Spring 2005-10 Federal class action bill signed into law
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Spring 2005-10 Federal class action bill signed into law

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Number 59
Spring 2005

Federal class action bill signed into law

Advocates of class action reform have won a significant victory with the recent enactment of the Class Action Fairness Act of 2005, which President Bush signed into law on February 18, 2005. The law became effective immediately, and applies to civil actions filed on or the date stated.

The primary purpose of the law is to curb “forum shopping,” a practice in which the plaintiffs’ lawyer files large, interstate class actions in certain hand-picked “magnet jurisdictions” that have little or no connection to a controversy. The law attempts to do this by expanding federal jurisdiction over interstate class action lawsuits. The law also heightens judicial scrutiny of the payments that plaintiffs’ lawyers get in so-called “coupon settlements” cases, and provides for notice of proposed settlements to relevant state and federal officials. The following is an overview of the law’s key changes.

Expanded federal jurisdiction

Most state courts are regarded to handle class actions with reasonable fairness and competence. Some, however, have shown a widely perceived bias against defendants in these litigations, and certain plaintiff class action lawyers have taken advantage by filing numerous cases in those courts for just that reason. In addition, these lawyers tend to make identical filings in multiple states and, because there is no good way to coordinate cases across state lines, this practice has become a technique for forcing settlements from defendants. The law helps to prevent both of these kinds of abuses through expanded federal jurisdiction over certain interstate class actions.

Accordingly, the law amends the U.S. Judicial Code to require only “minimal diversity” in class action suits. Federal district courts now have original jurisdiction in all class actions where there are at least 100 class members, the amount in controversy exceeds $5 million and at least one class member resides in a state other than the home state of any defendant. The law, however, contains a “local controversy exception” that leaves in state court cases in which:

more than two-thirds of class members and the principal defendants are citizens of the forum state where the action is filed, or

more than two-thirds of class members are citizens of the state in which the case is filed, at least one defendant is a citizen of that state, and the alleged culpable conduct and injuries were incurred within the state.

Moreover, if more than one-third, but less than two-thirds of class members are citizens of the forum state, the federal court may accept or decline jurisdiction after considering statutory criteria to weigh the respective national and state interests at stake.

The law makes corresponding changes to rules governing removal of class actions, and allows for expedited review of orders remanding class actions to state court. Under the law, any defendant may remove a class action to the appropriate district court without the consent of the other defendants. And, unlike most remand decisions, a district court’s order remanding a class action to state court will be subject to discretionary appellate review.

Taken together, these new provisions should curtail the ability of class action plaintiffs to manipulate their pleadings in order to keep a case in a state court.

Restrictions on “coupon settlements”

The new law compels greater scrutiny of so-called “coupon settlements” in class actions, which are most often derided for the tendency of the plaintiffs’ lawyers in such cases to receive cash attorneys’ fees, while the classes they represent receive only coupons or other in-kind relief. Henceforth, contingent fees awarded to attorneys in connection with coupon settlements must be based upon the value of coupons that are actually redeemed by class members, rather than the alleged market value of the coupons issued as settlement consideration. Fees may otherwise be based upon the amount of time spent, or a “lodestar” methodology including a multiplier in appropriate cases. Courts are also specifically authorized to withhold approval of settlement agreements that do not include a mechanism for distributing the value of unclaimed coupons to charitable or governmental organizations.

Notification requirements

Defendants are subject to new notice requirements in class action settlements. Within ten days of a settlement, defendants must notify each “appropriate state official” and “appropriate federal official” (in most cases, federal and state attorneys general) of the nature of the action, the terms of the proposed settlement, and the approximate number of affected residents in each state. A settlement cannot receive final court approval until at least 90 days after state and federal officials have been notified.

Report on class action settlements

Within the next 12 months, the Federal Judicial Conference must prepare and recommend “best practices” for class action settlements. The recommendations are to ensure that class members are the “primary beneficiaries” of any settlement, and that attorney fee awards appropriately reflect the efforts expended and the results obtained by class counsel.

What’s next

It is widely expected that provisions such as those summarized above will reduce state court class actions in the future. However the change in general state court class action filings because of the Act may not be as dramatic as expected. As effective as many of the Act’s changes in class action practice may be, it is unlikely that many plaintiffs’ attorneys will abandon filing state class action suits in magnet jurisdictions. Some attorneys in the past have gone to great lengths to find new ways to manipulate their clients’ pleadings, in order to stay in their hand-picked venues. In fact there are indications that the drop in class action filings after the new law has taken effect is due to the fact that plaintiffs’ attorneys are carefully rethinking their tactics, rather than abandoning such cases.

© 2005 Goldman Antonetti