CLASS ACTION FAIRNESS ACT OF 2005: A CANADIAN PERSPECTIVE

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1 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 63 CLASS ACTION FAIRNESS ACT OF 2005: A CANADIAN PERSPECTIVE William V. Sasso & Jacqueline A. Horvat 1 A. INTRODUCTION On February 18, 2005, President George W. Bush signed the Class Action Fairness Act of (CAFA) into law. CAFA significantly increased federal jurisdiction and imposed limitations on, and stricter scrutiny of, settlement approvals and attorney s fee approvals in settlements of all class actions filed in the United States on or after February 18, During the signing ceremony, President Bush remarked that CAFA marks a critical step towards ending the lawsuit culture of the United States and will ease the needless burden of litigation on every American worker, business, and family. 3 Although many have argued that the class action system ought to be abolished altogether, in his remarks, the President stated: Class-actions can serve a valuable purpose in our legal system. They allow numerous victims of the same wrong-doing to merge their claims into a single lawsuit. When used properly, class-actions make the legal system more efficient and help guarantee that injured people receive proper compensation. That is an important principle of justice. So the bill I sign today maintains every victim s right to seek justice, and ensures that wrong-doers are held to account. 4 Opponents of CAFA, however, contend that the limits on class action lawsuits imposed by CAFA are a bad idea whose time has come. 5 They contend that the legislation will act to limit access to courts, pro- 1 William V. Sasso & Jacqueline A. Horvat, Sutts, Strosberg LLP. 2 Class Action Fairness Act of 2005, Pub. L. No , 119 Stat. 4 [CAFA]. 3 President Signs Class-Action Fairness Act of 2005, Press Release, The White House (18 February 2005). Online: The White House, Office of the Press Secretary 4 Ibid. 5 Senator Joseph Biden, Editorial, New York Times (12 February 2005). 63

2 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW tect big business, and emasculate the ability of average citizens to seek justice and win proper recompense in the courts for corporate actions that harm consumers, the environment, and public health. Proponents of the law, however, have long argued that such provisions are necessary to reduce the number of frivolous class actions filed, restrain forum shopping by class counsel, and control settlements that provide unduly high fees to class counsel while providing little or no benefit to class members. Whether or not the much criticized law attains the broad and ambitious goals of its supporters or acts to protect the profits of corporate America from its purportedly greedy citizens and lawyers remains to be seen. B. WHY WAS CAFA ENACTED? The initial version of CAFA was first considered by Congress in its 105th session in Since then, and until the enactment of the final version of CAFA, there were numerous Congressional hearings wherein lawyers, judges, consumer groups, representatives of large corporations and various other organizations testified as to the potential effects of CAFA and the state of the class action regime as it existed at that time. The vast majority of testimony focused on how expanding the federal courts jurisdiction would affect the average consumer s ability to commence and win redress for corporate wrongdoing. The authors research uncovered very little in the way of empirical evidence, debates or reports concerning the coupon settlement provisions of CAFA, a focal point of the final version of CAFA. A number of reports and studies were commissioned by Congress. The two most often cited reports are the Senate Report from the Committee on the Judiciary dated September 26, 2000 and entitled The Class Action Fairness Act of 2000 (Senate Report) 6 and a study commissioned by the Center for Legal Policy of the Manhattan Institute entitled They re Making a Federal Case Out of It... In State Court (MI Study). 7 These will be described in detail below. 6 U.S., Committee on the Judiciary, The Class Action Fairness Act of 2000 (Senate Report , 106th Congress) (Washington, D.C.: United States Government Printing Office, 2000) [Senate Report]. 7 John H. Beisner and Jessica D. Miller, They re Making a Federal Case Out of It... In State Court (2001) 25 Harv. J.L. & Pub. Pol y 143 [MI Study].

3 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 65 VOLUME 2, N o 1, JULY ) Senate Report At the outset of the Senate Report, the Committee on the Judiciary identified the basis for CAFA: Our current class action system is plagued by numerous problems and abuses that are attributable largely to inadequate judicial supervision. Most of these problems and abuses are arising in State court class actions and threaten to undermine the rights of both plaintiffs and defendants. In too many cases, plaintiff class members do not know what their rights are, or what a class action settlement has accomplished. Judges too readily approve settlements that primarily benefit the class counsel, not the class members who they supposedly represent. Attorneys are awarded outrageous attorneys fees, while class members receive little or nothing. Often, multiple class action cases purporting to assert the same claims on behalf of the same people proceed simultaneously in different State courts, causing judicial inefficiencies and promoting collusive activity between plaintiffs, attorneys, and defendants. Lawyers frequently game the procedural rules to keep class actions in State courts before judges carefully selected for their tendency to readily certify classes regardless of the procedural irregularities or their penchant for approving settlements without regard to class member interests. Increasingly, frivolous class action lawsuits are being filed with the intent of extorting large, unwarranted settlements from defendants. And many State courts freely issue rulings in class action cases that have nationwide impacts, even when those rulings overturn established State and even national laws and policies. [Emphasis added] 8 Much of the focus of the Senate Report and debate centers on diversity jurisdiction and the potential shift of the majority of class actions to federal courts. Both the federal and the state courts have always had jurisdiction to hear class actions, and the rules governing certification are essentially the same in federal and state courts. However, a perception exists that federal court judges apply rules of certification much more harshly and strictly than state court judges and apply greater scrutiny to settlement approval hearings. The law prior to the enactment of CAFA required complete diversity in order for federal jurisdiction over class actions to apply. This 8 Senate Report, above note 6 at 8 9.

4 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW meant that all named plaintiffs must be citizens of different states from all named defendants, 9 a situation that rarely, if ever, could occur in class actions. Diversity jurisdiction was initially established by the framers of the Constitution of the United States to guarantee fairness for defendants from one state who are sued by citizens of another state. 10 The rules prior to CAFA also required the amount-in-controversy to be above $75,000 for federal jurisdiction to apply. The Supreme Court has interpreted this section to mean that each of the class members individually must claim damage in excess of $75,000 to establish federal jurisdiction. 11 The Senate Report contends that interstate class actions, which may involve millions of dollars and complex issues involving persons in many states, are the exact types of cases that should fall under the diversity jurisdiction rules. Plaintiff counsel in interstate class actions have been able to circumvent the complete diversity rule simply by locating and naming representative plaintiffs from the same states as those of some of the defendants. 12 Further, the amount-in-controversy requirement can be avoided by restricting the class definition to include only those individuals who have claims under $75,000; that is, claiming damages of a maximum $74, on behalf of each and every class member. 13 The Senate Report makes the following comment on the amount of the claim: This leads to the nonsensical result under which a citizen can bring a federal case by claiming $75,001 in damages for a simple 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). 14 The Senate Report describes the reasons to expand the federal court jurisdiction and to avoid such nonsensical results under the provocative heading Explosion of Class Actions in State Courts A System 9 Ibid. at 13, citing the Supreme Court of the United States decision in Snyder v. Harris, 394 U.S. 332 (1969). 10 Ibid. at Ibid. at 13, citing Zahn v. International Paper Co., 414 U.S. 291 (1973). 12 Ibid. at Ibid. at Ibid. at 14.

5 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 67 VOLUME 2, N o 1, JULY Ripe for Abuse. Class action filings in state courts increased 1,000 per cent from 1990 to 2000, while federal courts filings increased just over 300 per cent during the same period. 15 The Senate Report concludes that the reason for this dramatic increase in state filings, and the need for the expansion of federal jurisdiction over class actions, is attributable to the following: (a) some state court judges are less careful than their federal court counterparts about applying the procedural requirements that govern class proceedings; 16 (b) a large number of state courts lack the necessary resources, such as law clerks and additional staff, to supervise proposed settlements properly; 17 (c) some state courts have ignored the due process rights of out-of-state defendants by denying them the opportunity to contest the certification stage and the claims against them. There are even cases where class actions are issued and certified prior to the defendants being notified of the complaint; 18 (d) copycat class action filings, where similar, overlapping claims involving the same defendants and classes, are filed in different state courts. In these cases, no rules of consolidation or coordination exist among the state courts. If overlapping cases are pending in different federal courts, they may be consolidated under a single judge to promote judicial efficiency and ensure consistent treatment of the legal issues involved; 19 and (e) nationwide classes invite state courts to dictate to all the other states what their laws should be on a particular issue. This problem is particularly harmful when a state court issues a ruling that contradicts the laws of other states. 20 The Senate Report also contains a statement from certain senators who oppose the legislation. Their main contention is: Class action procedures have traditionally offered a valuable mechanism for aggregating small claims that otherwise might not warrant 15 Ibid. at Ibid. at Ibid. at Ibid. at Ibid. at For various examples, see Senate Report, ibid. at

6 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW individual litigation. This legislation will undercut that important principle by making it far more burdensome, expensive, and time-consuming for groups of injured persons to obtain access to justice. In doing so, it will make it more difficult to protect our citizens against violations of the consumer health, safety and environmental laws, to name but a few important laws. The legislation goes so far as to prevent state courts from considering class action cases which solely involve violations of state laws, such as state consumer protection laws. [Emphasis added] 21 The opponents further argue that federal courts will be overburdened and state courts will be undermined. The state courts are constitutionally required to provide due process and fairness to parties in class actions and, they argue, abuses that are not reversible on appeal will not occur. Finally, they argue that it will likely be far more expensive for consumers to litigate cases and more difficult and time-consuming to be heard in the federal court, which will cause fewer class actions to be brought. 22 In response to the legislation s critics, the Senate Report offers the following rebuttals: (a) the federal courts will not be overburdened because the civil caseload of state courts has grown much more rapidly than federal courts and federal court judges have better resources because they are able to delegate some of their work to magistrates or masters. Further, the federal judiciary is authorized to consolidate similar class actions before a single judge, whereas state courts are not. Finally, the federal courts regularly apply state laws and are regularly concerned with difficult conflict of law questions; 23 (b) while abuses of the class action regime do occur at both the state and federal levels, studies indicated that the actual abuse and the potential for abuse is much greater in state courts; 24 (c) CAFA does not provide an advantage to defendant corporations because it does not change the substantive law, it merely increases federal jurisdiction; 25 (d) injured consumers will not be delayed in obtaining redress; Ibid. at Ibid. at Ibid. at Ibid. at Ibid. at Ibid. at 41.

7 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 69 VOLUME 2, N o 1, JULY (e) state rights will not be trampled because no substantive laws are amended; 27 and (f) plaintiffs will not be denied any meaningful ability for recovery because the certification rates for federal and state courts are nearly equal. 28 2) Manhattan Institute Study The MI Study focuses on the empirical case for expanding federal jurisdiction over interstate class actions. 29 It commences with a review of diversity jurisdiction in the United States and the implications that the rules then in force had on class actions. 30 The MI study examined the filing statistics of three state courts Madison County in Illinois, Palm Beach County in Florida and Jefferson County in Texas and concluded that they experienced disproportionately high volume of class action filings, given their populations and general case docket size. 31 Madison and Jefferson counties each have populations of about 250,000 while Palm Beach has a population of about 1.1 million. 32 Madison County, however, has been the situs of more class actions in the last five or so years than all but two other county courts in the United States: Los Angeles (California) and Cook (Illinois) counties, which have populations larger than Madison County s by factors of 38 and 21 respectively. 33 The following chart, using the federal court as comparison, is instructive: COURT: MADISON JEFFERSON PALM BEACH FEDERAL CLASS ACTIONS ,133 FILED IN 1999 PER CAPITA CLASS ACTION FILINGS (per million) 27 Ibid. at Ibid. at MI Study, above note See MI Study, ibid. at Ibid. at Ibid. at Ibid.

8 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW This study essentially confirms that the filing of state court class actions is increasing rapidly, in numbers wildly disproportionate to their populations, particularly in Madison County. The study states that there does not appear to be any logical reason for this: Madison County is a rural area that is not home to a lot of lawyers (in fact, 85 per cent of counsel listed on cases commenced in Madison County are from out of the county); it is not a hub of commerce (none of the companies named as defendants in any of the class actions filed in Madison County had any presence in the area); and 99 per cent of the claimants in class actions filed in the county have no relationship whatsoever to Madison County (and 70 per cent of class actions filed purport to certify nationwide classes). 34 Then why are so many lawyers from across the United States filing in Madison County? John H. Beisner, one of the authors of the MI Study, and a follow-up study conducted in 2002, 35 testified before Congress in 2003 and concluded: The answer, of course, is a simple one. Lawyers think that if they go to Madison County, they ll be able to get a class certified quickly, scare defendants into a settlement, and take home a lot of money even if they have very weak legal theories and do very little legal work. 36 In fact, Madison County has become such a hotbed for class action filings that in the week prior to CAFA becoming law, twenty (20) class actions were filed in Madison County. 37 3) Stated Purposes and Intents of CAFA The preamble of CAFA reads To amend the procedures that apply to consideration of interstate class actions to assure fairer outcomes for class members and defendants, and for other purposes. 38 The stated intents of CAFA, as listed in the legislation, are to ensure fair and prompt recoveries for class members with legitimate claims, provide Federal court consideration of interstate cases of national importance under diversity jurisdiction, and benefit society by encouraging inno- 34 U.S., Class Action Fairness Act of 2003: Hearing on H.R Before the House Committee of the Judiciary, 108th Congress, (Washington D.C.: United States Government Printing House, 2003) at 46 [Hearing]. 35 John H. Beisner and Jessica D. Miller, Class Action Magnet Courts: The Allure Intensifies (2003) 4 BNA Class Action Litig. R Hearing, above note 34 at White House Press Release, above note CAFA, above note 2, preamble.

9 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 71 VOLUME 2, N o 1, JULY vation and lowering consumer prices. 39 In our opinion, the means by which business will become more innovative and prices of goods and services to consumers will be lowered is not otherwise addressed in CAFA. In its findings and purposes, Congress was also careful to acknowledge the value and significance of class actions to the American legal system, but only where they allow the most just and economical resolution of genuine claims of many plaintiffs against a common defendant or defendants. 40 Congress also identified a number of potential abuses of the class action regime. In particular, the potential for class members to be harmed by the process, or receive little or no benefit from it, can occur where class members receive awards of little or no value, such as coupons or credit vouchers, whereas class counsel is awarded large fees. 41 Congress found that abuses may also occur where baseless awards are made to some class members at the expense of others and where confusing notices are published that class members cannot understand sufficiently to exercise their rights. 42 Abuses of the class action system can also cause adverse effects on interstate commerce. 43 Congress found that by allowing state courts (which demonstrate bias against out-of-state defendants and deliver judgments that bind residents of other states) to deal with cases of national importance, public respect for the national judicial system is undermined. 44 In his remarks upon signing CAFA into law, President Bush again highlighted the reasons for CAFA s enactment by providing three examples of unsatisfied class members: Over the past few years I ve met people from all over the country who know the importance of class-action reform firsthand, and three of them are with us today. Marylou Rigat lives in Connecticut, yet a classaction involving her faulty roof was resolved by a judge in Alabama. The award covered only a fraction of the cost of new shingles, but that wasn t Marylou s biggest problem. She had no idea she was part of the class-action in the first place, and no one contacted her about her 39 Ibid., s. 2(b). 40 Ibid., s. 2(a)(1). 41 Ibid., s. 2(a)(2)(A), & s. 2(a)(3)(A). 42 Ibid., s. 2(a)(3)(B) & (C). 43 Ibid., s. 2(a)(2)(B). 44 Ibid., s. 2(a)(4).

10 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW award. She only learned by accident when she called the company about her warranty. And then she found out there was nothing more she could do. Hilda Bankston is with us. And her late husband used to own a drugstore in Fayette, Mississippi. Their business was doing well, until the store got swept up in massive litigation just because it dispensed prescription drugs for a certain drug prescriptions for a certain drug. She had to sell the pharmacy six years ago. But she s still getting dragged into court, again and again. Here s what she said: My husband and I lived the American Dream until we were caught up in what has become an American nightmare. Alita Ditkowsky is with us. She was part of a class-action against a company that made faulty televisions. When the case was settled in Madison County, Illinois, Alita s lawyer took home a big check while she got a $50 rebate on another TV, built by the same company that had ruined the first TV. (Laughter.) Here s what she said: I m still left with a broken TV. (Laughter.) He got $22 million. Where s the justice in this? 45 C. CAFA IN DETAIL For the stated reason of protecting class members and equalizing the perceived imbalance between the, in some cases, dollars off coupons class members receive and the millions of dollars class counsel receive in coupon settlements, Congress approved the Consumer Class Action Bill of Rights and Improved Procedures for Interstate Class Actions. 46 These provisions of CAFA aim to enhance judicial scrutiny of coupon and other settlements where class members are at risk of receiving little or no benefit from proposed settlements, as well as tying counsel fees in coupon settlements to the amount of coupons redeemed rather than the total amount issued or projected to be issued. As stated previously, there is little or no commentary available from proponents and opponents of coupon settlements in the United States. The authors have been unable to locate any objective or empirical study that may have supported the need for the coupon provisions. The most significant amendment that CAFA imposes is an expansion of the jurisdiction of the federal courts, shifting class actions out of the 45 White House Press Release, above note CAFA, above note 2, s. 3.

11 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 73 VOLUME 2, N o 1, JULY hands of certain state courts that are generally seen as friendly to class action plaintiffs and their counsel. 1) Attorney s Fees and Settlement Approvals CAFA imposes new limitations on attorney s fees in coupon settlements and class action settlements are subjected to greater scrutiny. A coupon settlement is a settlement where the class members are awarded coupons, credits, credit vouchers, or certificates for use towards future purchases and/or services from the defendant rather than receiving cash settlements. Such settlements have been harshly criticized on the basis that the non-transferable, time-limited coupons and the redemption process guarantees that the number of coupons that will actually be redeemed is very minimal and thus of little value to class members, while the class attorneys walk away with staggeringly high fees. 47 For example, a Texas class action settlement, involving late fees that Blockbuster improperly or excessively charged to its video and DVD renting customers, resulted in each class member receiving a minimal, non-transferable, and time-limited $1.00-off coupon for use on future movie rentals. The lawyers representing the class, however, received $9.25 million in counsel fees, outraging many consumer groups. 48 Although such settlements appear on their face to be unfair to class members, they can ultimately serve the greater purpose of behavioural modification. In 1993, airlines accused of price fixing settled numerous class actions and awarded class members a total of $458 million in flight coupons. In the end, although the coupons were rendered virtually useless, due to the number of restrictions and blackout days imposed by the airlines, the defendants ceased their price fixing activities. 49 Such behavioural modification is an important factor that should not be forgotten when coupon settlements or any class action settlements are criticized. In many cases, the non-monetary benefits are greater than any amount of cash class members may receive. 47 Thomas A. Dickerson & Brenda V. Mechmann, Consumer Class Actions and Coupon Settlements: Are Consumers Being Shortchanged? (Fall 2000) 12 Advancing The Consumer Interest. 48 Sheryl Gay Stolberg, Bill to Limit Some Suits Falls Victim To Politics New York Times (9 July 2004) A13. See also Marianne Lavelle, Class Action Crackdown, 138:6 U.S. News & World Report (21 February 2005) at 46. Online: U.S. News & World Report 49 Class Action Crackdown, ibid. at 46.

12 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW Therefore, rather than banning coupon settlements altogether, Congress recognized that coupon settlements can be beneficial to class members in several circumstances and approved various CAFA provisions that are designed to respond to these criticisms. The provisions falling under section 1712 now link class attorney s fees to the value of coupons redeemed and not the amount issued. It is expected that this will drastically cut the amount of fees received by class counsel in such cases because the number of coupons actually redeemed is consistently significantly lower than the amount distributed. CAFA delineates three methods for determining attorney s fees in coupon cases: (a) where class counsel seeks contingent fees and the proposed settlement provides for the recovery of coupons to class members, the portion of a counsel fee award to class counsel that is attributable to the award of coupons, will be based on the value to class members of the coupons that are redeemed; 50 (b) where the proposed settlement provides for the recovery of coupons to class members and a portion of the recovery of coupons is not used to determine the counsel fees payable, any attorney s fee award shall be based on the amount of time class counsel reasonably expended working on the action. This method does not, however, prohibit the application of a lodestar with a multiplier to determine the counsel fees; 51 and (c) where the proposed settlement provides for the recovery of coupons to class members and also provides for equitable relief, including injunctive relief, that portion of the counsel fees that is based on a portion of the recovery of the coupons shall be calculated in accordance with the first method, and that portion of the counsel fee that is not based upon a portion of the recovery of coupons will be calculated according to the second method above. 52 On counsel fees and settlement approval hearings concerning the awarding of coupons, CAFA allows the court to hear expert testimony from a witness qualified to provide information on the actual value to the class members of the coupons that are redeemed CAFA, above note 2, s. 3, s. 1712(a). 51 Ibid., s. 3, s. 1712(b)(1) & (2). 52 Ibid., s. 3, s. 1712(b)(2)(c). 53 Ibid., s. 3, s. 1712(d).

13 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 75 VOLUME 2, N o 1, JULY CAFA also requires special judicial scrutiny of coupon settlements. The foundation of the enactment of this provision is based on the fact that most if not all coupon settlements offer nominal amounts to class members, while plaintiffs class counsel receive significant fee awards. Under CAFA, the courts may only approve such settlements after a hearing and a written finding that the settlement is fair, reasonable, and adequate for all class members. 54 The court has also been given the discretion to require that a proposed settlement agreement involving coupons contains a provision for the distribution of a portion of the value of unclaimed or unredeemed coupons to one or more charitable or governmental organization, as agreed to by the parties. 55 2) Class Member Payment and Non-Monetary Awards Different Recoveries for Class Members CAFA also subjects two other types of proposed class action settlements to heightened judicial scrutiny in an attempt to protect against loss by class members and discrimination based on geographic location. The court may only approve proposed class action settlements where any or all class members are obligated to pay and where a net loss to the class members would occur, if the court makes a written finding that the nonmonetary benefits to the class members or class substantially outweigh the monetary loss. 56 Also, the court may not approve a proposed class action settlement that directs the payment of greater sums to some class members than to others solely on the basis that those receiving greater sums are closer in geographic proximity to the court wherein the action was commenced and the settlement approved. 57 CAFA also increases the participation and involvement of federal and state regulators in class action settlement and approval. Each defendant participating in the proposed settlement is now required, no later than ten days after a proposed settlement is filed in the court of competent jurisdiction, to serve upon the appropriate state official of each state in which a class member resides and the appropriate federal official, a notice of proposed settlement that consists of: (a) copies of the complaint, any amended complaints, and any materials filed with the complaint, unless the complaint and/or materials are 54 Ibid., s. 3, s. 1712(e). 55 Ibid., s. 3, s. 1712(e). 56 Ibid., s. 3, s Ibid., s. 3, s

14 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW available through the Internet in which case only notice of how to electronically access such material is required; (b) notice of any judicial hearing scheduled in the class proceeding; (c) any proposed or final notification to class members of the members rights to opt out of the class or any statement that no right to exclusion from the class exists; (d) any proposed or final class action settlement agreement; (e) any other agreement made between class counsel and defendant s counsel; (f) any final judgment or notice of dismissal; (g) if practicable, the names of class members who reside in each state and the estimated proportionate share of the claims of such members to the entire settlement to that state s official, or if this information is not feasible, a reasonable estimate of the number of class members residing in each state and their estimated proportionate share to the entire settlement; and (h) any written judicial opinion relating to (c) through (f) above. 58 In most cases, the appropriate state or federal official will be the respective attorney general. However, in certain instances, the person who has the primary federal or state regulatory, supervisory, or licensing responsibility in relation to the defendant will be the proper official to be served. 59 For example, where a defendant is a federal or state depository institution, a depository institution holding company, a foreign bank, or a non-depository institution subsidiary of any of the foregoing, the notice requirements are satisfied by the service of notice upon the federal and/or state official who has primary regulatory or state regulatory and/or supervisory responsibility. 60 CAFA does not act to expand the authority of any federal or state official or impose any duties, obligations, or responsibilities upon them in responding to the notice. 61 Final approval of a proposed class action settlement may only be issued after ninety days has passed from the last date on which the appropriate state and federal officials were served with the notice of proposed settlement. 62 Any class member may choose not to be bound by or com- 58 Ibid., s. 3, s. 1715(b)(1). 59 Ibid., s. 3, s. 1715(a)(1) & (2). 60 Ibid., s. 3, s. 1715(c)(1) & (2). 61 Ibid., s. 3, s. 1715(f). 62 Ibid., s. 3, s. 1715(d).

15 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 77 VOLUME 2, N o 1, JULY ply with a settlement agreement or a consent decree, if the class member can demonstrate that the required notices have not been provided. 63 3) Federal Court Jurisdiction Over Interstate Class Actions As noted above, under the pre-cafa rules, class actions were restricted to state courts unless every individual class member sought damages of $75,000 or more and the named plaintiffs were citizens of states different from each of the defendants. 64 One of the concerns of Congress in the debates leading to the CAFA s approval was the concern that by allowing state courts to hear certain class actions with class members and defendants located across the country, issues of national importance were being kept out of the federal courts, contradicting, in Congress s view, the intent of the framers of the U.S. constitution. 65 Also, state courts have long been criticized in defence counsel circles, as well as in Congress, as being plaintiff friendly, biased against large corporations, and as promoting forum shopping by predatory plaintiffs counsel. a) Changes to Diversity Jurisdiction Congress attempted to address these concerns by amending the federal diversity jurisdiction provisions of the Code, specifically section 1332 of Title 28. CAFA now provides that interstate actions which have national importance will be heard in the federal courts rather than in a state court. The legislation does not amend the substantive law to achieve this objective. Rather, CAFA simply increases the jurisdiction of the federal court over prospective class actions. CAFA eliminates the complete diversity rule for class actions and replaces it with a minimal diversity requirement. In other words, as long as one named class representative is diverse from any one defendant, the federal court will have jurisdiction. Opponents of the amendments, however, query why Congress would exacerbate the courts workload issues with legislation that will likely funnel a multitude of new cases into the already overburdened fed- 63 Ibid., s. 3, s. 1715(e)(1). 64 Goodwin Procter LLP, Client Alert Newsletter, New Law Will Help Protect Companies from Class Action and Mass Litigation Abuse (11 February 2005). 65 U.S., Cong. Rec., daily ed., vol. 150, S57 (20 January 2004), reporting S.A. 2232, proposed amendment to S. 274.

16 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW eral court system. 66 Further, they argue that the criticisms of supporters of the legislation are unwarranted. Specifically, the argument that state courts suffer from bias against out-of-state defendants lacks foundation because federal courts already possessed the right to exercise oversight if state courts failed to fulfill their duties of due process and fairness to all. 67 Further, in today s economy, most large corporations have a presence in more than one state and many have a presence in every state; therefore, the argument that out-of-state corporate defendants will find prejudice in state courts, based on presence within the state or lack thereof, is unwarranted. 68 Finally, there is no objective data or study to show that state courts are in general more inclined towards approving settlements and large counsel fee awards and, in effect, running a rubber stamp approval assembly line. In fact, studies show state courts and federal courts are equally likely to certify an action as a class proceeding. 69 b) Changes to Monetary Jurisdiction The federal court now has original jurisdiction over class actions involving classes of one hundred or more members that seek more than $5 million in the aggregate, 70 exclusive of interest and costs, and in which any class member is: (a) a citizen of a state different from any defendant; (b) a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a state; or (c) a citizen of a state and any defendant is a foreign state or a citizen or subject of a foreign state. 71 The foregoing does not apply to class actions only asserting a claim concerning a covered security, as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, or the rights, duties, fiduciary duties, 66 Representative John Conyers, Jr., Class Action Fairness A Bad Deal for the States and Consumers (2003) 40 Harv. J. on Legis. 493 at Ibid. at Ibid. at Ibid. at 504. See also Thomas E. Willging, Laural L. Hooper et al., Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules (Washington, DC: Federal Judicial Center, 1996); Thomas. E. Willging & Shannon R. Wheatman, An Empirical Examination of Attorneys Choice of Forum in Class Action Litigation (Washington, DC: Federal Judicial Center, 2005). 70 CAFA, above note 2, s. 4, s. 1332, 4(d)(6). 71 Ibid. s. 4, s. 1332, 4(d)(2).

17 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 79 VOLUME 2, N o 1, JULY and/or obligations with respect to or created by any security. 72 Further, the original jurisdiction of the federal court does not apply to class actions that relate to the internal affairs or governance of a corporation or other business enterprise and have their foundation in the laws of the state where the corporation or business enterprise is incorporated or organized. 73 The preceding and subsequent provisions apply to all class actions, regardless of whether the class has been certified or not. 74 CAFA contains an exception leaving truly localized disputes in state courts. This applies when over two-thirds of the class members are citizens of the state in which the action was filed and either (i) the primary defendant or defendants are also citizens of that state, or (ii) at least one of the defendants from whom significant relief is sought is also a citizen of the state and the alleged conduct and principal injuries resulting therefrom occurred in the state in which the action was filed. 75 The original jurisdiction of the federal court may also be declined over class actions in which greater than one-third, but less than twothirds, of the class members in the aggregate and the primary defendants are citizens of the state where the action was originally filed and where the court finds such to be in the interests of justice after reviewing the totality of circumstances. 76 The factors to be reviewed in making this determination are whether: (a) the claims asserted involve matters of national or interstate interest; (b) the claims asserted are governed by state laws; (c) the complaint is pleaded in such a manner as to avoid federal jurisdiction; (d) the complaint was brought in a forum with a distinct nexus with the class, the defendant or the harm; (e) the number of class members in the state in which the complaint was filed is substantially larger than the number of class members in any other state, and the citizenship of the other class members is dispersed among a substantial number of states; and (f) one or more class actions alleging the same or similar claims on behalf of the same or similar persons was filed in the three years preceding the filing of the subject class action Ibid. s. 4, s. 1332, 4(d)(9)(A) & (C). 73 Ibid. s. 4, s. 1332, 4(d)(9)(B). 74 Ibid. s. 4, s. 1332, 4(d)(8). 75 Ibid. s. 4, s. 1332, 4(d)(4)(A)(i) & s. 1332, 4(d)(4)(B). 76 Ibid. s. 4, s. 1332, 4(d)(3). 77 Ibid. s. 4, s. 1332, 4(d)(3).

18 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW The citizenships of plaintiffs and defendants for the purposes outlined above are determined as of the date of the filing of the complaint, the amended complaint, or, if the initial complaint is not subject to federal jurisdiction, the date of service by the plaintiffs of an amended pleading, motion, or other paper indicating federal jurisdiction. 78 These provisions and procedures do not apply to class actions in which the primary defendants are states, state officials, or other governmental bodies against whom the federal court is foreclosed from ordering relief, or to class actions where the number of class members of all classes and subclasses is less than one hundred members in the aggregate. 79 4) Removal of Interstate Class Actions to Federal Court CAFA and the new expansion of federal jurisdiction over class actions does not prevent plaintiffs from filing class action complaints in state courts or having them decided by state courts. CAFA, therefore, only modifies the rules for removing class actions from state courts to federal courts. Any defendant may now remove a class action from a state court to the federal court without the consent of the other defendants. 80 At its most general level, CAFA grants defendants a right to remove any class action commenced in a state court to the federal court where there is minimal diversity, in other words, at least one member of the proposed class is from a different state than at least one of the defendants, and the amount being claimed by the class, in aggregate, is greater than $5 million. 81 Under previous legislation, defendants faced many more obstacles to removing class actions to federal courts. For example, removal was prevented where any defendant was a citizen of the state in which the complaint was filed and of which any representative plaintiff was a citizen. Removal is now permitted regardless of whether a defendant is a forum state citizen. The old rules also required all defendants to consent to the removal. A federal court s order remanding a class action to state court is now also subject to discretionary appellate review. 82 This is a marked change 78 Ibid. s. 4, s. 1332, 4(d)(7). 79 Ibid. s. 4, s. 1332, 4(d)(5). 80 Ibid. s. 5, s. 1453(b) 81 Ibid. s. 4, s. 1332, 4(d)(2). 82 Ibid. s. 5, s. 1453(c)(1).

19 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 81 VOLUME 2, N o 1, JULY from the previous procedure and the general rule that remand orders are virtually non-appealable. As above, this appeal process does not apply to class actions in which the primary defendants are states, state officials, or other governmental bodies against whom the federal court is foreclosed from ordering relief, or to class actions where the number of class members of all classes and subclasses is less than one hundred members in the aggregate. 83 5) Mass Actions Equated to Class Actions for CAFA Purposes CAFA deems a mass action to be a class action under the federal court jurisdiction and removal provisions of CAFA. 84 A mass action is defined within CAFA as being any civil action [...] in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs claims involve common questions of law or fact. 85 For the purposes of CAFA, however, a mass action does not include a civil action where the plaintiffs claims are joined by motion brought by the defendant, arise from actions and injuries sustained in the state in which the action was filed, are asserted on behalf of the general public and not on behalf of individual members of class, or are consolidated solely for pretrial purposes. 86 6) Report on Class Action Settlements CAFA also specifically mandates the Judicial Conference of the United States to prepare a report on class action settlements and transmit the same to the Committees on the Judiciary of the Senate and the House of Representatives no later than twelve months from the date of the enactment of CAFA, namely February 18, This report is to contain recommendations on the best practices courts can use to ensure that: (a) proposed class action settlements are fair to class members; (b) fees and expenses awarded to counsel on class action settlements appropriately reflect the extent to which counsel succeeded in obtaining full redress for the class members and the time, expense, and risk that counsel devoted to the litigation; and 83 Ibid. s. 5, s. 1453(d). 84 Ibid. s. 4, s. 1332(11)(A). 85 Ibid. s. 4, s. 1332, 4(d)(11)(B)(i). 86 Ibid. s. 4, s. 1332(11)(B)(ii). 87 Ibid. s. 6(a).

20 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page THE CANADIAN CLASS ACTION REVIEW (c) the class members are the primary beneficiaries of the proposed class action settlement. 88 CAFA also requires the Judicial Conference to report on the actions it has taken, and any actions it intends to take, towards ensuring that any or all of its recommendations are implemented by the federal judiciary. 89 D. CONCLUSION In conclusion, Congress has stated that no substantive laws are being changed and no one s right to commence, certify, or settle a class action is challenged by the passing of CAFA. CAFA directs that the federal courts will provide the principal battlefields for class actions and forces plaintiffs counsel to become more creative with their strategies concerning and handling of class actions. It remains to be determined in practice whether all legitimate class actions will find a home and will be treated fairly and judiciously under the new procedures. CAFA is a striking political reaction critics say overreaction to perceived abuses that, on the authors review of the reports and debates before Congress, occurred in a handful of state courts in a handful of counties, which have attained a reputation for approving bad settlements and grossly high attorney fees. Assuming that there have been abuses in class actions in the United States (as well as in the conduct of many other types of civil and criminal proceedings), the approach of CAFA, in targeting the court system and not the real forum shopping and greedy abusers, is surprising. The authors are left with the concern, on the basis of the record before Congress, that the vast majority of state courts conduct class actions with competence and without bias. The record suggests that rarely has a state court usurped the function of a federal court and undertaken a case of national importance, and that, in reality, the vast majority of state courts are reluctant to certify nationwide classes. In these circumstances, we are concerned that the withdrawal of class actions from these competent and experienced judicial resources will limit the access to justice of legitimate class action claims. We look forward to the Report of the Judicial Conference of the United States which, under the terms of CAFA, will be released in February We must anticipate that the plaintiffs class action bar will be innovative in minimizing the impact with respect to shifting 88 Ibid. s. 6(b)(1) & (2). 89 Ibid., s. 6(b)(3).

21 CCAR vol 2 no 1-5 galleysi 7/20/05 2:09 PM Page 83 VOLUME 2, N o 1, JULY actions to the federal courts. As an example, in order to avoid the expanded jurisdictional net of the federal courts, plaintiffs counsel may seek state-wide classes in multiple forums across the United States, divide their claims into multiple, smaller actions each seeking less than $5 million in aggregate, or define their classes in such a way as to affect fewer than one hundred people. Such tactics may increase the burden on state courts. CAFA puts into practice novel and untested procedures which will require both the plaintiffs and defendants bar to develop new strategies in class actions. We, as observers, will have to wait and see how CAFA is interpreted and treated by both the federal and state courts.

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