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Developments in Consumer Class Actions, Part 1

By Mark L. Weyman and Gail M. Eckstein

Several recent developments have changed the landscape of consumer class action law and policy. In Part One of our two part series, we explore the Class Action Fairness Act of 2005 (the “Act”), which introduces new jurisdictional requirements that will shift many class action lawsuits from state to federal courts. In Part Two, we will discuss the recent United States Supreme Court decision that resolved a circuit split by determining that diversity jurisdiction extends to all members of a class in a federal action as long as the lead plaintiff in the class meets the statutory threshold for monetary damages. In addition, in Part Two we will consider Judicial Arbitration and Mediation Services ( “JAMS”), a large private alternative dispute resolution (ADR) company, that recently changed its policy regarding the enforcement of provisions in consumer contracts that prohibit class action arbitration. The Class Action Fairness Act, the Supreme Court decision concerning diversity jurisdiction, and the JAMS flip-flop in policy will have interesting and far-reaching implications on class action lawsuits brought in the future.

Overhauling Class Action Litigation: New Bill Limits Class Action Lawsuits in State Court

In February 2005, President Bush signed the Class Action Fairness Act of 2005 into law. The primary purpose of the Act is to curb perceived abuses of class action litigation involving settlement, recovery and “forum shopping.” The Act sets forth a consumer class action bill of rights that promotes fair and prompt settlements for legitimate class action claims, and attempts to follow the intent of the framers of the U.S. Constitution that important interstate cases should be determined in federal courts.

The Act introduces new jurisdictional requirements that expand the jurisdiction of federal courts to hear class action lawsuits filed on or after February 18, 2005. In order to curb forum shopping in ” state courts, the Act expands jurisdictional requirements to allow greater discretion for the federal courts to hear class actions, while still enabling state courts to retain jurisdiction over cases with which they maintain a distinct nexus. The result will be that class actions that are truly local in nature will remain in state court, while cases that involve multiple states are now more easily heard in federal court.

Congress effected these changes by amending the requirements (i) for diversity jurisdiction; and (ii) for removal of cases from state court. First, the Act significantly changes the amount-in-controversy requirement for diversity jurisdiction in order to permit class actions that are not eligible for federal question jurisdiction to be heard in federal courts. Previously, the claims of class members could not be aggregated to reach the $75,000 jurisdictional threshold necessary for diversity jurisdiction. This requirement precluded many class actions from being brought in or removed to federal court, particularly in consumer class actions where individual class members rarely held claims in excess of $75,000. In order to make it easier for such class actions to be brought in or removed to federal court, the new law requires that only the aggregate amount in controversy exceed $5 million.

The expanded jurisdiction of federal courts to hear class actions under the Act depends upon (i) the number of putative class members—100 or more; (ii) the aggregate amount in controversy—exceeds $5 million; (iii) where the parties reside—minimal diversity; and (iv) a number of discretionary factors. Three basic scenarios describe when federal courts “shall”, “may” or “cannot” exercise jurisdiction:

The district court “shall” have original jurisdiction in any action: (i) involving 100 or more putative class members, (ii) where the amount in controversy exceeds 5 million dollars as the aggregate sum of all the individual class member claims, and (iii) any plaintiff and defendant are from different states. The district court “may” decline to hear such cases where more than one-third but less than two-thirds of the class members and the primary defendants are citizens of the same state, upon consideration of the following factors: (i) whether the claims involve national or interstate interest; (ii) what law governs; (iii) whether the parties pleaded the action to avoid federal jurisdiction; (iv) whether any similar actions have been filed in the state within the last three years; and (v) the connection of the states, if any, to the parties and purported injury.

The district court “cannot” exercise jurisdiction where: (i) more than two-thirds of the class are citizens of the state where the action was filed; (ii) the “primary defendants” are citizens of the forum state; (iii) the principal harm occurred in that state; and (iv) no other class actions asserting the same harm were filed in the state within three years.

The Act also modifies the removal procedure by eliminating several important restrictions on removing lawsuits from state to federal court. Where federal jurisdiction is based on diversity, the removal statute strictly prohibits removing a state action more than one year after the action was commenced. The Act eliminates this time limitation for class actions. Further, the Act departs from the traditional rule which prohibited the removal of cases to federal court where any defendant was a citizen of the state in which the action was filed. The new provisions permit removal of a class action regardless of whether a defendant (even the removing defendant) is a citizen of the state in which the action was filed. The Act also eliminates the requirement that all defendants have to join or consent to a removal petition in a class action.

Major provisions of the Act address concerns about settlement, responding to complaints that, in many class action lawsuits, plaintiffs’ lawyers received exorbitant fees while the class members themselves recovered little or nothing. The Act continues to allow for “coupon settlements,” where defendants issue coupons to class members (for discounts on company products) and pay cash fee awards to plaintiff’s counsel, but does subject such settlements to particular scrutiny. Addressing the basic fairness of coupon settlements, the Act provides that a court may approve a class action settlement involving coupons “only after a hearing to determine whether, and making a written finding that, the settlement is fair, reasonable and adequate for class members.” 28 U.S.C. § 1712(e). In essence, however, this is nothing new and is a mere formalization of present practice.

The Act does, however, affect attorney fee awards in coupon settlements. Section 1712(a) of the Act sets forth the new rule that, in a coupon settlement, “the portion of any attorney’s fee award to class counsel that is attributable to the award of coupons shall be based on the value to class members of the coupons that are redeemed.” Attorneys will no longer be able to receive fees based on the gross amount of coupons awarded, or even upon predictions of how many coupons will be redeemed. Any percentage-based fee can be awarded only on the basis of the value of coupons actually redeemed. In cases where a settlement involves both coupons and injunctive relief, the Act provides that any portion of the fee attributable to coupons shall be calculated on the basis of the coupons actually redeemed, while any fee attributable to the equitable relief shall be determined on a “lodestar” basis, or on the number of hours expended on the equitable claim.

Overall, the Act provides several notable protections for class members. A court cannot approve a settlement involving a net monetary loss to class members unless the court finds that there are non-monetary benefits that outweigh the monetary loss, and certain class members cannot recover more because they are geographically closer to the court. In addition, the Act also implements various notification provisions (to state or federal government authorities) to provide an additional measure of oversight.

Reactions to this bill vary from overwhelming support to vehement opposition. Supporters of the Act view this legislation as the first part of a sweeping “tort reform” package, while opponents of the Act call the “tort reform” label a mischaracterization used to cover up legislation favorable to corporate interests. Supporters hope that this will strike a blow to the overactive trial bar, while opponents fear that this legislation will in effect “slam the courthouse door” on a wide range of injured plaintiffs and will let corporate wrongdoers off the hook.

Both plaintiffs and defense lawyers, however, predict that forum shopping will continue, albeit in a different direction. Several commentators have noted that the courts in certain circuits are far more likely to certify classes than their counterparts in the respective state systems. It is expected that filings may shift to these “friendlier” forums or that defendants may not remove cases as often in those regions.

In sum, change is on the horizon. The focus of significant consumer class actions likely will shift to federal courts. Although the structure of settlements may continue to include “coupon settlements,” there will be a careful review to assure fairness. Moreover, attorneys fee awards may be more conservative and will be tied to the ultimate recovery in a meaningful way in the case of coupon settlements.

ABOUT THE AUTHORS

Mark L. Weyman and Gail M. Eckstein are attorneys in Anderson Kill’s New York office and members of the firm’s Commercial Litigation Group. Mr. Weyman and Ms. Eckstein frequently represent defendants in class actions. Mr. Weyman can be reached at 212-278-1852 or mweyman@andersonkill.com. Ms. Eckstein can be reached at 212-278-1527 or geckstein@andersonkill.com.

This article originally appeared in the August 2005 issue of AKO Commercial Litigation Advisor, published bi-annually by Anderson Kill & Olick, P.C.

Read Developments in Consumer Class Actions (Part 2)

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March 2006