live; Who are the primary defendants, and of what states they are citizens;

4 Whether additional defendants need be impleaded or joined; and Whether, in potential mandatory remand situations, there exists a significant defendant from whom significant relief is sought and whose alleged conduct forms a significant basis of plaintiffs claims. These issues can be fraught with strategic implications. For example: Under CAFA, courts may be required to determine a number of substantive issues during the removal process, before the answer/motion to dismiss is even filed. In order to prove the size and location of the plaintiff class, defendants may be required to produce, early on, confidential information such as customer lists, complaint files, and so on. If out-of-state Defendant X wishes to remove, must it then argue that it as opposed to the in-state defendants is a primary defendant in the matter? What if the in-state defendants seek to remove on grounds that Defendant X is a primary defendant, over the objection of Defendant X? Because the removal statute states that qualifying class actions may be removed by any defendant without the consent of all defendants, crucial conflicts may arise early not only between plaintiffs and defendants, but also among defendants themselves. Moreover, these strategic issues must potentially be addressed in the first 30 days of the litigation, and, in many cases, long before a response to the complaint is filed. Although the one-year deadline on removals has been lifted, defendants still have only 30 days from service of the complaint or from the point at which it is ascertainable that the case could be removed, in which to seek removal as of right. Spillover Effect On Class Certification? While CAFA on its face affects only issues relating to jurisdiction and settlement, it may still bear on class certification issues. A court faced with determining the above issues early on in the litigation will undoubtedly begin to form an opinion regarding the viability of the putative classes: courts focusing closely on the class definition in order to determine the size and location of the class, as well as the appropriate designation of the primary defendants and whether the class allegations were pleaded in order to avoid federal jurisdiction, will likely evaluate the merits of plaintiffs class definitions and defendants relation to them. Similarly, a federal court may not wish to expend considerable resources required to adjudicate removability prior to certification, and may expedite the latter determination accordingly. Companies Headquartered Or Incorporated In Large States, Beware! Plaintiffs cannot take advantage of the Tier 2 or Tier 3 remand provisions of CAFA so long as the primary defendants are out of state. Plaintiffs will therefore likely join as many in-state defendants as possible, including those which might otherwise be only peripheral to the litigation, and then attempt to cast them as the primary defendants. Although such defendants true nexus to the claims along with appropriate venue and forum non conveniens issues will presumably be sorted out during the course of litigation, they will still be subjected to substantial discovery and motion practice before such determinations may be made. Whither The Nationwide Consumer Class? CAFA will not entirely eliminate the existence of plaintiff-friendly state court jurisdictions, but it will at least limit such courts ability to certify nationwide classes. There is considerable debate regarding the degree to which federal courts may be more or less likely than state courts to certify nationwide classes, and therefore the degree to which CAFA will impact the certification of nationwide classes once they are removed to federal court. A recent study by the Federal Judicial Center 1 suggests that class Thomas E. Willging & Shannon R. Wheatman, An Empirical Examination of Attorneys Choice of Forum in Class Action Litigation, Federal Judicial Center (2005). The study can be found at

5 certification rates by federal and state judges do not differ significantly; and recent decisions such as Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004) suggest that certification of nationwide consumer classes may be increasing in the federal courts. To the extent federal courts (continue to) resist the certification of nationwide consumer classes, CAFA may result in a splintering effect among state and federal actions arising from the same course of conduct. In such instances, we will most likely see an increase in consolidated federal multidistrict litigation against the same defendants, as well as coordinated multidistrict actions against different defendants arising out of the same alleged violations. Alternatively, federal judges may become more amenable to certifying multiple subclasses, rather than denying nationwide certification altogether based upon differences among the laws of the relevant states. The anti-coupon provision may have a drastic impact on class action settlement practice. Good-Bye, Coupon Settlements? While CAFA does not ban coupon settlements, the requirement that plaintiffs attorneys fees be based on the value of coupons actually redeemed (as opposed to those merely offered for redemption) as part of a settlement suggests that plaintiffs firms may reject any form of settlement in which coupons form all or part of the relief: while redemption rates vary based on many factors, some recent studies indicate that only about 25% of coupons offered in any class action are ever redeemed, with the redemption rate falling to only 13% in cases involving consumer plaintiffs. Anecdotal evidence suggests that even these low redemption rates are decreasing over time. CAFA affirms the existing practice of utilizing expert testimony on the value of coupon settlements -- which includes an analysis of the benefit to plaintiffs who redeem the coupons as well as the likelihood of redemption -- to determine whether plaintiffs attorneys fees for coupon settlements are fair, reasonable and adequate. But judicial consideration of the likelihood of redemption is not the same as a statutory provision pegging fees to actual redemption rates, especially when it excludes the value of unredeemed shares distributed to charities. Moreover, plaintiffs attorneys may need to wait until after the redemption period to submit their fee petitions. Finally, to the extent the provision extends to all non-cash consideration (as opposed to just traditional coupons, which CAFA does not define), the provision may have a drastic impact on class action settlement practice. Applicability To State Actions Filed Before CAFA Signed. As reported in the Wall Street Journal, numerous class actions have been filed in state courts in the days leading up to the passage and signing of CAFA. To the extent additional defendants are later named to cases filed pre-cafa, will CAFA govern the effect on jurisdiction which such additions may entail? Where plaintiffs initially fail to name a known defendant who is added later in this litigation, federal courts have held that the amendment to the complaint does not relate back to the original complaint, for purposes of tolling the statute of limitations. Similarly, primary defendants added after the passage of CAFA could argue that the new rules should apply to their attempts to remove the case to federal court

6 Boston Hartford London Los Angeles New York Orange County San Francisco Silicon Valley Tokyo Walnut Creek Washington bingham.com This alert was written by Beth I.Z. Boland, a Securities Litigation/Corporate Governance partner in Bingham McCutchen s Boston office, who can be reached at (617) or beth.boland@bingham.com. Associates Jonathan Sommer (San Francisco), Ilia O'Hearn (Hartford), Megan Deluhery (Boston), and Peter Pound (Boston) provided drafting and research assistance. For more information about the Class Action Fairness Act of 2005, please contact one of the following Bingham McCutchen practice group leaders with practices focused in class actions: Chris Hockett Donn Pickett Intellectual Property & Antitrust Commercial Litigation & Antitrust & Trade Regulation chris.hockett@bingham.com donn.pickett@bingham.com Steve Hansen Securities Litigation steven.hansen@bingham.com Dale Barnes Securities Litigation dale.barnes@bingham.com Janice Howe Products Liability janice.howe@bingham.com Peter Neger Products Liability peter.neger@bingham.com To communicate with us regarding protection of your personal information or if you would like to subscribe or unsubscribe to some or all of Bingham McCutchen LLP s electronic and mail communications, please notify our Privacy Administrator at privacyus@bingham.com or privacyuk@bingham.com. Our privacy policy is available at We can also be reached by mail in the U.S. at 150 Federal Street, Boston, MA , ATT: Privacy Administrator, or in the U.K. at 99 Gresham Street, London, England EC2V 7HG, ATT: Privacy Administrator This communication is being circulated to Bingham McCutchen LLP s clients and friends and may be considered advertising. It is not intended to provide legal advice addressed to a particular situation Bingham McCutchen LLP.