Under the United States Constitution, when a large lawsuit involves citizens from different states or a foreigner, federal courts are given primary jurisdiction. The inclusion of this provision was neither a historical accident nor act of whimsy on the part of the Founding Fathers; they purposefully wanted to limit discrimination against out-of-state litigants. They did not, however, foresee the rise of modern-day class action lawsuits. Thus, current judicial rules provide that as long as at least one defendant and one plaintiff in a lawsuit are from the same state, then the suit can proceed in that state’s court system, even if the case involves millions of plaintiffs and is truly interstate or national in nature. It is time for judicial procedures to catch up with reality, which is why the National Association of Manufacturers strongly supports S. 353, the Class Action Fairness Act, and H.R. 1875, the Interstate Class Action Jurisdiction Act.

Issue
Should rules governing whether class-action lawsuits are heard in federal versus state courts be updated?

NAM Position
Class-action lawsuits should be heard in federal court if they are national in nature, either because the composition of plaintiffs or defendants is nationwide or because any ruling or settlement will impact the laws of more than one state.

Background
As provided for in the Constitution, a lawsuit involving litigants from different states or countries is eligible to be heard in federal court. This is true even in cases where the federal court will be applying the relevant state statute subject to the state’s case law. Under the doctrine of "complete diversity" however, current federal rules stipulate that as long as one defendant and one plaintiff are from the same state, then the case should be heard in that state’s courts. In addition, even when complete diversity exists, the amount in controversy must be a minimum of $75,000 per plaintiff. These rules form the basis for how clever trial lawyers claiming to represent a class of plaintiffs are able to engage in the game of "forum shopping."

The first step is for a lawyer or law firm to devise a scheme to sue a company over some alleged harm. The next step is to use all means necessary to ensure that there are as many people in the class as possible. Under current rules, class members don’t even have to agree or be aware that they are part of the class action. Thus, an alleged harm resulting in only minimal damages of $1.00 per plaintiff suddenly multiplies into $25 million if there are 25 million members of the class. (Conversely, if the alleged harm itself is large and the class is so well-defined that you can’t just name person after person, a good trial attorney will make sure that such claims as "mental anguish" are low so that the total is less than $75,000 per plaintiff. This allows him or her to continue to shop for friendly forums.)

In deciding where to file a lawsuit, many lawyers play it safe and go to a local courthouse that is known for favoring plaintiffs and has a loose definition for what constitutes a class (although the lawyers may have to name a local retailer or distributor to ensure that the case remains under the jurisdiction of the court of choice). Once the class is certified, this leverage is used to try to extract a settlement. Even though the claim may be frivolous, it might make more business sense for the defendant to settle by giving class members a coupon for their next purchase of the product. The trial attorneys fee? Up to 40 percent of the settlement value. Class members may or may not have won something of value – indeed, they may have lost money!

If this sounds as if it can’t be true, consider the following real-world cases:

• Lawyers claiming to represent aggrieved fans of the singing group Milli Vanilli won their clients $1 to $3 each, while the lawyers were awarded $675,000. They then petitioned the court for fees of $1.9 million.
• Consumers of a breakfast cereal received coupons for a free box on their next purchase while the lawyers were paid nearly $2 million. At issue was a food additive for which no injury has ever been proven.
• Unsuspecting mortgage payers were assessed a charge of more than $90 from their escrow account after "winning" a class-action settlement; their lawyers received $8.5 million.
• A current lawsuit seeking unspecified damages accuses toothbrush makers of causing tooth abrasion.

Bipartisan legislation has been introduced in the 106^th Congress to change diversity rules back to the intentions of the Founders. Both S. 353, the Class Action Fairness Act, and H.R. 1875, the Interstate Class Action Jurisdiction Act, would give federal courts primary jurisdiction in lawsuits where at least one plaintiff and one defendant are from different states, and the class comprises at least 100 people. Moreover, S. 353 requires that the amount in controversy be at least $2 million, while H.R. 1875 stipulates that the total amount in controversy must be more than $1 million. Both would also ensure that local cases remain in state courts.

The legislation does not change any substantive law, nor would it deny legitimate plaintiffs their day in court. It would, however, provide for important improvements. First, it would remove what bias exists among elected state court judges whose primary contributors are members of the plaintiffs’ bar. The federal judiciary also would be more likely to consider the national impact of a case’s resolution where state laws may not be in conformity. In addition, federal judges are more prone to look after the interests of class members.

A justified concern is the effect on the caseload of federal judges if the legislation is enacted. The impact should not, however, be as great as it may at first appear. Under current rules, for example, class-action lawsuits are sometimes filed in multiple jurisdictions – the federal judiciary would find it easier to consolidate these. And, since federal judges are less tolerant of out-of-line lawyers’ fees and frivolous claims, there would be less incentive to bring questionable cases.

Status
The NAM participated in a press conference on May 19, 1999, to praise Reps. Robert Goodlatte (R-VA-6), Rick Boucher (D-VA-9), Ed Bryant (R-TN-7) and Jim Moran (D-VA-8) for their introduction that day of H.R. 1875. The House Judiciary Committee favorably reported the bill to the full House by a vote of 15-12 on Aug. 3, 1999. The full House passed H.R. 1875 on Sept. 23, 1999, by a vote of 222-207. S. 353 was introduced by Sen. Charles Grassley (R-IA) on Feb. 3, 1999, along with Sens. Herb Kohl (D-WI) and Strom Thurmond (R-SC). S. 353 cleared the full Senate Judiciary Committee on June 29, 2000, by a vote of 11-7. It is pending consideration by the full Senate.