Last month, President Bush signed into law the Class Action Fairness Act of 2005, which enables certain lawsuits commenced in state courts to be removed by a defendant to federal district court. The Act applies to class actions with more than 100 class members seeking more than $5 million, where at least one of the class members is from a different state other than where the company has headquarters or is incorporated.

THE BASICS

Below is a brief summary of The Class Action Fairness Act of 2005, and its key provisions. Please note this list is not definitive:

Less Forum Shopping

Designed to reduce “forum shopping,” wherein plaintiffs' attorneys seek preferential jurisdiction to maximize awards.

Federal Jurisdiction

Federal district courts get class action jurisdiction when (a) there are more than 100 class members; (b) the value of the claims exceeds $5 million; and (c) a member of the plaintiff class is a citizen of a state different from any defendant.

No Retroactivity

The Act applies only to class actions filed after the date of enactment: Feb. 18, 2005.

Exceptions

Does not alter jurisdictional rules that currently apply to most securities claims. Federal court would also not have jurisdiction if more than two-thirds of class members and the primary defendants are citizens of the state in which the action was filed.

Download Full Text Of The Class Action Fairness Act

Commentary

Class Action Fairness Act Becomes Law (Wachtell, Lipton, Rosen & Katz)

Class Action Fairness Act (Debevoise & Plimpton)

Key Provisions of the CAFA (Wiley Rein & Fielding)

The Class Action Fairness Act of 2005 (Jones Day)

President Signs Class Action Fairness Act (Perkins Coie)

President Bush signs the Class Action Fairness Act of 2005 during a ceremony in the East Room, on Feb. 18, 2005. Photo by Eric Draper

Defense counsel has frequently tried to move class action suits to federal courts, where they perceive judges are more likely to side with corporate interests; however, the moves were difficult due to pre-existing rules for interstate class action suits. Specifically, class actions could not be moved to federal court unless all the defendants and all the plaintiffs were from different states. This complete diversity requirement prevented defendants from moving class actions to the federal court if any one plaintiff or any one defendant were from the same state. Class actions also stayed in state courts if there was at least one individual claim among the plaintiffs that did not exceed $75,000.

The CAFA, signed into law on Feb. 18, rewrites these rules. As a result, companies expect the Act to curtail the number of suits filed against corporations in both state and federal courts. They also expect the Act to decrease the number of suits that are certified as classes, and the number of awards granted to plaintiffs.

That’s because nearly all class actions include plaintiffs who live in different states, and, in most cases, the plaintiffs have claims totaling more than $5 million. The new rules apply to cases filed on or after Feb. 18. Securities class action lawsuits are exempted from the legislation—the Securities Litigation Uniform Standards Act of 1998 had corralled them into federal courts.

In a memo assessing what the legislation means to businesses, four lawyers at McDermott Will & Emery wrote that companies will no longer have to defend themselves against nationwide class actions in “magnet” state courts “that are often far from headquarters and resources.”

Business lobbyists in favor of the legislation said plaintiffs’ lawyers typically “shop around” for state judges who have a reputation for certifying class-action suits and presiding over multimillion dollar rewards. They said the legislation was needed to stop this alleged abuse. Opponents of the legislation, including the Conference of Chief Justices and consumer and civil rights groups, said there was little if any evidence to support this allegation. And if there were abuses, the conference of Chief Justices added, the state courts and legislatures should fix them.

Most class actions are filed in state courts because the litigation is based on state consumer protection or anti-fraud statutes and does not usually present questions of federal law. Flanked by several state laws and plaintiffs from 40 states, for example, federal judges are more likely not to certify classes; the claims must arise from facts or law common to all the class members.

Cabraser

“It was the intention of some proponents of the Act to use it to clog the federal courts with an influx of state-based class actions,” said Elizabeth Cabraser, a prominent plaintiffs’ attorney in San Francisco specializing in class action litigation and founding partner of Lieff Cabraser Heimann & Bernstein. “But I don’t think this will happen; I think the federal court will struggle to hear these cases and try them fairly.”

Class action lawsuits give investors with relatively small claims the chance to group together and sue companies for alleged fraud, pollution, workplace discrimination and defective medicine. Plaintiffs often need to band together because of the costly litigation process. “The suits of mega-size like Enron will still be heard because there’s enough money in the wrongdoing to make them viable to bring and to endure a long litigation process,” said Pamela Gilbert, executive director of the Consumer Product Safety Commission from 1996 to 2001, and a partner at Cuneo Waldman & Gilbert in Washington, D.C. “But most class-actions are smaller than that,” she adds. “By forcing these cases to be certified in federal court, they will not be financially viable and thus never be heard. It makes these ever-so-difficult cases even more difficult.”

The new law does not force all class actions into federal court. A state court retains jurisdiction of a class action if two-thirds of all class members in the suit are citizens of the forum state and if the primary defendants are in that same state. The case may stay in state court if only one of the primary defendants resides in the same state as two-thirds of the class members, but, in such a scenario, the alleged fraud or crimes must also have been committed by the defendant in that same state.

When between one-third and two-thirds of plaintiffs are from the same state, the law allows federal judges to send a case back to a state venue, but only under certain circumstances, like whether the case arises from state law rather than national, and whether there is a clear connection between the case and the state court.

“The number of cases where the class definition will be such as to call the two-thirds or one-third provisions into play seems unclear,” wrote Public Citizen’s litigation group in a 15-page analysis of the new law. “Outside of cases where a class is defined to include only citizens of a particular state, there may be few cases where class members will be so concentrated in individual states that the two-thirds requirement could be met.” The litigation group, a public interest law firm in Washington, D.C., added, “Moreover, in cases where the two-thirds or one-third provisions may potentially apply, it is likely to be extremely difficult at the outset of case to determine whether they do.”

When plaintiffs do file class actions in state courts, defendants used to have one year from the filing date to ask for a removal to federal court. The new Act removes this limitation. Corporate defendants that discover facts showing that the case belongs in federal court can now file for a removal even if one year has passed since the suit was filed.

The Act adds requirements for coupon settlements, where class members get coupons worth, for example, $50 to replace some defective part of a product. The fee for the plaintiffs’ lawyers will now be based on the amount of coupons that are redeemed, rather than the total value of coupons granted to all the plaintiffs in a class action suit. The criticism here was that plaintiffs’ attorneys were receiving big paychecks while their clients received little or nothing.

The new law requires the settlement terms to be sent to the U.S. attorney general and an “appropriate state official.” But the Act does not require the attorney general or state officials to do anything with the notice of settlement terms. “The involvement of numerous government officials, each with his or her own constituency and political interests to consider, could increase the cost and complexity of settlement,” wrote Kenneth Forrest, Warren Stern, Jeffrey Fourmaux and Sarah McCallum, lawyers at Wachtell Lipton Rosen & Katz, in a Feb. 24 memo.

The full text of the Act, as well as key points and related commentary from several law firms, is available in the box above, right.

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