Class Actions after the Class Action Fairness Act of 2005
25 Pages Posted: 14 Jul 2006
The Class Action Fairness Act of 2005 (CAFA) is the most significant change in class action practice since the federal class action rule (Rule 23) was amended in 1966. It is primarily a jurisdictional act, accomplishing the transfer to federal courts of most multistate class actions. It accords federal-court original jurisdiction on a minimal diversity basis (which can easily be satisfied in multistate class actions) when the aggregate amount in controversy is $5 million. It also permits removal by any defendant if suit has been filed in a state court. It represents years of lobbying by business interests and was particularly directed at plaintiff forum-shopping in target venue state courts for multistate class actions. Whether it goes too far in depriving state courts of jurisdiction over large areas of class actions that are arguably local in character was much debated. CAFA also imposes restrictions on settlements and attorneys' fees which are partly duplicative of requirements already in Rule 23 and therefore relatively inconsequential, except for a burdensome and ill-defined requirement that government officials be notified before any class settlement can be approved.
CAFA will have considerable impact on how attorneys structure and conduct class actions. It contains some limited exceptions intended to preserve state court jurisdiction over cases which primarily involve the forum state's citizens. The home state exception applies when 2/3 or more of the plaintiff class and the primary defendants are citizens of the forum state. The local controversy exception is a variation, relaxing the requirement that all primary defendants be from the forum state. It applies if 2/3 of the plaintiff class and at least one defendant from whom significant relief is sought (and whose conduct forms a significant basis for the claims) is a citizen of the forum state. The largely untested terms of the exceptions and examples are discussed.
It seems likely that CAFA will result in a reduction in the number of multistate class actions. If plaintiffs' attorneys are intent on staying in state courts they may try to structure class actions to comply with one of the exceptions. However, that is not possible if a primary defendant is an out-of-state corporation (unless the limited circumstances of the local controversy exception are met). Thus the federal courts may be the only game in town for class actions against out-of-state defendants. The federal circuits differ as to their receptivity to class actions, and certification of multistate class actions is extremely difficult in some circuits. In addition, if the laws of a number of states have to be applied in a multistate class action, plaintiffs may not be able to meet the predominance of common questions requirement for a class action. Thus the manner in which the various federal district and circuit courts deal with the choice-of-law issue will be determinative of whether very many multistate class actions can survive. The demise of most multistate class actions could undermine efficiency and uniformity of result - for example, when multiple state-only class actions have to be filed in different federal courts around the country against the same defendant based on the same product defect, business practice, or environmental condition. Defendants may see advantages in not having to defend against a single massive multistate class action, but when eyeing the possibility of settlement, they typically favor the preclusive effect of a global multistate settlement. How the federal courts react to plaintiff pressures to certify multistate class actions versus countervailing defendant objections based on strict choice-of-law standards will have to be played out in the future.
Keywords: Class Actions, Class Action Fairness Act of 2005, CAFA, Federal Courts, Jurisdiction, Minimal Diversity, Removal, Choice of Law, Settlement, Attorneys' Fees, Class Action Bill of Rights, and Multistate Class Actions
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