• Class Action Fairness Act
  • March 7, 2005 | Authors: Jeffrey S. Jacobson; John S. Kiernan
  • Law Firm: Debevoise & Plimpton LLP - New York Office
  • President Bush today signed the Class Action Fairness Act of 2005 ("CAFA") into law. Under CAFA's provisions, which will apply to any new lawsuit filed after today, companies should no longer find themselves subject to putative nationwide class actions in state courts that are perceived to be more open to hearing such cases. For this reason alone, CAFA is a positive development for the business community. CAFA does not, however, signal the end of class actions, or even of state court class actions, and it may make cases that now will proceed in federal court somewhat more difficult to litigate and more expensive to settle. Clients faced with state court class actions in the post-CAFA era thus should consider their options carefully before removing them to federal court.

    Securities class actions and other types of cases raising questions under federal law will be little affected by CAFA. Under existing law, most such cases already can be removed to federal court and some can only be litigated in federal court. Certain cases that could not previously be removed to federal court under the Securities Litigation Uniform Standards Act ("SLUSA") and cases involving questions of internal corporate governance and breaches of fiduciary duty may not be removed to federal court under CAFA, even though they arise under state law.

    Where CAFA dramatically alters the playing field is in the area of putative multi-state and nationwide class actions filed in state courts alleging breaches of state consumer and employee protection statutes. Before CAFA, defendants could almost never successfully remove these cases to federal court, even if neither the defendant nor the vast majority of prospective class members had any tie to the forum state, because the value of each individual class member's claim rarely exceeds the $75,000 minimum for federal diversity jurisdiction. CAFA creates a special system for determining diversity jurisdiction that applies only to class actions.

    CAFA provides that these state law theory class actions may be removed to federal court if the aggregate damages sought by all class members exceed $5 million, and at least one class member resides outside the forum state. CAFA provides that any defendant can remove a case at any point in the case -- even in its advanced stages. If at least one "primary defendant" is incorporated in or has its principal place of business in the state, however, and two-thirds of the class reside in the forum state, then the federal court nearly always must remand the case to state court. Federal courts have the discretion to remand cases to state court if (1) any of the "primary defendants" is a resident of the state; and (2) at least one-third of the putative class members resides in the forum state. The factors a court must consider in this regard include choice of law, the existence of a national interest in the case, and whether similar actions are pending elsewhere. Significantly, CAFA also makes a federal district court's decision to remand a removed class action case appealable at the discretion of the Circuit Court of Appeals. Previously, remand decisions of district judges effectively have been unappealable.

    Congress's primary justification for CAFA was an apparent trend in some state courts to certify multi-state or nationwide class actions without conducting a real analysis of the individual issues, including choice of law problems, that would need to be resolved if the cases go to trial. This approach, which sometimes is called "certify now, worry later," puts tremendous pressure on defendants to settle cases once class certification is granted. Federal courts, by contrast, have become less hospitable to multi-state or nationwide class actions in recent years. A series of decisions from various Courts of Appeals requires most federal district courts to conduct thorough analyses of how a case could manageably be tried before they may certify cases to proceed on a class basis. District judges who fail to do this risk interlocutory reversal if the defendants bring immediate interlocutory appeals under Federal Rule of Civil Procedure Rule 23(f). Thus, by moving multi-state class actions to federal courts, CAFA should have the effect of greatly reducing the certification of multi-state or nationwide class actions in circumstances where individual issues of fact or law should be held to predominate.

    Because class action plaintiffs' lawyers understand these ramifications, we anticipate they will change their tactics in response to CAFA. In situations where plaintiffs' counsel might previously have filed a single, nationwide class action, they now may file several nearly identical single state or regional class actions in the largest states. For example, a plaintiff might file one case in state court in Beaumont, Texas, seeking certification of a Texas, Louisiana and Arkansas class; another case in Madison County, Illinois, seeking certification of an Illinois, Indiana and Wisconsin class. Where possible, they will name one or more defendants in each action who are residents of the forum state, in order to try to preserve state court jurisdiction.

    This tactic will be slightly more expensive for plaintiffs' counsel, and will require greater cooperation among plaintiffs' firms in different regions who are now fierce competitors, but it may allow them to evade some of CAFA's removal requirements. Even if the cases move to federal court, the smaller classes will raise issues under fewer states' laws and thus be easier to certify. Indeed, with multiple cases taking the place of single actions, and with more plaintiffs' lawyers involved, defending and settling class actions may in some situations become even more difficult and expensive under CAFA. Defendants also must worry about the collateral estoppel implications if they lose an action in one state with copycat actions pending elsewhere.

    CAFA also changes the way class actions may be settled in federal courts. The parties to a class action often find it mutually agreeable to settle by giving "coupons" to class members rather than cash. Coupon settlements remain permissible under CAFA, but the new law requires courts to make findings on the record that coupon settlements are fair. Additionally, CAFA encourages requiring defendants to guarantee minimum payments to the class (or to donate money to charities if class members fail to claim that minimum amount). It also requires courts, in setting the fee plaintiffs' counsel may receive in a settlement, to consider how factors such as the coupons' expected redemption rate (in contrast to the coupons' maximum theoretical value) may affect the compensation actually exacted from the defendant. These provisions may make plaintiffs much less willing to accept coupon settlements without minimum-payment provisions.

    Additionally, CAFA provides that, in all class action cases heard in federal court (including securities cases and other matters arising under federal law), defendants now must send detailed notices of prospective settlements not just to class members, but also to the Justice Department and to the Attorneys General of each state whose residents are in the class. (If notices are not provided to a state's official, class members in that state will not be considered bound by the settlement.) This raises the prospect of state politicians objecting to settlements in an attempt to extract additional payments.

    Our pre-CAFA experience has taught us that clients should think carefully before removing a class action to federal court. Removal may well be the better course, and the fact that CAFA allows more cases to be removed gives clients much greater flexibility to remove. There will be occasions, however -- particularly where clients would prefer to settle in the early stages -- where clients may find it advantageous to leave a multi-state or nationwide class action in state court.