A company’s success, and in some cases its survival, can depend on how well it manages legal risk. In general, the more rational and predictable a company’s legal exposure, the more effectively it can navigate the hazards of the U.S. legal system.
To date, two problems associated with class action litigation have especially plagued U.S. business. First, certain state courts had become notorious as magnets for plaintiffs’ class action lawyers seeking quick and easy class certification under minimal judicial scrutiny. Second, but equally troubling, companies would often find themselves battling multiple groups of plaintiffs’ lawyers on multiple fronts; becoming caught in the crossfire as they fought each other for the dominant position and coveted attorneys’ fee awards. These problems placed many General Counsel in the difficult position of trying to explain to their senior management why they could not readily and rationally resolve significant class litigation exposure.
The Class Action Fairness Act, signed into law by President Bush on February 18th, goes a long way toward rationalizing class action practice by substantially reducing the risks of defending class litigation in “unfriendly” state courts and in multiple jurisdictions. It does so by expanding federal diversity jurisdiction for cases filed after the Act’s passage. Under the Act, federal courts will now have jurisdiction over many class actions where the amount in controversy across the entire class is greater than $5 million and any member of the class is a citizen of a state different from any defendant. Although the Act preserves state court jurisdiction in cases of limited geographical scope, the Act significantly alters the financial incentives for plaintiffs’ class action counsel who wish to keep their cases in state court.
Rather than dissect the technical and procedural complexities of the Act, here we provide a practical overview of our expectations on the implications for your business.
You will not have to defend against nationwide class actions in state court. This means that you will not face nationwide classes in “magnet” courts that are often far from headquarters and resources. Also, because class actions in federal courts may be transferred from one district to another, or to multi-district litigation; multiple nationwide class actions will be subject to consolidation into a single proceeding, eliminating the need to fight nationwide proceedings in multiple jurisdictions.
You will defend class actions in fewer state courts. The expansion of federal diversity jurisdiction to many nationwide class actions may encourage some plaintiffs’ lawyers who wish to remain in state court to seek certification of classes consisting only of the residents of the forum state. However, they can remain in state court only if at least one of the defendants is also a citizen of that state. The limitations on the geographic scope of the class reduce the financial incentives for plaintiffs’ counsel to pursue class actions in state court, while the requirement concerning the defendant’s state of citizenship limit the number of state court jurisdictions where plaintiffs can maintain their claims. Other provisions prevent plaintiffs’ counsel from avoiding these limitations by naming nominal defendants. A natural consequence of these jurisdictional amendments is that you may be brought into more class actions in your state of incorporation or headquarters, while forum shopping plaintiffs’ lawyers may make more of an effort to join defendants from their jurisdictions of choice.
You will know your opponent when negotiating settlements. Before the Act’s passage, defendants often had to choose among competing groups of plaintiffs’ counsel with whom to negotiate class action settlements. Because businesses prefer to settle class actions on a national basis (thus buying peace globally rather than locally), the Act’s expansion of federal diversity jurisdiction and the likely consolidation of competing nationwide classes means that a defendant will know early on with whom it should be talking if it wants to settle the claims.
You may spend more time litigating jurisdictional issues. The Act’s jurisdictional provisions incorporate terms that are not yet defined. For example, the Act prohibits federal courts from exercising jurisdiction over class actions where more than two-thirds of the proposed class members are citizens of the state where the action is filed; at least one defendant from whom “significant relief is sought” and whose alleged conduct “forms a significant basis of the claims”; is a citizen from the same state; and the class members’ “principal injuries” were incurred in the forum state. Similarly, the Act permits, but does not require, federal courts to decline jurisdiction “in the interests of justice and looking at the totality of the circumstances,” where greater than one-third but less than two-thirds of the proposed class members and “the primary defendants” are citizens of the state where the action was originally filed. Because none of the quoted terms are defined, many battles will be fought over their meaning.
You will be less likely to negotiate coupon settlements. Historically, coupon settlements offered defendants opportunities to settle class actions without significant cash outlays. Settling parties sought approval of coupon settlements by highlighting the total value offered to class members. Because many coupons went unredeemed, the actual value received by the class was often significantly less than the total value offered to the class. In such cases, the redeemed value might have been disproportionate to the amount of the fee award to plaintiffs’ counsel, and for that reason coupon settlements came under sharp criticism in recent years. The Act changes this landscape by limiting contingent fee awards to a percentage of the value of the redeemed coupons, rather than the issued coupons. This provision significantly reduces the incentive of plaintiffs’ counsel to agree to coupon settlements, and for all practical purposes will limit or eliminate their availability to defendants.
The settlements you negotiate will be subject to increased governmental scrutiny. The Act requires settling defendants to provide notice of a proposed class action settlement to the United States Attorney General and to an official of each state where a class member resides. The required notice is not perfunctory, but will provide federal and state officials significant information concerning the case and the settlement from which they can make an informed judgment on whether the public’s interests are being protected. This additional layer of oversight will likely increase the costs of settlement and result in more litigation concerning the fairness of proposed settlements that have been negotiated by private counsel.
We have discussed just some of the consequences we expect to flow from this important new law. For more information concerning the Act and its effect on your business, please contact your regular McDermott lawyer or any of the contacts listed with this document.