THE CLASS ACTION FAIRNESS ACT OF 2005: OVERVIEW AND ANALYSIS By Joseph M. Callow, Jr.

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1 THE CLASS ACTION FAIRNESS ACT OF 2005: OVERVIEW AND ANALYSIS By Joseph M. Callow, Jr. On February 18, 2005, President Bush signed into law the Class Action Fairness Act of At the signing, President Bush described the Act as a critical step toward ending the lawsuit culture in our country and predicted that the Act will ease the needless burden of litigation on every American worker, business, and family. 1 The Act does not change the basic requirements for class certification under Rule 23 of the Federal Rules of Civil Procedure, but dramatically changes three key aspects of class action litigation. The Act: 1. expands federal diversity jurisdiction over interstate class actions, including expanded removal powers and limitations on remand; 2. establishes mandatory notice procedures requiring the mailing of notice and related settlement documents to the appropriate federal and state officials for review; and 3. limits attorneys fee awards in coupon class action settlements. The Act applies to any civil action commenced on or after February 18, 2005 and is not retroactive. 2 The Act is short but complicated. Anyone involved in class action litigation commenced after February 18, 2005 must become familiar with this new legislation. Expansion of Federal Court Jurisdiction Over Class Action Litigation Federal Diversity Jurisdiction The most publicized changes associated with the Act are an expansion of federal jurisdiction over multistate class actions. The changes are designed to establish broad federal court jurisdiction over multistate class actions, while attempting to preserve state court jurisdiction over class actions that predominantly involve plaintiffs and defendants of the same state. The Act redefines federal diversity jurisdiction for class actions. Pursuant to the Act, district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs, and is a class action in which A. any plaintiff class member is a citizen of a State different from any defendant; B. any plaintiff class member is a foreign state or a citizen of a foreign state and any defendant is a citizen of a State; or C. any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state. 3 The Act further specifies that claims of individual class members shall be aggregated to determine the $5,000,000 amount in controversy requirement. 4 1 White House Bill Signing Ceremony, Feb. 18, 2005, transcript and official press release available at whitehouse.gov/news/releases. The enumerated purposes of the Act are to: (1) assure fair and prompt recoveries for class members with legitimate claims; (2) restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction; and (3) benefit society by encouraging innovation and lowering consumer prices. See 109 P.L. 2(b) (2005). 2 See 109 P.L. 2 9 (2005) U.S.C. 1332(d)((2) (emphasis added) U.S.C. 1332(d)(6). One East Fourth Street Suite 1400 Cincinnati, Ohio

2 As a result, federal district courts have jurisdiction over class actions where individual plaintiff recoveries may be far less than $75,000 per person (which is the current minimum amount in controversy requirement for basic federal court jurisdiction) as long as there are enough plaintiffs to make the aggregate amount in controversy more than $5,000,000. A federal district court may decline to exercise jurisdiction over a class action in which greater than one-third but less than two-thirds of all proposed plaintiff classes and the primary defendants are citizens of the state in which the action was originally filed and based upon consideration of six enumerated factors. 5 A federal district court shall decline to exercise jurisdiction over a class action in which: 1. greater than two-thirds of the members of all proposed classes in the aggregate are citizens of the state in which the action was originally filed; 2. at least one defendant from whom significant relief is sought or whose alleged conduct forms a significant basis for the claims asserted is a citizen of the state in which the action was originally filed; 3. the principal injuries resulting from the alleged conduct or related conduct were incurred in the state in which the action was originally filed; and 4. no other class action asserting the same or similar factual allegations was filed during the preceding three year period. 6 A federal district court shall also decline to exercise jurisdiction over a class action in which two-thirds or more of all proposed plaintiff class in the aggregate and the primary defendants are citizens of the State in which the action was originally filed. 7 The changes regarding federal court jurisdiction do not apply to any class actions where the class is less than 100 in number. 8 The changes also do not apply to any class action where the primary defendants are states, state officials, or other governmental entities. 9 The changes to mandatory jurisdiction also do not apply to any class action that solely involves a claim that: 1. concerns a security; 2. relates to the internal affairs or governance of a corporation under state law; or 3. relates to rights, duties, and obligations relating to or created by a security. 10 Federal Jurisdiction over Mass Actions The Act also establishes federal jurisdiction over a mass action, defined as any civil action in which the monetary 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. 11 There is no aggregate jurisdictional minimum requirement for mass actions, except that jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the traditional diversity requirements of 28 U.S.C. 1332(a). 12 Mass actions do not include cases where: 1. all of the claims in the action arise from an event or occurrence in the state in which the action was filed and that allegedly resulted in injuries in that State or in States contiguous to that State; 2. the claims are joined upon motion by the defendant; 3. the claims are asserted on behalf of the general public and not on behalf of specific individual claimants under a state statute; or 4. the claims have been consolidated or coordinated for pretrial purposes only U.S.C. 1332(d)(3). The enumerated factors for the district court to consider in the interests of justice and looking at the totality of the circumstances include: (A) whether the claims asserted involve matters of national or interstate interest; (B) 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; (C) whether the class action has been pleaded in a manner that seeks to avoid federal jurisdiction; (D) whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; (E) 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; and (F) whether, during the 3-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. 28 U.S.C. 1332(d)(3)(A-F) U.S.C. 1332(d)(4)(A) U.S.C. 1332(d)(4)(B). Under all of these provisions, citizenship shall be determined as of the date of the filing of the complaint or amended complaint or the date of service of the amended pleading first indicating the existence of federal jurisdiction. 28 U.S.C. 1332(d)(7) U.S.C. 1332(d)(5)(B). While the changes encompassed in the Act do not provide for mandatory jurisdiction, certain plaintiff classes with less than 100 members may still meet existing jurisdictional requirements for federal jurisdiction anyway U.S.C. 1332(d)(5)(A) U.S.C. 1332(d)(9) U.S.C. 1332(d)(11)(B)(i) U.S.C. 1332(d)(11)(B)(i) U.S.C. 1332(d)(11)(B)(ii). 2

3 A mass action is deemed a class action for purposes of removal; once removed to federal court, a mass action cannot be transferred unless a majority of the plaintiffs consent. 14 Broadened Removal Jurisdiction In addition to expanding federal jurisdiction, the Act expands the federal court s authority to accept removal of class actions filed in state courts. The removal provisions of 28 U.S.C still generally apply to removal of state class actions but with three new exceptions: 1. the one year time bar for removal under Section 1446(b) does not apply to class actions (or mass actions) so removal can occur at any time in the state court litigation; 2. unanimous defendant consent is no longer required; any defendant can remove with or without the consent of other defendants; and 3. the residency of defendants in class actions is immaterial for removal purposes; a defendant can remove the case to federal court even if one of the defendants is a citizen of the state in which the action is brought. 15 This change negates the typical plaintiff tactic of naming a state resident as a nominal defendant to avoid removal. The Act also amends 28 U.S.C and allows for review by a federal court of appeals of any order denying or granting a motion to remand, and requires that the court of appeals complete all action on any appeal accepted for review not later than 60 days after the date on which the appeal was filed. 16 Broad Changes to Class Action Settlement Notice Requirements Rule 23(c)(2) generally provides that the court may direct appropriate notice to the class in mandatory and injunctive class actions and that the court must direct the best notice practicable under the circumstances, including individual notice to identifiable class members, for all other class actions. 17 The Act now requires mandatory notice to appropriate federal and state officials of any class action settlement submitted in federal court. Each defendant participating in a proposed class action settlement is now required to send a notice package to the appropriate federal official and to the appropriate state official of each state in which a class member resides. 18 The notice package must consist of: 1. a copy of the complaint and any materials filed with the complaint and any amended complaints (unless electronically available through the internet); 2. notice of any scheduled judicial hearing; 3. any proposed or final notification to class members of the settlement and explanation of exclusion rights; 4. any proposed or final class action settlement; 5. any settlement or other agreement contemporaneously made between class counsel and counsel for the defendants; 6. any final judgment or notice of dismissal; 7. if feasible, 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 ; or if not feasible, a reasonable estimate of same; and 8. any written judicial opinion relating to the settlement, notice, final judgment, or notice of dismissal. 19 Notice packages must be mailed to the federal and state officials not later than 10 days after a proposed settlement is filed in court, and a court cannot grant final approval of a class action settlement until at least 90 days after the federal and state officials have been served U.S.C. 1332(d)(11)(A), (C)(i) U.S.C. 1453(b) U.S.C. 1453(c). There is a curious provision that allows the court of appeals to extend this timeframe for 10 days for good cause shown and in the interests of justice or for any period of time if all parties to the proceeding agree to such extension. 28 U.S.C. 1453(c)(3)(A), (B). It is not exactly clear how the Court establishes good cause to extend its own deadline, or how it will request that the parties agree to an extension. In any event, if the court of appeals does not rule within the original or extended time period, the appeal shall be denied. 28 U.S.C. 1453(c)(4). 17 Fed. R. Civ. P. 23(c)(2) (2003) U.S.C. 1715(a), (b). The appropriate Federal official is the Attorney General of the United States, or if the defendant is a federal or state depository institution, a depository institution holding company, a foreign bank, or a nondepository institution subsidiary, the notice package is not served on the attorney general but on the person who has primary federal regulatory or supervisory responsibility with respect to the defendant. 17 U.S.C. 1715(a)(1). The appropriate state official is defined as the person in the state who has the primary regulatory or supervisory responsibility with respect to the defendant or who licenses or authorizes the defendant to conduct business in the state or the state attorney general. 17 U.S.C. 1715(a)(2) U.S.C. 1715(b)(1-8). Similar requirements apply for depository institutions. 17 U.S.C. 1715(c) U.S.C. 1715(b)(1), (d). 3

4 The Act does not create any new rights for these federal and state officials, but clearly provides them a window of time to review the proposed settlement and presumably decide whether to become involved, assert rights in some other manner, or do nothing. The Act explicitly punishes non-compliance with this notice provision any class member may refuse to comply with and may choose not to be bound by a class action settlement agreement or consent decree if the class member demonstrates a defendant s noncompliance with these notice requirements to appropriate federal and state officials. 21 Coupon Class Action Settlements Coupon class action settlements have often been the poster child for class action reform. Coupon settlements usually involve the mailing of discount coupons to class members; a large attorney fee payout to class counsel (in cash, not coupons); and little to no monitoring of the actual use or redemption of the coupons following court approval of the settlement. Class members typically receive little to no value for their damages and are often offended that they are required to conduct additional business with the defendant company that allegedly wronged them in the first place. The defendant obtains a broad release for little consideration because the redemption rates are usually low and may even be within the defendant s profit margin. Class counsel receive fees based on a percentage of a theoretical settlement value regardless of actual consideration paid by the Defendant to class members. The Act seeks to curtail coupon settlements by limiting attorneys fees that can be awarded to class counsel. If attorneys fees are awarded as a percentage of the coupons to be provided, attorneys fees shall be based on the value to class members of the coupons that are redeemed. 22 If attorneys fees are not based on coupon redemption, attorneys fees shall be based on a lodestar calculation of time reasonably expended with a court approved multiplier. 23 The court shall also include a fee award for injunctive and equitable relief obtained. 24 As with all class action settlements, the court may approve a proposed coupon class action settlement only after a hearing to determine that the settlement is fair, reasonable and adequate for class members. 25 The court may also require that a proposed settlement agreement provide for the distribution of a portion of the value of unclaimed coupons to one or more charitable organizations, as agreed to by the parties. 26 Analysis and Observations The Act was a key election year issue in 2004 and has been the subject of much acclaim and acrimony. As with any new legislation, the true impact of the Act will not be known for several years as federal courts work to interpret and apply the Act. At this point, a few general observations are important to note. First, as with most new legislation, some of the key provisions are not defined and may be difficult to apply in real life. The Act does not define primary defendants, significant relief, or significant basis for the claims asserted. The Act also sets forth various one-third and two-thirds numerical tests for jurisdiction yet it is often difficult if not impossible in practice to determine the number of putative class members at the time of filing a complaint in order to conduct such an analysis, much less determine the related state residencies. Federal courts are going to have to wrestle with this provision, define these terms, and determine what to do when exact mathematical calculations cannot be used. Second, the notice requirements relating to appropriate federal and state officials are an onerous and ominous provision and one that I believe was not widely publicized when support for this Act was sought. In a true nationwide class action settlement, each defendant will theoretically have to mail packages of relevant settlement documents to the United States Attorney General and 50 state attorney generals or other officials even if they have nothing to do with the proposed settlement and essentially wait to see if any or all of the appropriate officials take any action. Every federal class U.S.C. 1715(e)(1) U.S.C. 1712(a) (emphasis added) U.S.C. 1712(b)(1-2) U.S.C. 1712(b)(2) U.S.C. 1712(e); see also Fed. R. Civ. P. 23 (2003) U.S.C. 1712(e). 4

5 action settlement is now subject to policing by federal and state officials, which essentially amounts to an entirely new layer of discussion, analysis and potential additional litigation and negotiation. Defendants are no longer necessarily buying peace by settling with the class and class counsel. Defendants may be less willing to settle federal class actions given the burden and potential additional concerns raised by these new notice procedures. In addition, relief to plaintiff class members may be delayed if district courts allow federal and state officials to intervene and assert rights or become involved in the litigation. Third, the stated goal of the Act is to bring more class actions into federal courts. Federal courts, however, are generally overworked and lacking in necessary resources to handle their existing dockets. In passing the Act, Congress did not provide any additional resources to the federal judiciary to help accommodate this growth in workload, and it does not appear that such funding will be appropriated in the near future. The Act will most likely further delay federal court civil litigation, whether class action litigation or not. Fourth, the Act does not actually prevent the filing of class action complaints. Plaintiffs will most likely continue to file class action cases. The theory is that federal district court judges are less likely to certify national class actions, but that may not be the case. In addition, we can expect that plaintiff law firms will attempt to circumvent the Act by filing multiple state court class action complaints, a practice that exists today but on a less frequent basis. A defendant s exposure may be reduced by facing multiple state class actions rather than a federal national class action (and may be reduced by having a federal judge rather than a state judge decide class certification), but the transaction and litigation costs of multiple state court class action cases may actually increase. Finally, whether you believe the purpose of the Act is laudable or not, the bottom line is that class certification remains a decision largely in the discretion of district judges. Some class actions should be certified; some should not. Some settlements are fair and reasonable under the circumstances and should be approved; others should not. Good federal judges are needed to make these decisions and no amount of legislation will change this basic fact and foundation of our legal system. * * * At KMK, we have been involved in class action litigation for nearly 40 years and have followed all of the various changes to class action law during that timeframe. We will continue to monitor the Act and decisions interpreting and applying the Act as class action litigation continues to change. If you have any questions, please do not hesitate to call me or any of the KMK partners listed below, who practice class action and complex litigation. Joseph M. Callow, Jr. (513) James E. Burke (513) Richard L. Creighton, Jr. (513) Sue A. Erhart (513) Patrick F. Fischer (513) Louis F. Gilligan (513) Gregory M. Utter (513) See back panel for complete contact information for each partner. 5

6 If you have any questions or for additional information regarding The Class Action Fairness Act of 2005, please contact one of the KMK partners listed below. Joseph M. Callow, Jr. Direct Dial: (513) James E. Burke Direct Dial: (513) Patrick F. Fischer Direct Dial: (513) Richard L. Creighton, Jr. Direct Dial: (513) Louis F. Gilligan Direct Dial: (513) Sue A. Erhart Direct Dial: (513) Gregory M. Utter Direct Dial: (513) Keating, Muething & Klekamp, founded in 1954, is a service-oriented law firm currently with 105 lawyers and a support staff of more than 150 people based in Cincinnati, Ohio. We are committed to providing efficient, valuable and costconscious counseling. Our lawyers offer practical advice and time-tested business solutions. We focus on litigation, business representation and transactions, commercial finance, labor and employment, employee benefits, private client services, real estate and bankruptcy related legal services. For 50 years, we have contributed to the success of many businesses from small start-up companies and international corporations to non-profit organizations and government entities. For the past four years, Keating, Muething & Klekamp has been named one of the top business law firms in the Greater Cincinnati area by Corporate Board Member magazine. Corporate Board Member magazine conducts the survey and bases its findings on a poll of approximately 30,000 directors, general counsels and officers of public companies. Several of our lawyers also consistently appear in Woodward/White, Inc. s The Best Lawyers in America. Best Lawyers in America is based on an exhaustive peer-review survey of 15,000 leading lawyers throughout the country. In 2005, 31 of our lawyers were named Ohio Super Lawyers. Ohio Super Lawyers is a comprehensive listing of outstanding lawyers in more than 60 areas of practice and represents the top 5% of all lawyers in Ohio. One East Fourth Street Suite 1400 Cincinnati, Ohio