Center for Legal & Responsible Commerce

The Class Action Fairness Act of 2005: More Meaningless Reform from Washington

Many people have asked us for our take on the effect the Class Action Fairness Act of 2005 ("CAFA") will have on class actions.  Our response? First, we like being in federal court.  We do not bring frivolous cases or try to abuse the class action device1 so we do not mind the extra attention most federal judges pay to the claims being asserted.  Second, as with most other legislation that is based on anecdotal evidence and is not carefully drafted,2 the effect of CAFA will likely be minimal, and any impact that it may have on class action litigation will likely be more harmful than beneficial to CAFA's proponents.  This article briefly addresses the actual statistics regarding outcome of class actions in state and federal court, then discusses some of the shortcomings of CAFA.

The US Chamber of Commerce along with many of its larger members spent over eight years and tens of millions of dollars trying to get CAFA and its predecessors enacted.3 CAFA's only major change to the status quo was the enlarging of federal diversity jurisdiction to include "class actions" that implicate interstate commerce concerns and are alleged to include aggregate damages in excess of five million dollars.  Despite including "fairness" in the name of the act, like many other acts in Washington, there is nothing fair in trying to limit the liability of large entities that cause injuries that do not justify individual litigation.4

The proponents of CAFA have a misguided belief that removal of class action lawsuits to federal courts will cut down on the number of class actions.  Apparently the proponents of CAFA were too busy to notice an April 2004 Federal Judicial Center study entitled Attorney Reports on the Impact of Amchem and Ortiz on Choice of Forum in Class Action Litigation FJC Report to the Advisory Committee on Civil Rules.  The study demonstrated that there was no significant difference in the outcome of a class action based upon the court system that it was litigated in.  The percentage of cases being certified for litigation or certified for settlement were the same between cases in federal court and those remanded to state court.  Id. at 35.  The only difference noted was that cases that terminated without being certified tended to terminate without a ruling explicitly denying class certification in state court, whereas in federal court, the court explicitly denied certification.  Id. at 35-6.   The end result however, was the same.  It is worth noting that the usual target of tort "reform" measures, attorney's fees, are not significantly different between state and federal courts.  Id. at 40.  

Another argument of CAFA's proponents was that not only are issues of national importance being decided in nationwide class actions filed in state courts, but that the federal judiciary was better staffed and more capable of performing a thorough analysis of the arguments presented. There is no denying that federal trial court judges have law clerk(s), and that most state court trial judges do not have law clerks or similar resources to rely on.  It is also true that state court judges tend to have larger dockets than federal judges.  One thing the proponents of CAFA seem not to have noticed however is that Congress has been increasing the jurisdiction of federal courts for decades without committing additional resources, and CAFA will now burden the federal courts with thousands of additional cases, many of dubious merit, simply because the plaintiff styles the complaint as a class action and the Defendant(s) alleges that if certified the aggregate amount in controversy will exceed five million dollars.  Note to the business community and to Congress, you cannot continually increase the jurisidiction of the federal courts without committing additional resources, and expect the courts to continue to turn out the same high quality and well reasoned decisions that they have traditionally produced.  This is especially true when the federal courts are being burdened/distracted from the merits with issues related to jurisdiction because Congress could not even draft CAFA with reasonable clarity.

CAFA's poor drafting will eventually lead to it having very limited effect other than increasing the burden on the federal judiciary.  Some of the provisions that do not make sense include: requiring the use of lodestar and allowing for multipliers in calculating attorney's fees; conditioning remand on whether a similar class action has been filed within the preceeding three years, without respect to the disposition of that action or where the preceeding action was litigated; the lack of clear guidelines on when the relief sought or the alleged improper conduct is "significant;" and last but not least the time constraints for review of remand orders.

The requirement that district courts use the lodestar method with an allowance for a multiplier, to calculate attorney's fees ignores research showing that lodestar usually resulted in the attorney's fees being equal to or greater than the amount normally granted on a percentage of the common fund basis.  (See, Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules (Federal Judicial Center 1996), at 68-77).  Lodestar is disfavored because it is subject to easy manipulation, requires extra work of the court in reviewing hours billed, determining if the hours were redundant and billed at the correct skill level, factoring in the difficulty of the work performed, risk involved in pursuing the case, etc....  Id. The courts logically concluded that lodestar was an inferior method for calculating attorney's fees when quantifiable relief is obtained, not only because of the time involved but because the focus of attorney compensation should be the results achieved.  Id.  Lodestar encourages protracted litigation, not efficient, high value recoveries for the class.  Id.  At a time when we should be looking for ways to lower litigation costs, mandating the use of lodestar is unintelligent.  Courts would be far better off calculating a value for the common fund created by coupons by looking at the usual redemption rate and whether excess funds revert to the defendant.  While we should not reward class counsel for producing token settlements, we should not punish them because class members did not feel it was worth their time to redeem the coupons.  Further, coupons that are transferable and have cash value should not be treated the same as coupons that offer a small discount on a large purchase.  CAFA does not recognize these distinctions.

The next problem with CAFA is its blurring of when jurisdiction exists. Prior to CAFA the biggest problem a federal court faced in deciding subject matter jurisdiction was, is there a federal question,5 or is there complete diversity and is the jurisdictional amount satisfied?  Under CAFA, courts will now be forced to inquire into whether there is over five million dollars at stake when all of the class members claims are aggregated?  Have other cases been filed alleging the same 
conduct?6 Is there a non-diverse defendant from whom "significant" relief is sought and whose alleged conduct forms a "significant" basis for the claims asserted by the putative class?

Another example of CAFA's shoddy drafting is the portion creating 28 U.S.C. §1453(c), review of remand orders.  It is apparent that Congress was interested in keeping class action litigation moving by limiting the amount of time a circuit court has to review a district court's remand order.  So it is curious why Congress would provide for appeals of remand orders only, "if application is made to the court of appeals not less than 7 days after entry of the order."  Congress in its sloppiness probably meant "not more than" or "not later than."  It also seems as though Congress is undermining its grant of jurisdiction to review remand orders, if it strips away that jurisdiction because the appellate court has not ruled within 60 days (70 days if the court grants itself an extension).

A final example of CAFA's poor drafting is in § 7 of CAFA.  The amendments to Fed. R. Civ. Pro. 23 discussed in § 7 became effective on December 1, 2003.  There is no reason for the inclusion of this section in CAFA other than in recycling the same failed piece of legislation, CAFA's sponsors failed to review and remove § 7 before resubmitting CAFA.  The fact that this section was not removed during the legislative process further demonstrates how CAFA was rammed through Congress.

All things considered, CAFA will probably wind up backfiring on the business community.  It is well established federal precedent that courts should err in favor of class certification.  Further, in overloading the federal judiciary with cases, cases that are currently not being certified may slip through the cracks and be certified.  Additionally, many Defendant(s) may not wish to remove a case to federal court if in doing so they have to publicly admit that, if the class has a valid claim, the value exceeds five million dollars.  Finally, where overlapping class actions have been filed, if the defendant(s) remove some but not all cases, and then enter into settlement agreements with the case they left in state court, the defendant(s) failure to remove that particular case would be another, perhaps very persuasive, piece of evidence suggesting collusion between plaintiff(s) and defendant(s) in that case.7

1 "Unlike most other 'consumer advocates,' we do not believe that the proper use of the courts is to create new consumer rights, especially through the use of class actions.  We do not believe in filing frivolous lawsuits or using the shotgun method of accepting and filing cases.  All of our cases are carefully researched before they are filed." (Statement at the very front of the Center for Legal & Responsible Commerce's website.)

2 Another major reform bill that had little or no effect was McCain-Feingold.  After the 2004 election cycle, no one can argue that McCain-Feingold took the money out of political campaigns, or was a success on any other stated basis for McCain-Feingold's enactment.

3 There have been “Class Action Fairness Acts” of 1997 - 2004, each class action fairness act being a recycling of the same ideas that failed several times before.

4 One need only look at CAFA § 2(b)(3), "The purpose[ ] of this Act [is] to—benefit society by encouraging innovation and lowering consumer prices."  Whenever the business community (i.e., the drafters of CAFA) talk about innovation and low prices, they mean by blocking consumers' access to the courts.  It insults our intelligence to suggest that businesses will pass on savings from lower litigation costs rather than increase their profits.  For proof that savings do not get passed on, look at the savings realized by doctors in states that have instituted caps on damages in medical malpractice cases.  Doctor's premiums and insurer's profits continue to skyrocket.

5 "Federal question" is used liberally by the author and is not intended to be limited to 28 U.S.C. § 1331, but to any controversy where Congress has granted federal jurisdiction not based on diversity.  A review of title 28, chapter 85 of the USC reveals no other jurisdiction conferring statute that is as vague as CAFA § 4.

6 A question that may be relevant in deciding whether to certify a Fed. R. Civ. Pro. 23(b)(3) class, but not relevant to whether a court should have jurisdiction.

7 See the Ninth Circuit's original opinion in Epstein v. MCA, Inc. after remand from the Supreme Court.  The ninth circuit recognized that class counsel in the state court action had released federal claims worth roughly 1.4 billion dollars in exchange for attorney's fees of close to $700,000 and pennies for the shareholders.  There can be no doubt that the plaintiff's attorneys in the state court action were in collusion with MCA.  Unfortunately, CAFA would do nothing to prevent the type of collusion that occurred in the state case because CAFA exempts most securities class actions from its provisions.  It is unclear whether either the Private Securities Litigation Reform Act of 1995 or the Securities Litigation Uniform Standards Act of 1998 will prevent a repeat of theEpstein travesty.