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Week Ending July 9, 2004

S2062 the Class Action Fairness Act of 2004

BRIEF

The bill is an attempt to control some elements of class action lawsuits in the US.

Supporters of the bill hold that, often, class action suits are little more than an effort by unscrupulous lawyers wanting only to take advantage of their clients. Such lawyers, supporters hold, can end up with large amounts of the settlements while the members of the class who have allegedly been damaged get very little and in some cases actually pay attorney fees or settlement amounts..

Opponents of the bill hold that the legislation is little more than an effort to let damaging business practices off the hook by transferring jurisdiction of many class action suits to a federal court where the suit may be rejected or languish, un-litigated, for any number of years. The bill does not provide for a timeline under which a Federal court must respond to the suit.

Supporters hold that class action lawsuits are often settled or result in enormous payouts by the defendant, but because of the large number of claimants, the amount of settlement received by individual class members can be tiny in comparison. The attorneys for the claimants, however, can receive large amounts in legal fees. Sometimes the settlement is called a ‘coupon settlement’ in which claimants are paid with coupons for products or services from the company being sued.

Supporters also hold that jurisdictions in which the suits can be brought (called magnet courts) allow for attorneys to select a court that has shown to be sympathetic to class members. Those State courts would be presided over by an elected judge rather than a Federal judge appointed for life. The elected judge, then, might have a political or financial motivation for agreeing with the class action complainants who may be from the immediate area of the court. They believe that many cases should be heard in Federal courts.

The bill would dictate that a Federal district court would be prohibited from approving a proposed coupon settlement without first a finding that the settlement is fair, reasonable and adequate. The bill would also prohibit payment to attorneys that would result in a monetary loss to the class members. Also prohibited would be a proposed settlement that provides more settlement funds to members only because they live geographically closer to the court.

The bill also would have established that a district court has original jurisdiction of any civil action in which the matter exceeds $5 million and is between citizens of a State or foreign State and would set forth conditions under which a Federal court could or should reject hearing the case.

In a letter to Majority and Minority Leaders New York Attorney General Eliot Spitzer opposed the bill in detail with the support of attorney generals from 12 other states.

Ultimately the bill failed to reach debate. Exchanges between the Senate majority and Minority leaders centered on the Majority allowing or not allowing amendments to the bill including non-germane amendments, one that would seek to increase the minimum wage. The combination of the amendment dispute and elements of the bill that were opposed to resulted in a near even vote on cloture. Only 60 votes can invoke cloture. Several Republicans joined Democrats in opposing cloture and beginning debate on the bill.

Sponsor: Senator Charles E. Grassley (R-IA)

Vote: The bill met with a filibuster. The motion to invoke cloture and begin debate on the bill failed 44 to 43 (RV 154)

Cost to the taxpayers: Bill did not pass.

MORE INFORMATION

The bill has been a while in the making and benefited from a bi-partisan effort, but the current version still contained elements that could not be reconciled by both sides.

Senator Orin B. Hatch (R-UT) explained his view of the bill’s purpose “As anyone who has read the bill knows, it restores fairness to the class action system. Among other things, it eliminates the opportunity that exists in the current system for unscrupulous lawyers to profit by victimizing injured parties with sham settlements. It takes away the opportunity for those lawyers to use the system to extort legitimate businesses for their personal financial gain.

“Throughout the years, Congress has received powerful evidence showing an extraordinary concentration of large interstate class action lawsuits in a handful of outlier State courts--certain county courts, to be precise. The evidence further shows these outlier courts operate in a manner that deprives the rights of truly injured individual plaintiffs, as well as defendants. In too many cases, the families have fallen prey to the manipulation, and in some cases outright evasions, by certain plaintiffs' lawyers of the settled rules supposed to ensure basic fairness during the major interstate class action disputes. Too often, judges approve settlements that primarily benefit the class action attorneys rather than the injured class members.

“Indeed, it has become all too common for certain State courts to approve proposed settlements where class members receive little or nothing of value, such as meaningless coupons, while their attorneys rake in millions of dollars in fees.”

Senator Hatch emphasized the abuse of the class action legal system and included the stories of class action victims after which he outlined the elements of the bill that would correct inadequacies in the law. “It is one of the new games in litigation practice in America. It is a disgrace caused by a relatively small few in the legal profession but enough to make it a matter of great concern. This bill would clarify and solve some of these problems.

“To make matters worse, multiple class action lawsuits asserting the same claims on behalf of the same plaintiffs are routinely filed in different State courts, thus creating judicial inefficiencies and encouraging collusive settlement behavior. Unfortunately, the injuries caused by these abuses are not confined to the parties who are named in the class action complaint.

“Rather, they extend to everyday consumers who unwittingly get dragged into these lawsuits as unnamed class members simply because they purchased a cell phone, bought a box of cereal, drove a car fitted with a certain brand of tires, or rented a video. What we are talking about is a system that impacts the vast majority of people who live in this country, not only lawyers and some businesses, as some have wrongly suggested.

“We are talking about people such as Irene Taylor of Tyler, TX, who was cheated out of approximately $20,000 in a telemarketing scam that defrauded senior citizens out of more than $200 million.

“In a class action brought in Madison County, IL, the attorneys purportedly representing Ms. Taylor negotiated a proposed settlement which excluded her from any recovery whatsoever.

“We are talking about people such as Martha Preston of Baraboo, WI,…”. “Martha was involved in the infamous BancBoston case, brought in Alabama State court, which involved the bank's alleged failure to post interest to mortgage escrow accounts in a prompt manner. Ms. Preston received a settlement of about $4. Approximately $95 was deducted from her account to help pay the class action fees of $8.5 million.

“A Bank of Boston settlement over disputed accounting practices produced $8.5 million in attorneys' fees--costing the class members as much as $95, which was deducted from their accounts. The plaintiffs' attorneys in this case later sued class members for an additional $25 million. I do not care who you are, you have to say that is outrageous.

“Ms. Preston testified before the Judiciary Committee 5 years ago asking us to halt these abusive class action lawsuits, but it appears that, at least so far, her plea has fallen on very deaf ears.

“Class action abuses are far-reaching, so far-reaching that they affect nonconsumers as well. Take, for instance, Hilda Bankston, a hard-working American, …, who came to this country seeking to fulfill the American dream. Hilda found that instead of reaping the rewards that normally come with hard work, she was unmercifully dragged into hundreds of lawsuits filed by personal injury lawyers in the State of Mississippi. Why? She owned the only drugstore in Jefferson County--a county known for hosting one of the most notorious magnet courts in the country.

“Her small business became a prime target for forum-shopping personal injury lawyers in pharmaceutical cases, not because her business committed acts of negligence, and certainly not because her business had deep pockets to pay a large jury award or a lucrative settlement. To the contrary, they were sued, in this particular case, for the sole purpose of evading Federal court jurisdiction so the class action lawsuit could remain in State court.

“Why would personal injury lawyers go to such trouble to keep a class action in State court? Because unlike our Federal courts which have judges who are insulated from political influence through lifetime appointments, many State court judges are elected officials who answer through the political process itself.

“Even though Ms. Bankston no longer owns the drugstore, she continues to be named a defendant in these lawsuits today and is buried under a mountain of discovery requests because of the litigation. On a more personal level, Ms. Bankston told us about how this ordeal has affected her both personally and professionally. She testified that:

“’[N]o small business should have to endure the nightmares I have experienced. ..... I have spent many sleepless nights wondering if my business would survive the tidal wave of lawsuits cresting over it.’

“Critics have argued the Senate should vote this bill down because it amounts to nothing more than special interest legislation. These critics are dead wrong and stand in desperate need of a reality check. To be perfectly clear, it is because of the wrongs committed against everyday American consumers such as Irene Taylor and Martha Preston that the time has come for the Senate to pass class action reform. It is because of the victimization of innocent people like Hilda Bankston that the Senate needs to act now, and it is because of the public's collapsing confidence in our civil justice system that we need to pass this bill without further delay. Arguments being raised to the contrary are red herrings that distort the real truth of the matter. The class action problem is real and significantly affects the general public.”

WHAT THE BILL DOES-SUPPORTERS VIEW

Senator Hatch said, “The Class Action Fairness Act represents a modest and balanced solution to the class action problems. There are two core features to the legislation.

“First, the bill implements consumer protections against abusive settlements by, No. 1, valuing attorneys' fees in coupon settlements to those coupons that are actually redeemed by class members; No. 2, providing a standard for judicial approval of settlements that would result in a net monetary loss to plaintiffs; No. 3, prohibiting settlements that favor class members based upon geographic proximity to the courthouse; and, No. 4, requiring notice of class action settlements be sent to appropriate State and Federal authorities to provide them with sufficient information to determine whether the settlement is in the best interest of the citizens they represent.

“Second, the bill corrects a flaw in the current Federal diversity jurisdiction statute so the class actions with a truly interstate impact are adjudicated where they originally should be adjudicated, and that is in our Federal courts. Specifically, S. 2062 amends the diversity of citizenship jurisdiction statute to allow larger interstate class actions to be adjudicated in Federal court by granting original jurisdiction in class actions where there is ``minimal diversity'' and the aggregate amount in controversy among all class members exceeds $5 million.

“The bill also balances the States' interest in adjudicating local disputes by providing that class actions filed in the home State of the primary defendants remain in State court subject to a triple-tiered formula that looks at the composition of the plaintiffs' class membership. This formula become known as the Feinstein compromise, which we were able to reach with Senator Feinstein during the Judiciary Committee markup on the bill.”

OPPOSITION TO THE BILL

Senator Harry Reid (D-NV) attempted to balance the view with high-profile class action suits that have done some good, “I want the record to be spread with the fact that I am a trial lawyer. I am a proud trial lawyer. I graduated from law school, and I went back to Nevada and tried lots of cases. I have had over 100 jury trials. I have tried murder cases, and I have tried robbery cases. There was a period of about 4 years of my life where I defended insurance companies. I have tried cases as a plaintiff's attorney in slip-and-fall cases. I have tried automobile accident cases where some people were injured severely and some were killed. I have done liability litigation. I did an antitrust case, and I didn't know enough about it. Shell oil company drowned me with depositions all over the country. I settled for a fraction of what it was worth. That was the last antitrust case I took. But I took one in San Francisco with co-counsel who knew what he was doing in my first antitrust case.

“I have never done a class action lawsuit. But there are attorneys who specialize in class action lawsuits. Are these people who specialize in these lawsuits a bunch of bums who are cheating the system and doing illegal things?

“As my friend from Utah (Sen. Hatch) has said, it may not be fraud, but it is close to it--or words to that effect.

“Lets talk about a few issues that I know of which were class action lawsuits. A lot of us have had the experience of receiving a telephone bill when we didn't sign up with AT&T, but they are on our bill. It is called ``slamming.'' They put their product on your bill without your permission. People had to pay these bills. We didn't do anything legislatively to stop it. An attorney filed a class action against AT&T saying don't do that. Why? Because people were being charged $8 to $10 a month for a product they didn't ask for. This was stopped as a result of a class action lawsuit. They were enjoined from doing it and had to pay the people they cheated with actual dollars.

“One of the great movies I watched--because it was true--was called ``Erin Brockovich.'' Erin Brockovich--just to recount what she did, for lack of a better word--was a paralegal but not one who was really trained to be a good paralegal. But she was trained and wanted to go help people. She went around and dug up information like one of the sleuths you hear about in a good mystery novel, or watch on television--a private detective. She went around and did some sleuthing and came out with the fact that the ground water was being contaminated with pollutants from a company. She got a friend, a lawyer of hers, to file a lawsuit, and sure enough they won. They found the ground water was being contaminated.

“As a result of this class action lawsuit, Erin Brockovich became a hero. People had been killed as a result of this company, and no one else had to die or become sick.

“That was a class action lawsuit. Is there anything wrong with that? I think not.

“We all know all about the big tobacco cases. A lot of people do not know about a tobacco company that started advertising a light cigarette, and you smoked as much as you wanted--no problem. That was the advertising. They were lying. They were cheating. It wasn't true. How was that resolved? We didn't stop it here in the National Legislature. It was stopped as a result of a class action that was filed. Sure enough, light cigarettes were gone.

“Lots of environmental cases have been decided by class actions. Companies were doing awful things to the environment, and people asked about the detriment being created. They went to the Government, and the Government did nothing. As a last resort, who do you go to? You go to a lawyer.

“We have a big class action pending now--Wal-Mart, big, fat Wal-Mart. The initial evidence indicates that they have been discriminating against women from the day they became a company. There is a big class action lawsuit against Wal-Mart. We didn't do anything about it here legislatively. But this class action lawsuit, I have been told, is almost a slam dunk--that Wal-Mart is going to lose that and the women they have discriminated against will be made whole.

“Class action is an important part of our legal system. It has done a great deal to help people work their way through the process. The fact that I as a trial lawyer have not taken a class action lawsuit does not mean I didn't like class action litigation. It is a specialty. As with the example I gave dealing with antitrust litigation, you better know what you are doing before you get into the class action litigation.

“We all know what took place with tobacco litigation. Attorneys general from all over America joined in that. The State of Nevada has benefited from that class action litigation dealing with tobacco. We have a program a Republican Governor in the State of Nevada initiated that is very popular. It is called the Millennial Scholarships. If you graduate from a Nevada high school--any place in Nevada; there are 17 counties--with good grades, you get to go to school with your tuition paid for by tobacco.

“That is what this is all about. It is about people having the opportunity to go forward with litigation, when normally these people would be totally unprotected. When we do things legislatively, it is rare that people who have been harmed get their money back. That is an effect of class action.

“As we speak about attorneys general, I received in my office yesterday a letter from the attorney general of the State of New York. I have never met Eliot Spitzer. I know him by reputation. He is one of America's great attorneys general. The State of New York has been--I don't want to say ``blessed,'' but for lack of a better word, New York has received a great deal from that man who has taken on big companies, to his detriment on many occasions. We have a letter from him sent to Senator Frist and Senator Daschle. The letter is three pages long. I ask unanimous consent it be printed in the RECORD.”

Letter from New York Attorney general Eliot Spitzer:

State of New York, Office of the Attorney General, The Capitol,

Albany, NY, June 22, 2004.
Hon. BILL FRIST,
Majority Leader, U.S. Senate, Dirksen Senate Office Building, Washington, DC.
Hon. TOM DASCHLE,
Minority Leader, U.S. Senate, Hart Senate Office Building, Washington, DC.

DEAR MR. MAJORITY LEADER AND MR. MINORITY LEADER: On behalf of the Attorneys General of California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Montana, New Mexico, New York, Oklahoma, Vermont, and West Virginia, we are writing in opposition to S. 2062, the so-called ``Class Action Fairness Act,'' which reportedly will be scheduled for a vote in the next few weeks. Although S. 2062 has been improved in some ways over similar legislation considered last year (S. 274), it still unduly limits the right of individuals to seek redress for corporate wrongdoing in their state courts. We therefore strongly recommend that this legislation not be enacted in its present form.

As you know, under S. 2062, almost all class actions brought by private individuals in state court based on state law claims would be forced into federal court, and for the reasons set forth below many of these cases may not be able to continue as class actions. All Attorneys General aggressively prosecute violations of our states' laws through public enforcement actions filed in state court. Particularly in these times of state fiscal constraints, class actions provide an important ``private attorney general'' supplement to our efforts to obtain redress for violations of state consumer protection, civil rights, labor, public health and environmental laws.

We recognize that some class action lawsuits in state and federal courts have resulted in substantial attorneys' fees but minimal benefits to the class members, and we support targeted efforts to prevent such abuses and preserve the integrity of the class action mechanism. However, S. 2062 fundamentally alters the basic principles of federalism, and if enacted would result in far greater harm than good. It therefore is not surprising that organizations such as AARP, AFL-CIO, Consumer Federation of America, Consumers Union, Leadership Conference on Civil Rights, NAACP and Public Citizen all oppose this legislation in its present form.

1. Class Actions Should Not Be ``Federalized''.

S. 2062 would vastly expand federal diversity jurisdiction, and thereby would result in most class actions being filed in or removed to federal court. This transfer of jurisdiction in cases raising questions of state law will inappropriately usurp the primary role of state courts in developing their own state tort and contract laws, and will impair their ability to establish consistent interpretations of those laws. There is no compelling need for such a sweeping change in our long-established system for adjudicating state law issues. Indeed, by transferring most state court class actions to an already overburdened federal court system, this bill will delay (if not deny) justice to substantial numbers of injured citizens. The federal judiciary faces a serious challenge in managing its current caseload, and thus it is no surprise that the Judicial Conference of the United States has opposed the ``federalization'' of class action litigation.

S. 2062 is fundamentally flawed because under this legislation, most class actions brought against a defendant who is not a ``citizen'' of the state will be removed to federal court, no matter how substantial a presence the defendant has in the state or how much harm the defendant has caused in the state. While the amendments made last fall give the federal judge discretion to decline jurisdiction in some cases if more than one-third of the plaintiffs are from the same state, and place additional limitations on the exercise of federal court jurisdiction if more than two-thirds of the plaintiffs are from a single state, even in those circumstances there are additional hurdles that frequently will prevent the case from being heard in state court.

2. Many Multi-State Class Actions Cannot Be Brought in Federal Court.

Another significant problem with S. 2062 is that many federal courts have refused to certify multi-state class actions because the court would be required to apply the law of different jurisdictions to different plaintiffs--even if the laws of those jurisdictions are very similar. Thus, cases commenced as state class actions and then removed to federal court may not be able to be continued as class actions in federal court.

In theory, injured plaintiffs in each state could bring a separate class action lawsuit in federal court, but that defeats one of the main purposes of class actions, which is to conserve judicial resources. Moreover, while the population of some states may be large enough to warrant a separate class action involving only residents of those states, it is very unlikely that similar lawsuits will be brought on behalf of the residents of many smaller states. We understand that Senator Jeff Bingaman will be proposing an amendment to address this problem, and that amendment should be adopted.

3. Civil Rights and Labor Cases Should Be Exempted.

Proponents of S. 2062 point to allegedly ``collusive'' consumer class action settlements in which plaintiffs' attorneys received substantial fee awards, while the class members merely received ``coupons'' towards the purchase of other goods sold by defendants. If so, then this ``reform'' should apply only to consumer class actions. Class action treatment provides a received ``coupons'' towards the purchase of other goods sold by defendants. If so, then this ``reform'' should apply only to consumer class actions. Class action treatment provides a particularly important mechanism for adjudicating the claims of low-wage workers and victims of discrimination, and there is no apparent need to place limitations on these types of actions. Senator Kennedy reportedly will offer an amendment on this issue, which also should be adopted.

4. The Notification Provisions Are Misguided.

S. 2062 requires that federal and state regulators be notified of proposed class action settlements, and be provided with copies of the complaint, class notice, proposed settlement and other materials. Apparently this provision is intended to protect against ``collusive'' settlements between defendants and plaintiffs' counsel, but those materials would be unlikely to reveal evidence of collusion, and thus would provide little or no basis for objecting to the settlement. In addition, class members could be misled into believing that their interests are being protected by their government representatives, simply because the notice was sent to the Attorney General of the United States and other federal and state regulators.

Equal access to the American system of justice is a foundation of our democracy. S. 2062 would effect a sweeping reordering of our nation's system of justice that will disenfranchise individual citizens from obtaining redress for harm, and thereby impede efforts against egregious corporate wrongdoing. Although the Attorneys General of California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Montana, New Mexico, New York, Oklahoma, Vermont, and West Virginia oppose S. 2062 in its present form, we fully support the goal of preventing abusive class action settlements, and would be willing to provide assistance in your effort to implement necessary reforms while maintaining our federal system of justice and safeguarding the interests of the public.

Sincerely.

Eliot Spitzer,

Attorney General of the State of New York.

Senator Leahy, a Vermont Democrat in agreement that the class action lawsuit system is in need of repair, noted some specifics about the bill that concerned him, “…one provision seeks to reduce the delay plaintiffs can experience when a case is removed to Federal court. It sets a time limit for appeals and remand orders. But there is not a concomitant measure that would set a timeline for the district court to rule on the actual remand motion.

“This may seem like a bit of arcane lawyer's jargon, but it is a lot more than that. It means that you could be a plaintiff, be in State court legitimately. You suddenly get plucked out of State court. But then they could put you on the Federal docket. Somebody could say, OK, we are just going to leave it there year after year after year after year, and there is nothing you could do about it. There is no recourse.”

“In addition,” Senator Leahy continued, “I am disturbed the bill may deny justice to consumers and others in class actions involving multiple State laws. The recent trend in the Federal courts is to not certify class actions if multiple State laws are involved; thus, the class action bill could force nationwide class actions into Federal court and then just be dismissed for involving too many State laws. It is kind of a way of making sure that you never reach the merits of the case, whether in Federal courts or State courts, because you could get rid of it on a technicality. I understand Senator Bingaman has an amendment to prevent this from happening. I would support that.

“I am also concerned with provisions contained in the most recent iteration of this class action bill before the Senate. I try to keep up with it, but it keeps undergoing so many changes. But this latest part would deprive Vermonters of the right to band together to protect themselves against violations of State civil rights, consumer, health, and environmental protection laws in their own State courts. What it is saying is, we here in the Senate can make a far better judgment than the people of Vermont going into State courts on State matters or the people of Tennessee going into Tennessee court on a Tennessee matter.”

Minority Leader Senator Tom Daschle was specific in his view of the politics of the bill and his reasons for questioning the intent of the Republican majority as to whether or not they really wanted the bill to pass. Senator Daschle said, “I have to go home and explain to the people of South Dakota, if this legislation passes, why if in a case where 98 percent of the people who are adversely affected are from my State, the action occurred in my State, and was taken by, let's say, a corporation that may be in violation of South Dakota law cannot go to court in South Dakota. That is basically what this bill does. Why should the people harmed in my State, if 98 percent of those adversely impacted are from South Dakota, and if the law was violated in South Dakota, be forced to go to Federal court, a court that could be located in some other State, to resolve a serious legal question?

“I find it amazingly ironic that those on the other side who claim to be advocates of States rights would say, no; not in this case. In this case, we are going to take away the rights of the States; we are going to put them at the Federal level.

“There is a new trend happening on the other side. When it is inconvenient for States to have the power, they seem to find it just fine to move to the Federal level. That is what we are going to be telling the people of this country. Forget about States rights, forget about civil rights, forget about workers' rights.

“This is special interest legislation at its worst, and it deserves a full debate in the Senate, not the sham that we are going to have under these circumstances filling trees.”

Bill supporter Senator McConnell (R-KY) considered the Minority Leader’s opposition, too, as political, “It is absolutely clear from the observations of our good friend, the Democratic leader, he does not want the bill to pass in any event. In fact, he said on several occasions and repeated several times this morning he is against the bill. It is clear what he would like to do is structure a way of dealing with this bill that allows his party to get the vote on all of its favorite issues and we never pass the bill in any event.

“So the majority leader, to his credit, is trying to structure a way to proceed on this bill on the Senate floor that does two things: No. 1, guarantees that it be brought up, and No. 2, guarantees that it will be finished by structuring it in such a way that the amendments we deal with are related to the bill. That is not an unusual request. It is not an outrageous request and not an unprecedented request--in fact, a normal request.”