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Document 15 of 29.

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MAY 4, 1999, TUESDAY

SECTION: IN THE NEWS

LENGTH: 3731 words

HEADLINE: PREPARED TESTIMONY OF
BRIAN WOLFMAN, ESQ.
STAFF ATTORNEY, PUBLIC CITIZEN LITIGATION GROUP
BEFORE THE SENATE JUDICIARY COMMITTEE
ADMINISTRATIVE OVERSIGHT AND THE COURTS SUBCOMMITTEE
SUBJECT - S. 353

BODY:

Mr. Chairman and members of the Committee. I am submitting this testimony today in opposition to S. 353, the Class Action Fairness Act of 1999. Although we support the use of class actions and actively work to improve the class action process, this bill would do little or nothing to further that goal. To the contrary, S. 353 is an unwise and ill-considered incursion by the federal government on the jurisdiction of the state courts. It works a radical transformation of judicial authority between the state and federal judiciaries that is not justified by any alleged "crisis" in state court class action litigation.
Before explaining the basis for my conclusion that S. 353 should not be enacted, I want to describe my experience in class action litigation. I am a staff attorney with Public Citizen Litigation Group, a non-profit, national public interest law firm founded in 1972, as the litigating arm of Public Citizen, a consumer advocacy organization with approximately 150,000 members. Like other lawyers who represent consumers, we use class actions in situations where litigation of individual claims would be economically impossible.
Because we value class actions as an important tool for justice, we have, for a number of years, combated abuses in the class action system. We have increasingly devoted resources to opposing what we believe are inappropriate or collusive class action settlements,and have become the nationwide leader in fighting class action abuse. Among the more than 30 nationwide class actions settlements on which we have worked, we have served as lead or co-counsel for objectors in many of the most important cases, including Bowling v. Pfizer (Bjork- Shiley heart valve); Amchem v. Windsor (asbestos case, also known as Georgine); Hanlon v. Chrysler Corp. (Chrysler mini-vans); In re Telectronics Pacing Systems, Inc. (defective pacemaker leads); Duhaime v. John Hancock Mut. Life Ins. Co. (deceptive life insurance sales practices); In re General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig. (GM C/K Pickup Trucks); and In re Ford Motor Co. Bronco II Prod. Liab. Litig. (Ford Broncos). In these cases, we have objected to settlements that we thought grossly undervalued the plaintiffs' claims and we have opposed what we believed were the inflated fees of the plaintiffs' attorneys.
In addition, we have written articles on the problems we have encountered in class action settlements for law reviews and the popular press. See Brian Wolfman & Alan Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 71 N.Y.U.L. Rev. 439 (1996); Brian Wolfman, Forward: The National Association of Consumer Advocates' Standards and Guidelines for Litigating and Settling Class Actions, 176 F.R.D. 370 (1998); David C. Vladeck, Trust the Judicial System to Do Its Job, The Los Angeles Times, p. M5 (Apr. 30, 1995); Brian Wolfman, Class actions for the injured classes, The San Diego Union Leader, p. B-11 (Nov. 14, 1997).
The point of these introductory comments is that Public Citizen takes a back seat to no one in fighting class action abuse, to assure that injured consumers will be justly compensated, that class action attorneys' fees are sufficient (but not excessive), and the class action tool is not weakened. In our judgment, S. 353 will do little or nothing to aid injured consumers or combat collusion, while working a massive shift of power and caseloads to our overburdened federal courts at the expense of the state courts, the traditional forum for hearing disputes involving state law.
I. The Enormous Expansion of Federal Jurisdiction.
Section 3 of S. 353 allows proposed class actions to be filed in federal court if "any member of a class of plaintiffs is a citizen of a State different from any defendant .... "
Building on the language in section 3, section 4 of the bill permits removal from state court to federal court of any class action meeting these expanded criteria for filing class actions in federal court. Thus, as a practical matter, section 3, when combined with section 4's removal provision, would end most state-court involvement in consumer class actions. Although the bill provides that the federal court shall abstain from entertaining some class actions, that exception applies only where a "substantial majority" of the proposed class and the defendant are citizens of a single state, and the claims asserted will be governed primarily by the laws of that state. As we explain below, the bill would effectively eliminate state-court jurisdiction over class actions involving only in-state plaintiffs and only that state's law, simply because the defendant's principal place of business or state of incorporation is out of state, even where that defendant does substantial in-state business. As a result, the bill shifts an enormous amount of power from state to federal courts at a time when the federal courts ,are already overwhelmed.Two hypothetical cases illustrate our point. Assume that over the past two years a regional insurance company, with headquarters in Georgia and incorporated in Delaware, breached contracts of life insurance with 100,000 senior citizens living in Florida, by charging premiums higher than those promised and not paying certain benefits. The senior citizens file a class action in Florida state court alleging solely violations of Florida law. Under S. 353, the insurance company would have the option of removing this class action to federal court. There is no federal interest in resolving such a dispute because it does not involve federal law; more important, the Florida courts have a strong interest in resolving the case, to assure that Florida law is properly enforced. That interest is usurped by S. 353. Indeed, this example makes clear that S. 353 is little more than a "Corporate Defendant Choice of Forum Act," since it allows the corporate defendants -- not the plaintiffs -- to select the court system it prefers.
Similarly, a class of Kansas car owners files suit in state court under Kansas consumer protection statutes and Kansas common-law theories relating to a design defect in their vehicles. The defendant's corporate headquarters are in Michigan, and it is incorporated in Delaware, but it has large manufacturing plants in Kansas and sells thousands of cars and trucks in that state every year. There is no reason why a state court should not handle this class action. Surely, most Kansas trial courts, and the Kansas appellate courts on review, will be more familiar with the state-law issues than a federal court sitting in Kansas or the relevant federal appeals court headquartered in Denver. And yet S. 353 virtually assures that, regardless of the plaintiffs' wishes, this one-state controversy, involving only state law, will end up in federal court.
As these examples show, S. 353 dishonors the proper spheres of the states and the federal government in our federal system. The bill is a resounding vote of "no confidence" in our state courts. It is premised on a deep -- and misplaced -- distrust in state courts' ability to uphold the law. Our Constitution properly assumes that the states are fully capable of interpreting their own laws and handing out justice impartially. S. 353 is not in keeping with that basic constitutional principle.
Although this radical revision of the allocation of authority between the state and federal courts is enough in itself to warrant the defeat of S. 353, it is the inefficiencies created by the bill that will pose the largest roadblock to justice for ordinary citizens. By channeling most state-law based class actions to the federal courts, S. 353 will further weaken the ability of litigants to obtain justice in our federal courts.

As Chief Justice William H. Rehnquist has repeatedly explained in his annual report on the judiciary, the federal courts are already overburdened with cases that traditionally are dealt with in state courts, and the federal courts cannot bear any additional burden. See, e.g., William H. Rehnquist, The 1998 Year-End Report of the Federal Judiciary 5-7 (Jan. 1, 1999). And the Chief Justice has particularly asked Congress to consider reducing, not expanding, federal diversity jurisdiction. Id. at 7.
Moreover, not only would S. 353 intolerably increase the caseload of the federal courts, but it would do so with cases that are extremely complex and time consuming. Making matters even worse, these new federal cases involve solely issues of state law, with which state court judges are intimately familiar, but federal judges generally are not (as illustrated by the case involving Kansas law discussed above).
The caseload burden imposed by S. 353 would be reason enough to reject this legislation at any time, but the problem is particularly acute now, because there are a large number of federal judicial vacancies and the civil docket in some districts is severely backlogged. In short, S. 353 promises that injured consumers will be put on "hold" in the overburdened federal courts, without any opportunity to litigate their cases in state courts where they properly belong.
The proponents of S. 353 try to justify the bill on the ground that there is a class action "crisis" peculiar to the state courts. In general, the class action tool is a tremendous benefit to Americans. It is an important and powerful component of our civil justice system that can compensate ordinary citizens who, acting individually, would not have the means to challenge corporate and governmental wrongdoers. As noted at the outset of this testimony, Public Citizen recognizes that class action abuse threatens to sour the public and harm the very people that the class action tool is supposed to help. But it is wrong to think that abuse is limited to state courts. Last year, a federal appeals court approved the Chrysler minivan settlement -- where the settlement provided little more than Chrysler's prior promise to a federal regulator to fix the class members' defective door latches, with Chrysler agreeing to pay the lawyers five million dollars in fees! The federal and state courts must be vigilant and prevent such abuses and progress is being made in that regard.
The state courts can play a role in preventing abuse. For example, many of the anecdotes used by the proponents of S. 353 are based on class actions in Alabama where, the argument goes, the state courts there have been certifying cases without following the proper procedures. Responding to due process and forum-shopping concerns from corporate defendants, however, the Alabama Supreme Court has abolished the practice of certifying class actions before the defendant has an opportunity to answer the suit. See, e.g., Ex Parte State Mutual Ins. Co., Nos. 1960410, et al., 1197 WL 772923 (Ala. Dec. 16, 1997), and Ex Parte American Bankers Life Assur. Co. of Fla., No. 1950705, 1997 WL 773322 (Ala Dec. 16, 1997). The Court made clear that classes may not be certified without notice and a full opportunity for defendants to respond and that the class certification criteria must be rigorously applied.
Meanwhile, state court class actions continue to provide significant relief to consumers who would otherwise have gone without compensation. For instance, state-court class actions involving polybutylene pipe illustrate the importance of consumers banding together to fight corporate irresponsibility. Shell, Dupont, and other corporate giants sold leaky plastic pipes, which caused severe damage to the homes of tens of thousands of unsuspecting consumers. This state-court litigation resulted in hundreds of millions of dollars in recoveries and replacement of the faulty piping, which would never have occurred if the homeowners were required to face off against the companies on their own.
Another example is Naef v. Masonite -- concerning claims of defects in hardwood siding on homes and commercial property - commenced in 1994 in Mobile County, Alabama. The defendant removed the case to federal court, but the case was later remanded because of a lack of federal jurisdiction. A state-court jury found for the plaintiffs on the question of whether the product was defective, and the matter then settled for hundreds of millions of dollars shortly before trial on liability and damages. Under S. 353, this case could have been removed to federal court, although it appears that the matter was pursued vigorously in the state court and brought very considerable benefit to injured class members.
In another Alabama case -- Coleman v. GAF Building Materials Corporation -- a settlement was stuck that would provide thousands of injured plaintiffs with a replacement or repair of their allegedly defective roof shingles. As originally proposed, the settlement contained serious problems, including inadequate notice of the remedy. But objectors appeared, and the court allowed them to intervene to present their objections. The settlement was modified to remedy the settlement's serious flaws. The case was based on state law, and there is nothing to suggest that a federal, rather than state, forum was essential.
As evidence of the state-court class action "crisis," the supporters of S. 353 rely on a few anecdotes of settlements in which the class members were cheated at the expense of their lawyers. As noted, abuses do occur in state and federal court, and that abuse must be fought in the courts. But the anecdotes are just that -- anecdotes -- and much more evidence showing a systematic pattern of abuse in the state (as opposed to federal) courts must be required before Congress should consider enacting anything approaching the radical transformation in our state-federal balance contemplated by S. 353.
In sum, S. 353 should be rejected as unwise and unnecessary. It is an unwarranted attack on the integrity of the state courts and their ability to provide justice to its citizens, and it comes at a time when the federal courts are unable to handle the enormous increase in caseload that S. 353 would entail.
II. Constitutional Concerns.
S. 353 should not be enacted for the policy considerations given above. The Committee should be aware, as well, that S. 353 may also be constitutionally flawed. As this Committee is aware, our federal courts are courts of limited jurisdiction. Section 3 of the bill would stretch the limits, perhaps beyond the breaking point. The bill would overrule Strawbridge v. Curtiss, 3 Cranch 267 (1806), where the Supreme Court interpreted the diversity statute to require "complete diversity" between all named plaintiffs and defendants. Strawbridge is not a constitutional case and the Supreme Court has held that only "minimal" diversity (i.e., diversity between one plaintiff and one defendant) is required by the constitution. See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967). However, in our judgment, the Supreme Court's endorsement of minimal diversity does not ensure the constitutionality of sections 3 and 4 of S. 353, at least not in all of their applications.
The relevant constitutional provision, Article III, section 2, provides that "(t)he judicial Power shall extend to ... Controversies...between citizens of different States(.)" Assume a situation in which the named plaintiff and 50% of the proposed class members, and all the named defendants, are from state "x," but 50% of the proposed class members are from states "y" or "z." When a proposed class action is filed, the class does not yet exist and a constitutional "controversy" exists only between the named plaintiffs and the defendant.Put another way, there is no controversy between the absent class members -- on whom jurisdiction under S. 353 hinges -- and the defendant, and thus it is difficult to imagine how diversity jurisdiction can be constitutionally maintained in this circumstance prior to certification of the class and some reasonable assurance that there are, in fact, diverse class members. See Sosna v. Iowa, 419 U.S. 393, 399 (1975).
III. Other Problems With Sections 3 and 4 of S. 353.
Although we believe that S. 353 should be defeated, it should surely not be enacted in its current form. The following amendments would improve the bill.
- The rationale of diversity jurisdiction when it was first enacted at the end of the 18th century was to avoid prejudice against out-of- state defendants. As the Chief Justice pointed out in his 1998 annual report, that rationale is not nearly so powerful in today's society. See, e.g., William H. Rehnquist, The 1998 Year-End Report of the Federal Judiciary 7 (Jan. 1, 1999) (noting that in 1789, when the Judiciary Act was enacted, "there was reason to fear that out-of-state litigants might suffer prejudice at the hands of local state court judges and juries, and there was legitimate concern about the quality of state courts. Conditions have changed drastically in two centuries.").

Under S. 353, an in-state class of plaintiffs suing under their own state law can keep a state-law class action in state court only if the primary defendants are citizens of that state. (A corporation's citizenship is defined to include both the state in which it has its principal place of business and its state of incorporation). To be blunt, that makes little sense in a society in which large corporations have a significant business presence in many states.Surely, Disney should be suable in state court in Florida, as well as in California, where it has its headquarters. General Motors should be suable in state court in Pennsylvania, where it has a substantial manufacturing plant, as well as in Michigan (where it has its headquarters).
Thus, at the very least, section 4 of the bill (proposed 28 U.S.C. 1332(d)(3)) should be amended to require a federal court to abstain from hearing a class action in which a substantial majority of the class members are citizens of a single state of which the primary defendants are also citizens "or in which the primary defendants have a substantial business presence," and the claims assented will be governed primarily by the laws of that state.
- Section 3 of S. 353 (proposed 28 U.S.C. 1332(d)(6)(C)) provides that the limitations period for any claim that was asserted on behalf of a class member in an action dismissed or remanded to state court for failure to meet Rule 23's class certification criteria "shall be deemed tolled to the full extent provided by federal law." This provision is unfair for two reasons.
First, under American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), tolling would apply in any future individual action in federal court, but it is not certain that all the state courts -- where many subsequent individual actions would have to be filed -- will adopt the American Pipe rule under these circumstances. Second, American Pipe does not address the issue of whether the limitations period for a subsequent class action (as opposed to an individual action) would be tolled during the pendency of the original federal class action. Some federal circuit courts have held that American Pipe does not apply in that circumstance. See, e.g., Korwek v. Hunt, 827 F.2d 874, 879 (2d Cir. 1987).
The solution to both problems is the same. Rather than referencing "federal law," the bill should simply provide that the claims of the class members are tolled during the pendency of any action in which jurisdiction is based on proposed section 1332(d).
IV. The Other Provisions of S. 353.
In addition to the provisions of S. 353 concerning federal jurisdiction, the bill contains other provisions aimed at dealing with class action abuse. Although none of these provisions would warrant passage (or rejection) of this legislation in light of the serious problems noted in Parts I, II, and III above, we do have views on these provisions.
Attorney's Fees
Public Citizen is opposed to proposed 28 U.S.C. 1714 concerning regulation of attorney's fees. We believe that federal statutory regulation of attorney's fees is unwise and unnecessary. We do not believe that legislative language -- no matter how finely tuned -- can possibly deal with the situations that present themselves in class action cases, from cash fund settlements, to injunctive relief cases, to in-kind settlements, to settlements involving hybrid forms of relief. As in other areas, in the class action arena, fees should be left to doctrinal development in the courts, which have the necessary discretion to deal with the myriad situations that arise regarding fees.
Rule 11
Public Citizen is strongly opposed to section 5 of S. 353, which would make sanctions for violations of Rule 11 mandatory. History shows that mandatory Rule 11 sanctions are used disproportionately against plaintiffs' (particularly civil rights) attorneys and those attempting to extend the law in support of unpopular causes. Moreover, if sanctions are made mandatory, Rule 11 litigation would expand enormously. In times of heavy dockets, we should be seeking ways to lessen, not increase, satellite litigation.
Notice to State Attorneys General
We support proposed 28 U.S.C. 1713 concerning notice to attorneys general. It will make a modest improvement in increasing participation of state attorneys general, who have helped in the past in policing abusive class actions. We believe that notice should occur at the time of settlement (as the bill currently provides).
In closing, let me reiterate our opposition to this legislation. Since the founding of the Republic and the first Judiciary Act, it has been our shared national understanding that, except in relatively rare instances, litigation of state law questions would be the province of state courts. The enormous aggregation of power in federal court proposed by this legislation is unwise because it tears an enormous hole in the fabric of federal-state relations and because it adds a considerable burden on our already overworked federal court system. If there are genuine problems with state court class actions, Congress should work hand-in hand with state courts and legislatures to resolve them, mindful of the vital state interests that are implicated when Congress proposes curtailing state court jurisdiction. But under no circumstances should Congress adopt the heavy-handed approach embodied in S. 353.
END

LOAD-DATE: May 6, 1999

Document 15 of 29.


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