Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
July 21, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3232 words
HEADLINE:
TESTIMONY July 21, 1999 WALTER E. DELLINGER HOUSE JUDICIARY
CLASS ACTION IN FEDERAL COURT AND PENDING BILLS
BODY:
STATEMENT OF WALTER E. DELLINGER BEFORE THE HOUSE JUDICIARY COMMITTEE
HEARING ON H.R. 1875: "THE INTERSTATE CLASS ACTION JURISDICTION ACT OF 1999"
(July 21, 1999) Thank you very much for allowing me the opportunity to express
some thoughts regarding this important legislation, which would permit federal
courts to entertain multi-state class actions that have a significant impact
upon the national economy and that by all rights are appropriately adjudicated
by our national courts. Mr. Chairman, I have attached a short bio to this
testimony. I will only note here that for more than a decade, I have been
concerned with the problems associated with mass tort adjudication, and with
excessive or repetitive punitive damages awards in particular. A. The Need For
H.R. 1875. Class actions are designed primarily to address situations in which
large numbers of individuals have a common legal claim (typically against the
same entity) but the amount of each individual's claim is not sufficient to make
it economical to bring a separate lawsuit. The class action mechanism allows
aggregating the claims, thereby giving the group of plaintiffs their day in
court.(1) This legislation would not prohibit any class actions from being
filed, as it does not address whether class actions should be brought. Instead,
it addresses where a particular type of class action should be adjudicated,
namely, interstate class actions that involve plaintiffs and defendants from
several states and that call for the interpretation and application of the laws
of many different states. The issue, more specifically, is whether federal
courts should generally be charged with responsibility for handling these
large-scale, interstate class actions involving issues with significant national
commercial implications; or should those cases instead be reserved exclusively
to state courts? The answer, one might think, is self- evident. But the actual
experience, in fact, is to the contrary. Over the past ten years, class action
filings in state courts have increased at a rate that significantly exceeds
filings in federal court.(2) Interstate class actions remain in state court
despite their apparent national character because of an anomaly in the federal
jurisdictional laws. The Constitution provides for federal court jurisdiction
over cases of a distinctly federal character - for instance cases raising issues
under the Constitution or federal statutes, or cases involving the federal
government as a party - and generally leaves to state courts the adjudication of
local questions arising under state law. But the Constitution specifically
extends federal jurisdiction to encompass one category of cases involving issues
of state law: "diversity" cases, or suits "between Citizens of different
States." The First Congress established federal court jurisdiction over
diversity cases in the Judiciary Act of 1789, and diversity cases have remained
a part of federal court jurisdiction ever since. The Framers included diversity
cases within the jurisdiction of federal courts out of a fear that prejudice (or
at least a perception of prejudice) to defendants might result in circumstances
in which a state court adjudicates a case brought by in-state plaintiffs against
an out-of-state defendant.(3) The Framers were also concerned that state courts
might unduly discriminate against interstate businesses and interstate
commercial activity, and saw diversity jurisdiction as a means
of generally ensuring the protection of interstate commerce.(4) Although
interstate class actions would seem to fall squarely within the core of
diversity jurisdiction, they do not for two principal reasons,
both of which are longstanding, technical limitations on diversity
jurisdiction that predate the advent of the modern class action. First,
and most significantly, the diversity statute has been interpreted to require
"complete" diversity, so that diversity jurisdiction is lacking
whenever any single plaintiff is a citizen of the same state as any single
defendant.(5) In interstate class actions, which typically involve extremely
large numbers of plaintiffs in the class, it is exceedingly unlikely that there
will not be at least one plaintiff who shares a home state with one defendant.
(In fact, interstate class actions often involve nationwide plaintiffs' classes
with representatives from every state, in which case diversity
jurisdiction is categorically foreclosed.) In any event, plaintiffs can
easily evade federal jurisdiction by adding to the class of plaintiffs or to the
list of defendants in order to ensure that at least one plaintiff and defendant
share a common state citizenship. Second, in order to ensure that
diversity jurisdiction extends only to nontrivial state-law
cases, the diversity statute has always required that there be a certain amount
of recovery at stake in the case before conferring federal jurisdiction. That
amount is currently $75,000.(6) In class actions, that requirement has been
understood to require that every plaintiff in the class must assert a claim
involving at least $75,000, even if the aggregate amount at stake in the case
might exceed hundreds of millions of dollars.(7) Again, plaintiffs' attorneys
can configure the claims in order to ensure that at least one class member does
not satisfy the minimum amount, or can raise the dollar amount after the
one-year period for removal has passed. Thus, we are left with the strange, and
in my view, indefensible situation in which federal courts have jurisdiction
over a garden- variety state law claim arising out of an auto accident between a
driver from one state and a driver from another state, or a run- of-the-mill
trespass claim involving a trespasser from one state and a property owner from
another. But at the same time, federal jurisdiction does not encompass
large-scale, interstate class actions involving thousands of plaintiffs from
multiple states, defendants from many states, the laws of several states, and
hundreds of millions of dollars - cases that have obvious and significant
implications for the national economy. B. H.R. 1875 Cures The Jurisdictional
Anomaly. H.R. 1875 would correct that anomaly by amending the diversity statute
to provide for federal jurisdiction over interstate class actions. It should be
noted that, no one disputes the fact that the category of cases encompassed by
H.R. 1875 falls within the "judicial Power of the United States" set out in
Article III of the Constitution. Congress has chosen to invest some but not all
of the federal courts' diversity jurisdiction in the federal
courts,(8) and the "complete" diversity requirement was adopted before the
development of class action lawsuits. Consequently, H.R. 1875's extension of
federal courts' diversity jurisdiction to
cover interstate class actions is entirely in keeping with the scope of the
federal judicial power in Article III, and also with the Framers' intent that
Congress define the contours of federal jurisdiction (within Constitutional
limitations) in accordance with the national interest. H.R. 1875 specifically
would allow federal courts to adjudicate class actions where any member of the
class of plaintiffs is from a different State than any defendant. Significantly,
however, the bill does not extend federal jurisdiction to encompass "intrastate"
class actions, where the claims are governed primarily by the laws of the state
in which the case is filed and the majority of the plaintiffs and the primary
defendants are citizens of that state. Moreover, federal jurisdiction would not
lie over cases in which the aggregate claims do not exceed $1 million in value.
The upshot of the legislation is therefore to allow federal courts to exercise
jurisdiction over truly interstate class actions with significant nationwide
commercial implications, while retaining exclusive state court jurisdiction over
more local class actions that principally involve parties from that state and
application of that state's own laws. There are many reasons for favoring
federal court resolution of interstate class actions. First, there is a clear
federal interest in federal supervision and management of cases with significant
implications for national and interstate commerce. The rationales behind
diversity jurisdiction apply with special force to interstate
class actions: They typically involve out-of- state defendants and at least some
in-state plaintiffs, thereby raising at least some danger of prejudice against
the out-of- state defendant. And they squarely implicate the Framers' concern
with preserving national standards for regulating and protecting interstate
commerce through the exercise of diversity jurisdiction. In
fact, the substantial federal interest in protecting interstate commerce is an
integral part of our constitutional history, as much of the impetus for calling
the Constitution Convention stemmed from a general concern that the Articles of
Confederation provided the federal government too little authority to regulate
interstate commerce.(9) Accordingly, Chief Justice Marshall recognized early on
that the Commerce Clause embodies the substantial federal interest in regulating
"that commerce which concerns more States than one," as distinguished from "the
exclusively internal commerce of a State," which is more properly the concern of
the states alone.(10) The large-scale, interstate class actions addressed by
H.R. 1875 will in every instance involve "that commerce which concerns more
States than one." In addition to the apparent federal interest, federal courts
possess significant institutional advantages over state courts in adjudicating
interstate class actions. For example, plaintiffs may file the same class action
in several different state courts, attempting to convince each state court to
certify the case for class action treatment until one ultimately agrees. That
same strategy is unavailable in federal court, because federal law properly and
efficiently authorizes consolidation in one court of cases involving overlapping
claims.(11) The absence of such mechanisms in state court gives rise to obvious
inefficiencies, including duplicative discovery proceedings. As a result, a host
of state court class actions and one consolidated federal class action might
simultaneously address the very same issues involving the very same parties, in
contravention of the Chief Justice's recent admonition that "we can no longer
afford the luxury of state and federal courts that work at cross-purposes or
irrationally duplicate one another."(12) Federal courts also normally have
larger staffs than state courts, and, unlike many state courts, can draw upon
magistrate judges or special masters for assistance with various matters
including discovery. Finally, federal courts, through the exercise of their
diversity jurisdiction, generally have far more experience than
the typical state court in interpreting and applying the laws of several
different states and in resolving the complex and intricate choice-of-law issues
that arise in large-scale, interstate class actions. C. The False Federalism
Objection. The principal objection to H.R. 1875 purports to draw on federalism
principles, contending that the proposed legislation would entail an unwarranted
federal intrusion into the ability of states to experiment with class action
lawsuits. That line of reasoning reflects a wholly misguided understanding of
federalism, which I think may fairly be labeled "false federalism." To begin
with, there can be no federalism-based objection to the general authority of
federal courts to construe and apply state law: The very premise of
diversity jurisdiction is that federal courts would apply state
law in a particular category of cases, and diversity cases have been an integral
part of the federal courts' jurisdiction since the Framers specifically provided
for them in the Constitution and the first Congress enacted the Judiciary Act of
1789. So the question is not whether federal courts should interpret state law,
but instead in which cases federal courts should do so. And, as I have
explained, of all situations in which a federal court might be assigned
diversity jurisdiction, it seems most desirable for federal
courts to possess authority to adjudicate interstate class actions, cases that
have a decidedly national flavor. In addition, H.R. 1875 does not contemplate
any federal displacement of state policy choices manifested in substantive law.
In fact, the proposed legislation does not touch on substantive law in any
manner. Instead, the legislation would apply uniform, federal procedural
requirements to a narrow, carefully defined group of lawsuits with national
economic impact, thus allowing realization of enhanced efficiencies resulting
from federal courts' authority to coordinate and consolidate overlapping
pretrial proceedings and their relative familiarity with complex and intricate
choice-of-law considerations. Significantly, H.R. 1875's exclusion of federal
jurisdiction over "intrastate" cases would specifically respect and maintain a
state's authority to apply its own laws in cases that primarily involve parties
from its own state. The legislation extends federal jurisdiction over interstate
class actions, in which state courts are often called upon to apply other
states' laws. And a state of course does not have any cognizable, federalism-
based interest in interpreting, applying, and thereby dictating the substantive
law of other states. Many state courts faced with interstate class actions,
however, have undertaken to dictate the substantive laws of other states by
applying their own laws to all other states, which results essentially in a
breach of federalism principles by fellow states (not by the federal
government). And because the state court decision has binding effect everywhere
by virtue of the Full Faith and Credit Clause, the other states will have no way
of revisiting the interpretation of their own laws. H.R. 1875 would curb this
disturbing trend. A good example of this problem arises out of a case in
Illinois which was discussed in detail in a recent New York Times article.(13)
The title of the full-page article states that "Suit Against Auto Insurer Could
Affect Nearly All Drivers." The article reports that individuals representing a
host of constituencies - including Public Citizen, the Attorneys General of
Massachusetts, New York, Pennsylvania, and Nevada, the National Association of
State Insurance Commissioners - are "alarmed" by this lawsuit. The reason they
are so alarmed is that a rural court in Illinois is on the verge of telling all
other states what their auto insurance laws should be. The specific issue in the
multi-billion dollar, nationwide class action is whether auto insurers' use of
"aftermarket" auto parts in repairs (as distinguished from parts made by the
original manufacturer) amounts to fraudulent behavior. The Illinois court is
prepared to apply Illinois law to all fifty states even though state policy on
the use of aftermarket parts varies widely: Some states in fact encourage or
require insurers to use aftermarket parts in an effort to reduce insurance
rates. According to the Times article, the Illinois court is therefore about to
"overturn insurance regulations or state laws in New York, Massachusetts, and
Hawaii, among other places," and is going "to make what amounts to a national
rule on insurance." In another example, a state court in Minnesota recently
approved for class action treatment a case involving millions of plaintiffs from
44 states that will have the effect of dictating the commercial codes of all
those states.(14) The specific issue in the case is whether individuals have a
state law right to recover interest on refundable deposits paid to secure an
automobile lease. In certifying the class of plaintiffs, the court adopted an
understanding of Minnesota's version of the Uniform Commercial Code (UCC) that
was contrary to the interpretation of every other state to have considered the
issue under their own versions of the UCC. And by certifying the class, the
court decided that its unprecedented interpretation of the UCC would bind the
remaining 43 states that had yet to decide the question (even though, as Justice
Ginsburg stated while a judge on the D.C. Circuit in addressing a similar issue,
"the Uniform Commercial Code is not uniform,"(15) and is interpreted differently
in different states). In essence, the action of the Minnesota court will
establish the interpretation of 43 other states' UCC provisions even though the
other states might well have reached a different conclusion by applying their
own states' laws. Yet another example in this vein arises out of a recent
California case addressing whether home loan borrowers had been overcharged for
collateral homeowners' insurance by the defendant bank.(16) The California
courts have decided to preside over a class action involving a nationwide class
of plaintiffs encompassing 25,000 borrowers in all 50 states, despite the fact
that states have widely varying rules regulating the provision of collateral
homeowners' insurance by banks. The effect of the California courts' decision is
to overlook those differences and to dictate that California's resolution of the
issue will be binding on all other states. Tellingly, the California courts
relied on a prior California case involving a nationwide class action which
stated that, "California's more favorable laws may properly apply to benefit
nonresident plaintiffs when their home states have no identifiable interest in
denying such persons full recovery."(17) That sort of sentiment flies in the
face of basic principles of federalism by embracing the view that other states
should abide by California law whenever a California court determines that its
own laws are preferable to other states' contrary policy choices. Federal
courts, on the other hand, have exhibited particular sensitivity for the
variations in substantive law among the different states, in accordance with
core principles of federalism.(18) Moreover, when federal courts apply state law
pursuant to their diversity jurisdiction, there is no danger of
a bias in favor of any particular state's laws (which is not the case when one
state decides to apply its own laws to all other states). Indeed, that is the
basic premise underlying diversity jurisdiction. For these
reasons, I think any federalism-based objection to H.R. 1875 is simply off-base.
If anything, in fact, the proposed legislation would protect the ability of
states to determine their own laws and policies by restricting the ability of
state courts to dictate the laws of other states, an outcome that would promote
basic principles of federalism. D. Conclusion. H.R. 1875 is a straightforward
measure that would allow federal courts to preside over interstate class actions
that have significant implications for interstate commerce, while preserving the
authority of state courts to preside over class actions in which the parties and
the applicable law are primarily from the forum state. The bill accomplishes
that result without affecting the substantive law of any jurisdiction or the
legal rights of any person. I respectfully urge the Committee to report
favorably on this bill.
LOAD-DATE: July 26, 1999
