The Class Action Fairness Act of 2005: Summary and Analysis
September 15, 2005
G. Calvin "Calvin" Hayes- Tampa
Richard Williams - Los Angeles
The Class Action Fairness Act of 2005 (CAFA) became effective February 18, 2005, upon signature by President Bush. It applies, by its terms, to civil actions commenced on or after its enactment. CAFA § 9.
The principal features of CAFA are to permit larger multistate class actions to be prosecuted in federal district courts (CAFA §§ 4, 5), and to limit attorneys fees and settlements where class members would receive little value (CAFA §§ 3, 6), ostensibly to rectify abuses perceived in various class actions and made the subject of Congressional findings and statements of purpose (CAFA § 2).
CAFA is not designed to affect single-state-wide class actions pleaded with state law causes of action, such as class actions limited to consumers residing in a single state involving that state’s unfair trade practices law. However, federal jurisdiction is now provided under CAFA for class actions involving multiple states’ citizens and laws, particularly local tort and consumer protection statutes with which federal courts have been somewhat less familiar than state courts.
Some proponents of CAFA have expressed the view that state courts may be unduly willing to certify class actions under varying local standards; they are cautiously optimistic that federal judges applying the criteria of Rule 23, Federal Rules of Civil Procedure, will more frequently refuse class certification, finding multistate tort class action cases involve a predominance of individual issues of fact and law over common questions. Nationwide product liability classes involving the laws of 50 states have repeatedly been denied certification for just this reason. See, e.g., In re: Bridgestone/Firestone Inc. Tires Prods. Liab. Litig., 288 F.3d 1012 (7th Cir. 2002).
Proponents of class actions argue that regional lawsuits, involving citizens and laws of a few states per case, may avoid this certification obstacle with careful planning, focused pleading, and appropriate subclasses. Filing such multiple regional class actions and seeking their coordination under the federal Manual for Complex Litigation may provide some of the leverage and publicity effects of nationwide class actions that some plaintiffs’ counsel continue to seek.
CAFA was passed by Congress as a “clean bill,” to which amendments were not allowed on the floor of the House or Senate. Whatever the political merits of this strategy, clarifying amendments were impermissible during floor consideration; as a result, CAFA contains undefined terms and presents unresolved questions that will lead to procedural wrangling in the courts.
Perceived Abuses in Class Actions
In describing the purposes of CAFA, Congress made several negative observations about abuses in class actions:
“Class members often receive little or no benefit from class actions, and are sometimes harmed, such as where (A) counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value; (B) unjustified awards are made to certain plaintiffs at the expense of other class members; and (C) confusing notices are published that prevent class members from being able to fully understand and effectively exercise their rights.” CAFA § 2.
Congress also asserted that present practice keeps cases of national importance out of federal court and that in class actions, sometimes state courts demonstrate bias against out-of-state defendants or impose one local court’s view of the law on other states and bind the rights of the residents of those states. Id.
Federal Diversity Jurisdiction for Interstate Class Actions
At the heart of CAFA, by way of an amendment to 28 USCA 1332, federal district courts are given original diversity jurisdiction over any class action in both of the instances described below:
• where the matter in controversy exceeds $ 5 million (exclusive of interest and costs)
• where any member of a plaintiff class is a citizen of a state, or a citizen of a foreign state, different from the state of citizenship of any defendant, regardless of the citizenship of other parties; CAFA § 4(d)(2)
Thus, large interstate class actions can be filed in federal court; no longer will “complete diversity of citizenship” be required among the parties to such class actions.
Class actions may also be removed from state court to federal district court without regard to whether any defendant is a citizen of the state in which the action is brought. Removal is permitted by any defendant, without the consent of all defendants. Although most removal procedures in 28 USCA 1446 apply to class actions, its one-year time limitation does not. Thus, any defendant, whether local or foreign, may remove a class action at any time to federal court. CAFA § 5.
Certain class actions are not removable to federal court:
• those that “solely involve” a claim concerning “covered securities” as defined in Section 16(f)(3) of the Securities Act of 1933, 15 USCA 78p(f)(3), and Section 28(f)(5)(E) of the Securities Exchange Act of 1934, 15 U.S.C. 78bb(f)(5)(E)
• those that involve claims about rights, duties and obligations, including breach of fiduciary duties, with respect to “securities” as defined in Section 2(a)(1) of the Securities Act of 1933, 15 U.S.C. 77b(a)(1)
• shareholder derivative claims (“claim that relates to the internal affairs or governance of a corporation [that] arise under the laws where such corporation or business is incorporated or organized); in short, Delaware corporate law is not being federalized
CAFA requires that a federal district court must decline to exercise jurisdiction over a class action in which more than two-thirds of the proposed class members are citizens of the state in which the action was filed, so long as “significant relief” is sought at least against one of the defendants. CAFA § 4(d)(4).
After considering six specified factors and the “totality of circumstances,” the court may decline to exercise jurisdiction over a class action if more than one-third, and less than two-thirds, of the proposed class members and also the “primary defendants” are citizens of the state in which the action was filed. CAFA § 4(d)(3).
Factors for Declining Jurisdiction Under CAFA § 4(d)(3)
Under CAFA § 4(d)(3), for class actions in which between one-third and two-thirds of proposed class members and the primary defendants are citizens of the state in which the lawsuit was filed, a federal district court may choose to decline to exercise jurisdiction based on the “totality of circumstances” and “consideration” of six specified factors:
(1) whether the claims asserted involve matters of national or interstate interest
(2) whether the claims asserted will be governed by laws of the state in which the action was originally filed or by the laws of other states
(3) whether the class action has been pleaded in a manner that seeks to avoid federal jurisdiction
(4) whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants
(5) whether the number of citizens of the state in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other state, and the citizenship of the other members of the proposed class is dispersed among a substantial number of states
(6) whether, during the three-year period preceding the filing of that class action, one or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed
Presumably, the district court has discretion in applying these factors and in choosing what priority to give any one or more factors in a given case. It is unclear in CAFA how Congress anticipates some factors are to be applied in practice; for example, a forum’s nexus with the alleged harm or the filing of similar class actions in the prior three years could operate in favor of state or federal jurisdiction, depending upon the allegations and venue of those prior cases.
The fourth factor, a plurality of class members from one state, could mean that there is a significantly greater chance for a class action to be remanded to state court in larger states, such as California, Texas, New York, Florida, or Illinois.
Expedited Appellate Review of Remand Decisions in Class Actions
If a party seeks remand of a class action to state court, 28 USCA 1447 will apply, except that remand orders for class actions are now reviewable by appellate courts in expedited fashion.
Restrictions on Fees and Settlements
CAFA adopts several new statutory sections with specific limitations on class action settlements and the award of attorneys’ fees, a few of which are described below. Although CAFA, by its terms, does not govern cases predating its enactment nor to state court cases, these provisions are likely to be influential in such cases.
28 U.S.C. 1712 (Coupon Settlements)
If a proposed class settlement provides for any coupons to class members, the court may approve the proposed settlement only when the following two criteria are met :
• after conducting a hearing to determine whether the settlement is “fair, reasonable, and adequate for class members”
• after making a written finding that the settlement is “fair, reasonable, and adequate for class members”
In its discretion, the court may also require the distribution of a portion of the value of unclaimed coupons to one or more charitable or governmental organizations, as “agreed to by the parties.”
If a proposed class settlement provides for any coupons to class members, an award of attorneys’ fees in connection with settlement must be calculated in a particular way:
• a fee award based on that portion of the total value of settlement attributable to coupon values will be based upon only those coupons that are redeemed
• coupons distributed to, and redeemed by, charitable or governmental organizations shall not be included in calculations of an attorney’s fee award
• the court may, in its discretion and the motion of a party, receive expert testimony on the “actual value to the class members” of coupons that are redeemed
• a fee award based on settlement value not attributable to coupons shall be based on time “reasonably” expended by counsel in the action
• all fee awards shall be subject to court approval
• a fee award “shall include an appropriate attorney’s fee, if any” for obtaining injunctive or other equitable relief
• the court is not prohibited from application of a lodestar with a multiplier method in determining attorneys’ fees
28 U.S.C. 1713 (Monetary Loss Settlements)
If a proposed class settlement “obligates” any class member to pay money to class counsel that would result in a net [monetary] loss to that class member, the court may approve settlement only upon making a written finding that non-monetary benefits to the class member “substantially outweigh” the monetary loss.
Where a settlement requires the submission of claim forms and the notice has permitted opt-outs, there may be disparity between those bound by the settlement, if approved, and those actually submitting valid claim forms. It is unclear to whom fee obligations are allocatable in determining a monetary loss. The statute defines “class members” as those persons falling within the definition of a proposed or certified class; “class members” is the term used in this section. It may be necessary to defer this calculation until class member claims are submitted under the settlement, so that the apportionment of payment obligations to class members is limited to actual claimants.
Under Banks v. Commissioner of IRS, ___U.S. ___ (Jan. 24, 2005), a unanimous U.S. Supreme Court recently held that contingent fees paid to an attorney are generally attributable as personal income to the taxpayers winning a judgment related to such fees. An itemized deduction is available, per statute, for such amounts in certain classes of cases (civil rights, anti-discrimination and whistle-blower), but not in most contract, negligence, products liability or consumer protection cases. The smaller the class size, the greater is the prospect a consumer class could face monetary loss settlements.
28 USC 1714. Protection Against Geographic Discrimination
A court may not approve a proposed settlement that provides for the payment of greater sums to some class members than to others solely on the basis that the class members to whom the greater sums are to be paid are located in closer geographic proximity to the court.
Rule 23 Amendments from 2003 Officially Approved
Per CAFA § 7, the amendments to Rule 23, F.R.C.P., approved by the Supreme Court on March 27, 2003, are officially approved by Congress to take retroactive effect as of December 1, 2003, (as specified by the Supreme Court). Because federal courts have been applying those amendments since December 2003, following In re: Cree, Inc., Securities Litigation, 219 F.R.D. 369 (D.N.C. Dec. 17, 2003), this provision works no substantive change.
Conclusion
CAFA is a complex piece of legislation – this article has only briefly touched on some of its major components. It is essential for everyone involved with CAFA
to read it in its entirety and become familiar with its many intricacies.
For more information, e-mail Richard T. Williams or G. Calvin Hayes at
richard.williams@hklaw.com or
calvin.hayes@hklaw.com, respectively, or call toll free, 1-888-688-8500.