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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, the Class Action Fairness Act was introduced and was designed to amend the procedures involved in interstate class actions to assure fairer outcomes for class members and defendants. Specifically, the Act would have granted 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 would have allowed for the removal of interstate class action lawsuits from state to federal courts. The Class Action Fairness Act also included a consumer bill of rights that included provisions for: judicial review of non-cash settlements (i.e. coupons); protection against loss by class members; and clearer settlement information.

Although the House approved its version of the Class Action Reform Act, the Senate had more difficulty in passing the bill. However, building upon the bipartisan efforts of the 108th Congress, the Class Action Reform Act (S. 5) was introduced by Sen. Charles Grassley (R-IA) along with 33 bipartisan cosponsors on January 25. S. 5 is identical to the compromise legislation, S. 2290.

After six years of legislative efforts, the Senate voted on final passage of S. 5 on February 10th, 2005. The vote on final passage was 72-26, with all Republicans present voting in favor of the bill, as well as 18 Democrats and one Independent.

February 17, The House voted overwhelmingly (279-149) in favor of S. 5 and President George W. Bush signed the Class Action Fairness Act in law the next day.

NAMIC POSITION. Class action reform legislation was one of the top legislative priorities for NAMIC in the 109th Congress. NAMIC, along with the insurance industry, worked very hard with the Congress to enact this vitally important piece of legislation.

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