The Class Action Fairness Act: Analysis and Commentary. February 24, 2005

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1 The Class Action Fairness Act: Analysis and Commentary February 24,

2 Expanding Federal Jurisdiction 2

3 Expanding Diversity Jurisdiction The General Rule The general rule: minimal diversity Rule applies when there are 100 or more class members $5 million aggregate amount in controversy 3

4 Exceptions to Jurisdiction: Actions Brought in the Defendant s Home State Exception applies when the action is brought in the primary defendant s home state When more than two-thirds of the plaintiff class are from that state, the district court must decline to exercise jurisdiction When fewer than one-third of class members are from that state, there is federal jurisdiction 4

5 Exceptions to Jurisdiction: Actions Brought in the Defendant s Home State When more than one-third and fewer than two-thirds are from that state, the district court has discretion to exercise jurisdiction Question: who is the primary defendant? Question: where do class members live? 5

6 Exceptions to Jurisdiction: Local Controversies No federal jurisdiction when: More than two-thirds of class members are citizens of the forum state; At least one defendant is an in-state defendant from whom the plaintiff seeks significant relief and whose conduct forms a significant basis for the claim; The principal injuries resulting from the alleged conduct occurred in the forum state; and No class action alleging the same claims has been filed in the last three years. 6

7 Exceptions to Jurisdiction: Securities Litigation The Act does not apply to claims involving a covered security Federal jurisdiction in securities class actions is determined by the Securities Litigation Uniform Standards Act Some securities class actions fall between the cracks 7

8 Mass Actions Mass actions are treated as class actions if 100 or more named parties seek to jointly try claims for monetary relief But there are exceptions for certain mass actions: When all claims arise from a single event that causes injuries in the forum or in contiguous states; When the claims are joined on the defendant s motion; When the claims are asserted on behalf of the general public; or When the claims are consolidated solely for pretrial proceedings. Each plaintiff s claim must exceed $75,000 Mass actions may not be transferred under the MDL statute 8

9 Removal to Federal Court Class actions may be removed to federal court Even in-state defendants may remove Any defendant may remove The usual one-year limit on removal does not apply Remand orders are subject to expedited appeal 9

10 The Consumer Class Action Bill of Rights 10

11 Scope of the Bill of Rights Provisions Provisions do apply to securities suits Provisions do not apply to mass actions 11

12 Coupon Settlements Fees for plaintiffs counsel are tied to value of coupons actually redeemed by class members Court may hear expert testimony on the actual value of redeemed coupons When not based on the value of coupons, fees for plaintiffs counsel are based on time spent by counsel 12

13 Coupon Settlements Coupon settlements are subject to special judicial scrutiny Question: how and when is the value of a coupon settlement determined? Question: what is a coupon? 13

14 Notice to Federal and State Officials Specified state and federal officials must receive notice of proposed class action settlements Specified documents must be provided to those officials Consequences of noncompliance: class members are not bound by the settlement 14

15 Other Consumer Provisions Protection against loss by class members Protection against geographic discrimination 15

16 Effective Date of the Act The Act applies to actions commenced on or after the date of enactment 16

17 Are There Pitfalls For Defendants In the Class Action Fairness Act and Are Measures to Be Taken to Avoid Falling Into Them? 17

18 The Act requires each defendant participating in a settlement to notify both an appropriate federal official and an appropriate state official for every state in which a class member resides of a proposed class action settlement. The notification must be given within ten days after the proposed settlement is filed in Court. The Attorney General of the United States will ordinarily be the appropriate federal official. 18

19 The appropriate state official will be the person who primarily regulates or licenses the defendant in every state in which a class member resides. The notification must include defined information including if feasible information about the class members who reside in the state. 19

20 Final approval can not be given of a proposed settlement until 90 days after notification. Failure to give the required notice permits any class member to refuse to be bound by a settlement agreement or decree. 20

21 The Act contains a safe harbor notice provision which provides that a class member is still bound if notice has been directed to the appropriate Federal official and to either the State attorney general or the person that has primary regulatory, supervisory, or licensing authority over the defendant. This provision is slightly ambiguous in that the word State does not clearly modify the work person who has primary, regulatory, supervisory authority over the defendant. 21

22 Given the ramification of failure to comply, prudence would suggest that the word State be read to modify regulatory, supervisory authority over the defendant so that the provision permits notification of the State attorney general as opposed to person who has primary regulatory or licensing authority. It would seem wise to give the notice to the State attorney general if there is any unclarity at all regarding which State agency has primary regulatory or licensing authority. 22

23 Consideration should be given to whether it would not be more prudent in some cases to give notice to the State attorney general as opposed to the primary regulator. Practice has diverged as to whether individual releases or executed by each class member. In light of the notification provision, consideration should be given to obtaining individual releases in all cases. 23

24 The Act in effect requires that a defendant determine at inception of the case where the class members (or mass plaintiffs) reside. Knowledge about the geographical make up of the class is needed to determine whether the class action can be removed to federal court and also to comply with the notification provisions of the Act. 24

25 For example, if feasible, the defendant is required to provide information about the names of class members who reside in each state and the proportionate share of the claims of the class residing in the state to the appropriate State official and failure to comply with this provision may void the benefits of settlement. In addition, if more than two thirds of the class members (or mass plaintiffs) reside in the state in which the action is filed, the class action may not be removed to federal court. 25

26 This information was not heretofore critical for defendants to know (at least to this level) but assume a critical nature under the Act. Defendants should consider in advance if methods can be implemented prior to litigation being filed to better track such information. 26

27 Many of the Act s provisions depend upon the make up of the class at issue. The Act does not specify, however, is the composition of the class is determined by the potential size of the class or the class as certified. At time of removal, what methods does a defendant use to determine where will the class members reside? 27

28 How Will The Plaintiffs Bar Respond To The Class Action Fairness Act? 28

29 File single-state class actions in state court on behalf of the residents of that state against defendants located in that state. This strategy may be particularly effective in California, where many companies are located, classes can be fairly large, and trial courts have been receptive to certifying classes. File regional class actions against defendants in their home states, ensuring that class members from states other than the defendants represent less than ⅓ of the total number of plaintiffs. 29

30 File regional class actions against defendants in their home states, ensuring that class members from states other than the defendants represent less than ⅔ of the total number of plaintiffs and attempt to persuade the district court to remand the case under the five criteria set forth in 28 U.S.C. 1332(d)(3). This strategy would entail removal by the defendant, a motion to remand by the plaintiffs, and an interlocutory appeal in the event remand is granted, making it a fairly costly option for plaintiffs counsel. Plaintiffs counsel are likely to test out this option in a few carefully selected cases to determine whether it is worth pursuing in the future. 30

31 File multi-state class actions in federal courts within Circuits (most notably the Second Circuit) that have been comparatively lenient in applying class certification standards. Part and parcel of this strategy is confronting the manageability problems associated with needing to apply the laws of multiple states by arguing for application of the law of the defendant s state of domicile to the claims of all class members. There are serious constitutional problems with applying the law of any one state even the defendant s home state to the claims of every class member, but several state courts have endorsed this approach, and no federal appellate court has addressed it yet. The propriety of this means of addressing the manageability issue is currently before the Illinois Supreme Court in Avery v. State Farm Mutual Automobile Insurance Co. If the Illinois Supreme Court affirms the judgment below (thereby endorsing the application of Illinois law to the claims of class members in 50 states and the District of Columbia), the issue could well reach the U.S. Supreme Court. 31