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The Class Action Fairness Act:
It May Affect You
The Class Action Fairness Act was enacted on February 18, 2005, and it
may affect you. Perhaps you are unknowingly a member of a class action
lawsuit. Maybe you have already had the interesting experience of
receiving a postcard or letter stating that you or your business are
involuntarily a member of a class action lawsuit. Possibly you have
received a check for a small amount of money, perhaps just a few dollars
or less, for your share of a class action lawsuit you knew nothing about.
Or, perhaps your business has been sued in a class action lawsuit. If any
of these scenarios has happened to you, or if any of these scenarios occur
in the future, you should be aware of the Class Action Fairness Act.
The Class Action Fairness Act was the first federal law enacted in 2005
and is designed to correct abuses of past class action procedures by
making it easier for defendants in class actions to remove multistate
cases to federal court. The Legislature reformed class action procedures
that have historically allowed a small number of plaintiffs to represent
large numbers of people in lawsuits, often against insurance companies and
large businesses, without prior notice to all the people represented by
the class. These procedures often resulted in lawsuits which provided
millions of dollars in fees to class action plaintiffs lawyers with little
or no benefit to the class members. These procedures also often resulted
in unjustified awards to some class members at the expense of other class
members. As a result, the Legislature believed abuses of the class action
system harmed class members with legitimate claims, adversely affected
interstate commerce, unfairly harmed out-of-state defendants, and
undermined the national judicial system.
Intent of the New Law
Because of these abuses, the new law is intended to: (1) lessen the
number of frivolous class action lawsuits, especially those filed in state
court jurisdictions known for exorbitant run-away jury verdicts;
(2) curtail the practice of class action plaintiffs lawyers receiving
large fees, often in the millions of dollars, in cases where class members
receive compensation comprised of coupons or other awards of little or no
value; and (3) assure fair and prompt recoveries for class members with
legitimate claims.
It Is Easier to Get to Federal Court
The Class Action Fairness Act revises the federal jurisdiction statute
to grant federal courts original jurisdiction in cases seeking damages in
excess of $5,000,000 and any class member is a citizen of a state
different from any defendant. Further, class action lawsuits seeking more
than $5,000,000 must now be heard in federal court when less than
one-third of the plaintiffs are from the same state as the primary
defendant. However, federal courts may, after analyzing a variety of
circumstances, decline to exercise jurisdiction over any such class in
which more than one-third but fewer than two-thirds of the class members
and the primary defendant are citizens of the state in which the action
was originally filed. Federal courts are required to decline jurisdiction
over cases in which the primary defendant and more than two-thirds of the
plaintiffs are citizens of the state in which the action was originally
filed.
Requirements of Proposed Settlements and Fees
The Act also establishes requirements for the calculation of plaintiffs
attorneys' fees in cases that provide for a recovery of coupons to class
members. More specifically, attorneys' fees are to be based on the value
of the coupons actually redeemed by the class members or upon the time the
attorneys reasonably expended working on the case. Under the new
requirements of the Act, federal courts are to scrutinize all proposed
settlements and approve only appropriate and reasonable amounts of
attorneys' fees on a case-by-case basis.
Unanswered Questions
Many unanswered questions exist regarding the Act because courts have
not yet had time to interpret its provisions. For example, although the
Act states federal courts may exercise jurisdiction over cases in which
two-thirds or more of the class members and the primary defendants are
from the same State, the Act fails to define the term "primary
defendants." The courts will therefore be forced to establish the process
and methodology for determining which defendants are “primary defendants”
in any particular case. It is also unclear as to whether the new
requirements for written notice of proposed settlements, which are
intended to make proposed settlement notices simpler and clearer, will
actually increase litigation expenses for defendant businesses. Because
the Act's provisions are directed more towards consumer litigation,
analyzing a likely impact on employment-related claims will be difficult
until the courts have had time to interpret the Act and apply it to
various factual situations.
Conclusion
Because businesses are especially vulnerable to class action lawsuits,
as well as the costs, expenses, and stress that accompany them, it is
important for businesses to learn about and stay apprised of developing
law regarding the Class Action Fairness Act. Although the practical impact
of this new law is unknown, businesses should be encouraged by the
expanded ability to move a class action lawsuit from state court to
federal court to decrease the ability of class action plaintiffs to “forum
shop” for a biased and "plaintiff-friendly" state court venue.
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