Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
July 21, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4446 words
HEADLINE:
TESTIMONY July 21, 1999 PROF. E. DONALD ELLIOTT HOUSE JUDICIARY
CLASS ACTION IN FEDERAL COURT AND PENDING BILLS
BODY:
Testimony of Prof. E. Donald Elliott Before the House Committee on the
Judiciary Concerning H.R. 1875, the Interstate Class Jurisdiction Act of 1999
(July 21, 1999) As a long-time teacher of complex civil litigation and class
actions at Yale Law School, as well as a practicing attorney concentrating on
complex environmental litigation, I am greatly concerned that recent
developments have restricted the rights of litigants in large, multi-party class
actions to remove these cases to a neutral federal forum on grounds of diversity
of citizenship. The core purposes for which diversity
jurisdiction was created - preserving the appearance as well as the
reality of no bias in favor of local litigants - are particularly relevant in
large class-action litigation against out-of-state corporations. However, overly
rigid interpretations of the judge- made requirement for "complete diversity" of
citizenship among all parties in class actions have made it virtually impossible
to remove class actions to federal court. I am a strong supporter of the concept
of removal. I see removal as a crucial "safety valve" in our federal
jurisprudence, and I strongly support the provisions of H.R. 1875 that would
make removal to federal court in class actions cases a reality again by revising
the complete diversity requirement. The removal option not only guarantees the
reality and the appearance of fairness to the litigants directly involved, but -
even more importantly - the removal option gently discourages abuses in the
state courts by offering litigants a competitive choice to take their business
elsewhere. Like other governmental programs that improve systems by giving users
the option to go elsewhere if they are dissatisfied, removal does not override
state court autonomy to choose whatever law or class action rule the state may
like; keeping a removal option alive merely provides potential competition from
an alternative forum. Finally, I believe that removal of class actions to
federal court may be important for an additional reason: in many instances
overall efficiency in terms of speed and reduced transaction costs can be
enhanced by concentrating complex cases in a single federal forum for
resolution. To those who would complain that this legislation would bring more
cases into the federal courts, my simple answer is that interstate class actions
exemplify the core purposes for which the Framers included diversity
jurisdiction in the Constitution. There are plenty of other cases
involving diversity jurisdiction where we could pare back if
necessary to make room for these cases. Testimony of Prof. E. Donald Elliott
Before the House Committee on the Judiciary Concerning H.R. 1875, the Interstate
Class Jurisdiction Act of 1999 (July 21, 1999) Thank you very much for the
opportunity to discuss the important issues presented by the proposed
legislation being considered by this Committee today - H.R. 1875, the Interstate
Class Jurisdiction Act of 1999. I am particularly interested in the provisions
of the bill amending the diversity jurisdiction statute to
allow removal so that more interstate class actions to be heard by our federal
courts. I approach this subject from two different but related perspectives.
First, I have taught complex civil litigation and class actions at Yale Law
School since 1981 - first, as a tenured professor ultimately holding the Julien
and Virginia Cornell Chair in Environmental Law and Litigation, and since 1994,
part- time as an adjunct professor at Yale while also practicing. I have spent a
fair portion of my academic energy thinking and writing about how particular
jurisdictional and procedural rules affect the resolution of complex disputes
(particularly in environmental, toxic tort and consumer product injury cases). I
also served as an adviser to the Federal Courts Study Committee. Second, as a
practicing lawyer focusing on complex environmental litigation, I have had some
experience with the practical effects of our current jurisdictional regime
affecting class actions. (As requested by the Committee, a copy of my curriculum
vitae is attached). I. The Rising Tide of State Class Actions Is A Product Of
The Federal Courts' Reluctance To Take Jurisdiction Over Interstate Class
Actions. A. There Is A Class Action Explosion In Some State Courts. The flood of
class-action litigation in our state courts across the United States is too well
documented to warrant significant discussion, much less debate.(1) Why should we
consider the state-court class-action explosion a crisis? For one simple reason:
because the class action device has the (often realized) potential to put its
heavy thumb on the scales of justice, affecting not only procedure but also in
many instances the outcome of lawsuits. As I once observed in an article in the
University of Chicago Law Review, judges often are inclined to certify cases for
class-action treatment not because they believe a class trial to be more
efficient than an individual trial, but because they believe class certification
will simply induce the defendant to settle the case without trial.(2) Chief
Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit has
made the same point more recently and more bluntly: in his words, the mere act
of certifying a class "often, perhaps typically, inflict s irreparable injury on
the defendants."(3) When a class is certified in state court, where an
out-of-state defendant has little confidence in the prospect of a fair and
impartial trial on the merits, the coercive power of class certification is all
the greater. Plainly, the judicial system is supposed to provide procedures and
a forum for dispute resolution; it is not supposed to coerce particular
outcomes. B. The Federal Courts Have Played A Significant Role In Precipitating
The Class Action Crisis In The State Courts. Notwithstanding Chief Justice
Marshall's admonition that the federal courts must assume jurisdiction over
cases that come within the federal jurisdictional confines of the Constitution
and applicable statutes,(4) the clear trend in the federal courts over the past
several years has been to decline jurisdiction over interstate class actions in
any and every way possible. For example, federal courts have given a very strong
reading to the judge-made rule requiring "complete diversity" - the principle of
federal diversity jurisdiction stating that no plaintiff in a
lawsuit can be a citizen of the same state as any defendant . This rule may be
quite sensible in other contexts, but in class actions, it virtually assures
that large class actions will be kept out of federal court. The result has been
that class-action plaintiffs' attorneys can evade the federal court system
simply by naming (in addition to the real parties) a defendant with no
connection to the class action other than shared citizenship with the named
plaintiff. Blessing this practice, the U.S. Court of Appeals for the Eleventh
Circuit recently considered a class action in which an Alabama citizen filed a
class-action complaint against a Florida auto leasing company alleging the
existence of a fraudulent pricing scheme. The Alabama plaintiff also named an
Alabama auto dealership, which had no involvement in the development of the
alleged pricing scheme, and which had virtually no connection whatever with any
putative class member other than the single named plaintiff. Despite the
conceded fact that 98 percent of the 17,000 "plaintiffs" involved in the case
were unconnected to the non-diverse Alabama defendant, and therefore that the
focus of virtually all - but not technically all - of the trial court's efforts
would be on parties that were completely diverse, the Eleventh Circuit sent the
case back to state court.(5) The federal courts have also relied on the present
diversity- jurisdiction statute's amount-in-controversy
requirement - under which only cases that put more than $75,000 in issue may be
heard in federal court - to keep interstate class actions out of federal court.
Interpreting a previous (but fundamentally identical) version of the
diversity-jurisdiction statute, the Supreme Court held in 1973
that the amount-in-controversy requirement must be met by each and every class
member in a class action.(6) The Supreme Court did not address the issue of how
certain categories of relief (such as attorney's fees, punitive damages, and
injunctive relief) should be calculated for jurisdictional purposes, however.
Unfortunately, many (though not all) lower courts have addressed this issue
quite restrictively from a jurisdictional standpoint. For example, in cases
where defendants have attempted to remove cases to federal court on the ground
that a class-action complaint requests attorney's fees in excess of the required
jurisdictional amount, a number of courts have held that the amount of fees
requested cannot be attributed to all the class members, and therefore that such
cases cannot be heard in federal court.(7) Similarly, in cases where defendants
have attempted to remove cases to federal court on the ground that a complaint
seeks punitive damages well above $75,000, courts have held that the amount of
alleged punitive damages cannot be applied to the claims of all class members,
and therefore have remanded such cases to state court.(8) And in cases where
defendants have attempted to remove cases to federal court on the ground that a
defendant's cost of complying with the injunctive relief requested by the
plaintiff exceeds the jurisdictional amount, at least one federal appeals court
has held that the amount-in-controversy requirement is not met and that the case
therefore cannot proceed in federal court.(9) Federal courts also have
demonstrated an increasing willingness, in the absence of congressional
direction to the contrary, to seek out procedural technicalities on the basis of
which to decline jurisdiction even when the two statutory requirements of
diversity jurisdiction are satisfied. One very recent example
of this phenomenon is an unpublished remand order issued by the U.S. District
Court for the District of Arizona.(10) In that case, the plaintiff filed a
class-action lawsuit in Arizona state court attacking a marketing practice of an
auto manufacturer. To dissuade the manufacturer from removing the case to state
court, the plaintiff named an Arizona auto dealer as a defendant and declined to
state the amount of damages she sought. The manufacturer removed the case,
arguing that the diversity-of- citizenship requirement was satisfied because the
Arizona auto dealer had no connection with putative class members other than the
named plaintiff herself, and that the plaintiff's request for attorney's fees,
punitive damages, and injunctive relief were all sufficient to satisfy the
amount-in-controversy requirement. The district court rejected these arguments
and remanded the case to state court. Within weeks of the remand order, the
plaintiff filed a sworn disclosure statement disclosing that, in fact, she would
not seek any relief from or make service upon the Arizona dealer defendant.
Intrigued, counsel for the manufacturer asked the plaintiff's attorney to
stipulate that the plaintiff sought damages of $75,000 or less. The attorney
refused to stipulate. The manufacturer therefore removed the case to federal
court again, relying on the federal statute permitting re-removal of cases upon
the discovery of "other paper" showing that the requirements of federal
jurisdiction are met. The manufacturer pointed out that the plaintiff had
expressly disclaimed any right to relief against the only non-diverse defendant,
and that the plaintiff's refusal to stipulate to damages less than the
jurisdictional amount gave rise to an inference that she sought damages in
excess of the jurisdictional amount. The district court agreed with the
manufacturer both that there now was complete diversity of citizenship, and that
the plaintiff's refusal to stipulate created an inference that her claimed
damages exceeded $75,000. Nonetheless, the district court remanded the case to
state court, all for the exceedingly technical reason that the attorney's
refusal to stipulate did not constitute "other paper" upon which removal could
occur under the relevant provision of our removal statutes (28 U.S.C. 1446(b)).
In short, because there is no clear congressional mandate permitting interstate
class actions to proceed in federal court, some federal courts are straining to
avoid them. II. The Constitutional Purposes Of Diversity
Jurisdiction Support The Extension Of Federal Jurisdiction To Cover
Interstate Class Actions. A. Interstate Class Actions Implicate All Three
Concerns Identified By The Framers As Justifications For Diversity
Jurisdiction. Let me make clear at the outset that the decision whether
or not to extend diversity jurisdiction to cover interstate
class actions is a political decision, and not a constitutional one. The
Constitution's only limitation on diversity jurisdiction is
Article III's requirement that controversies be "between citizens of different
states." The Supreme Court has regularly recognized that the decision to require
complete diversity, and the decision to set a minimum amount in controversy, are
political decisions not mandated by the Constitution.(11) It therefore is the
prerogative of Congress to broaden the scope of diversity
jurisdiction to the extent it sees fit, as long as any two adverse
parties to a law suits are citizens of different states.(12) In my view,
extending diversity jurisdiction to cover interstate class
actions is not only permissible, but desirable in light of the purposes that
animated the framers of the Constitution in adopting the constitutional
diversity jurisdiction principle. Diversity
jurisdiction generally is thought to be premised on three
considerations, each of which I discuss in turn. The impermissibility of
locality discrimination. Perhaps the most important reason why the framers in
1787 thought it important to replace the Articles of Confederation with a new
Constitution was the conviction that a loose confederation of states was a
weaker form of government, and less protective of basic liberties, than a
single, unified nation. As Judge Henry Friendly explained, diversity
jurisdiction was an important component in the framers' plan to create
a stronger union out of the old confederation; its central purpose was (and is)
to protect citizens in one state from the injustice that might arise if they
were forced to litigate in the courts of another state.(13) Quoting James
Madison, Judge Friendly believed diversity jurisdiction to be
essential to a strong union because it "may happen that a strong prejudice may
arise in some state against the citizens of others, who may have claims against
them."(14) A century and a half after Madison, Justice Frankfurter put a more
practical face on Madison's understanding: "It was believed that, consciously or
otherwise, the courts of a state may favor their own citizens. Bias against
outsiders may become embedded in a judgment of the state court and yet not be
sufficiently apparent to be made the basis of a federal claim."(15) A number of
scholars have argued, persuasively in my view, that the problem with local bias
is based not only on the existence of such bias, but also on the possibility of
a perception of such bias. Chief Justice Marshall himself recognized the
constitutional significance of even the perception of bias: However true the
fact may be, that tribunals of the states will administer justice as impartially
as those of the nation, to the parties of every description, it is not less
true, that the constitution itself either entertains apprehensions of this
subject, or views with such indulgence the possible fears and apprehension of
suitors, that it has established national tribunals for the decision of
controversies between . . . citizens of different states.(16) Thus,
diversity jurisdiction not only was designed to protect against
bias, but to shore up confidence in the judicial system by preventing even the
appearance of discrimination in favor of local residents.(17) Given this
function, diversity jurisdiction should not be construed as
parsimoniously as the recent federal decisions described above have done;
instead, as others have recognized, the "prophylactic" function of
diversity jurisdiction demands that it be extended liberally to
cases in which legitimate concerns about locality discrimination might
arise.(18) In my view, these concerns are particularly weighty in the context of
class actions against large, out-of-state corporations. Whatever one's view of
the value of diversity jurisdiction generally (and I served as
an adviser to the Federal Courts Study Committee, which expressed some doubt
about the value of broad diversity
jurisdiction in the modern era in the context of suits
between individual citizens), there is no doubt in my mind that a federal forum
which is perceived as neutral and unbiased will enhance the quality of justice
in the context of large class actions against multiple parties, many of which
are out-of-state corporations. To those who would complain that this legislation
would bring more cases into the federal courts, my simple answer is these
interstate class actions exemplify the core purposes for which the Framers
included diversity jurisdiction in the Constitution. There are
plenty of other cases involving diversity jurisdiction where we
could pare back to make room for these cases if necessary. The undesirability of
discrimination against interstate businesses. Part and parcel of the political
failure of the Articles of Confederation was the economic failure of that
regime. It had become clear by 1787 that, if individual states were permitted to
enter into separate economic treaties with one another, and to impose tariffs
and other restrictions on the free flow of goods across state lines, the
economic health of the United States would falter. Discrimination against
out-of-state business entities by means of state judicial processes was regarded
as an equally great threat to the growth and economic health of the nation. As
one commentator put it: No power exercised under the Constitution . . . had
greater influence in welding these United States into a single nation than
diversity jurisdiction ; nothing has done more to foster
interstate commerce and communication and the uninterrupted flow of capital for
investment into various parts of the Union, and nothing has been so potent in
sustaining the public credit and the sanctity of private contracts."(19) The
importance of fostering confidence in the judicial system. Last, but certainly
not least, the availability of a federal forum enhances the perception (among
litigants and others) that justice is not meted out according to what one
commentator has called "the Good Old Boy System."(20) Northwestern University
law professor Martin Redish has compared the judicial system to a baseball game,
and pointed out that in the same way sports fans would not trust an umpire to
call balls and strikes fairly if he were affiliated with the home team, the
public cannot be expected to have confidence in a judicial system without the
life tenure and other protections of the federal judiciary - a system, like that
in effect in 38 states,(21) where judges are beholden to their constituents and
campaign contributors. Litigating lawyers typically refer to this as the "home
court" advantage. One important way in which the federal courts preserve public
confidence in the judicial system is by maintaining procedures designed to
minimize inconsistent results. Unlike state courts, the federal judiciary has
the ability to consolidate numerous complex lawsuits involving similar
allegations in a single district before a single judge.(22) By contrast, related
state court cases that are not susceptible to consolidation often reach
differing (and seemingly random) results, permitting class-action plaintiffs'
attorneys to take multiple bites at the apple in the hope that, despite a number
of losses on a particular issue, they will rack up a handful of lucrative wins.
One recent example of this phenomenon involved a series of cases filed in state
court against Ford Motor Company concerning the quality of paint on Ford cars
and trucks. All of these cases were removed to federal court, where they stayed
- except for one case, which a federal district judge in Texas remanded twice to
state court. The removed cases were consolidated before a single federal judge
in New Orleans, where all pretrial matters were conducted in a coordinated
fashion. The Texas case proceeded on its own, in state court. After the
completion of years of discovery, the federal judge issued what has already
become a leading opinion, denying class certification in the consolidated
federal cases.(23) Reviewing an identical record, an elected state judge in
Texas reached the opposite conclusion and certified a class.(24) What can
litigants and the public take from such a result, other than a sense of
randomness and inconsistency? Other witnesses today and at other hearings have
noted the practice followed by many state judges of simply certifying classes as
a matter of course,(25) the apparent willingness of state judges to approve
class settlements that seem to benefit no one other than the plaintiff's
attorneys,(26) and the fervor - demonstrated perhaps most recently in the
breast-implant class litigation in federal court in Alabama and in Louisiana
state court - with which state judges often advance cases that compete with
previously filed (and possibly even certified) class actions in federal courts.
But in my view, the issue transcends whether individual state courts cases
certifying classes are right or wrong, or what standards particular states adopt
for certifying class actions. At the structural level, it is important to have
the option - as we do in other areas of law -- to remove cases to federal court.
Removal is a brilliant innovation in our federal jurisprudence. It maintains the
autonomy of states to develop their own law and their own procedures (without
federal preemption) while at the same time creating a gentle incentive to keep
them from going too far. The existence of a removal provision creates what
economists call "potential competition." Removal is like the use of economic
incentives, rather than command-and-control regulation, in environmental
regulation, or like a school choice voucher program that improves the public
schools by giving students an option to go elsewhere. Removal does not override
the states' freedom of action. It merely abolishes a monopoly and creates a kind
of competitive market discipline. If a state goes too far, and its decisions are
perceived by litigants as unfair for whatever reason, the litigants may go to
another forum that they perceive as more neutral. Unfortunately, in the field of
class actions, the option to remove to federal court has been more apparent than
real, because of the decisions regarding diversity jurisdiction
discussed above. In my view, the most important provisions of H.R. 1875 are
those that would make removal to federal court - which is available as a matter
of course in other major litigation - available in class actions as well. As I
stated above, this is important not only to insure fairness to the litigants
themselves in the cases that are removed, but will, in the long run, I believe,
exercise a salutary effect on improving the quality of justice in the state
courts. B. The Current Statute Is Too Blunt An Instrument To Achieve Its Purpose
Of Ensuring That "Important" Cases Have An Available Federal Forum. As I have
already explained, the current diversity-jurisdiction statute
contains two requirements, neither of which is constitutionally required:
"complete" diversity of citizenship, and a minimum amount in controversy.
Intuitively, these two requirements serve a single purpose: to ensure that
"important" cases qualify for a federal forum, while protecting the federal
docket from cases too trivial to merit the attention of overburdened federal
judges. As the class-action explosion demonstrates, however, the current two
statutory requirements are not up to their task. Perversely, under the present
system, legally insignificant dispute that happens to involve citizens of
different states and a minimum amount in controversy - say, a slip-and-fall case
involving a Virginia citizen and a Maryland grocery story owner, or a contract
dispute between a businessman in Kansas City, Missouri, and his supplier in
Kansas City, Kansas - may qualify for federal diversity
jurisdiction. But the Texas lawsuit against Ford Motor Company - a
lawsuit that, according to the plaintiffs' attorneys, involved hundreds of
thousands of class members, each with tens of thousands of dollars in alleged
damages - somehow does not warrant the federal courts' time. Clearly, this
result is indefensible. It is time we realized - in academia, in the profession,
and in Congress - that the two current requirements of diversity
jurisdiction are simply proxies for all the underlying policies
warranting a federal forum. It is true that these proxies, because they have
been in force for many years, have come to be embedded in the legal culture. But
there is nothing sacred - and certainly nothing constitutional - about them.
They are merely proxies, and highly imperfect ones at that. More important than
fealty to these proxies is that we remember the underlying purpose they are
intended to serve: to provide a federal forum for cases that are sufficiently
large and important, judged against the three constitutional purposes I have
described above. Interstate class actions clearly are important on any measure.
Accordingly, I strongly support the proposed amendments. III. Conclusion I
appreciate the opportunity to testify today before this distinguished Committee.
Please allow me to summarize. Interstate class actions are filed at a rate that
increases every year. More and more, they are filed in state courts in a few
states that are perceived as being particularly favorable to plaintiffs. Federal
courts, lacking clear guidance from Congress, are bending over backwards to
decline jurisdiction. This has created strong pressure on out-of-state
defendants to settle cases. This pressure to settle class actions in state court
is real, and I urge Congress to take immediate steps to restoring the right to
remove to a neutral, federal forum.
LOAD-DATE: July 26,
1999 
