The New Face of Class Action Litigation
an interview with Professor Tobias Barrington Wolff of UC Davis Law School
Juliana Kreese | University of California, Davis, School of Law
Benjamin C. Rosenbaum

Posted Sunday, January 1, 2006
6 U.C. Davis Bus. L.J. 12 (2005)

A graduate of Yale University and Yale Law School, Professor Tobias Barrington Wolff clerked for the Honorable William A. Norris (ret.) and the Honorable Betty Binns Fletcher of the U. S. Court of Appeals for the Ninth Circuit. From 1998-2000, Professor Wolff practiced law in New York as a litigation associate with the firm Paul, Weiss, Rifkind, Wharton & Garrison. Professor Wolff has been teaching at the UC Davis School of Law since 2000. Recently he was awarded the honor of being a Visiting Professor at Stanford Law School in 2003-04 and Northwestern Law School in the fall of 2005.

Professor Wolff's teaches and writes in the areas of Civil Procedure, Conflict of Laws and Complex Litigation, Constitutional Law, and Sexuality and the Law. His recent publications include: Preclusion in Class Action Litigation, Columbia Law Review (2005), Interest Analysis in Interjurisdictional Marriage Disputes, University of Pennsylvania Law Review (2005), and Political Representation and Accountability Under Don't Ask, Don't Tell, Iowa Law Review (2004). He is also a co-author of the textbook Civil Procedure: Theory and Practice (Aspen, 2001 & Supp. 2004-05) along with Linda Silberman and Allan Stein.

Background

On February 18, 2005, President Bush signed the Class Action Fairness Act[1] into law. At the signing ceremony, President Bush touted the new federal legislation as "a critical step toward ending the lawsuit culture in our country." Indeed, the legislation aimed to curb rampant class action litigation which sometimes forced defendants unwillingly into state courts around the country. The Act also aimed to address the problem of exorbitant attorney's fees collected by plaintiff attorneys.

Currently, Federal Rule of Civil Procedure 23 is the primary source of federal regulation over class action lawsuits. The Act provides additional federal regulations and tools which deeply impact both class action plaintiffs and defendants. In general, the Act enables federal courts to exert jurisdiction over more class actions lawsuits than they were simply under Rule 23. The Act grants federal courts original jurisdiction over mass actions and class actions which have an amount in controversy exceeding $5 million and in which any members of the class is a citizen of a state different from that of any defendant. If over two-thirds of the plaintiffs and the primary defendants are from the state where the lawsuit was filed, the district court may decline to exert jurisdiction in the interest of justice. Furthermore, the Act provides measures to regulate the calculation of attorney's fees.

In the following interview, Professor Wolff discusses the issues surrounding the Class Action Fairness Act and evaluates the extent to which the Act ameliorates the problems it is meant to address.

Q: What are the differences between the class action requirements of Federal Rule of Civil Procedure 23 and the new Class Action Fairness Act?

A: For the most part, Rule 23 and the Class Action Fairness Act are quite separate. The only real areas of overlap have to do with some particular limitations on class action settlements that the Act imposes. But there really was nothing on the books like the Class Action Fairness Act before it was passed. It is the first statue of its kind related to class actions in the federal courts.

Q: What do you think were the circumstances that lead to this legislation?

A: I think the primary circumstance that led to the enactment of this law was the 2004 election. Earlier versions of the Class Action Fairness Act have been submitted to Congress since at least 1998. For the past six years, these proposed bills could not get out of the Senate. The 2004 election gave the President a temporary boost in, as he put it, his "political capital," and also increased the margin of the majority for the Republican Party in the Senate. It has generally been the Republican leadership that has been pushing this bill and the Democratic leadership that has been opposing it. With the 2004 election, the Republicans had the political strength in the Senate to push it through, and so they did.

Q: In a speech prior to signing the Class Action Fairness Act, President Bush made the following remarks:

"[T]his Act will help ensure justice by making two essential reforms.

First, it moves most large, interstate class-actions into federal courts. This will prevent trial lawyers from shopping around for friendly local venues. The bill will keep out-of-state businesses, workers, and shareholders from being dragged before unfriendly local juries, or forced into unfair settlements. And that's good for our system, and it's good for our economy.

Second, the bill provides new safeguards to ensure that plaintiffs and class-action lawsuits are treated fairly. The bill requires judges to consider the real monetary value of coupons and discounts, so that victims can count on true compensation for their injuries. It demands settlements and rulings to be explained in plain English, so that class members understand their full rights."

Could you comment on the President's observations here and discuss whether you feel that these goals will be furthered or stifled by this legislation?

A: Well, it is clearly true that the law assists defendants in class action lawsuits. In particular, if corporate defendants do not want to respond to a lawsuit or wish to avoid it altogether, this bill gives them more options to do so. In most places, federal courts are more skeptical than state courts about allowing class actions to proceed. As a result, moving lawsuits into federal court helps to cut down and frustrate attempts at forum shopping. Once a lawsuit is in federal court the judge or the defendants can have the case moved to different parts of the country within the federal system for convenience sake and thereby eliminate many of the benefits that the plaintiff enjoyed in state court. From the perspective of defendants, and particularly corporate defendants, this bill is great. It gives them powerful tools in resisting some of the abuses that they have suffered at the hands of state courts. And, certainly, there have been some abuses by state courts against corporate defendants.

The problem with the Class Action Fairness Act is that it does very little for consumers. Even though the President argues that this law is going to help protect consumers, that is really not correct. There have been problems, sometimes serious problems, with settlements in class action lawsuits that disproportionately benefit defendants and plaintiffs' attorneys. Coupon lawsuits are one example that people talk about most frequently. In these lawsuits, usually you have a corporate defendant who violates consumer protection laws. A class action lawsuit gets brought and the plaintiffs' attorneys negotiate a settlement, stating that the consumers in the class will get $50.00 off of their next purchase of a pickup truck or a television set from the defendant. Essentially that serves as a marketing tool for the defendant. Not many people use the coupons and those who do may wind up buying more products, so the defendant benefits even more. Further, the plaintiffs' attorneys and class action attorneys get paid a large fee based often upon the face value of these coupons, even though many consumers are not actually going to use the coupons. That has happened. It does not happen quite as much as opponents of class actions probably suggest, but it does happen.

The Act does little to protect consumers from that kind of lawsuit because consumers do not have any way of getting these lawsuits brought into federal court. While people often assume that plaintiffs always benefit from a permissive approach to class certification, there are some cases in which plaintiffs are better off with a skeptical court. Class counsel and the defendants sometimes strike a deal that works to everyone's benefit except the plaintiffs'. In such cases (sometimes referred to as "collusive"), the judge may be the only one available to protect the interests of the class. The general perception is that federal judges have been more protective of class members' interests than have state judges in recent years. Thus, class members may prefer to be in federal court in such cases. The question therefore arises: Who can force a class action to be heard in federal court? If the class action lawyers want to file the lawsuit in federal court they can do that. But they may dread the added supervision that comes from the federal courts.

Defendants can "remove" the case from state court to federal court, and in situations where they don't want to respond to the lawsuit, where they think the lawsuit does not have any merit, where they think the lawsuit should not be filed as a class action, that is a great option for them. They get sued in state court, they remove to federal court and then they can fight the certification of the lawsuit and fight against the kinds of forum shopping that we were talking about.

In a "collusive" lawsuit, however, nobody is going to invoke the jurisdiction of the federal courts. If the class action lawyers and the defendants are effectively working together -- because there is a settlement that both of them want, under which the attorneys will get paid and the defendants will get a sort of "get out of jail free card" for what might otherwise be serious liability -- then, they'll both agree to have the lawsuit move forward in state court. The people who might object to that, the consumers, have no way of bringing the lawsuit into federal court. The only people who have the power to bring the lawsuit into federal court are the class action attorneys or the defendants. So, unfortunately, to the extent that there is a problem with class action settlements that do no good for consumers and that sell off claims that should be valuable claims for them, this law does not provide them with any protection.

Q: Is the Act potentially in conflict with the Constitution or any federal statutes related to the federal judiciary's power?

A: I don't think so. As far as the Constitution is concerned, the most serious potential issue that some people and some academics have talked about is the extent of diversity jurisdiction. The way that these class actions are being brought into federal court is through the so-called "diversity" jurisdiction of the federal courts. Diversity jurisdiction was designed to provide a national federal forum, a national federal court system for disputes between people from different states to make sure that they get a fair hearing and that they are not discriminated against because of out-of-state bias. It made sense to say that you wanted a federal forum if you basically had people on the plaintiff's side and on the defendant's side who were from different parts of the country. But traditionally, diversity jurisdiction is used for lawsuits where there are a relatively small number of parties. The Class Action Fairness Act is the biggest expansion of diversity jurisdiction that we have ever seen. It dramatically loosens the requirements for "diversity" jurisdiction.

The Supreme Court has spoken to this issue before and has said that the constitutional requirements for diversity are very loose and that so long as you have one person on the plaintiff's side who is from a different state from one person on the defendant's side, that is good enough. But the Supreme Court never had occasion to say that, or to reaffirm that principal in an incredibly skewed context. For example, there are situations where you have a huge number of people who are all from one state and maybe a single additional plaintiff, or a couple of additional plaintiffs who are from a different state, suing a defendant from that same state. Say you have a class action of California residents and, for whatever reason, and this is not hard to imagine, there are a couple of people in the definition of the class, who now live in a different state. And then you have a California company as the defendant. Basically, you have a California dispute between California citizens and the California company. The out-of-state class members are never going to participate in the lawsuit and the fact that they're a part of this proceeding is really almost a technicality more than anything else. But, under the statute, that might be enough to create diversity jurisdiction in the federal courts, depending on how the lawsuit is configured. Some people have suggested that this is a use of diversity jurisdiction that goes beyond what we should read into Article III of the Constitution. Having said all of that, I am skeptical about that claim. I am more comfortable giving Congress broad authority concerning when the jurisdiction of the federal court should be invoked and when it should not. And, while I am not thrilled about this particular statute, for various reasons, I am skeptical about any argument that it exceeds Congressional powers.

Q: Do you foresee any commercial industry especially affected by the Act?

A: The most ambitious class action litigation in the Untied States recently has been in defective products cases, and particularly defective product cases for pharmaceutical products, drugs, and medical devices. These are difficult lawsuits to pursue as class actions for many reasons. State courts have been more willing to entertain these lawsuits than federal courts have and so that is one area where you might see a significant change.

Another area where class actions have been used very aggressively is in consumer fraud cases. Cases where the claim is, for example, that a company has used misleading advertising information, or has misleading contract terms. Insurance companies have been sued extensively under those types of claims. Recently, some computer companies have been sued for false representations on their products, and, once again, state courts have been much more willing to entertain particularly nationwide class actions. There are many reasons why nationwide class actions might be inappropriate in that type of claim. The Class Action Fairness Act probably makes nationwide class actions of those kinds of claims more likely while decreasing the likelihood of statewide class actions of that sort.

Q: The Act is intended to deal with what some critics argue is rampant state class action litigation. Do you think this type of abuse was as pervasive as these critics claim?

A: No, if anything, I think it is probably fair to say that it was less of a problem. In some of the states that exhibited the most troubling class action practices, state supreme courts have been imposing limits. The Alabama Supreme Court issued some decisions in1997 that imposed limits on the use of class actions. Alabama had previously been a sight where a lot of troubling class actions happened. Similarly, the Supreme Court of Texas in 1999 issued a series of decisions, which placed some significant limits on the way class actions get used. The Illinois Supreme Court, just a couple of weeks ago, issued a decision that placed significant limits on its Consumer Protection Act, and on the ability of plaintiffs' attorneys to have these nationwide class actions. Interestingly, the President gave a speech criticizing state class action lawsuits from Madison County, Illinois because it had been identified as one of the "problem" counties.

Although there are still some misuses of class actions in state court, there are also some instances of what I would call misuses of class action in the federal courts as well. But, if anything, in the past six or seven years, state legislatures and state supreme courts have taken a much more active role in addressing the problem at the state level. The Act is particularly poorly timed intervention. Although there are still abuses, it is not clear that this legislation really addresses those abuses, some of them at least, and, secondly, the states have become much more active in responding to those abusers.

Q: Do you think the federal courts will be unduly burdened by an influx of new class actions?

A: This is a serious concern. I am not sure what the answer is to that question. I think it is more likely that they are only going to be burdened if plaintiffs' attorneys continue to file class actions that defendants will be able to remove to federal court under the new law. And plaintiffs' attorneys are not stupid. Once they figure out that a certain type of class action is simply going to be removed into federal court if they try filing it in state court, they are probably going to change their behavior and they are probably going to look for the kinds of class actions that they can keep in state court. I actually am not that concerned that there is going to be a huge flood of lawsuits in federal court. I think it is more likely that after a period of adjustment, plaintiffs' attorneys are going to file different kinds of lawsuits.

Q: How do you think the Act will affect the pleading strategies of plaintiffs' attorneys? Can courts exclude an out-of-state plaintiff that potentially might have a claim in their state?

A: I think there are two sorts of issues: First, "Who are the members of the class?" and, second, "What is the citizenship of the defendant?" The way that the law is structured, a defendant is usually going to be able to remove the case into federal court if the defendant is sued someplace other than its home state. When the defendant is sued in its home state, especially in a statewide class action, frequently the provisions of the bill will not permit removal. There is a complicated structure that the law has about how "interstate" the class action has to be in order to satisfy the requirements of the law. Generally, if a corporate defendant is sued in his home state, it is going to be much harder to satisfy those requirements. If plaintiffs' attorneys want to keep these lawsuits in state court, then their pleading strategy is probably going to involve going after corporate defendants in their home states and suing on statewide class actions. And that, of course, is a change. That means, among other things, that there is less opportunity for forum shopping by plaintiffs' attorneys.

I should also say, however, that the desire to keep class actions in state court by plaintiffs' attorneys is not always wrong or for bad motives. In some cases, states have a different set of policies about when it is permissible to have a class action. California, for example, has much more liberal class action rules than the federal system, and there is nothing wrong with that. If plaintiffs' attorneys want to sue in state court because the law is more favorable to them in state court, there is nothing automatically wrong with that. When we talk about forum shopping as looking for a place that is not a very convenient or otherwise appropriate place to have the lawsuit, but where you think the juries and the judges are going to be on your side, that may be different. But, many plaintiffs' attorneys want to stay in state court because the state has enacted policies, through the democratic process, that are more favorable to them and this bill may have the effect of making those unavailable to them.

Q: In the wake of the Act, who do you think are the real winners and losers?

A: I think that the real winners are corporate defendants. This bill is immensely beneficial for them. Ironically, irresponsible plaintiffs' attorneys are also winners here. That is, the attorneys who are willing to enter into these "collusive" settlements and use a lawsuit as an opportunity to make a quick buck without worrying about whether they are doing any good for the people they are supposed to represent. They will continue to be able to engage in that type of practice. The losers are responsible plaintiffs' attorneys whose ability to be paid for their efforts is somewhat compromised by this law and, primarily, consumers who will not receive much protection from the part of the class action scenario that is potentially harmful to them - namely, these "collusive" lawsuits.

Proponents of the bill have argued that protecting corporate defendants is good for everybody because if you protect corporate defendants from these abusive lawsuits, the ones that never should have happened in the first place, then prices will go down. The idea is that when corporate defendants have to pay huge judgments on frivolous claims, they pass on those expenses to the consumers and prices on products go up. Now, one can hope that if this law winds up eliminating a lot of those abusive lawsuits, then perhaps prices on consumer products will go down or at least will not go up as fast. And, we will see if that is true. But I think the real losers here are consumers and responsible plaintiffs' attorneys.



[1] 28 U.S.C. §§ 1332(d), 1453, 1711-15 (2005)

Juliana Kresse and Benjamin Rosenbaum are staff editors for the Business Law Journal.