
  Class Action Litigation Client Alert

  February 18, 2005

  Class Action Fairness Act of 2005
  by

  Neumeier, Matthew

  Suskin, Howard

  Karcher, Kathy

  On February 18, 2005, President George W. Bush signed into law the Class Action Fairness Act of
  2005. After years of attempts to pass comprehensive class action reform legislation, this version of
  the bill swept through the United States Senate and House of Representatives in a matter of days
  once it was brought to the floor of the Senate. The Act is intended to discourage costly and
  abusive class actions while ensuring fair and efficient judgments on legitimate claims.

  The Class Action Fairness Act will significantly impact class action litigation by:

  • Expanding federal diversity jurisdiction for class action cases,

  • Loosening the restrictions on the removal of class actions on the basis of diversity

  jurisdiction and permitting expedited appellate review of remand rulings, and

  • Establishing guidelines so that class counsel does not benefit to the detriment of individual

  class members.

  The Act applies to any civil action filed on or after February 18, 2005, the date of enactment.
  Because the law will not be applied retroactively, the old rules – including those pertaining to
  diversity jurisdiction and the removal of lawsuits to federal court – apply to class actions filed
  before the law was passed.

  The Act Creates New Requirements for Diversity Jurisdiction in Class Action Cases.

  The provisions that will have the largest impact on class action litigation are those regulating
  federal jurisdiction. The effects of these new rules should be felt immediately, impeding blatant
  forum shopping in jurisdictions where lawsuits abound that are filed against out-of-state corporate
  defendants by local class representatives seeking millions of dollars in damages on behalf of
  putative nationwide classes. While the law is expected to have little impact on class actions
  directed toward local disputes, a defendant that has been sued in a foreign state now has a greater
  opportunity to remove the case to federal court, even if class members' potential damages
  individually are small.

  First and foremost, 28 U.S.C. § 1332, the federal diversity statute, has been amended so that
  district courts have original jurisdiction over civil class action cases, before or after the entry of a
  class certification order, involving (1) an aggregate amount in controversy in excess of $5,000,000,
  exclusive of interest and costs, and (2) diversity of citizenship between one plaintiff class member
  and one defendant, instead of complete diversity between all plaintiffs and all defendants. See
  Amended Section 1332(d)(2), (6), and (8). These provisions do not apply to cases (1) in which the
  primary defendants are states, state officials, or other governmental entities "against whom the
  district court may be foreclosed from ordering relief," (2) where the number of members of all

  aggregate proposed plaintiff classes is less than 100, or (3) that "solely involve a claim" concerning
  a "covered security"; relating to the internal affairs or governance of a corporation or other
  business enterprise and that arises under state law where the entity is incorporated or organized;
  or relating to the rights, duties, and obligations relating to or created by any "security." See
  Amended Section 1332(d)(5) and (9).

  Simply satisfying the criteria of the aggregated amount in controversy and basic diversity of
  citizenship will not always be enough to maintain a federal court action, however. The new law
  sets out both discretionary and mandatory provisions regarding a federal district court's ability to
  decline to exercise jurisdiction over a class action based on the citizenship of the putative class
  members and the named defendants and certain other factors. These exceptions to diversity
  jurisdiction, which are set forth below, may require considerable early discovery to support removal
  and/or dismissal or remand, long before the court makes a determination on class certification.

  Under Amended Section 1332(d)(3), the district court may decline to exercise jurisdiction under
  certain circumstances "in the interests of justice and looking at the totality of the circumstances." If
  greater than one-third but less than two-thirds of the members of the aggregate proposed plaintiff
  classes and the primary defendant(s) are citizens of the state where the case was originally filed,
  the district court may consider the following six factors to determine whether to decline jurisdiction:
  (A) whether the claims involve matters of national or interstate interest; (B) whether the claims will
  be governed by the laws of the state where the case was originally filed, or by other states' laws;
  (C) whether the class action was pleaded in a manner seeking to avoid federal jurisdiction; (D)
  whether the forum where the case was brought has "a distinct nexus with the class members, the
  alleged harm, or the defendants"; (E) whether a "substantially larger" number of citizens of the
  state where the case was filed would be members of the aggregate proposed plaintiff classes
  compared to the number of class members from any other state, and the out-of-forum class
  members' citizenship is dispersed amongst a "substantial number" of states; and (F) whether one
  or more class actions with the same or similar claims have been filed during the three years
  preceding the filing of the case.

  Because this provision is discretionary, it is unclear how courts will exercise this discretion as
  gatekeepers to the federal courthouse. Instead of applying bright line rules that typically govern
  jurisdictional decisions, now courts will be able to make many subjective determinations regarding,
  for example, whether claims involve matters of national or interstate interest or whether the case
  has been pled to avoid federal jurisdiction. Some state court "class action mills" could stay in
  business if the local federal jurisdictions interpret the discretionary provisions broadly, and send
  removed cases back to state courts. Certainly if a plaintiff files suit in federal court and the
  defendant prefers state court, the defendant could use this provision to try to get the case
  dismissed.

  Under Amended Section 1332(d)(4)(A), the district court shall decline to exercise jurisdiction under
  the following circumstances: (1) if greater than two-thirds of the members of the aggregate
  proposed plaintiff classes are citizens of the state where the case was originally filed; (2) if at least
  one defendant (from whom significant relief is sought and whose alleged conduct forms a
  significant basis for the claims asserted by the class) is a citizen of the state where the case was
  originally filed; (3) if the principal injuries were incurred in the state where the case was originally
  filed; and (4) if no other class action has been filed in the past three years asserting the same or
  similar factual allegations against any of the defendants. Moreover, pursuant to Amended Section
  1332(d)(4)(B), the district court shall decline to exercise jurisdiction if two-thirds or more of the
  members of the aggregate proposed plaintiff classes and the primary defendants are citizens of
  the state where the case was originally filed.

  The Removal of Class Action Cases on the Basis of Diversity Jurisdiction Has Been
  Simplified.

  Also significant are the Act's amendments to the federal removal statute (codified at 28 U.S.C. §
  1453), including the lifting of the one-year restriction on the removal of class action lawsuits to
  federal courts where the federal subject matter jurisdiction requirement is met only by diversity
  jurisdiction, and no federal question is implicated. As a result, plaintiffs will no longer benefit by
  waiting to amend class action complaints until after the one-year mark.

  In addition, a removing defendant that is a citizen of the state where the class action suit was
  originally filed is no longer barred from removing the suit, and one defendant may now remove a
  class action lawsuit without consent from other defendants. (The downside of this, of course, is
  that one defendant can force other defendants into federal court against their will.) The law also
  provides that federal appeals courts now may accept appeals from district court orders denying or
  granting motions to remand class actions, subject to an expedited timetable.

  These new removal provisions do not apply to cases that solely involve a claim concerning a
  "covered security"; relating to the internal affairs or governance of a corporation or other business
  enterprise and that arises under state law where the entity is incorporated or organized; or relating
  to the rights, duties, and obligations relating to or created by any "security."

  Coupon Settlements Are Now Subject to Greater Scrutiny.

  Recognizing that class actions are often settled with large attorney's fees awarded to class
  counsel, with only coupons for nominal amounts awarded to the individual class members, the Act
  sets out standards for coupon settlements. If a proposed settlement provides for coupons to class
  members, then contingent fees based on that settlement are determined from the value to class
  members of the redeemed coupons.

  The court has discretion, upon a party's motion, to receive expert testimony regarding the actual
  value to class members of the redeemed coupons. To approve a coupon settlement, the court
  must (1) hold a hearing, and (2) making a written finding that the settlement is "fair, reasonable,
  and adequate for class members." The court may require that a portion of the value of the
  unclaimed coupons should go to one or more charitable or governmental organizations (but this
  value cannot be included in the calculation of attorney's fees).

  Attorney's fees that are not contingent on the recovery of the coupons (including fees attributable
  to obtaining equitable relief, such as injunctions) are to be based on "the amount of time class
  counsel reasonably expended working on the action," and the lodestar with a multiplier is an
  available method to calculate this.

  Consumers can expect some benefits under this provision in the form of more meaningful
  settlements in the future. Due to the restrictions on class counsel's fees in coupon settlements, it
  is expected that class counsel will be less inclined to accept such settlements in lieu of monetary
  payouts. However, this could greatly increase litigation expenses for many defendants, who in the
  past have been able to avoid the risks of going to trial by paying class counsel's fees and
  distributing coupons that were often not redeemed. Defendants may face the tougher choice
  between paying out monetary settlements to class members or going to trial. On the other hand,
  some plaintiffs' attorneys may be discouraged from filing frivolous suits if it appears that their only
  options from defendants are a coupon settlement or a full-blown trial.

  Other notable new provisions include the following:

  Protection Against Net Loss by Class Members. Unless the court makes a written finding that
  "nonmonetary benefits to the class member substantially outweigh the monetary loss," a
  settlement cannot require a class member to pay sums to class counsel resulting in a net loss to
  the class member.

  No Discrimination Based on Geography. Settlement amounts cannot be greater for certain class
  members solely on the basis that those class members are located closer to the court than others.

  Notice of Proposed Settlements. Defendants must notify certain federal and state government
  officials of proposed class action settlements, and the court cannot approve a proposed settlement
  earlier than 90 days after the defendants serve notice. Failure to comply with the particular notice
  requirements could result in class members not being bound by the settlement.

  Conclusion

  As federal courts brace themselves for an increased caseload with the expansion of federal
  jurisdiction in the class action context, it remains to be seen what impact the new rules will have on
  the state and federal court systems. If federal courts are flooded with class actions, they could
  become bogged down in class action litigation that will slow down their dockets, generally adding
  to parties' litigation expenses. Alternatively, fewer frivolous class actions may be filed because of
  reduced benefits to class counsel, so caseloads may not be significantly increased.

  One thing is certain: the Class Action Fairness Act of 2005 offers greater choices to defendants
  and plaintiffs alike who have previously been prevented from bringing class action lawsuits to a
  federal forum.

  www.jenner.com


  ©Copyright 2005 Jenner & Block, LLP, One IBM Plaza, Chicago, IL 60611. Jenner & Block is an Illinois Limited Liability Partnership
  including professional corporations. Under professional rules, this communication may be considered advertising material. The
  material contained in this document has been authored or gathered by Jenner & Block for informational purposes only. It is not
  intended to be and is not considered to be legal advice. Transmission is not intended to create and receipt does not establish an
  attorney-client relationship. Legal advice of any nature should be sought from legal counsel.


Document Outline

  * Class Action Litigation Client Alert
  * February 18, 2005€€
  * Class Action Fairness Act of 2005
  * by
  * Neumeier, Matthew
  * Suskin, Howard
  * Karcher, Kathy
  * On February 18, 2005, President George W. Bush signed into l
  * The Class Action Fairness Act will significantly impact clas
  * Expanding federal diversity jurisdiction for class action ca
  * Loosening the restrictions on the removal of class actions o
  * Establishing guidelines so that class counsel does not benef
  * The Act applies to any civil action filed on or after Februa
  * The Act Creates New Requirements for Diversity Jurisdiction
  * The provisions that will have the largest impact on class ac
  * First and foremost, 28 U.S.C. §€1332, the federal diversity
  * Simply satisfying the criteria of the aggregated amount in c
  * Under Amended Section 1332(d)(3), the district court may dec
  * Because this provision is discretionary, it is unclear how c
  * Under Amended Section 1332(d)(4)(A), the district court shal
  * The Removal of Class Action Cases on the Basis of Diversity
  * Also significant are the Act's amendments to the federal rem
  * In addition, a removing defendant that is a citizen of the s
  * These new removal provisions do not apply to cases that sole
  * Coupon Settlements Are Now Subject to Greater Scrutiny.
  * Recognizing that class actions are often settled with large
  * The court has discretion, upon a party's motion, to receive
  * Attorney's fees that are not contingent on the recovery of t
  * Consumers can expect some benefits under this provision in t
  * Other notable new provisions include the following:
  * Protection Against Net Loss by Class Members.€ Unless the co
  * No Discrimination Based on Geography.€ Settlement amounts ca
  * Notice of Proposed Settlements.€ Defendants must notify cert
  * Conclusion
  * As federal courts brace themselves for an increased caseload
  * One thing is certain:€ the Class Action Fairness Act of 2005
  * €
  * www.jenner.com€
  * ©Copyright 2005 Jenner & Block, LLP, One IBM Plaza, Chicago,

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