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LEGAL REFORM

CLASS ACTION JURISDICTION

THE ISSUE IS. The enactment of class action reform legislation.

IT'S IMPORTANT BECAUSE. Increasingly, plaintiffs' attorneys "forum-shop" by taking advantage of lax certification standards to bring class action suits in selected state courts. Many of these suits are interstate in nature (i.e. there is a multi-state plaintiff class or a diverse defendant) and more appropriate in federal court. As a result, the proliferation of questionable class certification standards in state courts has created an unfair system that enables plaintiffs' attorneys to use class action to achieve a desired result because of the settlement pressures facing defendants after a class is certified. The true winners in these cases are the plaintiff's lawyers who receive large fees, while the class members receive a minimal recovery.

Listed below are several examples of class action abuses in state courts:

• In a class action suit in Texas, Toshiba was sued for a defect in the "floppy disk controllers" of its laptops-even though the defect had never actually resulted in injury to any of its users. In the face of potential liability of billions of dollars, Toshiba settled by paying the two named plaintiffs $25,000 apiece, giving the other class members small cash payments and coupons, and paying the plaintiffs' lawyers $147.5 million in fees.
• In the settlement of a class action lawsuit brought in an Alabama state court against the Bank of Boston, the named plaintiffs received no more than $8.76 apiece, which was added to their mortgage escrow accounts. However, in order to pay the over $8.5 million in attorneys' fees, the class members also had $91 deducted from their accounts.
• In a class action lawsuit against an airline, the plaintiff class members received $25 coupons to use when they purchased another airline ticket for over $250 from the same airline. The attorneys, however, received over $16 million in fees.
• In a class action lawsuit against Cheerios, there was no evidence of injury to any consumers due to a food additive in the cereal, the lawyers were paid almost $2 million in fees. The plaintiff consumers received coupons for a free box of cereal.
• In a settlement of a state court class action involving toxic pesticide fumes from a chemical plant, the residents of a New Orleans neighborhood each received an average of $6,658. The class action lawyers, however, received over $25 million in legal fees and expenses.

In the 108th Congress, Charles Grassley (R-IA) and seven other Senators introduced their version of the Class Action Fairness Act, S. 274, on February 4, 2003. In general, the Class Action Fairness Act is designed to amend the procedures involved in interstate class actions to assure fairer outcomes for class members and defendants. Specifically, the Act grants federal district courts original jurisdiction of any civil action where the amount in controversy exceeds $2 million and the members of the class meet set requirements. The Act also allows for the removal of interstate class action lawsuits from state to federal courts. The Class Action Fairness Act also includes a consumer bill of rights that includes provisions for: judicial review of non-cash settlements (i.e. coupons); protection against loss by class members; and clearer settlement information.

In June 2003, the House approved its version of the Class Action Reform Act, H.R. 1115, introduced by Reps. Bob Goodlatte (R-VA), Rick Boucher (D-VA) and James Sensenbrenner (R-WI). H.R. 1115 is nearly identical to S. 274 and passed the House by a vote of 253-170.

The Senate tried to follow suit in October 22 but S. 1751 (formerly S. 274) was rejected by one vote (59-39). However, A class action bill may be headed toward another Senate floor vote in early 2004. Senate Majority Leader Bill Frist (R-TN), along with Senators Christopher Dodd (D-CT), Tom Carper (D-DE), Charles Schumer (D-NY), and Mary Landrieu (D-LA), struck a compromise regarding changes to the bill language.

Under the current class action bill (now S. 2062), cases involving at least $5 million and 100 plaintiffs, in which the primary defendants - and fewer than two-thirds of the plaintiffs - are residents of the same state, would be eligible for transfer from state to federal court. The compromise would strike a provision in the current bill that would forbid special payments or consideration - known as bounty payments - for certain members of a class of plaintiffs.

The compromise included several other concessions. Among them: language that would prevent class actions from being removed from state courts if any defendant - not just a primary defendant - is a resident of the same state as two-thirds of the plaintiffs. They agreed to broaden an exception already in the bill outlining when mass action cases can be transferred. Also included in the compromise would be a provision that would provide a specific time frame for defendants' appeals of federal court decisions to reject class action transfers.

NAMIC POSITION. NAMIC believes that Congress must pass legislation to stop the current class action crisis and put interstate class actions in federal court. NAMIC supports such legislation as the Class Action Fairness Act that would remove class action lawsuits to federal court and provide consumers with increased protection.