Client Alert

Class Action Fairness Act of 2005 Senate Bill S.5

2/14/2005

President Bush signed the Class Action Fairness Act into law on February 18, 2005. The asserted purposes of the Class Action Fairness Act are to reduce frivolous class action lawsuits, decrease forum shopping, and curb class settlements that provide significant fees to class counsel, with marginal benefits to class members. The Act facilitates the removal of large, multi-state class actions from state to federal court. Complete diversity of citizenship between plaintiffs and defendants will no longer be required for federal court jurisdiction over certain high-stakes, multi-state class actions based upon state law. The Act applies stricter scrutiny to coupon settlements, and in particular, to fee awards based upon coupon settlements.

Some of the key provisions of the Act are summarized below:

Original Jurisdiction of Federal Courts: The Act grants federal district courts original jurisdiction of any civil class action in which the matter in controversy (1) exceeds $5 million, exclusive of interest and costs, and (2) diversity of citizenship exists between any one member of the plaintiff class (whether a named plaintiff or not) and any defendant. The diversity of citizenship requirement is met where any plaintiff is a citizen of a State that is different from any defendant; or where the action is between a citizen of a State and a foreign State or a foreign citizen. Under certain circumstances specified in the Act, however, district courts must decline jurisdiction or exercise discretion in determining whether to decline jurisdiction over a class action based upon, among other things, the percentage of class members who are citizens of the forum State as well as whether a primary defendant is also a citizen of the forum State. For example, if two-thirds or more of the class members and the primary defendants are citizens of the forum State, a federal court must decline jurisdiction.

Removal: The Act sets forth provisions governing the removal of interstate class actions to federal district court and authorizes discretionary appellate review of district court orders granting or denying a motion to remand. The Act provides for expedited rulings on these appeals.

Coupon Settlements: If a coupon settlement is proposed, the court may approve the settlement only after it holds a hearing and makes a written finding that the settlement is fair, reasonable, and adequate to class members. The court may also require that the settlement provide for the distribution of a portion of the value of the unclaimed coupons to charitable or governmental organizations, as agreed to by the parties.

Attorneys' Fees in Coupon Settlements: If class counsel has a contingency fee arrangement with plaintiffs, then an award of attorneys' fees based upon a class settlement with coupons must be valued by the amount of coupons redeemed, rather than the value of coupons issued. Attorneys' fees awarded in other coupon settlements shall be based on the amount of time reasonably expended by class counsel. Alternatively, a court may apply a lodestar with a multiplier method to calculate attorneys' fees. The Act provides no guidance on attorneys' fees in non-coupon settlements.

Nonmonetary Benefits to Class: A settlement where any class member is obligated to pay sums to class counsel that would render a net loss to the class member may be approved only when the court finds that nonmonetary benefits to the class member substantially outweigh the monetary loss.

Prohibiting Geographic Discrimination: Courts will be prohibited from approving a settlement that provides for greater sums to certain class members based simply on their geographic proximity to the court.

Notice to State and Federal Officials: The Act provides for notification procedures to both federal and state officials with supervisory responsibilities over defendants before a proposed settlement may be approved.

Reporting on Class Action Settlements: The Act directs the Judicial Conference of the United States to report on class action settlements, incorporating recommendations for best court practices to ensure fairness for class members and appropriate fees for counsel.

Effective Date: The amendments made by the Act apply to civil actions commenced on or after February 18, 2005.

The Class Action Fairness Act does not strip state courts of jurisdiction over multi-state class actions, as has been widely misstated in the press. The Act does, however, create a new basis for removal of and federal jurisdiction over certain large, multi-state class actions that previously proceeded only in state courts. Although the new requirements for federal jurisdiction are complicated, the Act will likely result in the removal of a significant number of multi-state class action cases from state to federal court. Many speculate that this will decrease the number of cases where multi-state classes are certified. Others contend that large verdicts from runaway juries will be minimized. It is probably too soon to tell. What is certain, however, is defendants will now have a new weapon with which to fight forum shopping in state courts friendly to class action cases. At the same time, the increased scrutiny of coupon and other class action settlement provisions will no doubt alter the manner in which multi-state class actions can be resolved.

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