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``(f) Nothing in this section shall be construed to impose any obligations, duties, or
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``(a) In any class action, the total attorney's fees and expenses awarded by the court to counsel for the plaintiff class may not exceed a reasonable percentage of the amount of--
``(1) any damages and prejudgment interest actually paid to the class;
``(2) any future financial benefits to the class based on the cessation of alleged improper conduct by the defendants; and
``(3) costs actually incurred by all defendants in complying with the terms of an injunctive order or settlement agreement.
``(b) Notwithstanding subsection (a), to the extent that the law permits, the court may award attorney's fees and expenses to counsel for the plaintiff class based on a reasonable lodestar calculation.''.
(b) TECHNICAL AND CONFORMING AMENDMENT.--The table of chapters for part V of title 28, United States Code, is amended by inserting after the item relating to chapter 113 the following:
``114. Class Actions
1711''.
SEC. 3. DIVERSITY JURISDICTION FOR CLASS ACTIONS.
Section 1332 of title 28, United States Code, is amended--
(1) by redesignating subsection (d) as subsection (e); and
(2) by inserting after subsection (c) the following:
``(d)(1) In this subsection, the terms `class', `class action', and `class certification order' have the meanings given such terms under section 1711.
``(2) The district courts shall have original jurisdiction of any civil action where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is a class action in which--
``(A) any member of a class of plaintiffs is a citizen of a State different from any defendant;
``(B) any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or
``(C) any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.
``(3) The district court shall abstain from hearing a civil action described under paragraph (2) if--
``(A)(i) the substantial majority of the members of the proposed plaintiff class are citizens of a single State of which the primary defendants are also citizens; and
``(ii) the claims asserted will be governed primarily by the laws of that State; or
``(B) the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief.
``(4) In any class action, the claims of the individual members of any class shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs.
``(5) This subsection shall apply to any class action before or after the entry of a class certification order by the court.
``(6)(A) A district court shall dismiss, or, if after removal, strike the class allegations and remand, any civil action if--
``(i) the action is subject to the jurisdiction of the court solely under this subsection; and
``(ii) the court determines the action may not proceed as a class action based on a failure to satisfy the conditions of rule 23 of the Federal Rules of Civil Procedure.
``(B) Nothing in subparagraph (A) shall prohibit plaintiffs from filing an amended class action in Federal or State court.
``(C) Upon dismissal or remand, the period of limitations for any claim that was asserted in an action on behalf of any named or unnamed member of any proposed class shall be deemed tolled to the full extent provided under Federal law.
``(7) Paragraph (2) shall not apply to any class action, regardless of which forum any such action may be filed in, involving any claim relating to--
``(A) the internal affairs or governance of a corporation or other form of entity or business association arising under or by virtue of the statutory, common, or other laws of the State in which such corporation, entity, or business association is incorporated (in the case of a corporation) or organized (in the case of any other entity); or
``(B) the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 or the rules and regulations adopted under such Act).''.
SEC. 4. REMOVAL OF CLASS ACTIONS TO FEDERAL COURT.
(a) IN GENERAL.--Chapter 89 of title 28, United States Code, is amended by adding after section 1452 the following:``§1453. Removal of class actions
``(a) In this section, the terms `class', `class action', and `class member' have the meanings given such terms under section 1711.
``(b) A class action may be removed to a district court of the United States in accordance with this chapter, except that such action may be removed--
``(1) by any defendant without the consent of all defendants; or
``(2) by any plaintiff class member who is not a named or representative class member without the consent of all members of such class.
``(c) This section shall apply to any class action before or after the entry of any order certifying a class.
``(d) The provisions of section 1446 relating to a defendant removing a case shall apply to a plaintiff removing a case under this section, except that in the application of subsection (b) of such section the requirement relating to the 30-day filing period shall be met if a plaintiff class member files notice of removal within 30 days after receipt by such class member, through service or otherwise, of the initial written notice of the class action.
``(e) This section shall not apply to any class action, regardless of which forum any such action may be filed in, involving any claim relating to--
``(1) the internal affairs or governance of a corporation or other form of entity or business association arising under or by virtue of the statutory, common, or other laws of the State in which such corporation, entity, or business association is incorporated (in the case of a corporation) or organized (in the case of any other entity); or
``(2) the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 or the rules and regulations adopted under such Act).''.
(b) REMOVAL LIMITATION.--Section 1446(b) of title 28, United States Code, is amended in the second sentence by inserting ``(a)'' after ``section 1332''.
(c) TECHNICAL AND CONFORMING AMENDMENTS.--The table of sections for chapter 89 of title 28, United States Code, is amended by adding after the item relating to section 1452 the following:
``1453. Removal of class actions.''.
SEC. 5. REPRESENTATIONS AND SANCTIONS UNDER RULE 11 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
Rule 11(c) of the Federal Rules of Civil Procedure is amended--
(1) in the first sentence by striking ``may, subject to the conditions stated below,'' and inserting ``shall'';
(2) in paragraph (2) by striking the first and second sentences and inserting ``A sanction imposed for violation of this rule may consist of reasonable attorneys' fees and other expenses incurred as a result of the violation, directives of a nonmonetary nature, or an order to pay penalty into court or to a party.''; and
(3) in paragraph (2)(A) by inserting before the period ``, although such sanctions may be awarded against a party's attorneys''.
SEC. 6. EFFECTIVE DATE.
The amendments made by this Act shall apply to any civil action commenced on or after the date of enactment of this Act.
Mr. KOHL. Mr. President, Senator GRASSLEY and I today introduce the Class Action Fairness Act of 1999. This legislation addresses growing problems in class action litigation, particularly unfair and abusive settlements that shortchange class members while class lawyers line their pockets with high fees.
Let me share with you just a few disturbing examples.
First, one of my constituents, Martha Preston of Baraboo, Wisconsin, was an unnamed member of a class action lawsuit against her mortgage company that ended in a settlement. While at first she got $4 and change in compensation, a few months later her lawyers surreptitiously took $80--twenty times her compensation--from her escrow account to pay their fees. In total, her lawyers managed to pocket over $8 million in fees, but never explained that the class--not the defendant--would pay the attorneys' fees. Naturally outraged, she and others sued the class lawyers. Her lawyers turned around and sued her in Alabama--a state she had never visited--and demanded an unbelievable $25 million. So not only did she lose $75, she was forced to defend herself from a $25 million lawsuit.
Second, class lawyers and defendants often engineer settlements that leave plaintiffs with small discounts or coupons unlikely ever to be used. Meanwhile, class lawyers reap big fees based on unduly optimistic valuations. For example, in a settlement of a class action against major airlines, most plaintiffs received less than $80 in coupons while class attorneys received $14 million in fees based on a projection that the discounts were worth hundreds of millions. In a suit over faulty computer monitors, class members got $13 coupons, while class lawyers pocketed $6 million. And in a class action against Nintendo, plaintiffs received $5 coupons, while attorneys took almost $2 million in fees.
Third, competing federal and state class actions engage in a race to settlement, where the best interests of the class lose out. For example, in one state class action the class lawyers negotiated a small settlement precluding
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Fourth, class actions are often filed in state courts that are more likely to give inadequate consideration to class certification and class settlements. On several occasions, a state court has certified a class action although federal courts rejected certification of the same case. And in several Alabama state courts, 38 out of 43 classes certified in a three-year period were certified on an ex parte basis, without notice and hearing. One Alabama judge acting ex parte certified 11 class actions in 1997 alone. Comparably, only an estimated 38 class actions were certified in federal court that year (excluding suits against the U.S. and suits brought under federal law). This lack of close scrutiny appears to create a big incentive to file in state court, especially given the recent findings of a Rand study that class actions are increasingly concentrated in state courts.
Fifth, in nationwide class actions filed in state court, class lawyers often manipulate the pleadings to avoid removal to federal court, even by minimizing the potential claims of class members. For example, state class actions often seek just over $74,000 in damages per plaintiff, and forsake punitive damage claims, to avoid the $75,000 floor that qualifies for federal diversity jurisdiction. Or they defeat the federal requirement of complete diversity by naming one class member who is from the same state as a defendant, even if all other class members are from different states.
Finally, out-of-state defendants are often hauled into state court to address nationwide class claims, although federal courts are a more appropriate and more efficient forum. For example, an Alabama court is now considering a class action--and could establish a national policy--in a suit brought against the big three automakers on behalf of every American who bought a dual-equipped air bags over an eight-year period. The defendants failed in their attempt to remove to federal court based on an application of current diversity laws. And, unlike federal courts, states are unable to consolidate multiple class actions that involve the same underlying facts.
These examples show that abuse of the class action system is not only possible, but real. And the incentives and realities of the current system are a big part of the problem.
A class action is a lawsuit in which an attorney not only represents an individual plaintiff, but, in addition, seeks relief for all those individuals who suffered a similar injury. Prospective class members are usually sent notice about the class action, and are presumed to join it, unless they specifically ask to be left out. When these suits are settled, all class members are notified of the terms of the settlement and given the chance to object if they don't think the settlement is fair. A court must ultimately approve a settlement agreement.
The vast majority of these suits are brought and settled fairly and in good faith. Unfortunately, the class action system does not adequately protect class members from the few unscrupulous lawyers who are more interested in big attorneys' fees than compensation for their clients, the victims. The primary problem is that the client in a class action is a diffuse group of thousands of individuals scattered across the country, which is incapable of exercising meaningful control over the litigation. As a result, while in theory the class lawyers must be responsive to their clients, the lawyers control all aspects of the litigation.
Moreover, during a class action settlement, the amount of the attorney fee is negotiated between plaintiffs' lawyers and the defendants, just like other terms of the settlement. But in most cases the fees come at the expense of class members--the only party that does not have a seat at the bargaining table.
In addition, defendants may use class action settlements to advance their own interests. Paying a small settlement generally precludes all future claims by class members. So defendants have ample motivation to give class lawyers the fees they want as the price for settling all future liabilities.
As a result, it is easy to see how class members are left out in the cold. Although the judge is supposed to determine whether the settlement is fair before approving it, class lawyers and defendants ``may even put one over on the court, a staged performance. The lawyers support the settlement to get fees; the defendants support it to evade liability; the court can't vindicate the class's rights because the friendly presentation means that it lacks essential information,'' Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348, 1352 (Easterbrook, J., dissenting) (7th Cir. 1996).
Although class members get settlement notices and have the opportunity to object, they rarely do so, especially if they have little at stake. Not only is it expensive to get representation, but also it can be extremely difficult to actually understand what the settlement really does. Settlements are often written in long, finely printed letters with incomprehensible legalese,
which even well-trained attorneys are hard pressed to understand. And settlements often omit basic information like how much money will go toward attorneys' fees and where that money will come from. In Martha Preston's case, one prominent federal judge found that ``the notice not only didn't alert the absent class members to the pending loss but also pulled the wool over the state judge's eyes,'' id.
We all know that class actions can result in significant and important benefits for class members and society, and that most class lawyers and most state courts are acting responsibly. Class actions have been used to desegregate racially divided schools, to obtain redress for victims of employment discrimination, and to compensate individuals exposed to toxic chemicals or defective products. Class actions increase access to our civil justice system because they enable people to pursuant claims collectively that would otherwise be too expensive to litigate.
The difficulty in any effort to improve a basically good system is weeding out the abuses without causing undue damage. The legislation we propose attempts to do this. It does not limit anyone's ability to file or settle a class action. It seeks to address the problem in several ways. First, it requires that State attorneys general be notified about proposed class action settlements that would affect residents of their states. With notice, the attorneys general can intervene in cases where they think the settlements are unfair.
Second, the legislation requires that class members be notified of a potential settlement in clear, easily understood English--not legal jargon.
Third, it limits class attorneys' fees to a reasonable percentage of the actual damages received by plaintiffs or to reasonable hourly fees. This will deter class lawyers from using inflated values of coupon settlements to reap big fees. Some courts have already embraced this standard, which parallels the recent securities reform law.
Fourth, it permits removal to federal court of certain class actions involving citizens of multiple states, at the request of unnamed class members or defendants. This provision eliminates gaming by class lawyers to keep cases in state court and, through consolidation of related cases in federal court, helps prevent a race to settlement between competing class actions.
Finally, it amends Rule 11 of the Federal Rules of Civil Procedures to require the imposition of sanctions for filing frivolous lawsuits, although the nature and extent of sanctions remains discretionary. This provision will deter the filing of frivolous class actions.
Let me emphasize the limited scope of this legislation. We do not close the courthouse door to any class action. We do not require that State attorneys general do anything with the notice they receive. We do not deny reasonable fees for class lawyers. And we do not mandate that every class action be brought in federal court. Instead, we simply promote closer and fairer scrutiny of class actions and class settlements.
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