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MAY 4, 1999, TUESDAY

SECTION: IN THE NEWS

LENGTH: 8508 words

HEADLINE: PREPARED STATEMENT OF
JOHN H. BEISNER
O'MELVENY & MYERS LLP
BEFORE THE SENATE JUDICIARY COMMITTEE
ADMINISRATIVE OVERSIGHT AND THE COURTS SUBCOMMITTEE
SUBJECT - S. 353: "THE CLASS ACTION FAIRNESS ACT OF 1999"

BODY:

In hearings over the past eighteen months, this Subcommittee and its House counterpart have heard considerable evidence of a severe state court class action crisis. The record reflects an explosion in the number of such cases being filed, prompted largely by a lax attitude toward class actions among some state courts. Some state courts operate without basic class certification standards and in disregard of fundamental due process requirements, resulting in injury to both unnamed class members as well as to corporate defendants. Another problem is that certain state courts are "federalizing" such litigation. By their laxity, they have become magnets for a disproportionate share of interstate class actions and are thus dictating national class action policy. Further, in litigating multistate class actions, those state courts are also frequently dictating the substantive laws of other jurisdictions. Considerable waste and inconsistent judicial rulings are occurring because there is no mechanism for coordinating overlapping, "competing" class actions (i.e., cases in which the same claims are asserted on behalf of basically the same classes) pending simultaneously in state courts around the country.
Witnesses at a March 5, 1998 House hearing (representing widely varied interests) expressed broad agreement that the wisest, least disruptive solution was the expansion of diversity jurisdiction over interstate class actions, allowing more such cases to be heard in federal courts. As one witness noted, "you have heard today from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking.., that.., you've heard from everyone.., that.., increasing the of... diversity jurisdiction.., to (encompass more class actions) is a good idea."
S. 353's jurisdictional/removal provisions would be a significant step toward resolving the state court class action crisis. They would fix a technical flaw in our current diversity jurisdiction statutes (enacted before the modem day class action) that bars federal courts from hearing most interstate class actions - the judicial system's largest lawsuits, often involving millions of dollars disputed among thousands of parties residing in multiple jurisdictions. This change would also make more broadly available the statutory mechanisms by which federal courts (but not state courts) may coordinate overlapping, competing class actions. Those provisions would allow both plaintiffs and defendants greater access to our federal courts without undesirable side effects. The bill would not alter any party's substantive legal rights. The bill would leave purely local disputes to the exclusive purview of state courts. And the bill would still allow state courts to hear class actions when parties prefer that forum.
The notice provisions of S. 353 would lessen the possibility that class actions will injure the interests of unnamed class members (as they now often do). The bill's attorney's fee limitations have potential to curtail some of the most egregious fee abuses, particularly some counsel's tendency to claim fees on the basis of speculative, amorphous benefits to a class.
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PREPARED STATEMENT OF JOHN H. BEISNER, O'MELVENY & MYERS LLP, WASHINGTON, D.C., BEFORE THE SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS OF THE U.S. SENATE COMMITTEE ON THE JUDICIARY
HEARING ON S. 353 "THE CLASS ACTION FAIRNESS ACT OF 1999"
MAY 4, 1999
I very much appreciate this opportunity to participate in today's discussion of S. 353, the Class Action Fairness Act of 1999.
At the outset, I want to disclose the sources of my perspectives on this subject. Basically, I am an "in-the-trenches" class action litigator. Over the past 19 years, I have been involved in defending over 250 class action lawsuits on a wide variety of subjects before the federal and state courts of 28 states at both the trial court and appellate level. On the basis of that experience, I wish to share a few thoughts about the problems that exist in the class action arena and about the respects in which I believe that S.353 would be a positive, effective response to those problems.
I. THERE IS A CONTINUING STATE COURT CLASS ACTION CRISIS.
It is exceedingly ironic that although class actions are probably one of the most complex procedural devices in our legal system, the general public has an acute awareness of what they are. From the citizen perspective, class actions are not pretty. Jury researchers - the people who survey potential jurors in anticipation of trials - will tell you that in most locales, the general public tends to view class actions as a blight on our legal system. Citizens correctly perceive that not all class actions are bad. But if you ask for a definition of a class action in those jury research settings (as I have on occasion), you will probably get an answer like: "Class actions are lawsuits in which the lawyers get all of the money and the people don't get anything." And you will also be told that class actions are usually lawyer-manufactured. The public senses that these lawsuits do not get started like a normal lawsuit does - a person walking into the lawyer's office and asking that redress for an injury be pursued. Instead, the public perceives that class actions are initiated when a lawyer gets an idea about filing a lawsuit (e.g., by reading about an issue in the newspaper) and then goes off to find somebody to front the lawsuit (i.e., the named plaintiff or class representative).
I do not mean to suggest that Congress should legislate in this highly technical legal arena based on such public perceptions. But for better or worse, the record shows that these perceptions are disturbingly accurate. And those perceptions of class actions are adversely skewing the public view of our legal system as a whole. Because of their size and scope, class actions receive disproportionate amounts of press attention. But even more significantly, class actions regularly touch more citizens than virtually any other aspect of our legal system. Indeed, given the proliferation of class actions in recent years, each of us sitting in this room - whether we know it or not - is a class member in numerous pending class actions. If you have ever bought a product or used a service, there are multiple class actions on file in which somebody is supposedly trying to vindicate your rights in some way. And because of the notice rules, citizens get a lot of mail about these cases - the only mail that most people ever get from a court. Most of the legalese that they see in those notices, they do not fully comprehend. But what they do understand is that their rights are often being manipulated to benefit other interests.
To understand the class action abuse problem, one need only consider for a moment the general concept that we are discussing. If I told you that the House had just passed a new bill that would allow lawyers to bring lawsuits without first obtaining permission from the parties on whose behalf the lawsuit supposedly was being brought, you presumably would be shocked. How could the House possibly conclude that we should allow lawyers to bring lawsuits not authorized by the claimants?
Rightly or wrongly, that's exactly what class actions are. They are a giant anachronism.

In the midst of a legal system in which individual rights are paramount - a system in which a lawyer normally cannot do much of anything without the informed consent of his or her client - we have this device through which a lawyer can walk into a court and say: "I am bringing claims on behalf of millions of people, even though I don't know exactly who or where they are and even though I have not obtained their permission to bring this lawsuit on their behalf."
Clearly, such a device invites abuse. It permits lawsuits in which the claimants play little or no role; lawsuits in which the lawyers call all of the shots without really even hearing the views and desires of their clients. Further, it allows attorneys to bring lawsuits where the real parties in interest have manifested no interest in suing. Plainly, such lawsuits present great risk that the lawyers who bring them will substitute their interests for those whose claims are at issue. In short, class actions are a powerful, abuse-inviting device that must be carefully policed by the courts to avoid legal catastrophe. Unfortunately, at least in many of our state courts, that careful supervision is not occurring.
A. Congress Has Already Amassed An Ample Record Of Class Action Abuse.
This hearing is not the first occasion on which Congress has received indications of state court class action abuse. Over the past eighteen months, Congress has been bombarded with warnings that something is badly amiss with class actions. The alarm bells have been ringing. Almost daily, there are press reports about class actions being used to deny (not protect) due process rights -- instances in which the legitimate interests of both class members and defendants are being ignored or injured.
In October 1997, this Subcommittee held a hearing on class action abuses. Last year, the Subcommittee on Intellectual Property and the Courts of the House Judiciary Committee held two such hearings (one in March and another in June). The record that emerged from those three sessions indicates that the alarm bells are ringing for good cause: state court class action abuse is rampant.
Those earlier hearings amply documented several serious problems:
- Some courts (particularly state courts) are not properly supervising proposed class settlements. The result is that class counsel become the primary beneficiaries; the class members (the persons on whose behalf the actions were brought) get little or nothing - or worse. For example, at all three hearings last year, there was discussion of the now infamous Bank of Boston class action settlement. At this Subcommittee's October 1997 hearing, both Senator Herb Kohl (D. - Wis.) and his constituent, Martha Preston, a member of the class, described the settlement as a "bad joke."1
At a March 1998 House hearing, Ralph G. Wellington, a Philadelphia attorney, elaborated, noting that the state court in that case approved a class settlement under which (m)ost of the 700,000 (class members) received minimal direct economic benefit; some received no direct benefit at all. Indeed, most had their mortgage escrow accounts.., deducted in order to pay several million dollars to the class counsel who had been approved to protect their interests. In short, having been included in a lawsuit they never envisioned, they had their own money from their own escrow accounts taken to pay class counsel for what many believe to have been a very dubious benefit.2
- According to several data sources, there has been an explosion in the number of state court class actions in recent years. Witnesses tied this phenomenon to the tendency of certain state courts to have an "anything goes" attitude toward class actions. At the March 1998 House hearing, Rep. James Moran (D.-Va.) observed that "(o)pportunistic lawyers have identified those states and particular judges where the class action device can be exploited." And offering specific examples, he decried the fact that "legitimate business enterprises ... are being severely harmed by existing class action practice" and that "(i)n other cases, where businesses may be legitimately at fault, injured consumers receive little, while the plaintiffs attorneys are enriched."
Similarly, John W. Martin, Jr., then the Vice President-General Counsel of Ford Motor Company, observed that "(t)he real purpose of the vast majority of class action lawsuits is to make money -- not for consumers, but for the lawyers bringing the suit." Noting specific state court examples, he urged that "(a)s a result, consumers are exploited and rarely receive substantial awards, while class action counsel frequently walk away with millions."
- The lax attitude toward class actions manifested by some state courts has constitutional (due process) ramifications. For example, Mr. Martin cited cases in which state courts had engaged in "drive-by class certification(s)"
- situations in which judges "grant() plaintiffs' motion to certify his claims for class treatment before the defendant even has a chance to respond to the motion (or, indeed, has even been served with the complaint)."
He also expressed concern about the '"I never met a class action I didn't like' phenomenon" -- state courts that "employ standards that are so lax that virtually every class certification motion is granted, even where it is obvious that the case cannot, consistent with basic due process principles, be tried to a jury as a class action." He cited examples of cases in which state courts had certified classes that federal courts had found uncertifiable. In some of those cases, the federal court cited due process or other constitutional reasons for finding class certification inappropriate; yet, the state courts charged ahead.
- Because the class action device is such a powerful tool, it can give an attorney unbounded leverage. John L. McGoldrick, Senior Vice President and General Counsel of Bristol-Myers Squibb Company, observed at the March 1998 House hearing that where class actions are not properly controlled by the courts handling them, there can be "the perverse result that companies that have committed no wrong find it necessary to pay ransom to plaintiffs' lawyers because the risk of attempting to vindicate their rights through trial simply cannot be justified to their shareholders. Too frequently, corporate decision makers are confronted with the implacable arithmetic of the class action: even a meritless case with only a 5% chance of success at trial must be settled if the complaint claims hundreds of millions of dollars in damages."
- The fundamental problem is the failure of some state courts to manage class actions so as to avoid the considerable potential for abuse. Rep. Moran testified that "(m)any state courts lack the complex litigation training, experience and resources necessary to deal with (interstate class actions)" and that "state court judges, who are elected in most states, are more prone to bias when the defendant is a large, out of state corporation." As Mr. McGoldrick put it, "(i)n some places, state court judges do not appreciate the raw power of the class action device and the need to circumscribe its usage. As a result, the rights of both defendants and the class members on whose behalf the actions were brought get ignored."
- This situation has encouraged the all too frequent filing of frivolous class actions in state courts. For example, Mr. Martin offered specific examples illustrating that due to the erosion of state court class action standards, "class actions that are being filed assert claims that are utterly without merit (or marginal at best)." And he noted that in interviews conducted for a study on class actions by the RAND Corporation's Institute for Civil Justice, "many attorneys (including some plaintiffs' counsel) observed that too many non-meritorious (class action lawsuits) are (being) filed and certified' for class treatment."
- The current situation in which class action litigation is being focusing in state courts is resulting in enormous waste, inconsistent results, and the risk of harm to class members' interests. More specifically, both Mr. McGoldrick and Mr. Martin noted the problems created whenever overlapping or "copycat" class actions are filed, a frequent occurrence. When such "copycat" cases are pending in different federal courts, they may be consolidated before a single judge through the Judicial Panel on Multidistrict Litigation, thereby ensuring uniform management of the litigation and consistent treatment of all legal issues. But when duplicative class actions are filed in two or more state courts in different jurisdictions, the "competing" class actions must be litigated separately in an uncoordinated, redundant fashion because there is no mechanism for consolidation of state court cases. As a result, state courts may "compete" to control the cases, often resulting in harm to all parties involved. Counsel also "foram shop," going from court to court trying to obtain a different result on class certification or other issues. And class counsel in the various cases may compete with each other to achieve a settlement, a phenomenon that can work to the disadvantage of the class members.

- Mr. Martin observed that "(t)he 'anything goes' mentality in state courts has led to a sad reality: as a practical matter, the most important question determining the outcome of a class action lawsuit has now become, not the merits of the claims or the propriety of class treatment, but whether the case can successfully be removed to federal court." He then offered numerous examples of ways in which lawyers who file class action lawsuits manipulate their pleadings to keep their purported class actions out of federal court (e.g., by naming defendants who defeat diversity but who have no real role in the litigation, by waiving class claims that might give rise to federal jurisdiction, by changing claims after the one-year removal deadline has passed).
B. The State Court Class Action Crisis Has Not Abated.
Little has changed since last year's class action-related hearings, except that we now have more data confirming that the state court class action crisis is for real. Most notably, a new publication - Class Action Watch - recently printed the results of a survey of major company experiences with class actions.3 In particular, the survey found that the number of class actions pending against the responding companies had increased dramatically over the ten year period 1998- 1998. As indicated by other data collection efforts, that growth was most pronounced among state court class actions. Over the ten-year period, the number of state court class actions pending against the respondents rose by 1,042% -- a greater than ten times increase.4 In contrast, the growth of pending federal cases was substantially less - only around 338%.5
The survey also provided strong support for the contention that if state courts in a particular locale begin manifesting an "laissez- faire" attitude toward class actions, they will become a magnet for such matters. For example, the survey noted that for years, the level of class action activity in Texas was relatively low. But of late, some Texas intermediate appellate courts have issued class certification-related decisions suggesting that Texas courts have a lower threshold for class certification than do our federal courts (even though Texas has adopted the federal class action rule and supposedly follows federal class action precedents). The effects of these decisions are not surprising. While the surveyed companies had experienced a 110% growth in the number of pending Texas state court class actions in the five-year period 1988-1993, that growth recently has accelerated dramatically.6 In the more recent five-year period (1993-1998), those companies reported a 338% increase in the number of class actions pending against them in Texas state courts.7
The survey also indicated that as the Texas courts seemingly became less rigorous about class actions, they were more frequently being called upon to hear class actions involving non-Texas residents. For example, the survey noted that both in 1988 and 1993, certified classes were almost always confined to Texas residents.8 By 1998, however, nationwide class actions were relatively common in Texas state courts.9
B. Other Problems With State Court Class Actions Are Emerging.
Over the past year, several other problems attributable to state court class actions have become increasingly apparent. I would like to focus on just two:
1. Overly Broad Classes Put Class Member Rights At Risk.
Because of the entrepreneurial motivations that underlie most class actions, it is not surprising that counsel try to make them as broad as possible. In short, why sue for a class of 1,000 people when you can sue for a class of 20 million people? A 20-million person class gives an attorney far more leverage against the defendant. And it creates the potential for a much larger pot of attorneys' fees (with no significantly larger investment).
The problem with this approach is that it causes the entire lawsuit to proceed on a lowest common denominator basis. The "average" claim becomes the claim by which the entire action is judged; class members with larger, more serious claims are simply lumped into the group and not given individual attention. Further, to make the litigation work as a class action, class counsel begin "shaving off' (i.e., waiving) the more complicated claims that may preclude trying the matter on a class basis. For example, certain legal theories requiring individual proof (e.g., fraud claims requiring individual demonstrations of reliance) may be thrown overboard. Likewise, claims for certain types of injuries (e.g., personal injury, property damage) may be excluded from the scope of the action. These "shortcuts" can be devastating for certain class members.
Let me use as an example a recently filed class action lawsuit that has garnered considerable attention - the now infamous "toothbrush" class action. According to a press release, this lawsuit, which is pending in state court in Chicago, assails the American Dental Association and several toothbrush manufacturers for failing to warn of the risk of a toothbrush related injury known as "toothbrush abrasion"/10 According to a press report, the "hard evidence" that backs this lawsuit is, in significant part, a toothpaste commercial that claimed that 36 million people brushed their teeth too hard.11 I suspect that a lot of people have reacted to this lawsuit in the manner of one letter to the editor:
I wonder if one can sue this attorney and his client for being abrasive and irritating. Any attorneys out there want to take up the challenge? We could make it a class-action suit against all ridiculous lawsuits such as this.12
Admittedly, I know little about this lawsuit. But if it is like most actions of this general type, the proposed class includes (a) a few people who actually claim to have suffered physical injury and (b) millions of people who simply claim to be at risk of injury. This paradigm poses two major problems. The people who claim actual injury are going to get lost in the lawsuit. If the matter actually gets adjudicated or settled on a class basis, the focus will be on the biggest group - the people who supposedly are just "at risk." If the case is tried, the jury likely would find for the defendants under this apparently bizarre theory. Or if the case is adjudicated in plaintiffs' favor or is settled, the remedy will focus on the "at risk" group (e.g., something like warnings and/or new toothbrushes). But what happens if somebody out there actually sustained physical injury? What if there actually are a few people who rightfully should have been warned by a dentist that they have a very rare dental situation requiring an unusual dental hygiene regimen?
Unless those persons are properly notified of what is going on in the lawsuit and closely follow the content of the notices (assuming that is possible), they will be out in the cold. If the case is tried and the class loses, their rights to pursue their claims for actual injury likely will be extinguished. Or even if plaintiffs win or obtain a settlement, the relief probably will not address their actual injury at all. And they will not be able to obtain individualized relief because the class victory or the settlement will preclude them from seeking more.
In some cases, class counsel seek to avoid these potential results by excluding people who actually have sustained personal injury, limiting the purported class to people who are merely at risk. But that approach creates another similar problem. If the case proceeds on a class basis and the class loses, all of the class members probably will be precluded from pursing claims if in fact they do experience actual injury in the future, in which case they may have a more compelling individual case to present to a jury. (For example, in the toothbrush case, if a jury found the warnings provided by the defendants to be adequate, each class member presumably would be precluded from arguing to the contrary in a personal injury action in the future.) Likewise, if the case is resolved (by settlement or trial) on the basis of minimal relief, each class member likely would be precluded from later asserting claims against the defendants if the risk came to fruition - if they discover later that they have actually experienced dental injury of some sort.
Federal courts have become sensitive to this problem and increasingly have refused to proceed with class actions that put class members' rights at risk in this manner.13 In contrast, state courts generally have been oblivious to this problem. Indeed, I am not aware of any state court that has even attempted to address this issue.
2. State Courts Are "Federalizing" Substantive and Procedural Law.
I have heard criticisms that S. 353 would "federalize" all class actions. That criticism overlooks a perversity of the current class action landscape -- class actions have already been federalized by the state courts.

When I say "federalized," I do not mean that the federal government has come in and told states what they are supposed to do. What I am talking about is "false federalism" - the current situation in which one state court goes around telling the other 49 state courts what their laws should be. When state courts preside over class actions involving claims of residents of more than one state (especially nationwide class actions) as they are increasingly inclined to do, they end up dictating the substantive laws of other states, sometimes over the protests of officials in those other jurisdictions.
A shining example appeared on page 29 of the September 27, 1998 edition of the New York Times. In a full-page article, the Times reported on a multi-billion dollar class action pending in a rural county court in downstate Illinois.14 The headline says: "Suit Against Auto Insurer Could Affect Nearly All Drivers."
The article says that all kinds of people are "alarmed" about this lawsuit. Public Citizen is "alarmed." Ralph Nader is "alarmed." The Attorneys General of Massachusetts, New York, Pennsylvania, and Nevada are "alarmed." The National Association of State Insurance Commissioners is "alarmed." Why are all of these people "alarmed?" Their concern is that the rural county court in Illinois is on the verge of telling all of the other states what their auto insurance laws are going to be. In the context of a nationwide class action, that court is set to decide whether auto insurance companies' use of "aftermarket" auto parts (as opposed to auto parts made by the "original equipment manufacturer" ("OEM")) in repairing insureds' vehicles is fraudulent behavior. The problem is that some states encourage or require insurance companies to use non-OEM parts, a policy intended to lower insurance rates. Nevertheless, the Illinois court is set to apply Illinois law to all other fifty states, and according to the Times article, may thereby may "overturn insurance regulations or state laws in New York, Massachusetts, and Hawaii, among other places." In short, this Illinois county court, which was elected by and is accountable only to the 61,000 residents of Williamson County, Illinois, is going "to make what amounts to a national rule on insurance." The Illinois Supreme Court has declined to stop the court;/15 the U.S. Supreme Court has also refused to intervene.16
Another example of this phenomenon is a class action now pending in the state court for Coosa County, Alabama.17 That suit was brought on behalf of the over 20 million people who have certain types of airbags in their motor vehicles. The lawyers therein are asking that the court order that the design of those federally-mandated airbags be declared faulty. That court may be the ablest and the most conscientious in our judicial system. But from a federalism policy standpoint, this situation defies logic. Why should an Alabama state court tell 20 million people in all 50 states what kind of airbag that they may have in their cars? What business does an Alabama state court have in presiding over this purportedly nationwide action when fewer than 2% of the claimants are Alabama residents and none of the out-of-state defendants even do business in the court's district? That Alabama court is accountable only to the 11,000 residents of the county that elects the court. Nevertheless, if counsel in that case have their way, that court he will be dictating national airbag policy.
Under the current situation, procedural class action law has also been federalized to a large extent - in the same perverse way. Even though only a minority of state courts are routinely falling to exercise sound judicial judgment on class action issues, those courts have become magnets for a wildly disproportionate share of the interstate class actions that are being filed. In short, attorneys file their class actions in the minority of courts that are most likely to have a "laissez-faire" attitude toward the class device. That distinct minority of state courts are essentially setting the national norm; they are effectively dictating national class action policy.
The new Class Action Watch testimony (discussed previously) tends to confirm this observation. But anyone doubting that this phenomenon is occurring need look no further than the testimony of Dr. John B. Hendricks at the March 1998 House hearing. He offered a docket study of state court class actions in one jurisdiction showing (a) that class actions had become disproportionately large elements of the dockets of some county courts, (b) that many of the class actions were against major out-of-state corporations lacking any connection with the forum county, and (c) that the proposed classes in those cases typically were not limited to instate residents and often encompassed residents of all 50 states. Dr. Hendricks identified one state court judge who had granted class certification in 35 cases over the preceding two years. As Dr. Hendricks stated, "(t)hat's a huge number of cases when one considers that during 1997, all 900 federal district court judges in the United States combined certified a total of only 38 cases for class treatment." The study failed to uncover any instance in which that judge had ever denied class certification. Clearly, that court alone was playing a radically disproportionate role in setting national class action policy.18
II. S. 353 IS A MODEST, WELL-REASONED ANSWER TO THE STATE COURT CLASS ACTION CRISIS.
From the record now before Congress, one could develop strong support for far reaching (some would say "radical") responses to the state court class action crisis. For example, Congress could enact federal legislation simply prohibiting state courts from using the class action device at all. Or Congress could perform major surgery on the class device itself (e.g., change procedural rules to allow class actions to be used only to pursue injunctive relief (not monetary damages) and thereby eliminate the economic incentives that encourage abuse of the device).
Instead, S. 353 takes a middle-of-the-road course, proposing very modest changes. Nevertheless, its multi-pronged approach should be effective in addressing many of the most serious class action problems that have been identified.
A. Provisions Expanding Federal Jurisdiction.
At the March 1998 House hearing, the witnesses were asked their views about a suggestion that the state court class action crisis could be quelled by expanding federal diversity jurisdiction to accommodate more class actions with interstate implications: - Prof. Susan Koniak, a member of the faculty at the Boston University Law School who described herself as being from the "plaintiffs' bar," responded that expanding federal jurisdiction over class actions would be a good idea. There's the polybutylene pipe case, which is one of the biggest class actions, was in Union City, Tennessee, in the state court, where no one could get there, you couldn't fly in to object. And that's common. Often these (state) courts are picked, and they are in the middle of nowhere. You can't have access to the documents and I don't think it's a full answer, but I think it should be done.19
- Former U.S. Attorney General Dick Thornburgh concurred, noting that (m)ost of the complaints that arise out of alleged inequitable treatment in these suits in state courts are in states where the judges are elected, and must.., depend on contributions which come from potential party litigants.
He stated that an expansion of federal jurisdiction over class actions is warranted because "federal courts have shown a much greater propensity to bring some sensible adjudication to the creation of classes and the progress of class cases."20
- In her prepared oral remarks, Elizabeth Cabraser, a leading plaintiffs' class action attorney, opined that much of the confusion and lack of consistency that is currently troubling practitioners and judges and the public in the class action area could be addressed through the exploration, the very thoughtful exploration, of legislation that would increase federal diversity jurisdiction, so that more class action litigation could be brought in the federal court. Not because the federal courts necessarily have superior judges, but because the federal courts have nationwide reach; they have the statutory mechanisms that they need to manage this litigation, so litigation can be transferred and coordinated in a single forum.12 - Both Mr. Martin and Mr. John Frank indicated their support for expanding federal diversity jurisdiction over purported class actions. And Mr. McGoldrick concluded the inquiry by telling the Subcommittee:
(Y)ou have heard (today) from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking to me that those of us who frequently disagree -- my friend Ms. Cabreset and I frequently disagree -- but you've heard from everyone the notion that diversity jurisdiction, increasing the ambit of it to permit class actions, is a good idea. And it seems to me that that's something this committee should weigh heavily in its deliberations.

22
S. 353 embraces the simple, elegant response to the state court class action crisis considered by this diverse group of witnesses -- a correction of the fact that federal courts lack jurisdiction to adjudicate interstate class actions, lawsuits that typically involve millions of dollars in dispute among thousands of parties residing in multiple jurisdictions. That change would aid resolution of the current state court class action crisis by eliminating restrictions that have forced both unnamed class members and defendants to have their claims heard before some tribunals that are ill-equipped to handle complex litigation and otherwise less vigilant about due process rights. Further, as Ms. Cabraser noted at the March 1998 House heating, the change would make available in most class actions the "statutory mechanisms" that federal courts (but not state courts) may wield "to manage (class) litigation," so that overlapping, competing class actions "can be transferred and coordinated in a single forum."23 And most importantly, the change would contribute to greater uniformity in the standards for deciding whether a controversy may be afforded class treatment.
As drafted in S.353, this solution would be implemented without undesirable side effects. The bill would not alter any party's substantive legal rights. The bill would not permit removal of truly local disputes; such matters would remain within the exclusive purview of the relevant state courts. And the bill would not preempt state courts' authority to hear class actions of any sort; if the parties prefer to litigate a particular interstate class action before an appropriate state court, they may do so.
The jurisdictional changes envisioned in S. 353 are entirely consistent with the current concept of federal diversity jurisdiction. At present, the statutory "gatekeeper" for federal diversity jurisdiction -- 28 U.S.C. 1332 -- essentially allows invocation of diversity jurisdiction in cases that are large (in terms of the "amount in controversy") and that have interstate implications (in terms of involving citizens from multiple jurisdictions). By nature, class actions typically fulfill these requirements. Because they normally involve so many people and so many claims, class actions invariably put huge sums into dispute and implicate parties from multiple jurisdictions. Yet, because section 1332 was originally enacted before the rise of the modem day class action, it did not take account of the unique circumstances presented by class actions. As a result, that section, as a technical matter, tends to exclude class actions from federal courts.24 That technical omission would be corrected by S. 353.
S. 353 would make this correction by amending 28 U.S.C. 1332 (the diversity jurisdiction statute) to extend federal diversity jurisdiction to cover any class action (with an aggregate amount in controversy in exceeding $75,000) in which there exists "partial diversity" between plaintiffs (including all unnamed members of any plaintiff class) and defendants, an approach wholly consistent with Article III of the Constitution.25 This expanded jurisdiction, however, would not encompass disputes that are not interstate in nature -- cases in which a class of citizens of one state sue one or more defendants that are citizens of that same state would remain subject to the exclusive jurisdiction of state courts. Further, federal courts would be required to abstain from heating certain local cases and state action cases. Thus, contrary to what has been argued by some critics, the bill would not move all class actions into federal court. Consistent with existing diversity jurisdiction precepts, it would preserve exclusively to state court jurisdiction what are primarily local controversies.
The amendments also would facilitate the removal to federal court of any purported class action that falls within the additional grant of federal diversity jurisdiction over class actions described above. The bill would not change the existing diversity jurisdiction removal procedures applicable to purported class actions, save for three exceptions intended to correct some of the tactics used by counsel to avoid federal jurisdiction over interstate class actions.26 In addition, the bill would authorize unnamed class members (not just defendants) to remove cases. This even-handed change would allow class members to move cases to federal court (within a reasonable time after notice is given) if they are concerned that the state court has not or will not adequately protect the absent class members' interests.
To avoid leaving before federal courts controversies not warranting the attention of the federal judiciary, the legislation would require a federal court to dismiss any case (that is in federal court solely due to the expanded diversity jurisdiction provisions) that it has determined may not be afforded class treatment. However, the bill specifies that an amended action may be refiled in state court. Further, the bill also protects the interests of the unnamed class members by specifying that federal tolling law will apply to the limitations periods on the claims asserted in the failed class action.
B. The Notice Provisions. The bill contains provisions (a) requiting that any formal, court- ordered notice to the class contain a "short summary written in plain, easily understood language" and (b) otherwise detailing the required contents of such notices. Further, the bill requires that the Attorney General of the United States and the attorneys general of any states in which class members reside be notified of any proposed class action settlement. As noted above, many state courts have not been vigilant about protecting the tights of unnamed class members, particularly those with clams that arguably may be more significant than the claims of the average class member. Further, some courts have not adequately balanced attorney compensation with what has been achieved for the class.
Many of these problems will be alleviated if the federal courts are allowed to hear more interstate class actions. However, expanding public awareness of proposed class actions and proposed settlements thereof will lessen the possibility that class actions will injure the unnamed class members that they are intended to benefit.
C. Attorney's Fees Provisions.
As was detailed previously, attorney's fees are the root cause of the tidal wave of class actions that we are experiencing and of the most serious class action abuses that we are seeing. S. 353 would limit such fees to a "reasonable percentage of the amount of: (a) damages actually paid to the class, Co) future financial benefits to the class attributable to the cessation of alleged improper conduct, and (c) costs actually incurred by defendants in complying with terms of any order or agreement. Reasonable lodestar fees will be available in any event.
These are very modest fee limitations. They do not address the fact "percentage of fund" fee awards in class actions are usually wholly unwarranted. Allowing plaintiffs' counsel to receive a significant percentage of the recovery in an individual lawsuit might be justified as bearing some relationship to the amount that an attorney legitimately should expect for prosecuting the claim (particularly when the attorney and his/her client presumably have agreed on the percentage). But a major purpose of a class action device is to achieve efficiencies - to prosecute large numbers of claims simultaneously with substantially reduced effort for all involved. Thus, counsel prosecuting a class action cannot reasonably expect a substantial percentage of whatever fund is created as a result of prosecuting a whole class of claims - there must be a substantial discount reflecting the efficiency of the class exercise. Otherwise, counsel are receiving a major, totally unjustifiable windfall.
In short, if enacted, the attorney's fees provisions in S. 353 will not substantially slow the engine driving class action growth. However, the bill's provisions are modest steps in the right direction. They do have the potential to curtail some of the more egregious fee abuses,especially the tendency by some counsel to claim fees on the basis of theories of speculative, amorphous benefits to the class.
III. CONCLUSION.
Thank you again for the opportunity to comment on S. 353. I respectfully urge the Subcommittee to recommend the bill favorably to the full Judiciary Committee. 1 Opening Statement of Sen. Herb Kohl, "Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees," S. Hrg. 105-504 (Oct. 30, 1997).
2 Unless otherwise noted, quotations attributed to witnesses at the "March 1998 Hearing" are from the prepared statements of those persons submitted for the hearing.
3 Analysis.

' Class Action Litigation - A Federalist Society Survey," Class Action Watch (Federalist Society Litigation and Practice Group, Class Action Subcommittee) at 1 (Vol. 1, No. 1).
4 Id. at 5.
5 Id.
6 Id at 7.
7 Id.
8 Id. at 8.
9 Id. The survey also contains data supporting the view of Mr. McGoldrick and others noted above that class actions provide extraordinary leverage to force settlements, regardless of whether those settlements make sense for either the class members or the defendants. Id. at 7-8.
10 The attorneys who brought the lawsuit have even set up a website regarding the action - at "www. toothbrush.corn." Among other things, it advises that if one suspects that he/she has toothbrush abrasion, they should "(f)irst, take care of your health" and then second, call for more infomation about the lawsuit at 1-877-SORE GUMS.
11 Not Too Abrasive, But Suit Causes Ache, Chicago Tribune, April 14, 1999, Oat Business 1.
12 Rubs the Wrong Way, Chicago Sun-Times, April 22, 1999, at 30.
13 See, e.g., In re Ford Motor Co. Bronco II Prod. Liab. Litig., 177 F.R.D. 360, 368 (E.D. La. 1996) (denying class certification because requested relief "does not encompass death, injury, property damage or other consequential damage"; noting that "by attempting to tailor their action in such a way as to improve their ability to establish commonality, class representatives may in fact create an adequacy problem"); Feinstein v. The Firestone Tire and Rubber Co., 535 F. Supp. 595, 600-01 (S.D.N.Y. 1982).
14 In the trial court, the action is captioned Snider v. State Farm Mut. Auto. Ins. Co., No. 97-L-114 (Ill. Cir. Ct.., Williamson County). 15 See Insurance Indus. Litig. Reporter, April 1, 1998, at 18 (noting that the Illinois Supreme Court had denied petitions to halt the action).
16 See Speroni v. State Farm Mut. Auto. Ins. Co. v. Speroni, 119 S. Ct. 276 (1998).
17 This lawsuit is captioned Smith v. General Motors Corp., et al., Civ. A. No. 97-39 (Cir. Ct. Coosa County, Ala.). Although the trial court initially certified a nationwide class in this action before the defendants were even served, the court subsequently lifted that order.
18 The Alabama Supreme Court has recently issued several rulings that may dampen this behavior. But when such action is taken in one state, counsel simply move the class action show to another jurisdiction where the courts have shown a lax attitude toward regulating the class device.
19 See Federal News Service Transcript, Mass Torts and Class Actions: Hearing before the Subcomm. on Intellectual Property and the Courts, House Comm. on the Judiciary (March 9, 1998), at 19 ("FNS Transcript").
20 Id. at 19-20.
21 Id. at 33-34.G
22 Id at 42.
23 See 28 U.S.C. 1407 (statute providing for transfer and consolidation of actions through multidistrict litigation mechanism).
24 At present, class actions not presenting federal questions often may not be brought in or removed to federal courts under diversity jurisdiction theories becauU.S. Supreme Court decisions interpreting section 1332. First, in Snyder v. Harris, 394 U.S. 332, 340 (1969), the Court ruled that in determining whether the parties satisfied the diversity prerequisite, a court should look only to the named parties (ignoring the unnamed class members). That ruling allows class proponents to avoid federal diversity jurisdiction by naming as plaintiffs parties who are non-diverse with a defendant, even though a significant number of the unnamed class members (if not the vast majority of class members) do not share the defendant's citizenship. Second, in Zahn v. International Paper Co., 414 U.S. 291 (1973), the Court held that the "amount in controversy" requirement in section 1332 is satisfied in a purported class action only if each and every member of the purported class is shown separately to satisfy the jurisdictional amount threshold (presently $75,000). That ruling means that even though class actions invariably are huge controversies, involving millions (or billions) of dollars of claimed damages, they cannot be heard in federal court. For example, an action involving 100,000 class members may put millions of dollars at stake, but it would not be subject to federal jurisdiction unless each class member had $75,000 at issue or a total of $7.5 billion for the purported class!
25 See, e.g., State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967) ("in a variety of contexts, (federal courts) have concluded that Article III poses no obstacle to the legislative extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are not co-citizens"). In State Farm, the Court noted that the concept of "minimal diversity" providing the basis for diversity jurisdiction in the class action context had already been discussed in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). On several subsequent occasions, the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction where there is less than complete diversity among the parties is wholly consistent with Article III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 199-200 (O'Connor, $., dissenting) ("Complete diversity.., is not constitutionally mandated."); Newman- Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826 (1989) ("The complete diversity requirement is based on the diversity statute, not Article III of the Constitution."); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978) ("It is settled that complete diversity is not a constitutional requirement."); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity).
26 First, the legislation would amend 28 U.S.C. 1441(b) to contra defendants' ability to remove all purported class actions qualifying for federal jurisdiction under the revised section 1332 (as discussed above) regardless of the state in which the action was originally brought.
Second, 28 U.S.C. 1446(b) would be amended to provide that a defendant could remove a putative class action at any time (even at a date more than one year after commencement of the action), so long as the action is removed within 30 days after the date on which the defendants may first ascertain (through a pleading, amended pleading, motion order or other paper) that the action satisfies the jurisdictional requirements for class actions (as set forth in the proposed section 1332(b)). This provision is intended to prevent parties from filing cases as individual actions and then recasting them as purported class actions (or as broader class actions) after the one-year deadline for removal has passed.
Third, S. 353 would amend 28 U.S.C. 1446(a) to allow any class action defendant to remove an action. At present, an action typically may be removed only if all defendants concur. This provision is intended to address situations in which local defendants with little at risk or defendants "friendly" to the named plaintiffs may preclude other defendants with substantial exposure from gaining access to federal court.
END

LOAD-DATE: May 6, 1999

Document 16 of 29.


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