U.S. House of Representatives

Committee on the Judiciary

Henry J. Hyde, Chairman

For immediate release August 2, 1999

Contact: Sam Stratman/Michael Connolly (202) 225-2492

Full Judiciary Committee to Markup "Interstate Class Action Jurisdiction Act" Tuesday

The class action device is a necessary and important part of our legal system. It promotes efficiency by allowing plaintiffs with similar claims to adjudicate their cases in one proceeding; it also leads to the adjudication of claims where there are small harms to a large number of people, which would otherwise go unaddressed because the cost to individuals of suing would far exceed any possible benefit to the individual. However, in recent years class actions have been used with an increasing frequency and in ways that do not promote the interests they were intended to serve.

Class actions were initially created in state courts of law and equity, and in 1849 became statutory with the advent of the Field Code, which several states adopted.⁽¹⁾ In 1938, a federal class action rule was first enacted in the form of Federal Rule of Civil Procedure 23.⁽²⁾ Rule 23 was substantially amended in 1966, and granted courts more flexibility in certifying class actions.⁽³⁾ The Field Code, the original federal Rule 23 and amended federal Rule 23 remain the three models for present-day state class action rules: 36 states have adopted amended federal Rule 23; seven still use rules modeled on the original federal Rule 23;⁽⁴⁾ and four still use Field Code-based class rules.⁽⁵⁾ Three states still permit class actions at common law and have no formal class rules.⁽⁶⁾

As a result of the adoption of different class action certification standards in the various states, the same class might be certifiable in one state and not another, or certifiable in state court but not in federal court. This creates the potential for abuse of the class action device, particularly when the case involves parties from multiple states and/or requires the application of the laws of many states. For example, some state courts routinely certify classes before the defendant is even served with a complaint and given a chance to defend itself. Other state courts employ very lax class certification criteria, rendering virtually any controversy subject to class action treatment. There are instances where a state court, in order to certify a class, has determined that the law of that state applies to all claims, including those of purported class members who live in other jurisdictions. This has the effect of making the law of that state applicable nationwide.

The existence of state courts which broadly apply class certification rules encourages plaintiffs to forum shop for the court which is most likely to certify a purported class. In many instances, the fact that a class is certified will determine the outcome of the case. Because the cases are brought on behalf of thousands (and sometimes millions) of claimants, the potential exposure for a defendant is enormous. Plaintiffs' counsel can use this potential exposure to coerce settlements that offer minimal benefits to the class members, but which result in hefty attorneys' fees.

Another problem created by the ability of state courts to certify class actions which adjudicate the rights of citizens of many states is that often times more than one case involving the same class is certified at the same time. In the federal court system, those cases involving common questions of fact may be transferred to one district for coordinated or consolidated pretrial proceedings. See 28 U.S.C. 1407. When these class actions are pending in state courts, however, there is no corresponding mechanism for cogently adjudicating the competing suits. Instead, a settlement or judgment in any of the cases makes the other class actions moot. This creates an incentive for each class counsel to obtain a quick settlement of the case, and an opportunity for the defendant to play the various class counsel against each other and drive the settlement value down. Again, the loser is the putative class member whose claim is extinguished by the settlement, at the expense of counsel seeking to be the one entitled to recovery of fees.

H.R. 1875 is intended to prevent these abuses by allowing large interstate class action cases to be heard in federal court. It would expand the statutory diversity jurisdiction of the federal courts to allow class action cases involving minimal diversity - that is, when any plaintiff and any defendant are citizens of different states - to be brought in or removed to federal court.

Article III of the Constitution empowers Congress to establish federal jurisdiction over diversity cases - cases "between citizens of different States." The grant of diversity jurisdiction was premised on concerns that state courts might discriminate against out of state defendants. Since 1806, with some exceptions, the federal courts have followed the rule of Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806), which states that federal jurisdiction lies only where all plaintiffs are citizens of states different than all defendants. This is known as the "complete diversity" rule.⁽⁷⁾

In a class action, only the citizenship of the named plaintiffs is considered for determining diversity, which means that federal diversity jurisdiction will not exist if the named plaintiff is a citizen of the same state as the defendant, regardless of the citizenship of the rest of the class. See Snyder v. Harris, 394 U.S. 332 (1969). And, since the early days of the country, Congress has imposed a monetary threshold -- now $75,000 -- for federal diversity claims. 28 U.S.C. 1332(a). However, the amount in controversy requirement is satisfied in a class action only if all of the class members are seeking damages in excess of the statutory minimum. See Zahn v. International Paper Co., 414 U.S. 291 (1973).

These jurisdictional statutes were originally enacted years ago, well before the modern class action arose, and they lead to perverse results. For example, under current law a citizen of one state may bring in federal court a simple $75,001 slip-and-fall claim against a party from another state. But if a class of 25 million product owners living in all 50 states brings claims collectively worth $15 billion against the manufacturer, the lawsuit usually must be heard in state court. The current statutes also allow attorneys to game the system to keep class actions out of federal court. Attorneys often name irrelevant parties to their class actions in an effort to "destroy diversity" - that is, to keep the case from qualifying for federal diversity jurisdiction. Further, counsel make other statements about the case to keep the defendant from removing the case to federal court (e.g., "plaintiffs seek only a very small amount of money in this case"). After one year, however, the attorneys recant those statements, since at that point, current statutes bar removal of the case to federal court.

H.R. 1875 would amend the diversity jurisdiction and removal statutes applicable to class actions to allow federal jurisdiction where there is a substantial risk of discrimination against out of state defendants. It amends 28 U.S.C. 1332 to grant original jurisdiction in the federal courts to hear interstate class actions where any member of the proposed class is a citizen of a state different from any defendant. An interstate class action would not include:

(1) intrastate cases - cases in which a "substantial majority" of the class members and defendants are citizens of the same state and the claims will be governed primarily by that state's law.

(2) limited scope cases - cases involving fewer than 100 class members or where the aggregate amount in controversy is less than $1 million.

(3) state action cases - cases where the primary defendants are states or state officials, or other governmental entities against whom the district court may be foreclosed from ordering relief.

If a case is filed in state court where the federal court has original jurisdiction under the amended section 1332, H.R. 1875 would allow its removal using the existing procedures contained in Chapter 89 of Title 28, with three new features:

(1) Unnamed class members (plaintiffs) may remove to federal court class actions in which their claims are being asserted within 30 days after formal notice. Under current rules only the defendants are allowed to remove.⁽⁸⁾ See 28 U.S.C. 1446.

(2) Removal of class actions to federal court would available to (a) any defendant without the consent of all defendants or (b) any plaintiff class member without the consent of all members. Current removal rules - which apply only to defendants - require the consent of all defendants.

(3) Section 1446 of Title 28 requires that a notice of removal be filed within 30 days of the receipt by the defendant of a copy of the pleading which gives notice of grounds for removal. However, that section bars the removal of cases to federal court after one year, even if the basis for removal does not occur until after that time. H.R. 1875 would eliminate the bar to removal of class actions after one year, and would apply the same removal notice rules to plaintiffs.

Under H.R. 1875, if a removed class action is found not to meet the requirements for proceeding on a class basis, the federal court would dismiss the action without prejudice. Plaintiffs would then be permitted to refile their claims in state court, presumably in a form amended either to fall within one of the types of cases not considered interstate class actions, or to be maintainable as a class action under federal Rule 23. The statute of limitations on individual class members' claims in such a dismissed class action would not run during the period the action was pending in federal court.

Section 4(d) of the Act expressly provides that it will not alter the substantive law governing any claims as to which jurisdiction is conferred under section 3. The effect of the Act is prospective only; it will apply only to cases commenced on or after the date of enactment.

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1. The Field Code required numerous parties and a common interest in law or fact. It reads, in part: "[W]hen the question is one of a common or general interest of many persons, or when the parties are very numerous and it may be impracticable to bring them all before the court, one or more may sue or defend for the benefit of the whole." See Newberg on Class Actions 3d Chap. 13 (1997).

2. The original Rule 23 recognized three types of class actions: the "true" class action involving joint rights in which a class decision was res judicata; the hybrid category involving several rights relating to specific property; and the "spurious" class action involving several rights affected by common questions, as to which the result was res judicata only as to the parties actually joined. Testimony of John P. Frank, Senate Committee on the Judiciary, May 4, 1999.

3. Current Rule 23 limits class action suits to instances where: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a).

4. Alaska, Georgia, Louisiana, New Mexico, North Carolina, Rhode Island, and West Virginia.

5. California, Nebraska, South Carolina, and Wisconsin.

6. Mississippi, New Hampshire, and Virginia.

7. The Supreme Court has regularly recognized that the decision to require complete diversity, and to set a minimum amount in controversy, are political decisions not mandated by the Constitution. See, e.g., Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826, 829 n.1 (1989). It is therefore the prerogative of the Congress to broaden the scope of diversity jurisdiction to any extent it sees fit, as long as any two adverse parties to a lawsuit are citizens of different states. See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967).

8. In 1875, the right to remove was extended to plaintiffs as well as defendants, but the experiment was short-lived, and in 1887, the predecessor of 28 U.S.C. 1441 once again restricted removal to defendants only. In individual cases, this reflects the fact that the plaintiff has chosen voluntarily to submit to the jurisdiction of the state court by choosing to file suit there. This rationale does not apply in the case of putative plaintiff class members who did not control the decision as to where to bring a class action.