The Subcommittee on the Constitution of the U.S. House of Representatives Judiciary Committee recently held a hearing on potential amendments to the Class Action Fairness Act of 2005 (“CAFA”).  The hearing, held seven years after CAFA’s enactment, was intended to address the impact the statute has had on class action litigation and what improvements or modifications, if any, are needed.  An article by Jessie Kokrda Kamens in the Bloomberg BNA Class Action Litigation Report and an article by John O’Brien in Legal Newsline summarize the hearing, and  the House Judiciary Committee website has a webcast and the hearing testimony.  The article in Class Action Litigation Report describes the Republican and Democratic subcommittee leaders’ positions as follows:

[Subcommittee chairman Rep. Trent] Franks [R-Ariz.] expressed concern in his opening statement that CAFA has introduced a new form of forum shopping where attorneys choose to file their cases in particular federal circuits that have proven friendlier to class actions. He also disapproved of some courts’ requirement that defendants must prove to a legal certainty that the amount in controversy in a suit is over CAFA’s $5 million threshold for removal.

Rep. Jerrold Nadler (D-N.Y.), ranking member of the subcommittee, said in his opening statement, “Far from reducing frivolous, time-consuming and expensive litigation, CAFA appears to have encouraged such litigation by enmeshing courts in lengthy battles of threshold questions that threaten meaningful access to the courts.”

Class action plaintiffs’ attorney Thomas Sobol recommended that CAFA be amended to make it easier for single-state class actions to remain in state court.  He argued that CAFA, together with Multidistrict Litigation (MDL) procedures, have resulted in single-state class actions that should be litigated in state courts being removed to federal court, consolidated in an MDL, and then having class certification denied because the federal court finds it unmanageable to resolve the numerous differences in state law among the various jurisdictions.  He also argued that the Supreme Court’s decision in AT&T v. Concepcion, upholding arbitration provisions that ban class actions, is unfair to consumers. 

John Beisner of Skadden Arps, representing the U.S. Chamber of Commerce’s Institute for Legal Reform, noted the successes that CAFA has made in reducing improper nationwide class actions in state courts.  He highlighted the 90% decrease in class actions filings in Madison County, Illinois, for example, following the enactment of CAFA.  He recommended that Congress consider fixing the requirement some circuits have imposed that a defendant establish the amount in controversy to a “legal certainty,” arguing that was inconsistent with CAFA’s intent to make it easier for defendants to remove cases to federal court.  He also recommended consideration of an amendment to address settlements that provide little benefit to anyone but the plaintiffs’ lawyers or provide chiefly cy pres relief together with attorneys’ fees.  Beisner also noted that some federal courts are certifying classes that include many putative class members that have not really sustained any injury. 

Professor Martin Redish of the Northwestern University School of Law also argued that settlements where the primary relief consists of cy pres relief (e.g., a contribution to a nonprofit organization to do work that might aid the class members) are an abuse of the class action device, and suggested that Congress either prohibit cy pres awards or impose a requirement that the district court find that a substantial portion of the class will actually receive compensation.

From the perspective of someone who is in the trenches defending class actions, most of them brought against insurance companies, I see a couple of potential loopholes in CAFA that were not addressed in this hearing and are worthy of consideration (although neither of these issues are fully resolved by the courts).  Under CAFA, if no defendant is a citizen of the state where suit is brought, the case is always removable if the amount in controversy is over $5 million.  This is because neither the “home state” nor the “local controversy” exception applies if there is no in-state defendant.  In insurance cases this is a common scenario because putative class actions are rarely filed in the insurance company’s home state, and it is rarely proper to name more than one insurer in the same case or to name some other in-state defendant.  That means that the only way plaintiffs’ lawyers can try to keep a case in state court is to keep the amount in controversy under $5 million.  There are two ways they have attempted to do this:

  1. The time period for the putative class is shortened to some period far shorter than the statute of limitations to keep the amount in controversy down.  If permitted, this tactic seems to defeat the purpose of CAFA because the plaintiffs’ attorneys, if they win the first “under $5 million” case, they can push for a larger settlement and/or potentially use collateral estoppel in bringing other “under $5 million” cases covering other short time periods.  The courts of appeals have not squarely addressed the propriety of this tactic, but it is something Congress could easily fix by requiring the use of the statute of limitations time period in calculating the amount in controversy.
  2. A purportedly binding “stipulation” is signed by the named plaintiff that he or she will not seek or accept more than $5 million on behalf of the proposed class.  The Eighth Circuit upheld this tactic in Rolwing v. Nestle Holdings, Inc. where otherwise there was over $12 million in controversy.  As I said in my prior post about Rolwing, these stipulations, if permitted, essentially make CAFA avoidable whenever a plaintiff’s attorney would like, as long as they can find a client willing to execute the stipulation.  While the Eighth Circuit’s opinion is unlikely to be the last word from the courts on this issue, it is something Congress could correct either by prohibiting these stipulations or reducing CAFA’s $5 million threshold to the $75,000 threshold for ordinary federal diversity jurisdiction.

These issues may not be as evident to those involved who are at the center of the debate over potential amendments to CAFA because the plaintiffs’ lawyers who tend to bring the largest, high-profile nationwide and multistate class actions do not tend to use these tactics (they may find them ethically questionable), and defense counsel who tend to defend the largest cases would not see these tactics being used.  But they are becoming an increasingly serious problem and are worthy of consideration in any potential CAFA reform.