[Senate Hearing 106-465]
[From the U.S. Government Publishing Office]
S. Hrg. 106-465
THE CLASS ACTION FAIRNESS ACT OF 1999
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
S. 353
A BILL TO PROVIDE FOR CLASS ACTION REFORM, AND FOR OTHER PURPOSES
__________
MAY 4, 1999
__________
Serial No. J-106-22
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
63-965 WASHINGTON : 2000
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce Cohen, Minority Chief Counsel
______
Subcommittee on Administrative Oversight and the Courts
CHARLES E. GRASSLEY, Iowa, Chairman
JEFF SESSIONS, Alabama ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan CHARLES E. SCHUMER, New York
Kolan Davis, Chief Counsel
Matt Tanielian, Minority Chief Counsel
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Grassley, Hon. Charles E., U.S. Senator from the State of Iowa... 1
Kyl, Hon. Jon, U.S. Senator from the State of Arizona............ 33
Thurmond, Hon. Strom, U.S. Senator from the State of South
Carolina....................................................... 33
Sessions, Hon. Jeff, U.S. Senator from the State of Alabama...... 34
Torricelli, Hon. Robert G., U.S. Senator from the State of New
Jersey......................................................... 35
Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin.....37, 38
CHRONOLOGICAL LIST OF WITNESSES
Statement of Eleanor D. Acheson, Assistant Attorney General,
Office of Policy Development, U.S. Department of Justice,
Washington, DC................................................. 40
Panel consisting of John P. Frank, Lewis and Roca, Phoenix, AZ;
and E. Donald Elliott, Prof. of Law, Yale Law School, New
Haven, CT...................................................... 52
Panel consisting of Stephen G. Morrison, general counsel, Policy
Management Systems Corp., Columbia, SC; Richard A. Daynard,
Prof. of Law, Northeastern University School of Law, Boston,
MA; and John H. Beisner, O'Melveny and Myers, LLP, Washington,
DC............................................................. 107
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Acheson, Eleanor D.:
Testimony.................................................... 40
Prepared statement........................................... 47
Beisner, John H.:
Testimony.................................................... 123
Prepared statement........................................... 125
Daynard, Richard A.:
Testimony.................................................... 116
Prepared statement........................................... 118
Elliott, E. Donald:
Testimony.................................................... 95
Prepared statement........................................... 96
Frank, John P.:
Testimony.................................................... 52
Prepared statement........................................... 55
Grassley, Hon. Charles:
Article: ``Federalist Society's Study On Class Actions: Part
I,'' Vol. 1 No. 1, Spring 1999............................. 5
Article: ``Federalist Society's Study On Class Actions: Part
II,'' Vol. 1 No. 2, Spring 1999............................ 21
Morrison, Stephen G.:
Testimony.................................................... 107
Prepared statement........................................... 109
APPENDIX
Proposed Legislation
S. 353 A bill to provide class action reform, and for other
purposes....................................................... 141
Questions and Answers
Responses of Eleanor Acheson to Questions from Senators:
Grassley..................................................... 154
Thurmond..................................................... 160
Torricelli................................................... 162
Kohl......................................................... 163
Responses of John P. Frank to Questions from Senators:
Thurmond..................................................... 167
Kohl......................................................... 168
Responses of Prof. E. Donald Elliott to Questions from Senators:
Grassley..................................................... 171
Thurmond..................................................... 171
Kohl......................................................... 172
Responses of Stephen Morrison to Questions from Senators:
Grassley..................................................... 180
Kohl......................................................... 186
Responses of Richard A. Daynard to Questions from Senators:
Torricelli................................................... 191
Kohl......................................................... 193
Responses of John H. Beisner to Questions from Senators:
Grassley..................................................... 246
Kohl......................................................... 256
THE CLASS ACTION FAIRNESS ACT OF 1999
----------
TUESDAY, MAY 4, 1999
U.S. Senate,
Subcommittee on Administrative Oversight
and the Courts,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Charles E.
Grassley (chairman of the subcommittee) presiding.
Also present: Senators Thurmond, Sessions, and Kyl [ex
officio].
OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR
FROM THE STATE OF IOWA
Senator Grassley. I want to say good afternoon to
everybody, and I would like to thank everybody for coming to
this hearing about class action abuse and S. 353, the Class
Action Fairness Act of 1999.
We have party caucuses that go on usually until 2:15 p.m.
or a little bit past that on Tuesdays. So since we have such a
full schedule of people to hear this afternoon, I want to start
on time and I will stop wherever we are for people,
particularly Mr. Torricelli or Mr. Kohl, who will represent and
speak for the Democrats. I will let them speak when they get
here, regardless of where we are in the process because it is
only fair for them to have an opening statement as well.
Although we had a joint hearing with the House earlier this
year on bankruptcy reform, this is the first Senate only
subcommittee hearing with Senator Torricelli as the ranking
member. So I welcome his participation and hope to work closely
with him during this Congress and beyond what is on the agenda
of this subcommittee. Although the subcommittee did not take up
the bankruptcy reform bill, I have had a very close working
relationship with Senator Torricelli on that major piece of
legislation.
The topic of our hearing today is an important subject that
lately has received considerable attention. More and more
people recognize that the class action system is being abused
and that the people who are supposed to be helped by this
process are instead getting used. Ultimately, the current
system is benefiting lawyers and not your average class member.
This subcommittee held a hearing about a year ago to
examine the problems occurring with class actions and how the
process is being abused at the expense of the plaintiff class
and defendants. We heard about scenarios where plaintiffs are
misled into accepting settlements which either offer them
little of value or even cost them money, while the class
lawyers get rich. We heard about settlements where plaintiffs
receive coupons of little value or with redemption restrictions
making them practically useless. Yet, their lawyers receive
millions of dollars in attorneys' fees.
We heard about attorneys searching the newspapers and the
Federal Register for possible cases, determining which ones
they can reap the most from, then recruiting potential
plaintiffs so that they can bring their lawsuits. Those things
are already on the record. We also heard about the increased
concentration of class actions in State courts, particularly in
courts which are more susceptible to approving class
certifications without adequately considering whether a class
action would be fair to all class members.
We heard about plaintiff lawyers gaming the system to avoid
removal to Federal court by manipulating the pleadings and by
finding a token plaintiff or defendant to defeat procedural
requirements. We heard about lawyers using the State court
system to get the lowest settlement amount possible for
defendants and the highest amount in attorneys' fees for the
plaintiff class lawyers. The abuse list goes on, and I am sure
that we are going to hear more about this today.
That is why Senator Kohl and I introduced the Class Action
Fairness Act. Our bill takes the first step at curbing class
action lawsuit abuses. It requires that settlement notices be
written in plain English and include the amount and sources of
attorneys' fees. It requires notification of State attorneys
general of any proposed class settlement that affects their
residents so that they can object if the settlement terms are
unfair. It penalizes frivolous class action filings by
requiring to impose rule 11 sanctions, although the nature and
extent of such actions remain discretionary.
Our bill discourages settlements that give attorneys
exorbitant fees based upon hypothetical over-valuation of
coupon settlements by providing that class action attorneys'
fees be based on a reasonable percentage of damages actually
paid to class members. It allows attorneys' fees to be based on
an hourly rate so that reasonable fees are available in all
kinds of cases, including those involving injunctive relief.
Our bill also allows more class action lawsuits to be
removed from State court to Federal court either by a defendant
or an unnamed class member. Currently, class lawyers can avoid
removal if the individual claims are for just less than $75,000
or if just one class member is from the same State as a
defendant. Consequently, plaintiff class lawyers gravitate
toward those State courts which permit class actions to proceed
with little or no scrutiny, and lawyers play games with the
procedural requirements to stay in those State courts.
On the other hand, Federal courts consistently give closer
scrutiny to class settlements and to whether it is fair for a
case to proceed as a class action. They are better equipped to
deal with multi-State issues. With their ability to consolidate
related cases, the Federal courts can bring about more
efficiencies and prevent a race to settlement between competing
cases.
Not only do I believe that the changes in our bill better
protect the due process rights of unnamed plaintiffs and
defendants, I believe that the fact that we are dealing with
multi-State plaintiffs makes the Federal courts an appropriate
forum for these kinds of cases. This is especially true because
I don't believe State courts should be dictating national
policy or imposing their State's laws on other State citizens
in these multi-State cases. In fact, I believe that to the
extent there is some federalization of class standards, it is
reasonable to do with uniformity rather than having individual
State courts setting different standards, which only breeds
gaming of the judicial system and forum-shopping.
Today, we will hear from witnesses that there is a clear
constitutional basis to having these multi-State class actions
proceed in Federal court. But our bill also takes into account
federalism concerns by making sure that the purely State cases
remain in State court, thus allowing State courts to retain
their ability to adjudicate class actions that involve their
citizens. I want to make it clear, our bill does not prevent
any claim from being heard, nor does it close the courthouse
door to any plaintiff.
Now, I have heard from lawyers who say that the plaintiff
class is obtaining the best value for their case by winning in
settlement a bunch of coupons. How can that be? How can a
lawyer tell me that the plaintiff class got a great deal where
the attorneys negotiated a settlement valued by the court at
millions of dollars, of which the class got only coupons, the
terms of which are so restrictive they are basically useless,
and the lawyers got all the cash?
Witnesses have testified to Congress that these coupons
allow the class lawyers to claim that a settlement is worth
much more than it really is worth, and therefore they can claim
more in attorneys' fees. Again I ask, if coupons are better for
the clients, why aren't the lawyers paid in coupons?
These coupon deals are so pervasive that even one of my
staffers got a notice telling him that as a member of a
plaintiff class in a lawsuit against a mortgage company, he had
won in settlement a coupon for $100 off the next financing or
refinancing of his mortgage with this company. But he doesn't
want to refinance his mortgage at this time, and certainly not
with the company that ripped him off in the first place. So you
tell me what use to this staff person is this coupon worth
$100. And I am sure that those attorneys are not going to be
paid with coupons to refinance their mortgages.
What I see happening is lawyers negotiating for something
of little to no value for their clients, but keeping what does
have value--in other words, cash--for themselves. The way I see
it, the class plaintiffs receive no benefit whatsoever and, in
fact, plaintiffs forfeit their right to sue. And the reason the
plaintiffs' bar is so opposed to any regulation is because we
are talking about taking away their gravy train.
Moreover, I find it remarkable that some still maintain
that the class action problems we are seeing--State court
abuse, attorney misconduct, and consumer exploitation--just
happen to be anecdotal. That is not the case. The RAND study, a
study by Stateside Associates, and statistics recently compiled
by the Federalist Society confirm that more and more class
action lawsuits are being filed, that they are increasingly
concentrated in State courts, and that abuses are occurring
with class actions.
For example the RAND study found that the problems are
intrinsically inherent in the class action system, stating
that, ``It is generally agreed that fees drive plaintiffs'
attorneys' filing behavior, that defendants' risk aversion in
the face of large aggregate exposures drives their settlement
behavior * * * In other words, the problems with class actions
flow from incentives that are embedded in the process itself.''
The House and Senate committee hearing records are replete
with examples of class action abuses. The Judicial Conference
has recognized that the process is being misemployed. They have
been studying how to fix the class action system for quite some
time now. Something has to be done, and our bill is one good
first step.
Today, the subcommittee will continue in its examination of
class action abuse. We will look at how the Grassley-Kohl bill
can address some of these problems, and listen to suggestions
on how to make our bill better and how to further address the
class action phenomenon. I am looking forward to hearing from
all of our distinguished witnesses.
Without objection, I would like to place in the record the
Federalist Society's study on class actions already referred
to.
[The study referred to follows:]
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Senator Grassley. Because he has to go very quickly, I want
to call on the Senator from Arizona for purposes of an
introduction.
STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM THE STATE OF
ARIZONA
Senator Kyl. Well, thank you very much, Mr. Chairman, and
thank you for the legislation you have sponsored and for
holding this hearing. I appreciate my colleagues allowing me to
proceed out of turn. As a member of the full committee but not
this subcommittee, I appreciate your courtesy.
I simply wanted to preliminarily introduce a member of your
third panel, John P. Frank, from my State of Arizona, a
distinguished member of the bar, a partner in the firm of Lewis
and Roca there, and a member of the firm's special litigation
group. In fact, Mr. Chairman, he has been involved in more than
500 appeals in the Arizona Supreme Court, the Ninth Circuit and
the U.S. Supreme Court. That is about as many appeals as I have
made to the chairman of our full committee here, so I know that
is a lot of appeals.
John Frank was a law clerk to Justice Hugo Black. He was an
Assistant Professor of Law at Indiana University, and then a
Professor of Law at Yale University. He has been named to the
National Law Journal's list of the 100 Most Influential Lawyers
in the country, not once, not twice, but three times.
In all of the good things I can say about him, of course,
there is one thing that is a black mark on his record, but I
will not fail to mention it. He has for many years, and
currently serves as General Counsel to the Arizona Democratic
Party. With that one exception, his record, however, is
outstanding. [Laughter].
In fact, I had the opportunity for a time to serve as
General Counsel to the Republican State Party at the same time
that John served for the Democrats, and we worked together on a
number of matters.
But to conclude, Mr. Chairman, John Frank is Chairman of
the Senior Advisory Board to the Ninth Circuit Court of
Appeals. And in addition to writing 11 books on legal history
and constitutional law, he served on the Civil Procedure
Committee of the Judicial Conference from 1960 to 1970, which,
of course, meant that he was a member of that committee in 1966
when it promulgated the present rule 23 on class actions.
He is eminently qualified to speak to the subject of your
bill. His conclusions and his testimony here are eminently
balanced and sensible. I commend them to you, and again
preliminarily introduce to you John P. Frank, of Phoenix. Thank
you for the opportunity to do that at this point.
Senator Grassley. We thank Mr. Frank for coming, and thank
you, Senator Kyl.
Senator Thurmond.
STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR FROM THE STATE
OF SOUTH CAROLINA
Senator Thurmond. Thank you, Mr. Chairman. I am pleased
that the subcommittee is holding this hearing today on S. 353,
the Class Action Fairness Act. I think this is important
legislation that is needed to help reform our class action
system. I appreciate your work, Mr. Chairman, on this issue.
Class action lawsuits are an extremely important aspect of
our court system. We generally think of lawsuits as involving a
few named persons. However, in class actions, hundreds or
thousands of people are often involved. A major reason for
class actions is to allow aggrieved people to combine together
to bring a lawsuit that would not be worth bringing on their
own. By combining together, the case can generate enough money
to compensate attorneys, and the results sometimes can be quite
beneficial for plaintiffs.
Unfortunately, however, there are sometimes abuses, and the
abuses appear to be increasing. There is a great incentive on
the part of lawyers representing the defendants to settle
because of the huge potential liability of their company from
all of the combined claims. These settlements are often quite
good for the attorneys for the plaintiffs, but not necessarily
for the plaintiffs themselves. Indeed, the plaintiffs are often
secondary to the attorneys.
In a hearing here by Senator Grassley in this subcommittee
in the last Congress on this issue, we heard from witnesses who
received essentially worthless coupons, while their attorneys
made millions. A key reform of this bill would combat this
problem by linking attorneys' fees to the plaintiffs' actual
recovery. This issue is especially important because a number
of class action lawsuits arise in State courts, especially
courts that have proven to be very receptive to class action
lawsuits.
Class action lawsuits are important for many litigants, but
they should not be used as social tools to effect social
change. This hearing is important to discuss the bill's efforts
for reform in this area, and I am pleased to have the witnesses
with us here today.
Thank you, Mr. Chairman.
Senator Grassley. Thank you, Senator Thurmond.
The Senator from Alabama.
STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE
OF ALABAMA
Senator Sessions. Thank you, Mr. Chairman. I want to say
that I believe that class actions can be extraordinarily
effective tools in helping us deal with legal problems
confronting America. Sometimes, the error, or negligence,
committed by the defendant is applicable to thousands, or even
hundreds of thousands of different individuals. Therefore,
100,000 lawsuits would not be appropriate, when one case could
settle for all the parties involved in those issues.
The concept of class action has been around a long time,
and I think it is a good concept. What has happened, however is
that over the years good advocates have figured out ways to
file those actions in circuits and in methods that maximize the
benefit to their client. And I respect them for that, but it is
up to us in Congress to make sure that we create laws that
guarantee fairness across the board.
I would like to note one case, for example, from my State
of Alabama, Hoffman v. Bank of Boston Mortgage Corporation, a
class action filed by a Chicago attorney in the circuit court
of Mobile, AL. The case alleged that the bank did not promptly
post interest to real estate escrow accounts. A settlement was
agreed to that limited the maximum recovery for class members
to $9 each.
After the State approved the settlement, the bank disbursed
more than $8 million to the class action attorneys in legal
fees and credited most of the accounts of the victims with
paltry sums. The legal fees, equal to 5.3 percent of the
balance in each account, were debited to the accounts. So they
debited everybody's account, these class action victims, with
the legal fees.
For many accounts, the debit to the account exceeded the
credit they obtained. For example, Dexter J. Kamowitz, of
Maine, did not initiate the class action against Bank of
Boston. However, he received a credit of $2.19 under the class
action settlement. At the same time, the class action attorneys
debited his account for $91.33 for legal fees, producing a net
loss of $89.14. Such results often produced outrage from class
members in other States affected by the action.
Judge Frank Easterbrook, of the Seventh Circuit, has asked,
``What right does Alabama have to instruct financial
institutions in Florida to debit the accounts of citizens in
Maine and other States?'' So this bill would eliminate some of
those abuses and help us deal with them. I know there are six
rural counties in Alabama which are seen as good counties to
file lawsuits in. There have been 91 class actions filed in
these six counties in the last number of years, I believe, from
1995 to 1997. And you ask why would a New York attorney or
someone from Chicago do that.
Well, a good attorney is out to find the best forum, if he
can, to file his case in, and many of them have found these
forums to be most advantageous. But you are setting a legal
principle and establishing penalties nationwide, and I think in
interstate matters that the class action really would be better
done in Federal court, where you have less possibility of home
cooking, a fairer system, a uniform system of law.
And although I certainly think we need to be careful about
expanding Federal jurisdiction--we have Federal jurisdiction in
cases with de minimis interstate commerce nexus, but when a
national corporation is dealing with clients in every State in
America, that is quintessentially an interstate operation and
it is the kind of thing that I think is appropriate in Federal
court.
Thank you for your leadership, Mr. Chairman. I am pleased
to join with you in support of this and I look forward to the
testimony, and if we can improve this piece of legislation, I
look forward to that. Thank you, sir.
Senator Grassley. We have a statement from Senator
Torricelli which we will insert into the record at this point.
[The prepared statement of Senator Torricelli follows:]
Prepared Statement of Senator Robert Torricelli
Thank you Senator Grassley.
I want to say first that I have great respect for my colleagues
Senator Grassley and Senator Kohl, and I don't doubt their commitment
to finding a solution to the problem of collusive class action
settlements where the attorneys receive more than the plaintiffs.
However, I'm not sure how the bill before us addresses that
problem. In fact, there are a few provisions in this bill that could
greatly hinder the ability of plaintiffs to obtain class action relief
at all.
Class actions are an essential part of our legal system.
They are necessary for administering many of the complex
cases that move through our courts.
And they are often the most economical and efficient method
for managing the claims of a group of similarly injured people.
Many times they are the only hope for the injured because
they allow people to pool resources against big defendants.
Class actions have been an important tool to accomplish policy
changes in a variety of areas including civil rights, antitrust,
consumer fraud and tort law.
The 1997 Texaco employment discrimination case was one of
the more notable cases in which this was true in recent years.
As you may recall, Texaco was found liable for
discriminating against its African-American employees. Indeed,
we all heard the tapes documenting the racial epithets used by
Texaco's management.
The Texaco plaintiffs could never have afforded to pursue
this case as individuals, but were able to use a class action
to obtain just compensation for the discrimination against
them.
And perhaps more importantly, they were successful in
altering Texaco's systemic discriminatory practices.
This is a perfect example of why we need to tread carefully in
reforming the class action system.
I am concerned that this bill sweeps too broadly and, in so doing,
would result in more harm than good.
My concerns center on two areas.
First, the bill drastically lowers the threshold for removing a
case to federal court.
The proponents claim there are problems with the current
requirement of complete diversity, but I disagree that the
solution is to change the law to the complete opposite end of
the spectrum, which is minimal diversity.
Minimal diversity would allow for removal of cases to
federal court if any class member is a citizen of a different
from any defendant.
Let me give you an example of the kind of cases that will be
affected by this bill.
tobacco cases
Class action lawsuits have been an indispensable tool in recent
efforts to hold the tobacco industry accountable.
Most tobacco class action litigation occurs in state courts. This
arrangement makes sense because the cases typically involve purely
state law claims.
But this bill will allow tobacco companies to routinely remove or
at least attempt to remove cases to federal court where it is more
difficult for class certification to occur.
In general, the tobacco industry prefers to litigate in federal
court and this bill corresponds perfectly with their strategy.
gun violence
Another example of class actions that will be affected is in the
area of gun violence.
Litigation is the primary way to ensure that the gun industry takes
responsibility for the safety of its products.
It would be a disservice to the more than 100 thousand individuals
injured by firearms each year to hinder the progress of these suits by
giving gun manufacturers the option of removing the case to federal
court where the result will be increases in costs and significant
delay.
My second concern is that in transferring so many class actions--
among the most resource-intensive of all litigation--to federal court,
we will place a tremendous burden on federal courts.
Federal judges have already seen their caseloads rise
substantially over the last five years.
The number of civil and criminal filings per district
judgeship climbed 16 percent to 484.
The number of appeals filed grew 11 percent.
Despite these increases, no new judgeships have been created
in 8 years and there are currently 65 vacancies in the Federal
Judiciary.
These discouraging statistics prompted Chief Justice
Rehnquist to call the federal judiciary ``a victim of its own
success.'' In short, people like federal courts so much that
they want to pursue their cases there.
In the past few years, Congress has continued to expand
federal jurisdiction to areas that were typically the exclusive
province of state courts. Yet, Congress has failed to provide
the courts with the resources they need to handle them.
I will conclude my remarks by quoting again from Justice Rehnquist.
He made these remarks in response to legislative proposals to increase
the jurisdiction of the federal court:
If the ill effects from these bills were confined to the
increase of the workload of the federal judiciary, they would
still be of concern to judges and to the legal profession. But
there is a much broader question involved. How much of the
complex system of legal relationships in this country should be
decided in Washington, and how much by state and local
governments?
That is a fundamental question of which we must not lose sight.
Thank you.
Senator Grassley. It is my privilege now to call on our
first witness, and that is Senator Kohl. Senator Kohl has
worked very closely and hard with me on this subject and I
appreciate his cooperation, and I would like to hear your
testimony at this point.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Mr. Chairman. Mr. Chairman and
members of this subcommittee, let me thank you for convening
this hearing today on class action abuses. Mr. Chairman, it has
been a pleasure working with you on legislation to help ensure
that victims stop being shortchanged, while their lawyers line
their pockets with exorbitant fees.
Let me just give you one disturbing example offered by one
of my constituents, Martha Preston, of Baraboo, WI, who
testified before this subcommittee less than 2 years ago and
whose case I believe Senator Sessions referred to just a few
minutes ago. Ms. Preston was an unnamed member of a class
action lawsuit against her mortgage company. While she did not
initiate the suit, the class action lawyers were supposed to
represent her. Instead, they negotiated a settlement that was,
at best, a bad joke.
Initially, she ``won'' 4 dollars and change. A few months
later, however, her lawyers went into her escrow account and
secretly took $80--20 times the compensation that she has
received. In total, her lawyers managed to pocket over $8
million in fees, but never explained to the court or to their
own clients that the class, not the defendant, were paid the
attorneys' fees.
Naturally outraged, she and others sued the class lawyers,
but her suit was turned away on a technicality by a divided
Federal court, even though Judge Easterbrook and other
dissenting judges blamed the class action lawyers for,
``pulling the wool over the State judge's eyes,'' and
complained that unfair class action settlements are too easily,
``crammed down the throats'' of overmatched victims.
Adding insult to injury, the lawyers turned around and sued
her in Alabama, a State she had never visited, and demanded an
unbelievable $25 million. So not only did she lose $75, she was
forced to defend herself from a $25 million lawsuit. Mr.
Chairman, in the words of Woody Allen, ``this is a travesty of
a mockery of a sham of justice.''
Even class action lawyers admit there is a problem. The
National Association of Consumer Advocates complains that,
``some * * * newcomers have brought with them a relatively new
brand of consumer advocacy, one in which the lawyers stand
first, if not alone, in the benefits line at the time of
settlement. Simply put, many consumer class actions are now
being settled on the basis of what the lawyers get and not what
the consumers in the class get.'' And Public Citizen agrees
that, ``all too often, class action settlements are approved
with little or no judicial scrutiny,'' citing a study finding
that 90 percent of all class settlements are approved without
amendment.
Fortunately, there are a few steps that we can take to weed
out the worst abuses, while still protecting what is basically
an effective process for vindicating rights. We don't want to
close the courthouse doors to important class action claims,
and we don't have to.
Mr. Chairman, that is why you and I have introduced the
Class Action Fairness Act of 1999. This measure, which you
described so eloquently, protects victims from being dragged
into lawsuits, unaware of their rights and unarmed on the legal
battle field. By promoting more disclosure and closer scrutiny,
it gives regular people back their rights and their
representation.
Mr. Chairman, I hope my own balanced record on these types
of issues adds credibility to our measure. Just today, I
reintroduced the ``Sunshine in Litigation Act,'' which
addresses the growing use of secrecy orders by Federal courts
that too often allow vital public health and safety information
that is discovered in litigation to be covered up, to be
shielded from mothers, fathers and children whose lives
potentially are at stake. Unlike our class action reform, this
is a proposal that trial lawyers support and some business
groups resist.
Whether it be secrecy in courts or class action reform,
doing what is right is what counts. And regardless of where the
special interests line up, our Class Action Fairness Act is a
terrific place to start. Of course, this is not a final
product; we continue to remain open to further negotiations.
But, Mr. Chairman, this is a balanced approach that corrects
the worst abuses while still preserving the benefits of class
actions. So I look forward to working together with you and
others to move this forward.
Thank you, Mr. Chairman.
Senator Grassley. And I accept your offer, obviously, as we
do continue our partnership on this bill.
Senator Thurmond or Senator Sessions, any questions from
either one of you?
Senator Sessions. No, Mr. Chairman. Thank you, Senator
Kohl, for your comments.
Senator Grassley. Thank you very much, Senator Kohl.
[The prepared statement of Senator Kohl follows:]
Prepared Statement Senator Herbert Kohl
Mr. Chairman and members of the Subcommittee, let me thank you for
convening this hearing today on class action abuses. Mr. Chairman, it
has been a pleasure working with you on legislation to help ensure that
victims stop being shortchanged, while their lawyers line their pockets
with exorbitant fees.
Let me give you just one truly disturbing example, offered by one
of my constituents--Martha Preston of Baraboo, WI--who testified before
this Subcommittee less than two years ago. She was an unnamed member of
a class action lawsuit against her mortgage company. While she did not
initiate the suit, the class action lawyers were supposed to represent
her. Instead, they negotiated a settlement that was, at best, a bad
joke.
Initially, she ``won'' four dollars and change. A few months later,
however, her lawyers went into her escrow account and secretly took
$80--20 times the compensation she received. In total, her lawyers
managed to pocket over $8 million in fees, but never explained to the
court or to their own clients that the class--not the defendant--would
pay the attorneys' fees.
Naturally outraged, she and others sued the class lawyers. But her
suit was turned away on a technicality by a divided Federal court, even
though Judge Easterbrook and other dissenting judges blamed the class
lawyers for ``pulling the wool over the state judge's eyes'' and
complained that unfair class action settlements are too easily
``crammed down the throats'' of overmatched victims.
Adding insult to injury, the lawyers turned around and sued her in
Alabama--a state she had never visited--and demanded an unbelievable
$25 million. So not only did she lose $75, she was forced to defend
herself from a $25 million lawsuit. Mr. Chairman, in the words of Woody
Allen, ``this is a travesty of a mockery of a sham of justice.''
In too many cases, victims are dragged into lawsuits unaware of
their rights and unarmed on the legal battlefield. In the end, they get
little or nothing, while their lawyers cash in. Some of these suits may
be frivolous. Even when the claims are real, defendants often collude
with class lawyers--leaving defendants with protection from future
lawsuits under unreasonably favorable terms, class lawyers with padded
wallets, and class members out of luck. And courts, who never hear from
anyone looking out for the victims' best interests, often don't give
class actions the close scrutiny they deserve.
Even class action lawyers admit there's a problem. The National
Association of Consumer Advocates complains that ``some * * * newcomers
have brought with them a relatively--new brand of consumer advocacy--
one in which the lawyers stand first, if not alone, in the benefits
line at the time of settlement. Simply put, many consumer class actions
are now being settled on the basis of what the lawyers get and not what
the consumers in the class get.'' And Public Citizen agrees that ``all
too often class action settlements are approved with little or no
judicial scrutiny,'' citing a study finding that 90 percent of all
class settlements are approved without amendment.
Fortunately, there are a few steps we can take to weed out the
worst abuses, while still protecting what is basically an effective
process for vindicating rights. We don't want to close the courthouse
doors to important class action claims. And we don't have to.
Mr. Chairman, that's why you and I have introduced the Class Action
Fairness Act of 1999. This measure promotes more disclosure and closer
scrutiny. And it gives regular people back their rights and their
representation.
First, it invites third parties--namely, state Attorneys General--
to look out for consumers by requiring they be notified about proposed
class settlements that would affect residents of their states. This
provision has been endorsed by Wisconsin's Attorney General Jim Doyle,
who also is President of the National Association of Attorneys General.
Second, it promotes better disclosure to class members, by requiring
notice in plain English--not legal jargon--of the terms of a proposed
settlement, including the source of attorneys' fees. Third, it makes
class lawyers think twice about ``scam'' settlements by limiting
attorneys' fees to a reasonable percentage of the actual damages
received by class members, rather than letting them reap big fees based
on inflated ``estimates'' of the value of unlikely-to-be-used $5
coupons.
Finally, it permits unnamed plaintiffs or defendants to remove
multi-state class actions to Federal court, where judges are likely to
give closer scrutiny and have the ability to consolidate related cases,
in order to prevent a ``race to settlement'' between competing cases
and competing class lawyers.
Let me emphasize the limited scope of this legislation. Unlike some
proposals out there to move from ``opt-out'' to ``opt-in'' procedures,
we do not close the courthouse door to any class action. And we do not
require that state attorneys general do anything with the notice they
receive. We do not deny reasonable fees for class lawyers. Nor do we
mandate that every class action be brought in Federal court.
These proposals have earned a broad range of support. Even Judge
Paul Niemeyer, the Chair of the Judicial Conference's Advisory
Committee on Civil Rules, who has testified before Congress on this
issue, expressed his support, calling this a ``modest'' measure, noting
in particular that increasing federal jurisdiction over class actions
will be a positive ``meaningful step.''
Mr. Chairman, I hope my own balanced record on these types of
issues adds credibility to our measure. Just today, I've reintroduced
the ``Sunshine in Litigation Act,'' which addresses the growing use of
secrecy orders by Federal courts that too often allow vital public
health and safety information that is discovered in litigation to be
covered up, to be shielded from mothers, fathers and children whose
lives are potentially at stake. Unlike our class action reform, this is
a proposal the trial lawyers support and some business groups resist.
Whether it be secrecy in courts or class action reform, doing what
is right is what counts. And, regardless of where the ``special
interests'' line up, our Class Action Fairness Act is a terrific place
to start. Of course, this is not a final product. We continue to be
open to further limitation of the removal provision, and you have
indicated that you may be able to live without the mandatory Rule 11
penalties, which inexplicably raise loud concerns.
But Mr. Chairman, this is a balanced approach that corrects the
worst abuses, while still preserving the benefits of class actions. I
look forward to working together to move it forward. Thank you.
Senator Grassley. Three or four administrative matters
before we call the next three panels, and I will obviously call
the next three panels separately. Everybody's full written
testimony will be put in the record as submitted to us, so your
entire statement will become part of the printed record.
Therefore, we ask you to summarize your oral testimony in 5
minutes. That is when the red light goes on, and then obviously
if you are in the middle of a sentence or in the middle of a
paragraph, finish it, but we would like to keep everybody to
the limit so we get through because there will be a lot of
questions to be asked and we want Members to be able to
participate.
One other administrative thing, and that is that for
Members who are here or for Members who aren't here, you can
expect that we won't be able to ask all of our questions
orally, so some will be submitted for answers in writing. We
would like to have those answers provided to us in writing
within 2 weeks from today. If that is an inconvenience for
somebody, tell us what would be a good time for you and we will
try to accommodate you, but normally we would like to do that
in 2 weeks.
On our second panel now, I introduce Assistant Attorney
General Eleanor Acheson, who will be testifying about the
Justice Department's views. I welcome you and thank you for
your cooperation in providing testimony for your Department and
for your participation in the hearing. I would ask you to
proceed.
STATEMENT OF ELEANOR D. ACHESON, ASSISTANT ATTORNEY GENERAL,
OFFICE OF POLICY DEVELOPMENT, U.S. DEPARTMENT OF JUSTICE,
WASHINGTON, DC
Ms. Acheson. Thank you, Senator Grassley. Good afternoon. I
appreciate the opportunity to appear before the Subcommittee on
Administrative Oversight and the Courts to lay out the
Department of Justice's views regarding the proposed Class
Action Fairness of 1999, S. 353.
I have submitted a more extensive written statement for the
record. That statement describes the Department's concerns with
each of the sections of the bill. To keep my oral statement
short, I will focus on those provisions of S. 353 that would
effectively federalize class actions, and then address whatever
questions you have, Senator Grassley, or any of the other
Members. By so limiting my opening statement, however, I don't
mean to minimize our other concerns that are described in the
written statement.
Sections 3 and 4 of S. 353 would effectively federalize
most State class actions by providing Federal jurisdictions for
class actions in which any plaintiff is diverse from any
defendant in the action. S. 353 further provides that if a
State class action is removed to Federal court and then is not
certified as a class action under Federal rules, the Federal
court is to remand the case to the State court, stripped of its
class allegations. In other words, even if the case could have
proceeded as a class action under the law of the State, S. 353
would effectively require the State to try each individual
claim separately.
The ability to consolidate large numbers of claims in court
is tremendously important. When there are large numbers of
individuals, each of whom has been significantly harmed, but
the potential recovery is insufficient to support an individual
lawsuit, a class action is virtually the only way these
individuals can seek redress through the legal system.
Plaintiffs, defendants, and the system of justice all benefit
from the efficiencies resulting from consolidated consideration
of multiple claims with common questions of fact and law.
Because the class action mechanism is so important, we
should be cautious in curtailing access to it, do so only on
indications of clear and undisputed failures or abuse, and make
sure that any limitations or changes to this procedure are
closely tailored to the specific problems identified.
S. 353 is apparently intended to address a perception that
State courts are too ready to certify class actions. Of course,
State courts are subject to the constraints of due process, as
are Federal courts. We do not believe that a difference between
State and Federal class certification standards justifies
Federal action. To the extent that there have been concerns
about ex parte certifications in State courts, the States
themselves appear to be remedying that situation.
S. 353 also apparently is intended to address concerns that
certification of nationwide class actions by State courts
permits individual States to impose their own law on the Nation
as a whole and leads to extorted settlements and other abuses
by class action attorneys. If this is indeed an endemic
problem, legislation addressing State certification of
nationwide classes may be in order, but S. 353 does not take
this approach.
Instead of focusing on what the appropriate limits on State
authority to bind out-of-state plaintiffs ought to be, S. 353
would permit removal to a Federal court of nearly all State law
cases that otherwise would be heard in State court. Implicit in
this provision is the belief that class certification is more
difficult to obtain in Federal court, since otherwise removal
to Federal court would not reduce the possibility of extorted
settlements.
Again, we do not believe that Federal policy concerning
class actions is sacrosanct. States, within the constraints of
due process, should be free to establish their own policies.
Moreover, the instances generally cited as evidence of abusive
or collusive class action settlements can and have occurred in
Federal as well as State courts. If the Congress believes that
courts are approving unjustifiable class action settlements,
Congress certainly has the authority to address that issue in
Federal class actions, and provide models for States to follow,
if appropriate.
There are certainly examples of class actions in which
settlements appear to provide benefits primarily to lawyers and
defendants rather than to the injured plaintiffs. There are
class actions in which the purported nationwide reach of the
State court seems problematic. Perhaps there are particular
classes of cases--the Judicial Conference has been considering
whether mass torts constitute such a class--that appropriately
should be tried in Federal court, even absent the traditional
grounds for Federal jurisdiction.
We would be pleased to work with the members of this
subcommittee and with the Congress to determine whether there
are specific, systemic problems with class actions that warrant
a Federal response and to help craft such a response.
Thank you.
Senator Grassley. Thank you very much. I will start out
with questioning and we will have 5-minute rounds of
questioning, and I thank you for your timeliness as well.
Your testimony makes reference to perceived abuses in class
actions. Yet, both the House and Senate have received abundant
testimony regarding these abuses. Moreover, as I referred to in
my opening statement, there have been several studies
documenting that class action filings are dramatically on the
rise. Many academics and judges acknowledge that the class
action rule has gone beyond what was originally intended.
So my question to you--really, two questions and then a
question that kind of summarizes--Are you saying that there is
no systemic problem with the class action system? Are you
saying that there are no real issues of consumer exploitation
and attorney misconduct in regard to class actions? And does
the Justice Department have any data indicating that the
information that we have about the tidal wave of State court
actions is just plain wrong?
Ms. Acheson. I am certainly not saying that the studies
that you refer to don't indicate that there are some problems.
I think my answer, Senator, is no to your first two questions.
And with respect to your third question about there being a
tidal wave of class actions in State courts, I think I would
say that, first of all, a tidal wave of any kind of litigation
in any particular forum doesn't necessarily in and of itself
indicate that there are any problems.
Getting back to your first question, it is clear, I
believe, that there are certainly excesses, abuses and failures
of courts and court systems, it would appear, to in some cases,
both respect to procedural aspects--we have talked about the ex
parte certification--and some substantive aspects, effectively
police class actions. Nobody is disputing that there are those
cases.
They occur both in State and Federal courts, however, and
one of our points about this bill and the problems that it
intends to target, which I think we would all agree should
appropriately be addressed, is that this bill doesn't, in
federalizing class actions, in taking State class action cases
into the Federal court, necessarily address those problems.
And so I think that is what we are saying. We are not
saying that there aren't problems. I think we are saying, and I
think the RAND study----
Senator Grassley. Maybe you could help us by suggesting,
since there are some problems, what you might suggest to fix as
to what you consider to be a problem.
Ms. Acheson. Well, first of all, I don't purport to be an
expert in this area, but it looks as if the studies that have
been done--I have not read the Federalist Society study, but we
will certainly look at that immediately--indicate a couple of
problems that do exist. One of them, which has been the
procedural problems that sometimes occur, it appears, at least,
in certain State court systems are beginning to be addressed by
State courts themselves.
Senator Sessions didn't refer to this, but one of the
problems procedurally has been a practice--I don't know whether
it was just in some counties in Alabama, but of ex parte
certification of class actions. Perhaps that occurs in other
State systems, but now the Supreme Court of Alabama has fixed
that problem and it is no longer appropriate as a procedural
way to go forward.
On the more substantive side, it seems to me that another
of the problems that have been identified, and I think people
rightly are concerned about, is the extent to which a State
court that has jurisdiction of a nationwide class action can
effectively apply its State law to out-of-state plaintiffs. And
while there are some Supreme Court cases which indicate the
limits that due process allows in such circumstances, I would
think that Congress could appropriately legislate within those
limits and cut back to some extent there.
So it would seem to me that might be one approach to get to
the business that is much commented on, which is how
appropriate is it for a State court somewhere to be binding an
out-of-state plaintiff.
Senator Grassley. Could I ask you one more question while I
still have time?
Ms. Acheson. Absolutely, Senator.
Senator Grassley. You raise concerns about federalizing
class actions. Aren't multi-State plaintiff class actions
exactly the kind of cases that should be in Federal court?
Wouldn't you agree, as Professor Elliott will testify, that the
Constitution's only limitation on diversity jurisdiction is
Article III's requirement that controversies be between
citizens of different States, but rules governing complete
diversity, minimum amount in controversy, and removal are
really political decisions not mandated by the Constitution?
Those latter words are his.
Because we are dealing with interstate class actions
involving plaintiffs and defendants from many different States,
shouldn't the Federal courts be at the very least an option for
these litigants? Don't you think that due process dictates
that?
Ms. Acheson. Well, I guess, Senator, I would say that I
don't believe due process dictates that. I would agree with
Professor Elliott that I think the Constitution allows it, but
I certainly don't think due process dictates it. I think that
there are federalism interests that are implicated here that we
need to be concerned about because there certainly are both
sets of circumstances and absolutely fully competent State
court systems and groups of judges who can handle class action
cases.
And somewhere between what the Constitution would allow and
some of the excesses that I know occur and have been vividly
described here today, I think we can craft some lines and some
sets of rules that would get at some of the abuses that have
been described, but perhaps not have the effect of pushing so
many cases into the Federal system.
Senator Grassley. Senator Thurmond.
Senator Thurmond. Thank you very much, Mr. Chairman. Mr.
Chairman, I have another engagement and have to leave. I
understand Mr. Steve Morrison, a distinguished attorney from
South Carolina, is one of the witnesses here today, and I wish
to welcome him. I would like to ask unanimous consent that I
may submit some questions for the record.
Senator Grassley. Yes. Senator Thurmond is an example that
I just spoke about that there will be some questions submitted
for answer in writing.
[The questions of Senator Thurmond are located in the
appendix.]
Senator Grassley. The Senator from Alabama.
Senator Sessions. Thank you. Ms. Acheson, I am
disappointed, I guess, that your statement is so strongly
adverse to this. It strikes me that we have a magnificent legal
system in America, but it is appropriate to reform it and
change it as we have evidence to suggest that there are
problems.
I think this administration is basically resisting all
attempts to reform tort law in America, and I think we need to
reach an accord where we can communicate on how to make it
better. That is just an observation. You probably disagree with
that, but I think we are not giving serious thought to it and
we need to work together to get some changes.
Let's take a typical class action, maybe a credit card
interest error, maybe a product defect, a medical defect that
is sent to 50 different States in America. Just as a matter of
public policy, wouldn't it be better that that case be settled
and handled in a Federal court, where the U.S. Supreme Court
may ultimately decide an issue, as opposed to the plaintiffs
being able to search 50 States and then finding the most
favorable law and then find the county or circuit within that
State that would be most favorable to their lawsuit and filing
it there? Just conceptually, isn't this the kind of case that
would be more appropriate in Federal court?
Ms. Acheson. Well, I think it is hard, on a relatively
bare-bones hypothetical, Senator, to really get into all the
competing interests. But the way that you have presented the
matter, it would seem to me that probably in a case where you
do have victims/plaintiffs in all 50 States, it might well be
the type of a case that would be most effectively and
appropriately handled in a Federal court. But it sort of
depends on what law would be applied because it may well be
that that Federal court is applying, unless there is some basis
for Federal jurisdiction, simply the law of one of the 50
States where the occurrence, whatever it was, the accident, the
fraud, the negligence, the whatever, took place.
So I think that one thing that really needs to be examined
is what is really the culprit here. Is the culprit people
searching out the best substantive law, or is the culprit
people searching out the weakest sort of procedural structures
that they can manipulate?
Senator Sessions. Well, good lawyers are going to seek the
most favorable forum in the whole world, if you allow them to.
They are not good lawyers if they don't, and I think it is our
job to make sure we have got a system that creates a favorable
forum for both parties, not just one party.
We have certainly had complaints and evidence to suggest
that plaintiff lawyers and defendants have gotten together in
pre-trial negotiations and agreed to settlements that provide
little for the victims, but allow large attorneys' fees for the
attorneys. And then they find a favorable State court somewhere
and go in and present a settlement, and little has been done by
the judge to go behind that settlement to make sure it is just.
Are you familiar with that problem?
Ms. Acheson. That is certainly one of the problems that has
been written about. I can't say I am personally familiar, but
you are absolutely right. It is one of the specific problems
that many people identify.
Senator Sessions. Well, I believe we have a situation in
which we have a class of cases that would be appropriate in
Federal court because not only some specific act of interstate
commerce is involved, but the entire matter is usually deeply
involved in interstate commerce. You have a Federal court
system that therefore can provide a universal system of law
that private industries and businesses can know what the law is
and protect themselves better, and would avoid aberrational
results.
I mean, why would you say these lawyers from Chicago want
to file a lawsuit like this in a rural county in Alabama? The
six counties in Alabama--I don't believe any of them have over
20,000 people in them. Why would they pick those counties to
file lawsuits if they didn't think there was some specific
advantage?
Ms. Acheson. I assume you are right in that. I assume you
are right, and I would only say this just to underscore the
main theme of our comment. One is we are absolutely not opposed
to class action reform. Two, we are simply concerned that
particularly with regard to the two or three major problems
that have been articulated that this legislation does not get
at it. And, three, Senator, we are more than ready to sit down
and address specifically your concerns of how to get at some of
these problems.
What we are concerned about is that federalizing is not the
answer because there really isn't any whole system of law that
a Federal court or any State court can apply in some of these
cases. I think the question is what can we do substantively,
but also what can we do to have appropriate cases be in the
Federal system and to shore up the State systems with respect
to the kind of policing that may need to happen in some of
these areas. But we, I want to underscore again, are more than
ready to work with you and with the chairman of this
subcommittee on this issue.
Thank you very much.
Senator Sessions. Well, we have criminal laws and other
laws that are very tenuously connected, lawsuits over
employment that have tenuous interstate commerce connections.
But often the class actions are just intrinsically interstate
commerce and I think they are most appropriate for this
handling.
Thank you.
Senator Grassley. Right now, there are State courts that,
in dealing with large class actions, are dictating the laws of
other jurisdictions. Does it make sense to you that a court in
Illinois is dictating to a resident of Massachusetts what their
law means?
Ms. Acheson. Well, I am not sure whether or not it makes
sense to me. I guess, Senator Grassley, what I believe our
concern is is that this bill does not necessarily address that
problem. If that case were brought in the Federal court in
Illinois and was determined to be appropriate for class
handling, the Federal court might well be applying the
substantive law of Illinois or Oklahoma or----
Senator Grassley. That gets to my point. Isn't the Federal
court in these instances better suited to do this?
Ms. Acheson. I am not sure why that is intrinsically so.
Senator Grassley. Well, I mean isn't that what Federal
courts are supposed to do when they preside over Federal
diversity cases?
Ms. Acheson. Well, there are class actions and other kinds
of group actions brought in the Federal court on Federal bases,
and then when there is diversity, obviously, they deal with the
State law. But State courts have for 200-plus years dealt with
the laws of their sister States. I mean, I think that just on
that sort of precept alone, there is nothing that is magical
about the Federal courts.
Senator Grassley. Well, I am in a situation, not a real
situation but a hypothetical situation, of my constituents--
explaining to them that their rights were adjudicated in a suit
that they never knew about, never consented to participate in.
It was heard by a State court judge who is elected by people in
another State and has no accountability to the citizens of my
State of Iowa, and there is nothing an Iowa citizen or court
can do about it if the case is settled. To me, that is a
problem. You don't see that as a problem?
Ms. Acheson. No. I do see that--first of all, I certainly
see it as a multi-layered problem that people might well have
objections to. What I think I am trying to say, Senator, is
that whether it is in Federal court or State court I don't
think is the answer to that problem. I think the answer to that
problem is some of the notification provisions and the whole
idea of clearer notice to parties, the opportunity to opt out.
If somebody does get notice, they know what the benefit of
staying in might be and what the consequences of getting out
and seeking to bring their action might be. I think there are
some other ways to get at that very problem. But simply
changing the forum doesn't change--the Federal court may be
stuck with exactly some of the same procedural shortcomings
that you are talking about. There is no guarantee, because a
matter is in Federal court, that the non-in-state plaintiff is
going to know any more, is going to be any further informed or
better protected just based on which court it is in.
Senator Grassley. Well, thank you very much.
Do you have another question?
Senator Sessions. I would just like to say that Texas is
also a favorite spot, and they have had a 338-percent increase
in these filings. Alabama is not the only one. I didn't want to
suggest that, but we do have a problem and I have been made
aware of it. I had the Attorney General from New Hampshire come
down 3 years ago when I was Attorney General of Alabama and
wanted my assistance to help intervene in one of these class
actions that involved his constituents in New Hampshire.
What you say about this, in theory, is correct, but our
Founding Fathers were practical people. They created separation
of powers and they understood home cooking. That is really why
we have diversity jurisdiction, so out-of-state defendants can
get a less home-flavored court and jury. Isn't that what we
have really got here in these class actions, a classic
diversity case, but because of its unusual nature can be pled
in such a way that it doesn't implicate the diversity rules?
Isn't that why we ought to make some reform?
Ms. Acheson. Well, I certainly think that based on some of
the examples that have been given here, it would seem to me to
be certainly, if not right over the edge, casting a shadow on
abuse of the law, if not the spirit. In those cases, we should
come up with some reforms.
Senator Sessions. Thank you, Mr. Chairman.
Senator Grassley. Thank you, Ms. Acheson. We appreciate
your cooperation.
Ms. Acheson. Thank you, Senator.
[The prepared statement of Ms. Acheson follows:]
Prepared Statement of Eleanor D. Acheson
Good afternoon. I appreciate the opportunity to appear before this
Subcommittee on Administrative Oversight and the Courts to express the
Justice Department's views regarding the proposed Class Action Fairness
Act of 1999 (S. 353).
introduction
The Class Action Fairness Act of 1999 (S. 353) proposes to deal
with perceived abuses in state class actions by effectively
federalizing class actions. Sections 3 and 4 of S. 353 are
substantively identical to H.R. 3789, a bill considered by the House in
the last Congress. Last October, the Administration issued a Statement
of Administration Policy that stated that the Attorney General would
recommend that the President veto H.R. 3789 if it were presented to
him. See Statement of Administrative Policy (issued Oct. 5, 1998). S.
353 raises the same concerns as H.R. 3789. Moreover, it includes a
number of additional provisions that raise additional concerns on
policy and its constitutional grounds. Accordingly, the Department
strongly opposes S. 353.
Before addressing the specific provisions of S. 353, I would like
to review the importance of class action procedures and the
significance of the provisions of S. 353 that would federalize most
class actions. When there are large numbers of individuals, each of
whom has been significantly harmed, but the potential recovery is
insufficient to support an individual lawsuit, a class action is
virtually the only way these individuals can seek redress through the
legal system. Even when the harm to some or all of the individual
victims might justify individual lawsuits, class actions are by far the
most efficient means of resolving large numbers of claims that have
common questions of fact and law. Indeed, court systems can be
overwhelmed by large numbers of similar claims, delaying and even
denying justice to plaintiffs. Class actions provide efficiency
benefits to defendants as well, permitting resolution of multiple
claims in one proceeding. Plaintiffs, defendants, and the system of
justice all also benefit from the reduction in or elimination of
inconsistent verdicts. Because the class action mechanism is so
important, we should be cautious in curtailing access to it, do so only
on indications of clear and undisputed failures or abuse, and make sure
that any limitations or changes to this procedure are closely tailored
to the specific problems identified.
S. 353 would address perceived abuses in class actions by
federalizing them--providing federal jurisdiction and removal authority
for almost all non-securities class actions. We do not believe that the
case has been made that there are abuses intrinsic to state court class
actions that justify the wholesale removal of these cases from state
courts. There have been cases raising concerns from state courts, but
also from federal courts, and the anecdotes about state cases seem to
reflect problems with individual judges or particular locales rather
than systemic problems in states' handling of class actions. Unless the
claimed abuses of class actions are peculiarly a state court or state
law problem, federalization would not address the problems.
A related, and, we believe, crucial aspect of our consideration of
S. 353 is that we live in a federal system. states should be able to
create the remedies in their courts that the states conclude best serve
the interests of their citizens. S. 353 would federalize class actions
involving only state law claims--claims based on federal law already
can be brought in federal court under federal question jurisdiction. We
should await evidence of clear necessity before the federal government
interferes with the authority of states to set their own law and
procedures in their courts, and that evidence should demonstrate that
the states have broadly overreached or are unable to address the
problems themselves.
Finally, we are all aware that federal class actions standards have
been narrowed considerably by court interpretation in the past decade
or so. There is much debate over whether this is a good or bad thing,
but the very existence of the debate makes clear that there are public
policy choices to be made. There is nothing sacrosanct about federal
choices. When assertions are made that states certify class actions
that ``should not'' be certified, or approve settlements that ``should
not'' be approved, we need to be sure that such statements are not
simply expressions of policy differences. In a system of federalism,
state public policy choices should not be overridden without a showing
of compelling national need. There must be evidence of harm to
interests of national scope that require a federal response, and even
with such evidence, federal preemption should be limited to remedying
specific problems with tailored solutions, something that S. 353 does
not do.
There are certainly examples of class actions in which settlements
appear to provide benefits primarily to lawyers and defendants rather
than to the injured plaintiffs. There are class actions in which the
purported nationwide reach of a state court seems problematic. Perhaps
there are particular classes of cases--the Judicial Conference has been
considering whether mass torts are such a class--that appropriately
should be tried in federal court even absent the traditional grounds
for federal jurisdiction. We would be pleased to work with the Members
of this subcommittee and with the Congress to determine whether there
are specific systemic problems with class actions that warrant a
federal response and to attempt to craft such a response.
I would now like to turn to the specific provisions of S. 353.
section 2--notification requirements
Section 2 of the bill requires notification of the Attorney General
and state attorneys general of proposed settlements in class actions,
requires that hearings on proposed settlements be delayed for 120 days
after notification, imposes plain language requirements on class
notices, and limits attorneys' fees in class actions. We have the
following concerns about the provisions in this section.
1. Notification of the Attorney General
Requiring notice to the Attorney General of all class
certifications and settlements is unnecessary and burdensome, both to
the litigants and the Attorney General. Under this provision, the
Department is likely to be inundated with notices in cases in which the
Federal government has no interest. We note that the statute does not
indicate what the Attorney General is supposed to do with the notices
or the information contained in them. In addition, despite the
provision in the bill that these notice requirements impose no legal
obligations on the Attorney General, the Attorney General's silence in
response to notices may in some cases be interpreted as acquiescence,
if not approval.
2. Instructing State-court judges as to the timing of hearings on
proposed class action settlements
Section 2's requirements concerning notice of proposed settlements
in state court class actions and hearings on those proposals implicate
constitutional principles of federalism. Section 2 would require, for
example, that judges in state as well as Federal courts to wait at
least 120 days after service of settlement documents on state and
Federal attorneys general before convening any hearing to evaluate the
fairness of a proposed class-action settlement. Such procedural
directions to state judges, although constitutional in our view, could
be subject to significant constitutional challenge as an impermissible
infringement on the states' sovereign authority to determine the manner
in which state courts adjudicate state law claims.\1\
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\1\ See Johnson v. Frankell, 117 S. Ct. 1800, 1805 (1997)
(recognizing a ``general rule, bottomed deeply in belief in the
importance of state control of state judicial procedure, * * * that
federal law takes the state courts as it finds them'') (internal
quotations omitted). But see also Printz v. United States, 117 S. Ct.
2365, 2371 (1997) (noting that at least some types of Federal
instructions to state courts are exempt from the general proscription
against the commandeering of State governmental institutions).
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3. Notice and attorneys fees provisions
The notification provisions of section 2 would create a number of
difficulties in class actions. First, it is often difficult to
determine the current residence of all members of a plaintiff class.
This would necessitate providing notice to the attorneys general of all
fifty States in order to ensure that agreements are enforceable against
class members who generally could not otherwise opt out. The 120-day
advance notice requirement follows general practice in most cases, but
would not permit an expedited settlement even if the court and parties
agreed in a particular case that it was necessary.
Finally, the proposed limitation on attorneys' fees could create a
number of problems. It is not clear why class actions brought under
particular substantive rules of law should have different attorneys'
fees rules than other cases involving the same rules of law. For
example, it is not clear why Title VII class actions involving classes
of current and former federal employees, which the Department defends
on behalf of the United States, should have different attorneys' fees
rules than all other Title VII cases. Title VII, like other employment
discrimination statutes, has its own fees provision and there is a
well-established body of law concerning what is and is not permitted.
One of the principles established by that body of law is rejection of
the kind of proportionality set forth in proposed section 1714(a).
Courts recognize that civil rights cases often concern equitable rather
than monetary relief, and that attorneys may be unwilling to pursue
these cases (or Title VII cases subject to caps on recovery) if they
will not be paid for their efforts. Proposed subsection 1714(b), which
permits courts to base attorneys' fees on a reasonable lodestar
calculation, provides some, but not enough, correction. A reasonable
lodestar is often the beginning rather than the end of fee calculations
in Title VII cases. Multipliers are available for particularly
complicated cases or for experienced plaintiffs' counsel. The interests
of both plaintiffs, the courts, and even defendants are best served by
not discouraging experienced and knowledgeable counsel from taking on
these cases.
sections 3 and 4--class action jurisdiction and removal from state to
federal court
Under current law, Federal district courts have jurisdiction in
diversity cases only when all plaintiffs are diverse from all
defendants. That is, no plaintiff can be a citizen of any State of
which any defendant is a citizen. Section 3 of S. 353 would change that
rule for class actions alleging State law claims. Under S. 353, Federal
district courts would have jurisdiction in such cases as long as any
class member was a citizen of a State different from any defendant.
Section 4 of S. 353 would permit any defendant (without the concurrence
of the other defendants) to remove such a case from State to Federal
court. Once removed to Federal court, the case would be governed by
Federal law concerning class actions. In the event that the Federal
district court did not certify the proposed class, S. 353 provides that
the case would be remanded to State court stripped of its class
allegations.
S. 353 provides exceptions for corporate governance and securities
class litigation. The legislation also permits Federal courts to
abstain from hearing class actions against State government entities or
officials against whom Federal courts may not be able to order
relief.\2\ S. 353 also permits Federal courts to abstain from hearing
class actions in which the ``primary defendants'' and a ``substantial
majority'' of the members of the plaintiff class are from the same
State and that State's law governs the action. This exception is not
likely to produce a significant reduction in the number of State class
actions subject to removal. Defendants in class actions are likely to
be corporate entities whose citizenship has no necessary relationship
to where claims against them arise, so the exception for cases in which
plaintiffs and defendants are predominately citizens of the same State
is likely to apply to few cases.
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\2\ This latter exception appears to be superfluous in light of
Pennhurst State School & Hospital v. Halderman, 465 U.S. 89 (1984). In
that case, the Supreme Court held that the Eleventh Amendment forbids
Federal courts from ordering States and State officials to conform to
State law.
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Because the exceptions in S. 353 are likely to be insignificant,
the effect of this statute would be to grant defendants the option of
State or Federal court in almost all State class actions. In addition,
since cases not certified in Federal court would be remanded to State
court stripped of their class allegations, the bill would effectively
federalize class action standards. This latter result would not be
affected by the provision in the legislation that permits plaintiffs to
file amended class actions upon remand, since S. 353 appears to permit
defendants to remove the amended action to Federal court once again.
The bill apparently is intended to address a perception that State
courts are too ready to certify class actions. Of course, State courts
are as subject to the requirements of due process as Federal courts.\3\
If there are class action procedures in State courts that protect the
due process rights of the parties but are objectionable on policy
grounds, these policy issues should be addressed in the State courts
and legislatures. We do not believe that a mere difference between
Federal and State class certification standards justifies Federal
action. We live in a federal system and the States should be free to
provide the remedies they consider appropriate in their courts. To the
extent that S. 353 is directed at concerns about ex parte class
certifications in certain states, state legislatures and courts are the
appropriate bodies to address these concerns.\4\
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\3\ In Phillips Petroleum Co. v. Shutts (472 US 797, 821-22 (1985),
the court held that for a forum state to apply its law to non-residents
in a nationwide class action, the state ``must have a significant
contact or significant aggregation of contacts to the claims asserted
by each member of the plaintiff class, contacts `creating state
interest,' in order to ensure that the choice of law is not arbitrary
and unfair.'' The court held that if this test was not satisfied,
violations of the Due Process Clause of the Fourteenth Amendment and
the Full Faith and Credit Clause of Article IV would result.
\4\ Indeed, the complaints about ex parte class certification have
focused on one county in a particular state, and the Alabama Supreme
Court has dealt with that problem. See Ex parte Equity Nat'l Life Ins.
Co., 715 So.2d 192 (Ala. 1997); Ex parte Citicorp Acceptance Co., 715
So.2d 199 (Ala. 1997); Ex parte First Nat'l Bank, 717 So.2d 342 (Ala.
1997).
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S. 353 also apparently is intended to address concerns that
certification of nationwide class actions by State courts permits
individual States to impose their own law on the nation as a whole and
leads to extorted settlements and other abuses by class action
attorneys. If this indeed is an endemic problem, legislation addressing
State certification of nationwide classes may be in order, but S. 353
does not take this approach. Instead of focusing on what the
appropriate limits on state authority to bind out-of-state plaintiffs
ought to be, S. 353 simply would permit removal to Federal court of
nearly all State law class actions that otherwise would be heard in
State court. Implicit in this provision is the belief that class
certification is more difficult to obtain in Federal court, since
otherwise, removal to Federal court would not reduce the possibility of
``extorted'' settlements. Again, we do not believe that Federal policy
concerning class actions is sacrosanct and that the States, within the
constraints of due process, should be precluded from establishing their
own policies. Moreover, the instances generally cited as evidenced of
abusive or collusive class action settlements have occurred in federal
as well as state courts. If the Congress believes that courts are
approving unjustifiable class action settlements, Congress certainly
has the authority to address the issue in federal class actions and
provide models for states to follow if appropriate. Finally, a recent
study by the Federal Judicial Center found that ``there were not
objective indications that settlement was coerced by class
certification.'' See Thomas E. Willging, et al., Empirical Study of
Class Actions in Four Federal District Courts: Final Report to the
Advisory Committee on Civil Rules (Federal Judicial Center 1996), at
60, 90 (1996).
We note that S. 353 would permit the removal to Federal court of
cases concerned solely with State law that are most appropriately tried
in State court. For example, a class action brought under State law
concerning a corporation's operations within the State would be
removable to Federal court solely because a primary defendant happened
not to be a citizen of the State, even if the defendant had substantial
operations in the State. This bill would undermine the efforts of State
courts to address State and local matters by allowing litigants to
circumvent and render irrelevant the State court system. In our view,
this provides further demonstration of why federalization of class
actions is not an appropriate remedy for perceived class action abuse.
We also are concerned about the potential impact of this
legislation on the Federal judiciary at a time when the Chief Justice
of the United States has expressed serious concern about the marked
expansion of caseloads of Federal courts. See Chief Justice Rehnquist,
The 1997 Year-End Report on the Federal Judiciary at (I)(A).
Preliminary data from RAND's ongoing study of class actions suggest
that more than half of such litigation is in State courts. Class
actions are among the most resource-intensive litigation before the
judiciary. A study of class actions in Federal court by the Federal
Judicial Center showed that class actions took two to three times the
median time of a civil case from filing to disposition and consumed
almost five times more judicial time than other civil cases. FJC,
Empirical Study of Class Actions in Four District Courts at 7. By
expanding Federal court jurisdiction for class actions and permitting
removal from State courts, this bill could move most of this litigation
into the Federal judicial system, potentially requiring substantial new
Federal resources. Responsibility in this area should continue to be
shared among both the Federal and State judicial systems.
In addition to these policy concerns, we believe that the bill's
displacement of State-law class certification procedures could be
subject to constitutional challenge on federalism grounds. As a general
matter, Congress has the power to prescribe the manner in which Federal
courts, in the exercise of their diversity jurisdiction, handle issues
such as class action certification, ``which, though falling within the
uncertain area between substance and procedure, are rationally capable
of classification as either.'' Hanna v. Plumer, 380 U.S. 460, 472
(1965). However, sections 3 and 4 of S. 353 would expand the Federal
courts' diversity jurisdiction in a highly selective fashion. Putative
class actions that failed to meet the federal standard for class
certification would be returned to state court in disaggregated form
for individualized adjudications. The resulting displacement of States'
decisions as to the proper role of class action procedures in the
adjudication of State-law claims could be attacked as an impermissible
form of federal interference in States' decisions as to how to
structure the operations of the their own courts. Although we believe
that these provisions are constitutional and that such a challenge
should not succeed under current doctrine, there is a strong likelihood
of constitutional litigation on this point.
section 5--rule 11
Section 5 of S. 353 would amend Rule 11 of the Federal Rules of
Civil Procedure to require judges to impose sanctions upon finding a
violation of Rule 11, instead of leaving the issue to the judge's
discretion as is the case now. This provision would apply to all civil
litigation, not simply class actions. We strongly oppose this provision
for a number of reasons.
First, we believe that, barring an emergency requiring prompt
legislation, amendment of the rules of procedure should proceed through
the processes of the Rules Enabling Act, 28 U.S.C. Sec. Sec. 2071, et
seq. That act was created by Congress for the precise purpose of
affording fair and thorough consideration, with an opportunity for
comment by the public at large, to proposals for rules amendments. The
Department strongly supports the Rules Enabling Act process. To the
extent that any amendment to Rule 11 is necessary, it would be
appropriate for the Advisory Committee on Civil Rules to make a
proposal to the Judicial Conference Standing Committee on Rules of
Practice and Procedure for consideration. Accordingly, we urge that the
change proposed in S. 353 be submitted to the Judicial Conference or an
appropriate committee of the Conference for review in the first
instance, rather than being pursued directly through legislation.
Our second reason for objecting to the proposed modification of
Rule 11 is that the modification is not directed at the problem S. 353
is intended to address. The modification appears intended to deter
frivolous class actions, but Rule 11 applies to civil litigation
generally. The impact on class actions of the proposed change is likely
to be minuscule compared to its impact on other aspects of civil
litigation. While we do not necessarily agree that class actions are a
greater source of frivolous lawsuits than other kinds of civil actions,
if any measures are to be taken to deter frivolous class action claims,
the measures should be directed specifically at that issue.
We also object to the proposed modification of Rule 11 on
substantive grounds. In 1983, sanctions under Rule 11 were made
mandatory, as S. 353 would make them again. In 1993, sanctions once
again were made discretionary in response to the ``increased
disruption'' caused by the mandatory sanctions provision enacted in
1983. See Proposed Amendments to the Federal Rules of Civil Procedure:
Hearing Before the Subcomm. On Courts and Admin. Practice of the Senate
Comm. on the Judiciary, 103d Cong. 9-10 (1993) (statement of Sam C.
Pointer, Jr., Chief District Judge for the Northern District of Alabama
and Chairman, Advisory Committee on Civil Rules). Judge Pointer
observed that the empirical studies of the Federal Judicial Center
``amply support [the Advisory Committee's] conclusion that there has
been an excessive and unproductive amount of Rule 11 activity'' under
the 1983 version of the rule. Judge Pointer further noted that the
Judicial Conference accepted the view that ``explicit discretion to
decline imposition of sanctions is needed in order to deal with the
problem of Rule 11 motions that raise technical, insignificant
violations.'' Judge Pointer also recognized the concerns of the civil
rights bar that ``the 1983 version of Rule 11 had been used by defense
counsel and some courts to `chill' the development of potentially
meritorious, yet untested and novel, claims.'' Thus, ample deliberation
and research supported the change from mandatory to discretionary
sanctions in 1993. No such research demonstrates the need for the
revision to Rule 11. S. 353 would accomplish, particularly outside of
the Rules Enabling Act process. For these reasons, the proposed
revision to Rule 11 is unwarranted.
conclusion
As discussed in my testimony, there may be discrete problems with
class actions that need to be addressed. We would be happy to work with
Members of this subcommittee and with the Congress to address any such
problems. Nevertheless, we do not believe that federalization of class
actions and imposition by the federal government of numerous
requirements in state court class actions litigation is appropriate for
the reasons we have set forth, and accordingly the Department of
Justice strongly opposes enactment of S. 353.
Senator Grassley. Our next panel is Mr. John Frank and
Professor Don Elliott. Mr. Frank is a partner with the Phoenix
law firm of Lewis and Roca. He is the witness that was
introduced by Senator Kyl, and he is the last living member of
the committee which created the class action rules in the
period of time of 1963 to 1966. Mr. Frank will be able to
provide us with a unique insight into the class action rules.
Mr. Elliott is a partner at the Washington, DC, office of
Paul, Hastings, Janofsky and Walker, and is currently an
adjunct professor at Yale Law School. Previously, Mr. Elliott
was at the Yale Law School as a professor, 1981 to 1994,
specializing in a number of subjects, including complex
litigation, class action, and constitutional law.
Welcome to both of you. I think we will start with you, Mr.
Frank.
PANEL CONSISTING OF JOHN P. FRANK, LEWIS AND ROCA, PHOENIX, AZ;
AND E. DONALD ELLIOTT, PROFESSOR OF LAW, YALE LAW SCHOOL, NEW
HAVEN, CT
STATEMENT OF JOHN P. FRANK
Mr. Frank. Thank you, Mr. Chairman. I appreciate the
opportunity to be here very much. This has been a subject of
deepest interest to me. You are right; in the 1960's, I was on
the committee. I dissented at that time because I thought it
would lead to fraud, and I must say the results seem to
indicate that.
In more recent years, there has been 7 years of work by
subsequent committees, headed by Judge Patrick Higginbotham,
Judge Paul Niemeyer and Judge Scirica. All of them have invited
me to participate as an emeritus member, so I have participated
in all of the meetings and the hearings on this subject in the
last several years. I have the report of the Federal Judicial
Center, and the RAND report was sent to me for comment before
it became final. So it is a matter of deepest interest. I
strongly support this bill.
Senator Sessions, you may be perhaps amused to know that
you are not the only Alabamian nor the first to have doubts on
this subject. I cannot give you orally, because the time is too
short, the history of this matter, except to say that
originally when we created this rule, we assumed that the
largest class would be 100 people. And we were looking at
airplane crashes and the Ringling Brothers fire at Hartford,
CT.
The growth of this to involve thousands and thousands of
people was totally beyond the anticipation of the rule.
But I return to Senator Sessions. Senator, at page 8--if
you have my statement, at page 8a, when Justice Black, whose
clerk I was and whose very close friend I was, so that we
corresponded for all the years of his life, made his decision
in Snyder v. Harris requiring that each party have the
jurisdictional amount, and thus frankly cutting down on class
actions, I wrote him an applauding note and sent him a copy of
my dissent to the rule. And he responded, ``Thanks for sending
me your dissent to Rule 23(b)(3) concerning which I wrote in my
opinion in Snyder v. Harris. I certainly agree with you that
the rule is a very poor one, and I am glad to know that you
agreed with me at the time it was passed.''
To add to your collection of oddities, Senator Grassley, I
have inserted at page 15 of my statement an illustration of a
check that some victorious member of a class who, for his joy
in being in a class, got a check, a copy of which I enclose,
for $.08, with counsel receiving a very large sum.
Let me use the balance of my time to speak briefly to the
bill itself because there simply isn't time to make a
comprehensive statement here for you. But let me turn to the
bill.
First, I have made some technical suggestions to the staff
where I think, Senator Grassley, you can do even more to
tighten down on that fee subject. There are some details there
that I would not use in this precious time, but they are there.
I do think one thing you ought to give real thought to is you
have unleashed the injunction thing without putting an
effective control on the fees there, and all that is going to
do is shift the cases from damage cases to injunction cases,
which is already happening. And I submit that a little
tightening there would be an improvement and carry out your
wish, which I strongly applaud.
On the fee subject, as I say, I have covered it. Coupons
ought to be abolished. You are absolutely right. This business
of giving people a coupon for what would amount for the
discount they would get on the merchandise anyway and then
paying a large fee is simply scandalous. Also, I think,
Senator, and members of the committee, you ought to take up the
subject of fluid recovery.
I would like to make one or two other points. May I do so?
I am not sure if the light tells me that I am done.
Senator Grassley. Yes.
Mr. Frank. Fluid recovery is what is being done--the sort
of thing Senator Thurmond objected to, I think, where there is
nothing to give the class, so you take the amount of money and
give it to some charity and then pay a large fee to the client.
That is wrong. That is the kind of social policy that ought to
be made by the Congress or by the administrative agencies and
should not be the subject of the whimsical jurisdiction of some
class action judge.
I have one very gray point to take up, Senator Grassley--
two, if I may, briefly. One, the problem with the Department of
Justice. Clearly, if the Department is going to veto the bill,
it is a waste of time; you probably will have trouble getting
two-thirds.
Those problems can be solved. Ms. Acheson was very clear
that they are ready to talk. I submit that if you think it
wise, you might arrange informally to have Judge Higginbotham
of the Fifth Circuit and Judge Pointer of your circuit, who are
the two most experienced judges in America on the Federal-State
relation problem in class actions, and who have administered a
great number of the cases with both Federal and State
participating, together with the Department of Justice and some
technical member of your group--let me nominate Senator Kyl--to
see if you can't work out a compromise with Justice. I suspect
you could, and if I can personally be of any assistance, I
would like to.
The only other subject I can take up, with the indulgence
of your time, Senator Grassley, goes to you, but it is major. I
respectfully submit that it is probably not a good idea to have
this rule 11 thing tacked on here because what you are doing--
you have got plenty of opposition from the class action bar as
it is. I am responsible more than any other bar member in the
country for the 1993 revision of rule 11, and it is working
rather well and was supported by the Litigation Section of the
ABA and countless other groups all over America. You don't need
two wars.
What is more important is it is not a good solution to the
problem that is troubling you, and I ask leave to state briefly
what I submit would be a better solution. In the committees of
the last 7 years, we have repeatedly taken up the subject of
the small case--I gave you the example of the $.08, the $.38;
you gave the $10 case--whatever they may be, the trivial case
which ought not be in the Federal courts at all.
The slang expression for these cases in the committee
dialogue was the ``t'ain't worth it cases.'' They are just not
worth putting in the Federal system. They are not worth putting
in any system. They are just fee engenderers and there is
nothing else to them. It is the biggest complaint you have and
it is a good one.
I submit that this bill should provide, as earlier drafts
of the pending rule has provided--and it should have stayed
there--that it would be very constructive to put a ``t'ain't
worth it'' provision into your statute and provide that the
court, before certifying a class, should ensure that the
prospect of financial reward to members of the class is large
enough to be worth undertaking it in the first place, so that
the $.02, $.08, $15 trivial cases would be barred from being in
this category at all.
I submit that that will get to, Senator Grassley, what you
wisely want. You will get rid of the frivolous cases that way
and still keep it within the orbit of class actions without
taking on a side war that I greatly fear would result in
defeating the whole bill. And it is a good bill and you ought
to do it, and I thank you for letting me say so.
Senator Grassley. We will consider your recommendation as
well on that point.
[The prepared statement of Mr. Frank follows:]
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Senator Grassley. Professor Elliott.
STATEMENT OF E. DONALD ELLIOTT
Mr. Elliott. Thank you very much, Mr. Chairman. If I could
begin with a very brief personal note, in 1989 I was confirmed
as general counsel of EPA by the Senate, and I remember, Mr.
Chairman, in our courtesy calls you said to me, why would
anyone leave a professorship at Yale to go be a general counsel
at EPA? And I must say, Senator, I wanted to tell you that in
some of the dark hours at EPA I remembered that comment.
But I am here today as a longtime teacher of complex
litigation and class actions at Yale Law School, where I have
been a successor of John Frank's since 1981. I am a qualified
supporter of class actions, although I think there are some
abuses under the Federal rules, as well. But I am here
primarily because I am very concerned that some recent
decisions have restricted the rights of litigants in the large
multi-party cases that I agree with Senator Sessions really
ought to be in the Federal courts, to remove those kinds of
cases into the Federal courts where they belong.
And I do disagree with the Department of Justice's
position. I was very disappointed with it. I do not think this
legislation effectively federalizes. I think that is a little
bit too simplistic. My view as both a litigating lawyer and a
professor of civil procedure is that we have struck a really
brilliant balance in cases. We give the plaintiff the first
choice of where they file the case, but that is not an
unlimited choice. It is balanced by the defendant's right to
remove. And that is true in all kinds of cases and it is one of
the core reasons we have diversity jurisdiction.
Unfortunately, for a variety of reasons that we could get
into if you are interested, that right to removal has become
more apparent than real in complex class action cases. It is
pretty easy for a good lawyer to join some parties that will
defeat complete diversity, and thereby make a complex case,
including a class action case, one that can't be removed to
Federal court.
So I think what we are really talking about in the removal
provisions here is not effectively federalizing litigation, but
restoring the balance between the plaintiff's right to pick and
the defendant's right to remove the case to Federal court if
there is too much home cooking or too much of what we sometimes
call the home court advantage.
I don't think there is any real serious question about the
constitutional authority of the Congress to do something like
that. And I think it is important to realize that removal is, I
think, a really brilliant part of our jurisprudence. It not
only guarantees reality and the appearance of fairness to the
litigants directly involved, but I think sometimes it is not
fully recognized that it creates a kind of incentive that
gently discourages the State courts from going too far through
the device of competition.
Senator Grassley, you will be glad to know that we in
academia are again rediscovering some of the virtues of the
market, and I think increasingly market approaches to a variety
of areas are coming back into fashion. And in a sense, that is
what removal does. It doesn't override the States' decision to
have any kind of class action rule they want. It simply says if
there is a little competition and an alternative to go to
Federal court, then States are not able to go too far.
In a sense, it is like the school choice plans. You know,
you try to improve the public schools by giving somebody an
opportunity to go elsewhere if the State is not using its
monopoly in the right way. And I think the removal provisions
of this bill are definitely a step in the right direction.
I also disagree with the Justice Department interpretation
that if cases are remanded from Federal court that they are
necessarily stripped of the class action allegations. It is
true that those allegations are stricken, but once the case
goes back to State court, if it is appropriate for State
certification, I don't see why those class action allegations
couldn't come back in. So I think that is a provision that
needs to be clarified in terms of its intent.
Since time is short, let me just wind up. You mentioned
that there might be some areas for further thought as the
process goes forward, and let me mention two or three. First of
all, part of the problem we have in terms of removal in class
action cases is created by--and these are not in my written
statement. I apologize, but just in thinking about it last
night, part of the problem is created by the 1996 amendments to
28 U.S.C. 1446(b), the removal statute that provides an
absolute 1-year limitation on the right to remove to Federal
court in diversity cases. In these complex class action cases,
you are not going to get to the question of who the proper
parties are within that year.
Another provision that is a problem is 28 U.S.C. 1359,
which is the collusive joinder provision. It provides that you
can't add fictive parties for purposes of establishing Federal
jurisdiction. But it does not provide you can't add parties
collusively for the purpose of defeating Federal jurisdiction.
So when you take those two together, the reality of what
happens is you can avoid joinder by sticking some parties in
there as named plaintiffs who are going to be non-diverse.
And there are several different ways to fix that problem.
One way which I would support is to abolish the complete
diversity requirement. I agree with Senator Sessions. These are
the kinds of cases, particularly when they are multi-party
cases, that fundamentally belong in the Federal courts and
really respond to the core purposes for which we have Federal
diversity jurisdiction.
I will just finish up by saying I also think that the
limitations on the extraterritorial of State courts in class
action cases, which I heard the Justice Department saying they
might support--I think that is also an area that would be
helpful.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Elliott follows:]
Prepared Statement of E. Donald Elliott
As a long-time teacher of complex civil litigation and class
actions at Yale Law School, as well as a practicing attorney
specializing in complex litigation, I am greatly concerned that recent
decisions by some federal courts have restricted the rights of
litigants in large, multi-party class actions to remove these cases to
a neutral federal forum on grounds of diversity of citizenship. The
main purposes for which diversity jurisdiction was created--preserving
the appearance as well as the reality of no bias in favor of local
litigants--are particularly relevant in large class-action litigation
against out-of-state corporations. However, overly rigid
interpretations of the judge-made requirement for ``complete
diversity'' of citizenship among all parties in class actions have made
it virtually impossible to remove class actions to federal court.
I believe that removal is a brilliant innovation in our federal
jurisprudence, and I strongly support the provisions of S. 353 that
would make removal to federal court in class actions cases a reality
again by revising the complete diversity requirement. The removal
option not only guarantees the reality and the appearance of fairness
to the litigants directly involved, but--even more importantly--the
removal option gently discourages abuses in the state courts by
offering litigants a competitive choice to take their business
elsewhere. Like other governmental programs that improve systems by
giving users the option to go elsewhere if they are dissatisfied,
removal does not override state court autonomy to choose whatever law
or class action rule the state may like; keeping a removal option alive
merely provides potential competition from an alternative forum.
Finally, I believe that removal may be important for an additional
reason: in many instances overall efficiency in terms of speed and
reduced transaction costs can be enhanced by concentrating complex
cases in a single federal forum for resolution.
Thank you very much for the opportunity to discuss the important
issues presented by the proposed legislation being considered by this
Subcommittee today--S. 353, the Class Action Fairness Act of 1999. I am
particularly interested in the provisions of the bill concerning the
expansion of our diversity jurisdiction statutes to allow removal so
that more interstate class actions to be heard by our federal courts.
I approach this subject from two different but related
perspectives. First, I have taught complex civil litigation and class
actions at Yale Law School since 1981--first, as a tenured professor
ultimately holding the Julien and Virginia Cornell Chair in
Environmental Law and Litigation, and since 1994, part-time as an
adjunct professor at Yale while also practicing. I have spent a great
deal of academic energy thinking and writing about how particular
jurisdictional and procedural rules affect the resolution of complex
disputes (particularly in environmental, toxic tort and medical and
consumer product injury cases), and have served as an adviser to the
Federal Courts Study Committee. Second, as a partner focusing on
complex environmental litigation at Paul, Hastings, Janofsky & Walker
LLP, I have had some experience confronting the practical effects of
the current jurisdictional regime.
I. The Rising Tide of State Class Actions Is A Product Of The Federal
Courts' Reluctance To Take Jurisdiction Over Interstate Class Actions
a. there is a class action crisis in the state courts
The flood of class-action litigation in our state courts across the
United States is too well documented to warrant significant discussion,
much less debate.\1\ Many out-of-state defense lawyers have had the
experience of arriving at a state courthouse, only to see their
opponent drive up in a car bearing a campaign sticker from the judge's
last election. Why should we consider the state-court class-action
explosion a crisis? For one simple reason: because the class action
device has the (often realized) potential to put its heavy thumb on the
scales of justice, affecting not only procedure but also in many
instances the outcome of lawsuits. As I once observed in an article in
the University of Chicago Law Review, judges often are inclined to
certify cases for class-action treatment not because they believe a
class trial to be more efficient than an individual trial, but because
they believe class certification will simply induce the defendant to
settle the case without trial.\2\ Chief Judge Richard Posner of the
U.S. Court of Appeals for the Seventh Circuit has made the same point
more recently and more bluntly: in his words, the mere act of
certifying a class ``often, perhaps typically, inflict[s] irreparable
injury on the defendants.'' \3\ When a class is certified in state
court, where an out-of-state defendant has little confidence in the
prospect of a fair and impartial trial on the merits, the coercive
power of class certification is all the greater. Plainly, the judicial
system is supposed to provide procedures and a forum for dispute
resolution; it is not supposed to coerce particular outcomes.
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\1\ Among other places, the ever-increasing rate at which state-
court class actions are being filed against out-of-state corporate
defendants has been documented in Working Papers of the Advisory
Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol.
1, at ix-x (May 1, 1997) (``Advisory Committee Working Papers'')
(memorandum of Judge Paul V. Niemeyer to members of the Advisory
Committee on Civil Rules); and Deborah Hensler, et al. (Institute for
Civil Justice), Preliminary Reports of the RAND Study of Class Action
Litigation, at 15 (May 1, 1997) (``ICJ Report'') (stating that the
``doubling or tripling of the number of putative class actions'' has
been heavily ``concentrated in the state courts'').
\2\ See E. Donald Elliott, Managerial Judging and the Evolution of
Procedure, 53 U. Chi. L. Rev. 306, 323-24 (1986).
\3\ In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1295 (7th Cir.
1995).
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b. the federal courts have played a significant role in precipitating
the class action crisis in the state courts
Notwithstanding Chief Justice Marshall's admonition that the
federal courts must assume jurisdiction over cases that come within the
federal jurisdictional confines of the Constitution and applicable
statutes,\4\ the clear trend in the federal courts over the past
several years has been to decline jurisdiction over interstate class
actions in any and every way possible. For example, federal courts have
given a very strong reading to the judge-made rule requiring ``complete
diversity''--the principle of federal diversity jurisdiction stating
that no plaintiff in a lawsuit can be a citizen of the same state as
any defendant. This rule may be quite sensible in other contexts, but
in class actions, it virtually assures that large class actions will be
kept out of federal court. The result has been that class-action
plaintiffs' attorneys can evade the federal court system simply by
naming (in addition to the real parties) a defendant with no connection
to the class action other than shared citizenship with the named
plaintiff. Blessing this practice, the U.S. Court of Appeals for the
Eleventh Circuit recently considered a class action in which an Alabama
citizen filed a class-action complaint against a Florida auto leasing
company alleging the existence of a fraudulent pricing scheme. The
Alabama plaintiff also named an Alabama auto dealership, which had no
involvement in the development of the alleged pricing scheme, and which
had virtually no connection whatever with any putative class member
other than the single named plaintiff. Despite the conceded fact that
98 percent of the 17,000 ``plaintiffs'' involved in the case were
unconnected to the non-diverse Alabama defendant, and therefore that
the focus of virtually all--but not technically all--of the trial
court's efforts would be on parties that were completely diverse, the
Eleventh Circuit sent the case back to state court.\5\
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\4\ See Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 403 (1821)
(``It is most true that this Court will not take jurisdiction if it
should not; but it is equally true, that it must take jurisdiction if
it should. The judiciary cannot, as the legislature may, avoid a
measure because it approaches the confines of the constitution. We
cannot pass it by because it is doubtful. With whatever doubts, with
whatever difficulties, a case may be attended, we must decide it, if it
be brought before us. We have no more right to decline the exercise of
jurisdiction which is given, than to usurp that which is not given.'').
\5\ See Triggs v. John Crump Toyota, Inc., 154 F.3d 1284 (11th Cir.
1998).
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The federal courts have also relied on the present diversity-
jurisdiction statute's amount-in-controversy requirement--under which
only cases that put more than $75,000 in issue may be heard in federal
court--to keep interstate class actions out of federal court.
Interpreting a previous (but fundamentally identical) version of the
diversity-jurisdiction statute, the Supreme Court held in 1973 that the
amount-in-controversy requirement must be met by each and every class
member in a class action.\6\ The Supreme Court did not address the
issue of how certain categories of relief (such as attorney's fees,
punitive damages, and injunctive relief) should be calculated for
jurisdictional purposes, however. Unfortunately, many (though not all)
lower courts have addressed this issue quite restrictively from a
jurisdictional standpoint. For example, in cases where defendants have
attempted to remove cases to federal court on the ground that a class-
action complaint requests attorney's fees in excess of the required
jurisdictional amount, a number of courts have held that the amount of
fees requested cannot be attributed to all the class members, and
therefore that such cases cannot be heard in federal court.\7\
Similarly, in cases where defendants have attempted to remove cases to
federal court on the ground that a complaint seeks punitive damages
well above $75,000, courts have held that the amount of alleged
punitive damages cannot be applied to the claims of all class members,
and therefore have remanded such cases to state court.\8\ And in cases
where defendants have attempted to remove cases to federal court on the
ground that a defendant's cost of complying with the injunctive relief
requested by the plaintiff exceeds the jurisdictional amount, at least
one federal appeals court has held that the amount-in-controversy
requirement is not met and that the case therefore cannot proceed in
federal court.\9\
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\6\ See Zahn v. International Paper Co., 414 U.S. 291 (1973).
\7\ See Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214
(3d Cir. 1999) (citing cases); but see In re Abbott Laboratories, Inc.,
51 F.3d 524 (5th Cir. 1995).
\8\ See, e.g., In re Brand Name Prescription Drugs Antitrust
Litig., 1997 U.S. App. LEXIS 22267, at *26 (7th Cir. 1997) (``the right
to punitive damages is a right of the individual plaintiff, rather than
a collective entitlement of the victims of the defendant's
misconduct''); Gilman v. BHC Securities, Inc., 104 F.3d 1418, 1430 (2d
Cir. 1997) (to same effect); but see Allen v. R & H Oil & Gas Co., 63
F.3d 1326, 1335 (5th Cir. 1995) (permitting aggregation of punitive
damages for purposes of satisfying jurisdictional amount requirement);
Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1359 (11th Cir. 1996)
(same holding).
\9\ See Packard v. Provident Nat'l Bank, 994 F.2d 1039, 1050 (3d
Cir. 1993) (``allowing the amount in controversy to be measured by the
defendant's costs would eviscerate Snyder's holding that the claims of
class members may not be aggregated in order to meet the jurisdictional
threshold'').
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The federal courts' contribution to the class action crisis is not
limited to an increasingly narrow reading of the two statutory
requirements for federal diversity jurisdiction. Federal courts also
have demonstrated an increasing willingness, in the absence of
congressional direction to the contrary, to seek out procedural
technicalities on the basis of which to decline jurisdiction even when
the two statutory requirements of diversity jurisdiction are satisfied.
One very recent example of this phenomenon is an unpublished remand
order issued by the U.S. District Court for the District of
Arizona.\10\ In that case, the plaintiff filed a class-action lawsuit
in Arizona state court attacking a marketing practice of an auto
manufacturer. To dissuade the manufacturer from removing the case to
state court, the plaintiff named an Arizona auto dealer as a defendant
and declined to state the amount of damages she sought. The
manufacturer removed the case, arguing that the diversity-of-
citizenship requirement was satisfied because the Arizona auto dealer
had no connection with putative class members other than the named
plaintiff herself, and that the plaintiff's request for attorney's
fees, punitive damages, and injunctive relief were all sufficient to
satisfy the amount-in-controversy requirement. The district court
rejected these arguments and remanded the case to state court.
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\10\ Dixon v. Ford Motor Co., Civ. A. 99-456 (D. Ariz.).
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Within weeks of the remand order, the plaintiff filed a sworn
disclosure statement disclosing that, in fact, she would not seek any
relief from or make service upon the Arizona dealer defendant.
Intrigued, counsel for the manufacturer asked the plaintiff's attorney
to stipulate that the plaintiff sought damages of $75,000 or less. The
attorney refused to stipulate. The manufacturer therefore removed the
case to federal court again, relying on the federal statute permitting
re-removal of cases upon the discovery of ``other paper'' showing that
the requirements of federal jurisdiction are met. The manufacturer
pointed out that the plaintiff had expressly disclaimed any right to
relief against the only non-diverse defendant, and that the plaintiff's
refusal to stipulate to damages less than the jurisdictional amount
gave rise to an inference that she sought damages in excess of the
jurisdictional amount. The district court agreed with the manufacturer
both that there now was complete diversity of citizenship, and that the
plaintiff's refusal to stipulate created an inference that her claimed
damages exceeded $75,000. Nonetheless, the district court remanded the
case to state court, all for the exceedingly technical reason that the
attorney's refusal to stipulate did not constitute ``other paper'' upon
which removal could occur under the relevant provision of our removal
statutes (28 U.S.C. Sec. 1446(b)).
In short, because there is no clear congressional mandate
permitting interstate class actions to proceed in federal court, some
federal courts are straining to avoid them.
II. The Constitutional Purposes Of Diversity Jurisdiction Support The
Extension Of Federal Jurisdiction To Cover Interstate Class Actions
a. interstate class actions implicate all three concerns identified by
the framers as justifications for diversity jurisdiction
Let me make clear at the outset that the decision whether or not to
extend diversity jurisdiction to cover interstate class actions is a
political decision, and not a constitutional one. The Constitution's
only limitation on diversity jurisdiction is Article III's requirement
that controversies be ``between citizens of different states.'' The
Supreme Court has regularly recognized that the decision to require
complete diversity, and the decision to set a minimum amount in
controversy, are political decisions not mandated by the
Constitution.\11\ It therefore is the prerogative of Congress to
broaden the scope of diversity jurisdiction to any extent it sees fit,
as long as any two adverse parties to a law suit are citizens of
different states.\12\
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\11\ See, e.g., Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S.
826, 829 n.1 (1989) (``The complete diversity requirement is based on
the diversity statute, not Article III of the Constitution''); Owen
Equip. & Erection Co. v. Kroger, 437 U.S. 365, 373 n.13 (1978) (to same
effect).
\12\ See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-
31 (1967).
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In my view, extending diversity jurisdiction to cover interstate
class actions is not only permissible, but desirable in light of the
purposes that animated the framers of the Constitution in adopting the
constitutional diversity jurisdiction principle. Diversity jurisdiction
generally is thought to be premised on three considerations, each of
which I discuss in turn.
The impermissibility of locality discrimination
Perhaps the most important reason why the framers in 1787 thought
it important to replace the Articles of Confederation with a new
Constitution was the conviction that a loose confederation of states
was a weaker form of government, and less protective of basic
liberties, than a single, unified nation. As Judge Henry Friendly
explained, diversity jurisdiction was an important component in the
framers' plan to create a stronger union out of the old confederation;
its central purpose was (and is) to protect citizens in one state from
the injustice that might arise if they were forced to litigate in the
courts of another state.\13\ Quoting James Madison, Judge Friendly
believed diversity jurisdiction to be essential to a strong union
because it ``may happen that a strong prejudice may arise in some state
against the citizens of others, who may have claims against them.''
\14\ A century and a half after Madison, Justice Frankfurter put a more
practical face on Madison's understanding: ``It was believed that,
consciously or otherwise, the courts of a state may favor their own
citizens. Bias against outsiders may become embedded in a judgment of
the state court and yet not be sufficiently apparent to be made the
basis of a federal claim.'' \15\
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\13\ See Henry J. Friendly, The Historic Basis of Diversity
Jurisdiction, 41 Harv. L. Rev. 483 (1928).
\14\ Id. at 492-93.
\15\ Burford v. Sun Oil Co., 319 U.S. 315, 316 (1943) (Frankfurter,
J., dissenting on grounds unrelated to diversity jurisdiction).
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A number of scholars have argued, persuasively in my view, that the
problem with local bias is based not only on the existence of such
bias, but also on the possibility of a perception of such bias. Chief
Justice Marshall himself recognized the constitutional significance of
even the perception of bias:
However true the fact may be, that tribunals of the states will
administer justice as impartially as those of the nation, to
the parties of every description, it is not less true, that the
constitution itself either entertains apprehensions of this
subject, or views with such indulgence the possible fears and
apprehension of suitors, that it has established national
tribunals for the decision of controversies between * * *
citizens of different states.\16\
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\16\ Bank of United States v. Devaux, 9 U.S. (5 Cranch) 61, 87
(Marshall, C.J.).
Thus, diversity jurisdiction not only was designed to protect against
bias, but to shore up confidence in the judicial system by preventing
even the appearance of discrimination in favor of local residents.\17\
Given this function, diversity jurisdiction should not be construed as
parsimoniously as the recent federal decisions described above have
done; instead, as others have recognized, the ``prophylactic'' function
of diversity jurisdiction demands that it be extended liberally to
cases in which legitimate concerns about locality discrimination might
arise.\18\
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\17\ See, e.g., Adrienne J. Marsh, Diversity Jurisdiction:
Scapegoat of Overcrowded Federal Courts, 48 Brooklyn L. Rev. 197, 201
(1982).
\18\ See James W. Moore & Donald T. Weckstein, Diversity
Jurisdiction: Past, Present and Future, 43 Tex. L. Rev. 1 (1964).
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In my view, these concerns are particularly weighty in the context
of class actions against large, out-of-state corporations. Whatever
one's view of the value of diversity jurisdiction generally (and I
served as an adviser to the Federal Courts Study Committee, which
expressed some doubt about the value of diversity jurisdiction in the
modem era in the context of suits between individual citizens), there
is no doubt in my mind that a federal forum which is perceived as
neutral and unbiased will enhance the quality of justice in the context
of large class actions against multiple parties, many of which are out-
of-state corporations.
The undesirability of discrimination against interstate businesses
Part and parcel of the political failure of the Articles of
Confederation was the economic failure of that regime. It had become
clear by 1787 that, if individual states were permitted to enter into
separate economic treaties with one another, and to impose tariffs and
other restrictions on the free flow of goods across state lines, the
economic health of the United States would falter. Discrimination
against out-of-state business entities by means of state judicial
processes was regarded as an equally great threat to the growth and
economic health of the nation. As one commentator put it:
No power exercised under the Constitution * * * had greater
influence in welding these United States into a single nation
[than diversity jurisdiction]; nothing has done more to foster
interstate commerce and communication and the uninterrupted
flow of capital for investment into various parts of the Union,
and nothing has been so potent in sustaining the public credit
and the sanctity of private contracts.''\19\
\19\ John J. Parker, The Federal Jurisdiction and Recent Attacks
Upon It, 18 A.B.A. J. 433, 437 (1932); see also John P. Frank,
Historical Bases of the Federal Judicial System, 13 Law & Contemp.
Probs. 3, 27 (1948).
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The importance of fostering confidence in the judicial system
Last, but certainly not least, the availability of a federal forum
enhances the perception (among litigants and others) that justice is
not meted out according to what one commentator has called ``the Good
Old Boy System.''\20\ Northwestern University law professor Martin
Redish has compared the judicial system to a baseball game, and pointed
out that in the same way sports fans would not trust an umpire to call
balls and strikes fairly if he were affiliated with the home team, the
public cannot be expected to have confidence in a judicial system
without the life tenure and other protections of the federal
judiciary--a system, like that in effect in 38 states,\21\ where judges
are beholden to their constituents and campaign contributors.
Litigating lawyers typically refer to this as the ``home court''
advantage.
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\20\ Working Papers of the Advisory Committee on Civil Rules on
Proposed Amendments to Civil Rule 23, Vol. 4 (May 1, 1997) (comments of
consumer advocate Stephen Gardner).
\21\ See Erwin Chemerinsky, Federal Jurisdiction Sec. 1.5m at 34
(2d ed. 1994).
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One important way in which the federal courts preserve public
confidence in the judicial system is by maintaining procedures designed
to minimize inconsistent results. Unlike state courts, the federal
judiciary has the ability to consolidate numerous complex lawsuits
involving similar allegations in a single district before a single
judge.\22\ By contrast, related state court cases that are not
susceptible to consolidation often reach differing (and seemingly
random) results, permitting class-action plaintiffs' attorneys to take
multiple bites at the apple in the hope that, despite a number of
losses on a particular issue, they will rack up a handful of lucrative
wins. One recent example of this phenomenon involved a series of cases
filed in state court against Ford Motor Company concerning the quality
of paint on Ford cars and trucks. All of these cases were removed to
federal court, where they stayed--except for one case, which a federal
district judge in Texas remanded twice to state court. The removed
cases were consolidated before a single federal judge in New Orleans,
where all pretrial matters were conducted in a coordinated fashion. The
Texas case proceeded on its own, in state court. After the completion
of years of discovery, the federal judge issued what has already become
a leading opinion, denying class certification in the consolidated
federal cases.\23\ Reviewing an identical record, an elected state
judge in Texas reached the opposite conclusion and certified a
class.\24\ What can litigants and the public take from such a result,
other than a sense of randomness and inconsistency?
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\22\ See 28 U.S.C. Sec. 1407 (providing for consolidation by the
Judicial Panel on Multidistrict Litigation).
\23\ See In re Ford Motor Co. Vehicle Paint Litig., 182 F.R.D. 214
(E.D. La. 1998).
\24\ See Ford Motor Co. v. Sheldon, 965 S.W.2d 65 (Tex. App.--
Austin 1998), writ granted.
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Other witnesses today and at other hearings have noted the practice
followed by many state judges of simply certifying classes as a matter
of course,\25\ the apparent willingness of state judges to approve
class settlements that seem to benefit no one other than the
plaintiff's attorneys,\26\ and the fervor--demonstrated perhaps most
recently in the breast-implant class litigation in federal court in
Alabama and in Louisiana state court--with which state judges often
advance cases that compete with previously filed (and possibly even
certified) class actions in federal courts. All of these developments
can have no other consequence than a serious erosion of public
confidence and trust in the judicial process.
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\25\ See Advisory Committee Working Papers, Vol. 3, at 39
(testimony of Lewis Goldfarb, Chrysler Corporation) (noting that many
state judges ``almost see it as their civic duty to certify classes'').
\26\ See Lawrence W. Schonbrun, The Class Action Con Game,
Regulation, Fall 1997, at 50.
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But in my view, the issue transcends whether individual state
courts cases certifying classes are right or wrong, or what standards
particular states adopt for certifying class actions. At the structural
level, it is important to have the option--as we do in other areas of
law--to remove cases to federal court. Removal is a brilliant
innovation in our federal jurisprudence. It maintains the autonomy of
state to develop their own law and their own procedures (without
federal preemption) while at the same time creating a gentler incentive
to keep them from going too far. The existence of a removal provision
creates what economists call ``potential competition.'' Removal is like
the use of economic incentives, rather than command-and-control
regulation, in environmental regulation, or like a school choice
voucher program that improves the public schools by giving students an
option to go elsewhere. Removal does not override the states' freedom
of action. It merely breaks a monopoly and creates a kind of
competitive market discipline. If a state goes too far, and its
decisions are perceived by litigants as unfair for whatever reason, the
litigants may go to another forum that they perceive as more neutral.
Unfortunately, in the field of class actions, the option to remove
to federal court has been more apparent than real, because of the
decisions regarding diversity jurisdiction discussed above. In my view,
the most important provisions of S. 353 are those that would make
removal to federal court--which is available as a matter of course in
other major litigation--available in class actions as well. As I stated
above, this is important not only to insure fairness to the litigants
themselves in the cases that are removed, but will, in the long run, I
believe, exercise a salutary effect on improving the quality of justice
in the state courts.
b. the current statute is too blunt an instrument to achieve its
purpose of ensuring that ``important'' cases have an available federal
forum
As I have already explained, the current diversity-jurisdiction
statute contains two requirements, neither of which is constitutionally
required: ``complete'' diversity of citizenship, and a minimum amount
in controversy. Intuitively, these two requirements serve a single
purpose: to ensure that ``important'' cases qualify for a federal
forum, while protecting the federal docket from cases too trivial to
merit the attention of overburdened federal judges. As the class-action
explosion demonstrates, however, the current two statutory requirements
are not up to their task. Perversely, under the present system, any
legally insignificant dispute that happens to involve citizens of
different states and a minimum amount in controversy--say, a slip-and-
fall case involving a Virginia citizen and a Maryland grocery store
owner, or a contract dispute between a businessman in Kansas City,
Missouri, and his supplier in Kansas City, Kansas--qualifies for
federal jurisdiction. But the Texas lawsuit against, Ford Motor
Company--a lawsuit that, according to the plaintiffs' attorneys,
involved hundreds of thousands of class members, each with tens of
thousands of dollars in alleged damages--somehow is not ``important''
enough to warrant the federal courts' time.
Clearly, this result is indefensible. It is time we realized--in
academia, in the profession, and in Congress--that the two current
requirements of diversity jurisdiction are simply proxies for
``importance.'' It is true that these proxies, because they have been
in force for many years, have come to be embedded in the legal culture.
But there is nothing sacred--and certainly nothing constitutional--
about them. They are merely proxies, and highly imperfect ones at that.
More important than fealty to these proxies is that we remember the
underlying purpose they are intended to serve: to provide a federal
forum for cases that are sufficiently large and important, judged
against the three constitutional purposes I have described above.
Interstate class actions clearly are important on any measure.
Accordingly, I strongly support the proposed amendments.
III. Conclusion
I appreciate the opportunity to testify today before this
Subcommittee. Please allow me to summarize. Interstate class actions
are filed at a rate that increases every year. More and more, they are
filed in state court in an effort to capitalize on the political
goodwill that many local class-action plaintiff's attorneys have with
their local elected judges. And federal courts, lacking any clear
guidance from Congress, are bending over backwards to decline
jurisdiction over these cases. This has created strong pressure on out-
of-state defendants to settle cases, regardless of the merits of the
claims involved. This situation is a real and tangible threat to due
process in this country, and I urge Congress to take immediate steps to
address the threat by restoring the right to remove these cases to a
neutral, federal forum.
Senator Grassley. Thanks to both of you, and we will have
5-minute rounds of questions as well for this panel.
I will start with you, Mr. Frank. I would like to have you
comment on the Justice Department's concerns regarding
diversity removal provisions in the bill. Do you think that the
Justice Department's criticisms are justified?
Mr. Frank. I think not, and I must acknowledge to you, sir,
that I have been the principal defender of diversity through
many Congresses for many years. That is one of the reasons you
are keeping it. So I am very strongly in support of the
diversity jurisdiction generally.
At the same time, I have some sympathy with the feeling of
the Department, evidently, that they don't want to inundate the
system with cases. I also have a sense, as you gentlemen with
more experience have, with the practical politics of the
situation, because the plain gut fact of the matter is that you
are either going to work this out with Justice or you won't get
the bill through, I would fear.
And I listened to Ms. Acheson with very great interest. She
and I had spoken before the meeting, and I heard her repeatedly
encouraging discussions to see if some compromise can't be
worked out. And I think that that is just, as I earlier
suggested, essential.
I noted Senator Sessions nodding to me when I mentioned
Judge Pointer of his State, who has done more than any other
single judge in America to make the systems work well together,
and by having joint hearings. And I am also a member of the
Council of the American Law Institute. There is a bill to work
out integration of State and Federal systems. Charlie Wright
could be a useful guy for this discourse.
So I take the liberty of suggesting that while I personally
believe strongly in the bill as it stands, I suggest that
tactically it shouldn't be difficult to work out with Justice
some way which would get away from perfectly outrageous
situations. I have included an essay in my own statement on
that Bank of Boston case that you spoke about. Of course, that
is appalling, and we have just got to put a stop to that. And
if there is no way to do it but running a steam roller through
it, then please run a steam roller. But I think you could work
something out.
Senator Grassley. Thank you.
Professor Elliott, you heard the critics of our proposal
argue that it would federalize class action procedures, so that
if a Federal court denies certification, a State court can't
turn around and certify the same class. Do you believe that
most State courts already look to the Federal law as a class
action procedural issue?
Mr. Elliott. Overwhelmingly, they do. I think that is part
of the problem. In many, many, many States, as a litigating
lawyer, I think my clients and I would not particularly care
whether we are in the Federal court or the State court because
there are very similar rules. We do have some situations--and
it is kind of a race to the bottom--where certain jurisdictions
have developed rules that are extremely favorable to the
plaintiff, and cases that have very little connection with that
forum tend to get filed in those few areas.
But I think in the overwhelming majority of jurisdictions,
the rule is pretty similar to the Federal rule, or even more
restrictive than the Federal class action rule. But, again, I
think that is why the approach of removal which is used in this
bill is really such a good one because you are not going to
remove a case to Federal court solely because of a difference
in class action standards. You are going to make a decision
based on the overall mix of whether or not the State court and
the State judge and the State jury and the State procedural
system as a whole is perceived as reasonably fair.
And if not, I think it is important, particularly in multi-
State cases with out-of-state corporate defendants, that there
be an opportunity to remove that case to a more neutral forum.
I don't think that is federalizing the rule. I think it is
really just the core purposes of diversity jurisdiction.
And let me note I have not been as strong a supporter of
diversity jurisdiction as John Frank. I was one of the advisers
to the Federal Court Study Committee that recommended some
contracting of diversity jurisdiction. But if we have diversity
jurisdiction at all, in my opinion, these kinds of cases where
you have out-of-state, multi-State corporate defendants are
really the core purposes for which diversity jurisdiction is
created.
And I think it is ultimately very ironic that the simple
slip-and-fall case between two citizens of different States can
be in Federal court, and the kind of case that involves many,
many people throughout the country and many corporations can't
be effectively brought in the Federal court because of these
problems with the removal provisions.
Senator Grassley. Professor Elliott, would you please
comment on the Justice Department's testimony of how far--well,
this isn't just the Justice Department's testimony. How far
will this legislation go toward addressing problems associated
with class actions? I would also ask Mr. Frank that as well.
Mr. Elliott. I think it is a useful first step, but I don't
believe it goes far enough. I think there is plenty more work
to be done in this area. As I indicated, I think there are
abuses even under the Federal rule, but as a very moderate,
balanced first step, restoring the right to remove cases back
into the Federal court I think is a good first step.
Senator Grassley. Would you like to comment, Mr. Frank?
Mr. Frank. I simply feel that it is a very long and a very
good first step, and I take the liberty of complimenting you on
it, especially on that portion that you mentioned earlier. You
are keeping the true State cases in State courts. In my State,
for example, there is a pending class action about water
rights. Now, that belongs in the State court. It involves our
water. The plaintiffs are people involved in the State. It is a
very legitimate State class action. You have protected that
very, very thoroughly.
I have made my technical suggestions, which I respectfully
submit would perhaps strengthen the bill and go squarely to
where you want to go, Senator Grassley, and I hope you can
consider them.
Senator Grassley. The Senator from Alabama.
Senator Sessions. Thank you, Mr. Chairman. I agree with
you, Professor Elliott, that really this is the heart and soul
of what diversity is about. It is precisely the kind of case
that is in harmony with the philosophy, I believe, of
diversity, and it is appropriate.
I recall an individual who got elected chief justice of the
Alabama Supreme Court and was narrowly defeated by a few votes
this last time for reelection, but when he was in private
practice, he made a closing argument that was presented in the
Alabama Lawyer in which he said, looking at his jury, he wanted
them to return a verdict, a big verdict, a verdict so big that
it would have to be written by the president of that New York
corporation personally. And he wanted it so big, that the
executive would cry when he wrote it.
There is a sense sometimes that juries can be inflamed
against foreign defendants, and sometimes you end up with
bizarre verdicts that are not always helpful. That is why we
had some diversity to begin with, and I think we are moving
away from that.
Mr. Frank, I would also note for you Judge Higginbotham is
a University of Alabama graduate. So your three people there--
Justice Black, and Higginbotham, and Judge Pointer--are all
University of Alabama graduates.
Mr. Frank. It is clear that Judge Higginbotham is very
enthusiastic about that, and one of the meetings of the
committee under his chairmanship was at the University of
Alabama and I was allowed to give a lecture in the Black Room
that is now in the building there. I hope you have seen it. It
is really very nice.
Senator Sessions. It is very nice. Thank you for your
continual interest in this. Like any piece of legislation,
obviously, you had concerns that interested me. Some of the
concerns you had at that time, you now believe have proven to
have been correct, is that right?
Mr. Frank. Yes.
Senator Sessions. So you would say to the legislative body,
based on your personal experience and the experience we have
had over these years, that it is time for us to improve the law
so we can minimize those concerns?
Mr. Frank. Yes, though I don't want to claim I have a
crystal ball. Let me say nobody in America in the 1960's ever
anticipated that we were going to get this massive growth. I
repeat, what we thought we were dealing with was small matters.
May I add one other word? I am keenly aware that the
Committee on Civil Procedure and the special committee headed
by Judge Scirica has recently recommended that there be further
study of the mass tort problem. I have read it. They have sent
it to me. I strongly endorse that proposal of Judge Scirica,
and at the same time that is no reason why you have to paralyze
action on this particular difficulty. This is a subset of the
problem; it is a severe abuse. And you are very wise in doing
just what you are doing.
Thank you.
Senator Sessions. I thank you for that, and I agree 100
percent. We had hearings on the asbestos litigation. I believe
200,000 asbestos cases have been concluded; 200,000 are
pending, and another 200,000 expected. Seventy percent of
asbestos companies, 25 companies, are in bankruptcy, and only
40 percent of the money paid out by the asbestos companies has
gotten to the victims.
In mass tort, we have got to do better. For those who love
the law, we need some professors to be outraged about that.
This money should have gone to victims and not the bureaucrats
and lawyers in between, in my view. But that is to some degree
another subject.
With regard to the Department of Justice, I hope your
optimism is not too great, Mr. Frank, because I am not sure
they want legislation. But I certainly would be prepared to
work with you or the chairman, if he chose. I have spent some
time personally with Judge Pointer, who I think is one of the
country's finest district judges, and he believes that this is
not an undue burden on the Federal courts; a necessary burden,
I assume he would call it. And he thinks your suggestions are
on the right track.
Mr. Elliott, with regard to the attorneys' fees, aren't
there circumstances in which there is a conflict of interest
between the attorney and the clients, the thousands they may
represent? Would you explain why we can't always rely on a fee
agreement to be a fair setting of attorneys' fees?
Mr. Elliott. I would be glad to, and I certainly agree with
you that there is an inherent conflict between the attorney and
the clients in class action cases. That is one of the reasons
that we have the provisions that are unique in rule 23(e) in
the Federal system requiring that the settlement agreements and
the fee agreements have to be approved by the court because in
a class action case, although you have some representative
parties that are in some of the academic literature referred to
as decorative figureheads, you can't really count on them to
negotiate an agreement. So these fee agreements are not really
negotiated with class action members in the way that they would
be in a normal situation.
And along those lines, Senator Sessions, let me just make
one remark. You mentioned the asbestos cases, and as you
continue to draft this legislation, I think we have to be
careful that we cover what are sometimes called quasi-class
actions. I was involved in defending the--and the closing
argument you mentioned reminded me of the times I had heard
that.
I was involved in defending the 8,800-plaintiff Baltimore
asbestos cases, at the time one of the largest asbestos cases
ever. That was not filed as a class action.
Senator Sessions. 8,800 individual lawsuits?
Mr. Elliott. 8,800. They just named 8,800 consolidated
cases. And if you were to have a situation where your
legislation granted removal, but it was limited to those cases
that are class actions, you might create incentives for people
to file these cases in the State courts under liberal joinder
provisions, but simply to name 8,800 people.
So I think you need to think as the process goes forward
about how this gets drafted so that we are really dealing with
the multi-party cases, not just those that are formally class
actions. I mean, we had a situation where people were using
consolidation as an alternative to class actions, and you can
get to pretty much the same result that way in many cases.
Senator Sessions. Thank you.
Senator Grassley. The last question was something I was
going to ask Mr. Frank, so I just wondered if you want to
comment on the last question that he asked just to have a
confirmation of everything we have talked about here today.
Mr. Frank. I think Mr. Elliott has done this so well, and
John Beisner is coming before you and he speaks for me very
well. I do reiterate what I took the liberty of saying before.
I really believe that if the right people expert in this field
spent an afternoon together, they would solve this problem and
come back to you with a proposal that could be unanimously
accepted. It just isn't that difficult.
Some of the cases should stay in State courts, some of them
shouldn't. You have made a brave step. Perhaps something
further can be done, and it so needs to be done. Please don't
let this valuable bill die because of a quarrel over that very
important question. It just has got to be compromised somehow.
Thank you.
Senator Grassley. Thank you, and I say thank you to the
entire panel. Your contribution is very worthwhile for this
project that we are going forth on.
Now, on our fourth and final panel, I would call Mr. Steve
Morrison, Professor Richard Daynard, and Mr. John Beisner. Mr.
Morrison is a partner with the Columbia, SC, law firm of
Nelson, Mullins, Riley and Scarborough, as well as general
counsel for Policy Management Systems Corporation. He is the
witness that Senator Thurmond has referred to as being a
constituent of his, and Senator Thurmond is glad to have Mr.
Morrison here. He also serves as board chairman of the Lawyers
for Civil Justice.
Professor Daynard is a professor at Northeastern University
School of Law and is active in tobacco-related studies and
litigation. He has published numerous articles dealing with
tobacco liability.
Mr. Beisner is a partner in the Washington, DC, office of
O'Melveny and Myers, and he has defended over 250 class action
lawsuits in both Federal and State court.
I would ask Mr. Morrison to start.
PANEL CONSISTING OF STEPHEN G. MORRISON, GENERAL COUNSEL,
POLICY MANAGEMENT SYSTEMS CORP., COLUMBIA, SC; RICHARD A.
DAYNARD, PROFESSOR OF LAW, NORTHEASTERN UNIVERSITY SCHOOL OF
LAW, BOSTON, MA; AND JOHN H. BEISNER, O'MELVENY AND MYERS, LLP,
WASHINGTON, DC
STATEMENT OF STEPHEN G. MORRISON
Mr. Morrison. Thank you, Mr. Chairman. Mr. Chairman, I am
an old trial lawyer. I have had the privilege of trying over
200 cases to jury verdict in over 20 States in the United
States, and I have seen home cooking in various places and I
have seen some excellent judges and fundamental fairness.
Your bill restrikes the appropriate balance of fundamental
fairness in class actions by allowing for the use of diversity
jurisdiction to remove the case to Federal court. It is what
the Framers intended and it is what we need as practicing
lawyers.
Nicholas Negroponte, who is head of the media lab at the
Massachusetts Institute of Technology, a fellow who foresaw the
digital world that we are in now, wrote a book called Being
Digital in 1996. He says if you are going to look to the
future, looking straight ahead with your head down, you don't
always see things. To see the future appropriately, you need to
see it from peripheral vision because some of the things that
come at you really come out of left field.
I think out of left field, we have had a situation where
class actions have increased so dramatically from 1988 to
1998--up 1,000 percent in some areas, 300 percent in other
areas. The RAND study says most of them are in State courts.
The focus has been on State court litigation.
So, Mr. Chairman, what I say is what is happening out
there? Has corporate conduct really changed? Is the business
world significantly more evil in more multiples across the
country, in the United States? No, absolutely not.
What has changed is an attitude toward entrepreneurial
litigation which is going to the lowest common denominator,
that is the jurisdiction where they can get the best possible
judge with the least possible rigor in the class certification
process. Entrepreneurial litigators are bringing these cases in
hometown jurisdictions. Now, why are they doing that? They are
bringing them in hometown jurisdictions because the whole ball
game in class action is about class certification.
When I am litigating a class, if I can prevent it from
being certified, or at least get enough rigor in the class
process by which you have a rational certification of people
that are really injured, really in like situation, whose cases
can be tried together rationally, then you can come up with a
rational settlement or, better yet, a rational trial process by
which you can go to a verdict.
There is a case down in Tennessee that is commented upon in
several of the articles that are before you where a class
action involving 23 million people nationwide was certified on
the same day it was filed. What do you think the defendant has
to do under those circumstances? The defendant is forced to
settle with a 23-million-person multiplier in that situation.
That is legal blackmail in a State court. You know those 23
million people didn't all live in Tennessee, nor were all the
defendants in Tennessee. But there were enough defendants and
enough plaintiffs in Tennessee to allow that to go forward.
That was wrong.
And, you know, when we looked further into it, we found
that within 10 days before that, the same lawyer in the same
court in the same State of Tennessee had filed a case against
the music industry for a class action. That is abusive, and
that is what is going on. So we have a huge increase in
monetary demands, no change in corporate behavior, and an
entrepreneurial litigation going on.
Why? It is because the States are less rigorous. It is
because the States are less able to manage this litigation.
They have not been set up for it, they have not had the
training in it, they do not have the clerks in it. Mr.
Chairman, when I go to a State court in a small county, I am
frequently confronted with a judge in a mass tort situation,
class action or other mass tort, where the judge the next day
will be hearing a divorce case, and the case right before mine
was a juvenile crime case and the case right after mine is a
slip-and-fall in a grocery store.
Now, the State courts have to deal with that. There are
wonderful, brilliant State court judges in all of our States
and they have to deal with justice on an individual level in
that State, in that locality. That makes sense. But does it
make sense for them to be handling a nationwide class action?
No, it does not. That is what diversity jurisdiction is all
about.
Now, when we take a look at what is happening, we get this
certification, we get the blackmail multiplier in there. And
then what we really have to do is look at who runs the case
once that is done. Well, Mr. Chairman, the person who runs the
case is the self-appointed chief executive officer of the case;
it is a lawyer. There are no clients.
In fact, in the Federalist documents there is a quote from
William Lerache, who is probably one of the major class action
plaintiff lawyers in the country, saying it is wonderful not to
have a client. If your client is going to get $.08 at the end
of the case, there is no client, there is no accountability.
Now, that person has not been elected by a board of directors,
not been elected by the shareholders, not been elected by the
voters. That entrepreneurial litigator is then negotiating a
class settlement that is really about that person's fee.
If I might just conclude, so who is getting tromped on
here? The people that are really getting tromped on are the
consumers. The consumer then ends up paying a huge fee for an
$.08 settlement. The disclosure didn't come out on the fee. The
disclosure didn't come out in plain English. The notification
didn't come out in plain English.
And what is the solution to all of this? Interstate class
actions should be in the Federal courts. Why? Mr. Chairman, the
Federal courts are particularly able to handle these. They were
designed for multi-State issues, to deal with them. They have a
sensitivity toward the substantive law of each State.
Moreover, if you look at what is happening in the
peripheral vision, the aggregation of large numbers of claims,
as Senator Thurmond said in his opening statement, is creating
social policy. In essence, the courts are being used by
aggregating large numbers of claims to make public policy,
absent an elected representative, absent a legislator.
Why is that significant? The Federal courts are
extraordinarily sensitive to separation of powers, and so they
are sensitive to the law of each State. They have a mechanism
by which we are not going to duplicate these class action
lawsuits, so there is a mechanism to manage them. Most of the
Federal judges have two or three law clerks. Most of the
Federal judges have a docket that is more manageable. They work
extraordinarily hard, but the variety and size of cases is in a
narrower band.
They are in a situation where, if they can have this
appropriate jurisdiction, eliminating the sham defendant or the
false joinder, as you have done here, and the amount in
controversy claim-shaving abuse, all you do is take appropriate
Federal actions in the U.S. district courts where they belong.
I strongly endorse this bill as a very powerful first step and,
as Professor Frank said, a long first step toward class action
reform.
Thank you.
Senator Grassley. Thank you, Mr. Morrison.
[The prepared statement of Mr. Morrison follows:]
Prepared Statement of Stephen G. Morrison
Thank you for this opportunity to speak to you today about the
merits of S. 353, the Class Action Fairness Act of 1999. This important
legislation at least partially addresses one of the most serious
problems raised by class action litigation in our nation's legal
system, and I therefore urge the members of this Subcommittee to give
their careful consideration and support to this legislation.
Before spelling out the reasons for my support of this legislation,
let me tell you about the multiple perspectives that I bring to this
subject. Indeed, I have seen the subject matter of this legislation--
class actions--``up close and personal'' from four very distinct
vantage points. First, I am a partner and practitioner trial attorney
with the law firm of Nelson, Mullins, Riley & Scarborough in Columbia,
South Carolina. In that role, I have had considerable involvement with
the adjudication of class action litigation. Second, I am the General
Counsel of Policy Management Systems Corporation, a publicly traded
(NYSE) technology computer systems and technology services company.
Third, I currently serve as Board Chairman of the Lawyers for Civil
Justice (LCJ), a national coalition of the leading corporate counsel
and defense bar organizations. Finally, I recently served as President
of the Defense Research Institute, an organization of 21,000 lawyers
defending civil cases in America's civil courts every day. My firm
which has over 200 lawyers in North Carolina, South Carolina, and
Georgia has been involved in defending dozens of state and federal
class actions. My own personal experience in handling state and federal
class actions involving both national and ``local'' issues and classes
in managing multidistrict litigation forms the primary basis for my
testimony.
I. The Number Of Class Actions Has Increased Exponentially
When it comes to class actions, there may be room for legitimate
debate on a lot of issues. But there is no room for dispute on a key
point--over the past several years, the number of putative class action
lawsuits filed has skyrocketed. I have seen that phenomenon in my own
legal practice. I have seen that phenomenon as a general counsel, both
in dealing with the legal docket of my company and in corresponding
with fellow general counsels of other companies. And I have seen that
phenomenon in my work with Lawyers for Civil Justice, whose members
have spent many hours discussing and analyzing the burgeoning ``class
action problem.'' Personally, I have experienced the explosive increase
in class action suits through the over fifty class action cases
recently or currently handled by my firm; multiple state court class
action cases filed against Policy Management Systems Corporation over
the cost of photocopying hospital and other medical records; and the
alarming increase in state court class actions filed against corporate
members of Lawyers for Civil Justice.
There's a lot more than just anecdotal evidence of this trend. Both
this Subcommittee and its House counterpart held hearings last year in
which ample evidence of the class action tidal wave was supplied. For
example, the record of those hearings reflect statements from the
Federal Judicial Conference's Advisory Committee on Civil Rules
observing that over the past few years, U.S. companies have experienced
300-1,000 percent increases in the number of purported class actions
filed against them.\1\ And a study by the highly regarded RAND
Corporation confirms this trend.\2\
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\1\ Working Papers of the Advisory Committee on Civil Rules on
Proposed Amendments to Civil Rule 23, Vol. 1, at ix-x (``Working Papers
1'') (memo to members of the Standing Committee on Rules and Procedure
and the Advisory Committee on Civil Rules from Judge Paul V. Niemeyer).
\2\ Deborah Hensler et al., Preliminary Results of the RAND Study
of Class Action Litigation 15 (May 1, 1997) (``RAND Report'').
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Let me also observe that it is not only the number of these cases
that has grown--the size of those cases has also grown. It is not
unusual for the proposed classes in these cases now to encompass
millions of Americans. And not surprisingly, with the number of class
members growing in the average case, the monetary demands are growing
as well. Thus, it is not unusual for a company to be served with a
class action lawsuit seeking damages of a billion dollars or more.
This dramatic increase in the number of state court class actions
and the size of the awards being sought is puzzling to say the least.
Obviously, it is not attributable to any radical change in corporate
behavior. I see no evidence that our nation's business leaders suddenly
lost their moral compass, such that it is rampant corporate wrongdoing
that is prompting these lawsuits. Instead, I think it is clear that the
explosion of class action filings can only be attributed to the fact
that certain members of the plaintiffs' bar have discovered that some
of our state courts can be a fertile playing field for class
litigation.
b. the class action device is being abused
Given the immense stakes involved in nearly all class actions, one
might think that these class actions would generally be filed and
litigated in the federal district courts. After all, a core function of
the federal courts is to adjudicate claims between the citizens of
different states that involve substantial amounts of money. But there
is compelling evidence that the recent growth in the number of class
actions is primarily a state court phenomenon. The RAND Report notes
that the ``doubling or tripling of the number of putative class
actions'' has been ``concentrated in the state courts.'' \3\
---------------------------------------------------------------------------
\3\ See, e.g. RAND Report, supra note 2, at 15.
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The reason for this explosion of state court class actions is
simple. State courts in a number of jurisdictions have exhibited a
relatively lax attitude toward class action lawsuits--that is, many
local courts are willing to certify for class treatment cases that do
not meet the basic, generally accepted class action requirements.\4\
Not surprisingly, some members of the class action plaintiffs' bar have
seized this obvious opportunity. They have taken their lawsuits to
state courts that are less likely to exercise the rigorous case
management necessary to ensure that all parties (including unnamed
class members) receive due process. Having discovered an open door in
state courts, plaintiffs' counsel are filing class action lawsuits that
they would never have seriously considered bringing a few years ago.
---------------------------------------------------------------------------
\4\ At the same time, federal courts have laid down clearer, firmer
rules, governing when a matter may be afforded class treatment. The
recent decisions of the U.S. Supreme Court in Amchem Products v.
Windsor, 117 S.Ct. 2231 (1997), the Fifth Circuit in Castano v.
American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), the Sixth Circuit in
In re American Medical Sys., Inc., 75 F.3d 1069 (6th Cir. 1996), the
Seventh Circuit in In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th
Cir.) (Posner, J.), cert. denied, 116 S.Ct. 184 (1995), the Ninth
Circuit in Valentino v. Carter-Wallace, Inc., 97 F.3d 1227 (9th Cir.
1996), the Eleventh Circuit in Andrews v. American Tel. & Tel. Co., 95
F.3d 1014 (11th Cir. 1996), have reminded federal district courts of
the importance of taking the requirements of Rule 23 seriously; that
is, matters may be certified for class treatment only if they clearly
meet the certification prerequisites set forth in Fed. R. Civ. P. 23.
---------------------------------------------------------------------------
In interviews for the RAND Report, many attorneys (including some
plaintiffs' counsel), observed that ``too many non-meritorious [class
action lawsuits] are [being] filed and certified'' for class
treatment.\5\ As a result, U.S. corporations (both large and small) are
being forced to expend substantial resources defending an onslaught of
cases, most of which do not come close to satisfying the class action
prerequisites. By readily obtaining certification of huge classes in
state courts, plaintiffs' attorneys are able to create enormous
financial exposure and to thereby force settlements of cases that
otherwise would not be taken seriously.
---------------------------------------------------------------------------
\5\ RAND Report, supra note 2, at 22.
---------------------------------------------------------------------------
But corporations are not the only victims here. Class actions are
supposed to be brought on behalf of class members--usually consumers.
But in the class actions we are seeing today, class members are the
forgotten participants. No one checks to see if the putative class
members really want to have their claims asserted in a class action. No
one asks the class members how or where they wish their claims to be
asserted. No one confers with class members to find out if they wish to
have their claims litigated. And most importantly, no one obtains input
from class members about how they wish to have their claims settled (if
at all). In short, consumers' claims are being used by attorneys as
business ventures. Consumers have little or no control over how their
claims are being used. Thus, not surprisingly, they exercise little or
no control over what happens to their claims.
1. Defendants' due process rights are being ignored
The record shows that many state courts do not give a fair shake to
either class action defendants or the members of the putative classes--
only class counsel are benefited. The state court abuses of the class
action device have become open and notorious. As defendants in state
court class actions, U.S. companies are being denied fundamental due
process rights. Let me describe a few types of problems defendants
commonly incur in these courts.
Some state courts ignore the due process rights of out-of-state
corporate defendants. In these jurisdictions, the defendant is not
afforded a fair opportunity to contest the claims brought against it.
The most outrageous example of this is the ``drive-by class
certification'' in which a state court judge grants plaintiffs' motion
to certify his claims for class treatment before the defendant even has
a chance to respond to the motion (or, indeed, in some instances has
even been served with the complaint).
For example, I noted in the record of the House hearings last year
discussion of a lawsuit filed against a major car manufacturer in a
Tennessee state court.\6\ Plaintiffs filed several inches of documents
with their complaint. Astoundingly, by the time the court closed on the
very day that the action was filed, the judge had entered a nine-page
order granting certification of a nationwide class of 23 million
vehicle owners--one of the largest class actions ever certified by any
court.\7\ In the order, the court stated that it had conducted ``a
probing, rigorous review'' of the matter. I am not sure how you could
possibly do that in a few hours on the day a case is filed. And I am
quite sure that you could not do ``a probing, rigorous review'' when
the defendant was never even notified about the lawsuit before that
order was entered and was provided no opportunity to tell its side of
the story. Only a few days earlier, the same plaintiffs' attorney had
filed another multistate class action--one alleging antitrust
violations in the music/compact disc industry--before the very same
Tennessee state court.\8\ Once again, in that major class action, the
trial court entered an order granting class certification on the same
day the complaint had been filed, long before the defendants were
notified of the lawsuit and certainly before they had been afforded any
opportunity to respond to the request for class certification.
---------------------------------------------------------------------------
\6\ Sweet v. Ford Motor Company, Civil Action No. L-10463 (Cir. Ct.
for Blount County, Tenn.) (filed Jul. 10, 1996).
\7\ See Order Granting Nationwide Class Certification, Sweet v.
Ford Motor Company, Civil Action No. L-10463 (Cir. Ct. for Blount
County, Tenn.) (filed Jul. 10, 1996).
\8\ Robinson v. EMI Music Distribution. Inc., Civil Action No. L-
10462 (Cir. Ct. of Blount County, Tenn.) (filed July 8, 1996).
---------------------------------------------------------------------------
Another common problem with state court class actions is the ``I
never met a class action I didn't like'' phenomenon. Although most
state courts will at least give the defendant a chance to respond to a
class certification motion, many of them employ standards that are so
lax that virtually every class certification motion filed is granted,
even where it is obvious that the case cannot, consistent with basic
due process principles, be tried to a jury as a class action. This
problem is evidenced by the frequency with which state courts are
readily certifying cases as class actions, while federal courts
conclude that the very same cases cannot be litigated on a class basis.
For example, I am aware of cases in which a state-court judge certified
a nationwide class of persons who allegedly claimed that the house
siding they had purchased was defective. Later, however, a federal
district court judge presented with the same case rejected any prospect
of certifying a class in that matter, finding that affording class
treatment in that case obviously would deny the due process rights of
the defendants and the purported class members.\9\
---------------------------------------------------------------------------
\9\ Compare Naef v. Masonite Corp., No. CV-94-4033 (Circuit Court,
Mobile County, Alabama), with In re Masonite Hardboard Siding Prods.
Litig., 170 F.R.D. 417, 424 (E.D. La. 1997).
---------------------------------------------------------------------------
2. Consumers are being used and their rights are being trampled
The real purpose of the vast majority of class action lawsuits is
to make money--not for consumers, but for the lawyers bringing the
suit. As a result, consumers often are exploited and rarely receive
substantial awards, while class action counsel frequently walk away
with millions. For instance:
The Chicago Tribune reported that in a class action against
Arista Records seeking to recover the prices paid for albums by
the rock duo Milli Vanilli (that contained the voices of other
performers), class members obtained a settlement recovery of $1
to $3 each. But the court awarded the lawyers $675,000. And for
those lawyers, that was not enough. They petitioned the court
to increase their fee to $1.9 million.
Business Today reported that in a class action against a
cereal maker regarding the use of a food additive that had not
injured any consumer, the consumers received (in settlement) a
coupon entitling them to free cereal (if they bought more
cereal). Meanwhile, the lawyers for the class were paid nearly
$2 million in fees--approximately $2,000 per hour.
The Baton Rouge (La.) Advocate reported that in a settlement
of a state court class action involving toxic pesticide fumes
from a chemical plant, the residents of a New Orleans
neighborhood each received a few thousand dollars. But the
class action lawyers walked away with over $25 million in legal
fees and expenses.
An article in the San Diego Union Tribune criticized the
settlement of a state court class action in which the author
had received 93 cents and her class counsel had received
$140,000.
The Chicago Tribune reported that one state court class
action settlement with a mortgage bank yielded an $8.5 million
payment to the class attorneys, but a $91.33 debit to the class
members' mortgage escrow accounts.
I am also very disturbed by the circumstances (discussed in more
detail below) in which class counsel waive the rights of the class
members (whose rights they are supposed to protect) in an effort to
make a case more amenable to class treatment. In short, in order to
achieve the class counsel's personal objective--to create a class
action business venture--counsel frequently jettison purportedly viable
claims and take other actions that are adverse to the interests of
class members.
These reports are particularly disturbing because they reveal how
grossly the class action device has been distorted. The class action
device was intended to protect consumers. It was not created to enable
lawyers to get rich.
Before going any further, let me say that I am pleased that S. 353
addresses the issues of consumer exploitation and attorney misconduct
in a number of its provisions.\10\ For example, the class notices that
class member receive frequently are written in small print and
legalese. Since those notices typically are telling class members that
they are about to give up important legal rights (unless they take
appropriate action), it is imperative that they understand what they
are doing and the ramifications of their actions. The bill requires
notice of proposed settlements in all class actions, as well as all
class notices, must be in clear, easily understood English and must
include all material settlement terms, including the amount of
attorneys' fees.
---------------------------------------------------------------------------
\10\ However, I would urge the Congress to work with the courts
through the rule making process rather than legislatively amending Rule
11 of the Federal Rules of Civil Procedure. Specifically, Congress
should be cautious in the area of ``mandatory'' judicial sanctions. I
would urge leaving discretion with the federal judges as to when and
whether sanctions are appropriate in each case.
---------------------------------------------------------------------------
The bill also requires that state attorney generals be notified of
any proposed class settlement that would affect residents of their
states. The notice would give state attorney generals the opportunity
to object if the settlement terms are unfair.
Senate Bill 353 requires that attorneys' fees in class actions be
based on a reasonable percentage of damages actually paid to class
members, the actual costs of complying with the terms of the settlement
agreement, as well as any future financial benefits. In the
alternative, the bill provides that, to the extent the law permits,
fees may be based on a reasonable hourly rate. This provision would
discourage settlements that give attorneys exorbitant fees based on
hypothetical overvaluation of coupon settlements, yet allows for
reasonable fees in all kinds of cases.
II. Federal Courts Are The Appropriate Forum For Litigating
Interstate Class Actions
State courts are simply not the appropriate tribunals for many
class action lawsuits, particularly those with interstate commerce
dimensions. In many (if not most) instances, state court class action
cases involve putative class members from multiple jurisdictions suing
defendants from outside the forum state. This engenders the bizarre
situation in which a state court in one state (e.g., Massachusetts) is
interpreting the state law of another (e.g., South Carolina) and
resolving the claims of South Carolina residents. What business does a
Massachusetts court have dictating to South Carolina what its laws mean
and in resolving the claims of its citizens? It is far more appropriate
for a federal court to interpret the laws of various states, which is
inherently what the constitutional concept of diversity jurisdiction is
all about. Other state courts have adopted a different, equally
unsatisfactory approach. They apply their own state's laws to all
claims asserted in a purported class action, even though the class is
comprised primarily of out-of-state residents and even though the laws
of those class members' respective home states may be radically
different.\11\
---------------------------------------------------------------------------
\11\ See, e.g., Snider v. State Farm Mut. Auto. Ins. Co., No. 97-C-
114 (Ill. Cir., Williamson Co.) (order certifying nationwide class of
state-law based claims).
---------------------------------------------------------------------------
In addition to these problems, many state courts have neither the
complex litigation experience nor the support staff necessary to
address the complex, technical issues normally presented by class
actions. And perhaps most importantly, they lack any mechanism for
coordinating parallel litigation. Once a purported class action is
filed, counsel in other jurisdictions often file ``copycat'' cases--
purported class actions asserting basically the same claims on behalf
of basically the same class members. Because state courts have no
mechanism to consolidate cases, as do the federal courts, defendants
are unfairly required to expend substantial resources defending these
duplicative lawsuits. In such circumstances, there is no mechanism for
achieving coordination and avoiding inconsistencies in results. Indeed,
in some instances, the two state courts are forced to compete, each
vying to control the litigation. This situation often works against the
interests of the class members, as class counsel in the various cases
sacrifice class members' rights in an effort to jockey for controlling
position. The situation is also unfair to defendants, potentially
giving the same classes several bites at the apple against a class
action defendant.
If, however, overlapping or similar class actions are filed in two
different federal courts, the multidistrict litigation process permits
the transfer and consolidation of those cases for pretrial purposes,
particularly the coordination of discovery. This is a much more
efficient and effective system that does not needlessly waste judicial
or corporate resources. Federal courts are by far the more appropriate
forum in which to adjudicate class actions. Virtually all federal
judges have two or three law clerks on their staff; state court judges
typically have none. Federal court judges are usually able to delegate
some aspects of their cases (e.g. discovery issues) to magistrate
judges or special masters; it is not the norm for such personnel to be
available to state court judges.
The current law has been manipulated by plaintiffs' lawyers making
removal of class actions to federal court virtually impossible. The
state court class action environment has led to a sad reality: as a
practical matter, the most important question determining the outcome
of a class action lawsuit has now become, not the merits of the claims
or the propriety of class treatment, but whether the case can
successfully be removed to federal court. Because of the lackadaisical
way in which some state courts treat class actions, a class action that
stands practically no chance of succeeding in a federal court can
result in a multi-million (or billion) dollar judgment if it ends up in
state court. Thus, the fight over the existence of federal jurisdiction
becomes, as a practical matter, the entire game. The lawyers who file
class action lawsuits recognize this. Accordingly, they have become
increasingly adept at manipulating their pleadings to keep their
putative class actions out of federal court. Tactics include:
(1) Filing a complaint that, fairly read, gives rise to a
claim under some federal statute, thereby qualifying the case
for the assertion of federal question jurisdiction. To disguise
this fact, the complaint will omit any explicit reference to
the federal claim, or may even expressly disclaim any intent to
pursue an available federal claim.
(2) On the diversity side, lawyers who want to keep a high-
stakes class action out of federal court often manipulate the
parties in an attempt to destroy complete diversity. Under
traditional principles of diversity jurisdiction as applied to
class actions, ``complete diversity'' exists only if the state
of citizenship of all named plaintiffs is completely different
than the state of citizenship of all named defendants. To
destroy this, lawyers whose primary target is an out-of-state
deep-pocket corporation sometimes name a token defendant who
resides in the same state as one or more of the named
plaintiffs. For example, a lawyer wanting to sue a company in
Texas state court may name as a codefendant a Texas-based
employee of that company.
The inherently fraudulent nature of this tactic is obvious:
although all putative class members may conceivably have a
claim against the defendant corporation, few (if any) of the
putative class members had any dealings with the token in-state
defendants, meaning that a classwide judgment against these
defendants is impossible. As all parties recognize, the
corporation is the only real target of the lawsuit. The in-
state defendants are there only to facilitate the remand of the
action to state court on the basis of the ``absence of complete
diversity.'' Once the jurisdictional battle is over, these
defendants usually fall by the wayside.
(3) Alternatively, lawyers sometimes include on the
plaintiffs' side of the case a named plaintiff who lives in the
same state as the defendant. Thus, a defendant may, under the
present law be served with a complaint in Alabama state court
which purports to be brought by three Alabama residents and one
resident of its home state. Again, the manipulative intent here
is clear. Why would a plaintiff who has a grievance against a
company within his or her home state travel all the way to some
other forum to file a lawsuit? Obviously, the reason is that
her lawyers are trying to prevent the corporation from
defending against this inherently nationwide controversy in a
federal court.
(4) The ``amount-in-controversy'' prong of the federal
diversity requirement also is the subject of frequent
manipulation. The U.S. Supreme Court's decision in Zahn v.
International Paper \12\ has been interpreted as holding that,
in a putative class action, the ``jurisdictional amount''
requirement (now $75,000) is met only if each and every
putative class member's individual claim is worth that amount.
Exploiting this general rule, class action complaints often
declare over and over again that all putative class members
seek less than the jurisdictional amount (sometimes $74,999).
---------------------------------------------------------------------------
\12\ 414 U.S. 291 (1973).
---------------------------------------------------------------------------
In recent years, some exceptions to the basic Zahn rule have
developed. For example, some federal courts of appeals have
held that class actions that seek punitive damages in excess of
the jurisdictional amount may meet the amount-in-controversy
requirement.\13\ In response, class action complaints now
purport to ``waive'' any and all claims that might conceivably
give rise to a punitive damage award (or at least limit
punitive damages to a lesser amount).
---------------------------------------------------------------------------
\13\ See Tapscott v. MS Dealer Serv.--Corp., 77 F.3d 1353, 1359
(11th Cir. 1996).
These kinds of ``claims-shaving'' tactics raise disturbing issues
of adequacy-of-representation and due process. While a single plaintiff
suing solely in his own name surely is the ``master of his complaint''
and may limit the claims he asserts or the relief he seeks in order to
stay in state court, a litigant (and his counsel) who seeks to
represent large numbers of other people in a class action is
constrained by his fiduciary obligations to the absentee members of the
class. As several courts have recognized, it is inherently improper for
a class action lawyer to unilaterally ``waive'' otherwise available
claims that absentee claimants might wish to assert simply in the name
of forum-shopping.\14\ Nevertheless, it happens every day--class
counsel sacrifice the claims of unnamed class members in order to keep
their cases in state courts.
---------------------------------------------------------------------------
\14\ See, e.g., Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir.
1997); Ex parte Russell Corp., 1997 WL 641325 (Ala. Oct. 17, 1997).
---------------------------------------------------------------------------
Crafty lawyers can exploit still other tricks to deprive an out-of-
state class action defendant of its right to defend itself in a federal
forum. For example, under current law, all defendants must consent to
the removal of a case to federal court. If one defendant objects, the
case cannot be removed. Accordingly, plaintiffs' lawyers sometimes join
a ``plaintiff-friendly'' person or entity as a defendant, with the
understanding the nominal defendant will use his status to veto any
removal attempt.
Another abuse stems from the requirement that any lawsuit be
removed to federal court within one year after its ``commencement.''
Lawyers sometimes quietly file putative class actions in state courts
that have no deadline for providing service, and then decline to serve
the defendant until the one year deadline has expired. Alternatively,
they include statements in their complaint designed to insulate the
case from removal (such as assertions that only a nominal per-claimant
amount is sought), wait one year, and then file an amended complaint
that raises the amount-in-controversy or eliminates other impediments
to removal only after the one year deadline has expired.
These pleading tactics (and others like them) invariably are
employed in purported class actions that, by virtue of the inherent
diversity of the real parties in interest and the amounts actually at
stake, ought to be litigated in federal court. They are complicated
lawsuits that require the substantial resources and expertise that the
federal courts are uniquely situated to devote to them (and that state
courts, which spend most of their time handling smaller matters, are
not institutionally well-suited to handle). They are also lawsuits that
present exceedingly high-stakes for the defendant, and therefore give
rise to the risks of parochialism and prejudice that the federal court
system is designed to prevent (but that, regrettably, infect some state
court systems).
Such pleading tactics are intended to mask the inherently federal
character of these lawsuits. They elevate the deliberately manipulated
``form'' of the lawsuit over its actual substance. They should be
outlawed. The bulk of today's class actions--large cases with
interstate commerce implications--plainly belong in the federal courts.
Accordingly, I urge this Subcommittee to vote favorably on S. 353.
S. 353 addresses and resolves the problems associated with the
adjudication of class actions in state courts by allowing more class
action lawsuits to be removed from state court to federal court. The
bill allows unnamed class members to remove to federal court class
actions in which their claims are being asserted (within 30 days after
they are formally notified about the class action). (This is a critical
change, because if a state court is not protecting the class members'
interests, this will be the only viable mechanism by which
unrepresented class members can get their day in court.) It also allows
defendants to remove to federal court.
With these removal possibilities in mind, the bill would create a
modest expansion of federal jurisdiction over class actions. Under the
bill, a class action would qualify for federal jurisdiction if the
total damages exceed $75,000 and parties include citizens from multiple
states. However, the bill provides that cases remain in state court
where the substantial majority of class and primary defendants are from
the same state and that state's law would govern, or the primary
defendants are states and a federal court would be unable to order the
relief requested.
Lastly, the bar on removing cases to federal court after one year
would not apply to class actions (although a defendant would still have
to remove within 30 days after first becoming aware of federal
jurisdiction).
III. Conclusion
The state court class action crisis has reached epidemic
proportions. In order to close the floodgates on the filing of
meritless class actions and recraft a legal tool that has been
manipulated beyond recognition to the benefit of few and the greater
detriment of millions of American consumers, the legislative system
must provide the federal courts with the ammunition to enforce their
right to hear interstate class actions cases. Under current law, most
interstate class actions cannot be heard in federal court. The current
statutes also allow plaintiffs' attorneys to game the system to keep
class actions out of federal court. And finally, under the existing
law, there is no mechanism by which class members can insist that their
claims be heard in federal court. S. 353 would make modest procedural
changes, but it would not alter substantive law.
This legislation will clearly improve the efficiency of the
judicial system because federal courts have special procedural tools
for dealing with the complex litigation and are better able to manage
claims involving parties from multiple states. Furthermore, the overall
workload of our judicial system because allowing more interstate class
actions to be heard in federal court will permit consolidation of
duplicative, competing and overlapping cases. America needs class
action reform badly. S. 353 is a balanced, modest approach to
correcting class action abuse.
The title of this bill--the ``Class Action Fairness Act''--is very
appropriate. But it also points out a unique twist in the present class
action environment. As members of Congress, you hear the word ``fair''
all the time. Usually, however, deciding what is fair involves choosing
between two or more parties with vested interests. If the Government
needs to close one of two defense facilities, the two cities in which
those facilities are based will make arguments about why the other
city's facility is the one that should be closed. And it may be left to
Congress to decide what is ``fair''--to decide which city's facility
should be closed. What is undeniable in that debate, however, is that
both cities have a vested interest in the outcome. They both have
community investments and jobs at stake.
What is strange about the current class action situation is that it
is not ``fair'' to any of the parties with proper, vested interests.
For all the reasons I have set forth above, it is not ``fair'' to the
class members whose claims are at stake. And it is not ``fair'' to the
defendants against whom those claims are being asserted. At present,
the system is irrationally designed to benefit primarily the parties
involved who really do not have a proper, vested interest--the
attorneys who bring these lawsuits. I therefore applaud this
legislative initiative and urge its passage.
Again, I thank the Committee for permitting me to present my views
on this problem that is challenging our legal system.
Senator Grassley. Professor Daynard.
STATEMENT OF RICHARD A. DAYNARD
Mr. Daynard. Thank you, Mr. Chairman. Like everyone else
who has spoken today, I too find that there are class action
abuses, some of them, particularly the one that has frequently
been referred to, but others as well, I think quite outrageous.
Where I disagree with most people who have spoken, but agree
with Ms. Acheson, is that this is the wrong remedy for class
action abuse. I think there are better remedies.
I, too, would be happy to think with you or anyone else on
the subject of the appropriate remedies. I think this is the
wrong one, and I think the example of tobacco cases makes that
clear. In the case of tobacco cases, the removal provisions of
Senate bill 353 would impede justice by preventing plaintiffs
from ever getting their day in court. That would be the
practical effect.
Beginning with the first lawsuits against the tobacco
industry in 1954, and continuing for the next 4 decades, the
industry managed to avoid ever paying damages to a single
afflicted smoker, non-smoker, or family member. Its principal
strategy was to use or abuse every possible procedural device
for the purpose of discouraging plaintiffs' attorneys from
bringing such cases through guaranteeing that their expenses
will exceed any possible recovery.
As an attorney for R.J. Reynolds Tobacco Company wrote
following the dismissal of several individual cases, ``The
aggressive posture we have taken regarding depositions and
discovery in general continues to make these cases extremely
burdensome and expensive for plaintiffs' lawyers, particularly
sole practitioners. To paraphrase General Patton, the way we
won these cases was not by spending all of our money, but by
making that other son-of-a-bitch spend all of his.''
Now, to counter the tobacco industry's ``bankrupt the
plaintiff lawyer'' tactics, plaintiffs' lawyers eventually
began bringing class actions in both State and Federal courts
on behalf of afflicted smokers and non-smokers. These class
actions for the first time raised the amount of the possible
recovery above the cost of bringing the cases, allowing
plaintiffs' attorneys to prudently make the investment of time
and money needed to even the playing field, thereby giving
their clients a chance to have their cases heard on the merits.
This is indeed the principal historic justification for all
23(b)(3) class actions, to recruit effective advocates for
injured parties who would otherwise be without redress.
Unfortunately, the Federal courts have been unwilling to permit
individual tobacco victims to band together in class actions.
Beginning with the Fifth Circuit's reversal of the trial
court's class certification in Castano v. American Tobacco Co.
in 1996, Federal courts have uniformly refused to certify these
cases. They have articulated various reasons. Ironically, three
of the reasons cut strongly against the remedy that you have
provided in Senate bill 353.
First, as the Castano court noted, there have been so few
tobacco cases actually going through the courts that it is
often difficult to know how the supreme courts of the various
States, which are the ultimate arbiters of State-based common
law under the doctrine of Erie Railroad v. Tompkins, would
decide various legal issues that they present. Indeed, the
court repeatedly refers to the Castano case, a national class
action on behalf of all addicted smokers, as an immature tort.
And it suggests quite reasonably that State courts should have
the first crack at addressing these State law issues.
Second, there is a concern expressed by the Federal courts
in these cases that the Seventh Amendment may stand in the way
of a viable class action trial plan to the extent that such a
plan may risk having a later jury reconsider an issue decided
by a previous jury. Whether or not that concern is justified is
a matter of Federal constitutional law. It is simply irrelevant
in State class actions, since the Seventh Amendment has not
been held binding upon the States under the 14th Amendment.
While various States may have similar constitutional
provisions, the interpretation of those provisions are entirely
a matter for the courts of each State and may well be less
restrictive than the Seventh Amendment.
Third, the Federal courts have been concerned about--and it
is provided in the Federal rules, in rule 23(b)(3)(D)--they are
concerned about the difficulties likely to be encountered in
the management of the class actions. While it is perfectly
appropriate for Federal courts to exercise their discretion to
decline class certification in light of such difficulties, it
is not appropriate for them to decide that the cases would also
be too difficult for State courts to bother with.
Yet, section 4 of 353 contemplates exactly that, that class
actions could be removed from State courts, stripped of class
action status, perhaps because of manageability problems, and
then remanded to State court as a collection of individual
actions. This would be an extraordinarily paternalistic act on
the part of the Federal courts with respect to the State
courts, telling them that they, the State courts, would have
such difficulties running the case as a class action that they
may not even try.
The arrogance of this assertion becomes particularly clear
if there are hundreds or thousands of named plaintiffs rather
than just a handful. Many State courts could well decide that
their docket control needs require the case to run as a class
action. Yet, Senate bill 353 could easily end up preventing the
State from operating its court docket in a cost-efficient
manner, a result that I believe may well be forbidden by the
Tenth Amendment.
The State court tobacco cases, on the other hand, have been
proceeding well. As might be expected, some classes have been
certified, while others have not. And I mention in my written
testimony at least four cases that have been certified and are
important cases. The tobacco companies have, of course, notice
that they are vulnerable to class actions in State court, but
not in Federal court.
The primary defendants in tobacco cases are from different
States, guaranteeing that all tobacco class actions would be
removable under Senate bill 353, all of them. Whatever the
reasons for the uniform run of Federal court decisions, and
whether or not these are justified in terms of the needs,
capacities and priorities of the Federal court system, to send
tobacco class actions to Federal court is to send them to their
death. That is the practical effect. That is why section 4 of
Senate bill 353 could well be entitled ``The Tobacco Industry
Relief Act of 1999.''
Now, like Mr. Frank, I too have some thoughts about section
5 on rule 11. I won't go through them here. I think that rule
11 would have the unintended effect of essentially stymieing
the development of the law, both common law and statutory
interpretation and constitutional law. And I think that is also
very ill-advised.
Thank you.
Senator Grassley. Thank you, Professor Daynard.
[The prepared statement of Mr. Daynard follows:]
Prepared Statement of Richard A. Daynard, J.D., Ph.D.
My name is Richard Daynard. For the past 30 years I have been a law
professor at Northeastern University School of Law. For much of this
time I taught and thought about the nature of the legal process. For
the last 15 of these years I have specialized in toxic torts and
complex litigation, and especially in tobacco litigation.
I would like to comment today on two aspects of S. 353, section 4
(removal jurisdiction) and section 5 (Rule 11). Though my comments on
section 4 are brief, my comments on section 5 are even briefer, and I
would like to begin with those.
section 5
Section 5 would make sanctions mandatory for Rule 11 violations,
and would make lawyers financially responsible if they are found that
they have made a ``[]frivolous argument for the extension,
modification, or reversal of existing law or the establishment of new
law.''
This section would tend to stunt the natural processes for
developing, extending, and refining legal doctrine, processes that all
of us learned about in law school, and that Justice Cardozo, Prof. Karl
Llewellan, and many others have described so well. The common law,
constitutional law, and even the interpretation of specific statutes
have developed as they have, thanks in no small part to the willingness
of lawyers to challenge, and even radically challenge, existing
doctrines and interpretations. Buick v. McPherson, Erie R.R. v.
Tompkins, Baker v. Carr, Brown v. Board of Education--the list could go
on, covering every field of law and many thousands of cases, where the
law as it is today is the result of creative lawyers having thought and
argued ``outside the box'', challenging the then-accepted paradigms,
conventional wisdom, and politically correct thinking about what the
law is and should be.
Under Section 5 these organic processes, what Oliver Wendell Holmes
called ``the life of the law'', would atrophy. Lawyers would be
frightened to challenge the status quo, because it is often impossible
to know in advance how a particular judge will respond to a creative,
but perhaps politically incorrect, argument. The judge might accept the
argument, might recognize the argument as nonfrivolous but reject it
anyhow, or might reject it and find it frivolous. There is simply no
way an attorney can know for sure which way the judge will respond.
Section 5 strongly encourages the attorney to ``play it safe'' by not
making the argument at all, even though the law (that is, all of us)
might have benefited had the argument been made and accepted by the
trial judge, or by a higher court on appeal. With the processes of
legal development and refinement stymied, the law becomes stagnant and
grows increasingly distant from justice.
Not only is Section 5 poisonous to the natural processes of legal
development; it is also totally unnecessary. Lawyers do not
intentionally make frivolous arguments. ``Frivolous arguments'' are a
subset of ``losing arguments'', and no one in his right mind
intentionally makes a losing argument. Indeed, the fear of losing the
case, and in the instance of contingency fee plaintiffs' attorneys of
losing one's investment, is more than sufficient to discourage
attorneys even from playing close to the line.
section 4
Section 3 provides original federal district court jurisdiction for
almost all class actions--those in which any class member is a citizen
of a different state than any defendant. Abstention is required if the
substantial majority of the plaintiff class are citizens of the same
state as the ``primary defendants'', and the case is based primarily on
that state's laws.
This section, by itself, is benign. However, it provides the
necessary predicate for Section 4, which permits any defendant or any
plaintiff class member to remove any class action that is within the
federal court's original jurisdiction.
Unlike Section 5, Section 4 does not impede justice by interfering
with the development of legal doctrine. Rather, in a range of cases,
and particularly in tobacco cases, it impedes justice by preventing
plaintiffs from ever getting their day in court.
Beginning with the first lawsuits against the tobacco industry in
1954 and continuing for the next four decades, the industry managed to
avoid ever paying damages to a single afflicted smoker, nonsmoker, or
family member. Its principal strategy was to use or abuse every
possible procedural device, for the purpose of discouraging plaintiffs'
attorneys from bringing such cases by guaranteeing that their expenses
will exceed any possible recovery. As an attorney for R.J. Reynolds
Tobacco Company wrote, following the dismissal of several individual
cases, ``the aggressive posture we have taken regarding depositions and
discovery in general continues to make these cases extremely burdensome
and expensive for plaintiffs' lawyers, particularly sole practitioners.
To paraphrase General Patton, the way we won these cases was not by
spending all of [RJR]'s money, but by making that other son of a bitch
spend all of his.'' Haines v. Liggett Group, Inc., 814 F. Supp. 414
(D.N.J. 1993).
To counter the tobacco industry's bankrupt-the-plaintiff's-lawyer
tactics, plaintiffs' lawyers eventually began bringing class actions--
in both state and federal courts--on behalf of afflicted smokers and
nonsmokers. These class actions for the first time raised the amount of
the possible recovery above the cost of bringing these cases, allowing
plaintiffs' attorneys to prudently make the investment of time and
money needed to even the playing field, thereby giving their clients a
chance to have their cases heard on the merits. This is, indeed, the
principal historic justification for Rule 23(b)(3) class actions: to
recruit effective advocates for injured parties who would otherwise be
without redress.
Unfortunately, the federal courts have been unwilling to permit
individual tobacco victims to band together in class actions. Beginning
with the 5th Circuit's reversal of the trial courts class certification
in Castano v. American Tobacco Co., 84 F.3d 734 (1996), federal courts
have uniformly refused to certify these cases. They have articulated
various reasons.
Ironically, three of the reasons given cut strongly against S. 353.
First, as the Castano court noted, there have been so few tobacco cases
that it is often difficult to know how the supreme courts of the
various states--the ultimate arbiters of state-based common law under
the doctrine of Erie Railroad v. Tompkins--would decide various legal
issues that they present. Indeed, the court repeatedly refers to the
case, a national class action on behalf of all addicted smokers, as
``an immature tort''. And it suggests, quite reasonably, that state
courts should have the first crack at addressing these state law
issues.
Second, there is a concern that the Seventh Amendment may stand in
the way of a viable class action trial plan, to the extent that such a
plan may risk having a later jury reconsider an issue decided by a
previous jury. Whether or not that concern is justified as a matter of
federal constitutional law, it is irrelevant in state class actions,
since the Seventh Amendment has not been held binding upon the states
under the Fourteenth Amendment. While various states may have similar
constitutional provisions, the interpretations of those provisions are
entirely a matter for the courts of each state, and may well be held
less restrictive than the Seventh Amendment.
Third, the courts have been concerned about ``the difficulties
likely to be encountered in the management'' of the class actions.
While it is appropriate for federal courts to exercise their discretion
to decline class certification in light of such difficulties, see Rule
23(b)(3)(D), it is not appropriate for them to decide that the cases
would also be too difficult for state courts to bother with. Yet
Section 4 of S. 353 contemplates exactly that--that class actions could
be removed from state court, stripped of class action status (perhaps
because of manageability problems), and then remanded to state court as
a collection of individual actions. This would be an extraordinarily
paternalistic act on the part of the federal courts with respect to the
state courts--telling them that they (the state courts) would have such
difficulties running the case as a class action that they may not even
try. The arrogance of this assertion becomes particularly clear if
there are hundreds or thousands of named plaintiffs, rather than just a
handful: many state courts could well decide that their docket control
needs require the case to run as a class action. Yet S. 353 could
easily end up preventing the state from operating its court docket in a
cost-efficient manner--a result that may well be forbidden by the Tenth
Amendment.
The state court tobacco cases, on the other hand, have been
proceeding well. Some classes have been certified, while others have
not. Among those that have been certified are Broin v. Philip Morris
Companies, Inc., an action by a class of nonsmoking flight attendants
tried in a Florida state court in 1997, and eventually settled by the
tobacco industry for a $300 million research fund, waiver of the
statute of limitations, and a de facto concession in the individual
follow-on cases that environmental tobacco smoke causes a variety of
disease; Engle v. R.J. Reynolds Tobacco Co., an action by a class of
nicotine-addicted afflicted Florida smokers which has been in trial in
a Florida state court since July, 1998; Scott v. American Tobacco Co.,
a class of addicted Louisiana smokers scheduled for trial in Louisiana
state court this coming fall; and Richardson v. Philip Morris
Companies, Inc., a class of addicted and of afflicted Maryland smokers,
certified as a class by a Maryland trial judge in January 1998 and
presently under appeal in the Maryland courts.
The tobacco companies have, of course, noticed that they are
vulnerable to class actions in state court, but not in federal court.
The ``primary defendants'' in tobacco cases are from different states,
guaranteeing that all tobacco class actions would be removable under S.
353. Whatever the reasons for the uniform run of federal court
decisions, and whether or not these are justified in terms of the
needs, capacity, and priorities of the federal court system, to send
tobacco class actions to federal court is to send them to their death.
That is why Section 4 of S. 353 could well be entitled, ``The Tobacco
Industry Relief Act of 1999.'' Thank you.
Academic preparation
Massachusetts Institute of Technology (1970-1980): Ph.D. in Urban
Studies and Planning (specializing in Law and Social Policy): Columbia
University Sociology Department (1968-1970): M.A., Faculty Fellow;
Harvard Law School (1964-1967): J.D. cum laude, Harvard Legal Aid
Bureau; Columbia College (1960-1964): A.B. summa cum laude, Phi Beta
Kappa, Siff (University-wide) Prize in Philosophy of Science, Kinne
Prize in Humanities, Regents Scholarship; Bronx High School of Science
(1957-1960): Mathematics Award, Honor Society.
Professional employment
Northeastern University School of Law: Assistant Professor of Law
(1969-1972); Associate Professor of Law (1972-1973); Professor of Law
(1973-present). Hon. Henry J. Friendly, United States Court of Appeals
for the Second Circuit, New York City (July 1967-August 1968). Law
Clerk; Columbia University School of Law (September 1968-June 1969);
Associate in Law (teaching fellow); Tufts New England Medical Center;
Instructor in Psychiatry (1976-1989). Consultant, Consumers Union, New
York Office (1979); Consultant and Lecturer (1986-Present); Expert
Witness before various state insurance commissions (1988).
Bar admissions/recognition
New York 1967; U.S. Court of Appeals, 6th Cir. 1986; U.S. Supreme
Court 1986; U.S. Court of Appeals, 11th Cir. 1987, U.S. Court of
Appeals, 5th Cir. 1996; Who's Who in American Law (6th ed., 1989; 7th
ed., 1992; 8th ed., 1994, 9th ed. 1996, and 10th ed., upcoming); Who's
Who in America (51st ed., 1997); Who's Who in the World (15th ed.,
1998); Who's Who in Finance and Industry (31st ed., 1999); The
Gleitsman Foundation Certificate of Special Recognition, (1998);
Smoking or Health Award, American Lung Association of Massachusetts
(1991).
Smoking and health responsibilities
President, Group Against Smoking Pollution of Massachusetts (1983-
); President, Stop Teenage Addiction to Tobacco (1995-), Vice President
(1991-1995), Board of Directors (1990-); President, Clean Indoor Air
Educational Foundation (1984-1992), Tobacco Control Resource Center,
Inc. (1993-); Chairman, Tobacco Products Liability Project (1984-);
Editor-in-Chief, Tobacco Products Litigation Reporter (1985-);
Associate Editor, Tobacco Control: An International Journal (1998-);
Member, Advisory Committee on Tobacco Policy and Public Health (Koop-
Kessler Committee) (1997); Advisory Board, Tobacco Divestment Project
(1990-); Member, American Society of Heating, Refrigeration and Air
Conditioning Engineers, Standing Committee on Indoor Air Ventilation
(SSPC-62), and Subcommittee on Health and Comfort (1992-); Member,
National Coordinating Committee on Tobacco Policy Research (1990-1993);
Secretary, Tobacco Control Council, National Association for Public
Health Policy (1990-); Advisory Board, Foundation for a Smoke-Free
America (1989-); Board of Directors, Americans for Nonsmokers Rights
(1991-); Member, Harvard Institute for the Study of Smoking Behavior
and Policy, Study Group (1986-1989); Chair, New England Tobacco Control
Professionals Study Group (1989-1990).
Principal Investigator, Robert Wood Johnson Foundation's Americans
with Disabilities Act Smokefree Policy Research and Evaluation Project
(1994-1995); Principal Investigator, Massachusetts Tobacco Control
Program's (MTCP) Legal Policy Research Project (1994); Principal
Investigator, MTCP Americans with Disabilities Act Smokefree
Demonstration Project (1994-96), Principal Investigator, National
Cancer Institute's Legal Interventions to Reduce Tobacco Use (1995-);
Principal Investigator, Robert Wood Johnson Foundation Legal and
Political Strategies and Local Tobacco Control; peer reviewer, medical
and public health journals and book publishers, University of
California Tobacco Related Disease Research Program, and 1995 Surgeon
General's Report; submitted amicus curiae briefs in four appellate
cases, as well as to the U.S. Supreme Court; wrote model for
Massachusetts ordinances banning smoking in public places (1975).
Testified (or submitted testimony) before congressional and state
legislative committees, Federal interagency Committee on Smoking &
Health, administrative agencies, and local governmental bodies in
several states; Appeared on national television and radio programs
(including ``Nightline,'' ``Today,'' ``This Week with David Brinkley,''
``McNeil-Lehrer,'' ``Frontline,'' ``Crossfire,'' ``Inside Business,''
CBS, NBC and ABC Evening News, and ``All Things Considered''), on
British, German, and Spanish television, on British, Canadian,
Australian, and Korean radio, and on local programs in many cities;
extensively quoted in national magazines and newspapers (including
Time, Business Week, Barrons, New York Times, Washington Post, and Wall
Street Journal), in the international press, in wire service stories,
in syndicated columns, in regional newspapers throughout the U.S., and
in legal and medical publications; Subject of feature articles in Wall
Street Journal (April 20, 1987), New York Times (February 14, 1988),
and Boston Sunday Globe (May 1, 1994).
Delivered Ford Hall Forum lecture with Surgeon General Koop
(October 10, 1985); lectured on tobacco products liability to doctors
at several local hospitals and at the Royal Society of Medicine,
London, to attorneys in bar committee and continuing legal education
meetings, to public health students at Harvard and Boston University,
to meetings of local lung, public health, and civic associations, and
to annual conferences of Stop Teenage Addiction to Tobacco (1986-);
Mellon lecture at University Of Pittsburgh Law School (1987); presented
papers at 6th World Conference on Smoking and Health (Tokyo, 1987);
Keynote address at Asian-Pacific Conference on Control of Cigarette
Smoking (Teipei,1989); Keynote Address, 7th World Conference on Tobacco
and Health (Perth, 1990); chaired or co-chaired 11 nationwide meetings
of plaintiffs' attorneys and public health advocates, three ATLA
section meetings, and several press conferences; invited speaker,
American Public Health Association, 1986, 1988, 1989, 1990, 1992; 1996;
1997; American Society for Preventive Oncology (Washington, 1989);
Commentator, Association for Consumer Research (New Orleans, 1989), on
effects of cigarette advertising on smoking behavior; 15th
International Cancer Congress (Hamburg, 1990); International Symposium
on the Control of Tobacco-Related Cancer and Other Diseases (Bombay,
1990); Workshops on Passive Smoking and Nonsmokers' Rights, 7th World
Conference on Tobacco and Health (Perth, 1990); World Conference on
Lung Health (Boston, 1990); Faculty, Fifth Summer Conference, Stanford
Center for Research in Disease Prevention (July, 1990); International
Conference on Cancer Prevention (Bethesda, 1991); leader, Workshop on
Legal issues in Tobacco Control, ``Tobacco Use: An American Crisis,''
Wash., D.C. (January 1993); Conference on ``Tobacco Use: An American
Crisis'' (Washington, 1993) National Workers' Compensation and
Occupational Medicine Seminar (Hyannis, 1993); American Society of
Addiction Medicine (Atlanta, 1993); American Trial Lawyers Ass'n
(Tucson, 1994); Mass. Tobacco & Youth Conference (Boston, 1994);
President's Cancer Panel (Virginia, October 5, 1994); 9th World
Conference on Tobacco and Health (Paris, 1994); European Conference on
Tobacco and Health (Helsinki 1996); 10th World Conference on Tobacco
and Health (Beijing 1997): lecturer to business executives on legal
implications of smoking in the workplace at conferences sponsored by
the New Hampshire, Massachusetts, Connecticut and Indiana Lung
Associations (1986-); St. Louis ASSIST Coalition (1994), and at
conferences an Connecticut, Rhode Island and Massachusetts sponsored by
the Environmental Protection Agency (1994-); lectured to faculty
seminar at Johns Hopkins University Department of Epidemiology (1995);
lectured to National Dental Tobacco-Free Steering Committee (Bethesda,
1996); Harvard Law School Conference on the Tobacco Settlement: Should
Tort Law Be on the Table? (Cambridge, Mass. 1997).
Selected publications
``Tobacco Products Liability Litigation as an Antismoking
Strategy,'' in Aoki, M. et. al. Smoking and Health 1987, 409-413;
``Tobacco Liability Litigation as a Cancer Control Strategy,'' 80 J.
Nat. Cancer Institute 9 (1988); ``The Cipollone Documents,'' 24 Trial
50 (November, 1988) (with Laurie Morin); ``Up from the Ashes: Cigarette
Litigation and the Dewey Decision,'' 5 Toxics Law Reporter 630 (1990);
``Proving Causation in Lawsuits Involving Environmental Tobacco
Smoke,'' in Proceedings of Pre-conference Workshop on Passive Smoking
(1990) 84-89; ``Worldwide Litigation,'' in Tobacco & Health 1990: The
Global War, 189-191; ``Product Warnings--Tobacco'' (with Laurie Morin)
in Handling Product Warning Cases (Wiley, 1991); ``Health Hazards of
Secondhand Smoke'' (with Stanton Glantz), Trial (June 1991) 37-39;
``Recent Developments in Tobacco Litigation--1991,'' 1 Tobacco Control:
An International Journal, 1992; 1:37-45; ``Tobacco Litigation--Purpose,
Performance, and Prospects,'' in National Cancer Institute Monograph:
International Conference on Cancer Prevention: Facts, Maybes, and
Rumors (1992, #12, 53); ``Redress for Injury Caused by Environmental
Tobacco Smoke'' (with Edward Sweda), 28 Trial #3, 50 (March 1992);
``Judicial Action for Tobacco Control,'' in Roemer, R., ed.,
Legislative Action to Combat the World Smoking Epidemic (1992);
``Controlling Cancer by Suing Tobacco Companies: The Potential for
India in the Light of the U.S. Experience,'' Control of Tobacco-related
Cancers and Other Diseases, International Symposium, 1990, P.C. Gupta,
J.E. Hamner, III and P.R. Murti, Eds, (Oxford University Press, Bombay,
1992); ``Cipollone Ruling Sends Industry a Message: Say Goodbye to
Federal License to Lie,'' 20 Prod. Safety & Liab. Rptr. 712 (1992);
``Tobacco in Court'' (edited special issue and wrote two articles), 17
World Smoking and Health #2 (1992); ``When Cigarettes Start Fires:
Industry Liability,'' (with Andrew McGuire) 28 Trial 411, 44 (1992); 23
Trial Lawyers Quarterly 22 (1993); ``Report of the Tobacco Policy
Research Study Group on Tobacco Litigation'' (with others), 1 Tobacco
Control 537 (Supp. 1992); ``Tobacco Use as a Sociologic Carcinogen: The
case for a Public Health Approach.'' (with Thomas Novotny, Patricia
Shane, and Gregory Connolly), in Cancer 1992 (V. DeVita, ed.);
``Chipping Away at the Legal Immunity of Tobacco Companies,''
Priorities 11 (Summer 1993); ``Smoking Out the Enemy: New Developments
In Tobacco Litigation,'' 29 Trial 16 (November 1993); ``Tobacco
Products Liability Suits in Massachusetts--a Neglected Opportunity,'' 1
J. Mass. Aca. Trial Attys #3 50 (Jan. 1994) (with Friedman); ``Second-
hand Smoke and the ADA: Ensuring Access for Persons with Breathing and
Heart Disorders,'' 13 St. Louis Univ. Public Law Rev. 635 (1994) (with
Mark Gottlieb and Jennifer Lew), ``Catastrophe Theory and Tobacco
Litigation,'' 3 Tobacco Control 59 (1994); ``The Third Wave of Tobacco
Liability Cases,'' 30 Trial (November 1994); ``The Third Wave of
Tobacco Litigation in the U.S. and Beyond,'' World Health Organization
Tobacco Alert (April 1995) (with Graham Kelder and Mark Gottlieb);
``The Tobacco Industry Under Fire,'' Trial (November 1995) (with
Kelder); ``Tobacco Industry Tactics,'' British Medical Bulletin
(January, 1996) (with Sweda); ``Waiting to Exhale: Tobacco Companies
Hold Their Breath Over a New Legal Challenge That Could Have a Crushing
Effect,'' The Boston Sunday Globe Focus Section (February 11, 1996)
(with Kelder), ``Tobacco Litigation as a Public Health and Cancer
Control Strategy,'' Journal of the American Medical Women's Association
(March 1996) (with Kelder): ``The Role of Litigation on the Effective
Control of the Sale and Use of Tobacco: Litigation as Substitute for
and Supplement to Conventional Means of Regulation Thwarted by the
Tobacco Industry,'' 8 Stanford Law & Policy Review 1 (1997) (with
Kelder), ``The Many Virtues of Tobacco Litigation, Trial (November
1998) (with Kelder); ``A Year of Living Dangerously: The Tobacco
Control Community Meets the Global Settlement,'' Public Health,
(November/December 1998) (with Michele Bloch and Ruth Roemer).
Richard A. Daynard holds a J.D. from the Harvard Law School and a
Ph.D. in Urban Studies and Planning (specializing in Law and Social
Policy). Since 1969, he has been a Professor of Law at the Northeastern
University School of Law. Professor Daynard has been involved in a
number of organizations devoted to the study of tobacco and public
health policy and implementation. He has served as President of the
Group Against Smoking Pollution of Massachusetts (GASP) from 1993-
present; Chairman of the Tobacco Products Liability Project from 1984-
present; President of the Tobacco Control Resource Center from 1984-
present; Editor-in-Chief of the Tobacco Products Litigation Reporter;
and President of Stop Teenage Addiction to Tobacco (STAT) from 1996-
present, among others. He has published numerous articles in such
journals as The Journal of the American Medical Association; Tobacco
Control: An International Journal; Cancer; Trial; and Tobacco and
Health. His experience and expertise on tobacco law, policy, and
litigation places him in the middle of the public debate over smoking,
leading to appearances on Nightline; Today; This Week with David
Brinkley; Frontline; Crossfire, the ABC, NBC, CBS, CNN, MS-NBC, CNBC,
and FOX news programs; and on National Public Radio, ABC, CBS, and BBC
radio programs.
Senator Grassley. Now, Mr. Beisner.
STATEMENT OF JOHN H. BEISNER
Mr. Beisner. Thank you, Mr. Chairman. I very much
appreciate the opportunity to participate in this hearing this
afternoon. What I would like to do is spend a few minutes
highlighting parts of my written testimony and to respond to
some of the points made earlier by the Justice Department.
The first point I would like to make is that the Justice
Department, particularly in its written testimony, seems to be
saying that we don't see much of a problem out there with class
actions. I think that statement was tempered somewhat by the
oral statements of Ms. Acheson this afternoon, and I hope that
that is a breakthrough, as Mr. Frank suggested earlier, for
discussions on that subject. Hopefully, that will be a major
outcome of this hearing today.
I was particularly struck by Ms. Acheson's describing the
hypotheticals that both of you presented to her as being,
``over the edge'' at one point. I am sure that the people back
at my office this afternoon will be happy to hear that the
cases that we are working on are deemed by the Justice
Department to be, ``over the edge,'' because let me assure you
that I have got a hundred on my docket that are exactly like
the hypotheticals you were putting. These are not hypotheticals
that are drawn out of the air. These are what these cases
really are.
And I fear that part of the problem may be that we need to
perhaps do a better job of getting some more information to the
Justice Department on this subject. Between this subcommittee
and the House subcommittee, you have now had four hearings on
this subject. This is the first one the Justice Department, I
believe, has participated in, and I think that perhaps we may
have an information flow problem here and we need to be getting
more information to the Justice Department so that there is a
better understanding of this issue.
The second point I would make is that I am deeply troubled
by what seemed to be in the Justice Department's testimony
somewhat of a direct assault on the notion of Federal diversity
jurisdiction. The Justice Department's testimony suggests that
when a State law-based lawsuit is removed to Federal court, the
State where the lawsuit was originally filed is somehow
deprived of its right to resolve that controversy.
That argument ignores what Federal diversity jurisdiction
is all about. It is a mechanism by which a State law-based
claim may be moved from a local court to a Federal court to
ensure that all the parties are going to have a level playing
field and to ensure that interstate commerce interests are
protected. This isn't a concept that the courts made up. It is
not something that Congress came up with. It is in Article III
of the Constitution.
As Professor Elliott testified earlier, that concept is
particularly applicable to these sorts of interstate class
actions. And, again, it is disturbing to me to hear the Justice
Department seemingly suggest that that constitutional concept
should be ignored in these sorts of cases.
A third point I would make is that it is also somewhat
troubling to me what the Justice Department seems to be
suggesting as an alternative to the legislation that is being
proposed here because I think that alternative really may be
quite an affront to States' rights, as opposed to this
legislation.
The Department suggests that we should instead be talking
about legislation--and I am quoting their written testimony
here--``focusing on the appropriate limits on State authority
to bind out-of-state plaintiffs.'' Now, under that approach, we
would actually be curtailing the authority of State courts.
Such legislation, I fear, although I haven't seen exactly what
the Justice Department is talking about, might be a declaration
that, contrary to the Full Faith and Credit Clause of the
Constitution, State court judgments wouldn't be honored
nationwide.
Besides being constitutionally suspect, I fear that such an
approach is unfair. Basically, what I think Justice is saying
in their testimony is that it would be preferable to have a
statute that would prevent State courts from issuing judgments
that apply to out-of-state plaintiffs, while at the same time
encouraging State courts to be able to issue judgments that
would be applicable to out-of-state defendants.
Finally, as has been discussed by a number of witnesses, we
have this issue of whether the jurisdictional removal
provisions of S. 353 would federalize all class actions. And
others have noted, I really think that that suggestion ignores
the current class action landscape. They have already been
federalized. The oddity here, though, is that they have been
federalized by State courts.
We are not talking about the Federal Government coming in
and telling States what to do, which is what you normally think
of when you hear the word ``federalism.'' It is State courts
going in and telling 49 other States what their laws are. I
wanted to note that a shining example of this appeared last
September 27 in the New York Times, on page 29 to be precise.
In a full-page article, the Times reported on a multi-billion-
dollar class action that is now pending in a county court in
downstate Illinois.
The banner headline on that article said, ``Suit Against
Auto Insurer Could Affect Nearly All Drivers.'' The article
said that all kinds of people are alarmed about this lawsuit.
It quoted Public Citizen as being alarmed. Ralph Nader was
alarmed. The attorneys general of Massachusetts, New York,
Pennsylvania and Nevada were all alarmed. The National
Association of State Insurance Commissioners were alarmed.
Well, why were all these people alarmed? Well, their
concern is that this county court in Illinois is on the verge
of telling all of the other States what their auto insurance
laws are going to be. In the context of this nationwide class
action, that court is set to decide whether auto insurance
companies' use of after-market auto parts, as opposed to the
auto parts made by the original vehicle manufacturers, in
repairing insureds' vehicles is fraudulent behavior.
The problem is that some States encourage or require
insurance companies to use those sorts of after-market parts as
a way of lowering insurance costs. Nevertheless, the Illinois
court is set to apply Illinois law to all 50 States, and
according to the Times article may thereby, ``overturn
insurance regulations or State laws in New York, Massachusetts
and Hawaii, among other places.''
In short, this Illinois court, which was elected by and is
accountable only to the 61,000 residents of Williamson County,
IL, is going to make what amounts to a national rule of
insurance. That is the sort of federalization that we are
talking about with State court class actions.
Thank you.
[The prepared statement of Mr. Beisner follows:]
Prepared Statement of John H. Beisner
In hearings over the past eighteen months, this Subcommittee and
its House counterpart have heard considerable evidence of a severe
state court class action crisis. The record reflects an explosion in
the number of such cases being filed, prompted largely by a lax
attitude toward class actions among some state courts. Some state
courts operate without basic class certification standards and in
disregard of fundamental due process requirements, resulting in injury
to both unnamed class members as well as to corporate defendants.
Another problem is that certain state courts are ``federalizing'' such
litigation. By their laxity, they have become magnets for a
disproportionate share of interstate class actions and are thus
dictating national class action policy. Further, in litigating
multistate class actions, those state courts are also frequently
dictating the substantive laws of other jurisdictions. Considerable
waste and inconsistent judicial rulings are occurring because there is
no mechanism for coordinating overlapping, ``competing'' class actions
(i.e., cases in which the same claims are asserted on behalf of
basically the same classes) pending simultaneously in state courts
around the country.
Witnesses at a March 5, 1998 House hearing (representing widely
varied interests) expressed broad agreement that the wisest, least
disruptive solution was the expansion of diversity jurisdiction over
interstate class actions, allowing more such cases to be heard in
federal courts. As one witness noted, ``you have heard today from
professors, from plaintiff's lawyers, from defense lawyers, from
consumer representatives, from business people, from a whole range. And
it is striking * * *. that * * * you've heard from everyone * * * that
* * * increasing the ambit of * * * diversity jurisdiction * * * to
[encompass more class actions] is a good idea.''
S. 353's jurisdictional/removal provisions would be a significant
step toward resolving the state court class action crisis. They would
fix a technical flaw in our current diversity jurisdiction statutes
(enacted before the modern day class action) that bars federal courts
from hearing most interstate class actions--the judicial system's
largest lawsuits, often involving millions of dollars disputed among
thousands of parties residing in multiple jurisdictions. This change
would also make more broadly available the statutory mechanisms by
which federal courts (but not state courts) may coordinate overlapping,
competing class actions. Those provisions would allow both plaintiffs
and defendants greater access to our federal courts without undesirable
side effects. The bill would not alter any party's substantive legal
rights. The bill would leave purely local disputes to the exclusive
purview of state courts. And the bill would still allow state courts to
hear class actions when parties prefer that forum.
The notice provisions of S. 353 would lessen the possibility that
class actions will injure the interests of unnamed class members (as
they now often do). The bill's attorney's fee limitations have
potential to curtail some of the most egregious fee abuses,
particularly some counsel's tendency to claim fees on the basis of
speculative, amorphous benefits to a class.
I very much appreciate this opportunity to participate in today's
discussion of S. 353, the Class Action Fairness Act of 1999.
At the outset, I want to disclose the sources of my perspectives on
this subject. Basically, I am an ``in-the-trenches'' class action
litigator. Over the past 19 years, I have been involved in defending
over 250 class action lawsuits on a wide variety of subjects before the
federal and state courts of 28 states at both the trial court and
appellate level. On the basis of that experience, I wish to share a few
thoughts about the problems that exist in the class action arena and
about the respects in which I believe that S. 353 would be a positive,
effective response to those problems.
I. There Is A Continuing State Court Class Action Crisis
It is exceedingly ironic that although class actions are probably
one of the most complex procedural devices in our legal system, the
general public has an acute awareness of what they are. From the
citizen perspective, class actions are not pretty. Jury researchers--
the people who survey potential jurors in anticipation of trials--will
tell you that in most locales, the general public tends to view class
actions as a blight on our legal system. Citizens correctly perceive
that not all class actions are bad. But if you ask for a definition of
a class action in those jury research settings (as I have on occasion),
you will probably get an answer like: ``Class actions are lawsuits in
which the lawyers get all of the money and the people don't get
anything.'' And you will also be told that class actions are usually
lawyer-manufactured. The public senses that these lawsuits do not get
started like a normal lawsuit does--a person walking into the lawyer's
office and asking that redress for an injury be pursued. Instead, the
public perceives that class actions are initiated when a lawyer gets an
idea about filing a lawsuit (e.g., by reading about an issue in the
newspaper) and then goes off to find somebody to front the lawsuit
(i.e., the named plaintiff or class representative).
I do not mean to suggest that Congress should legislate in this
highly technical legal arena based on such public perceptions. But for
better or worse, the record shows that these perceptions are
disturbingly accurate. And those perceptions of class actions are
adversely skewing the public view of our legal system as a whole.
Because of their size and scope, class actions receive disproportionate
amounts of press attention. But even more significantly, class actions
regularly touch more citizens than virtually any other aspect of our
legal system. Indeed, given the proliferation of class actions in
recent years, each of us sitting in this room--whether we know it or
not--is a class member in numerous pending class actions. If you have
ever bought a product or used a service, there are multiple class
actions on file in which somebody is supposedly trying to vindicate
your rights in some way. And because of the notice rules, citizens get
a lot of mail about these cases--the only mail that most people ever
get from a court. Most of the legalese that they see in those notices,
they do not fully comprehend. But what they do understand is that their
rights are often being manipulated to benefit other interests.
To understand the class action abuse problem, one need only
consider for a moment the general concept that we are discussing. If I
told you that the House had just passed a new bill that would allow
lawyers to bring lawsuits without first obtaining permission from the
parties on whose behalf the lawsuit supposedly was being brought, you
presumably would be shocked. How could the House possibly conclude that
we should allow lawyers to bring lawsuits not authorized by the
claimants?
Rightly or wrongly, that's exactly what class actions are. They are
a giant anachronism. In the midst of a legal system in which individual
rights are paramount--a system in which a lawyer normally cannot do
much of anything without the informed consent of his or her client--we
have this device through which a lawyer can walk into a court and say:
``I am bringing claims on behalf of millions of people, even though I
don't know exactly who or where they are and even though I have not
obtained their permission to bring this lawsuit on their behalf.''
Clearly, such a device invites abuse. It permits lawsuits in which
the claimants play little or no role; lawsuits in which the lawyers
call all of the shots without really even hearing the views and desires
of their clients. Further, it allows attorneys to bring lawsuits where
the real parties in interest have manifested no interest in suing.
Plainly, such lawsuits present great risk that the lawyers who bring
them will substitute their interests for those whose claims are at
issue. In short, class actions are a powerful, abuse-inviting device
that must be carefully policed by the courts to avoid legal
catastrophe. Unfortunately, at least in many of our state courts, that
careful supervision is not occurring.
a. congress has already amassed an ample record of class action abuse
This hearing is not the first occasion on which Congress has
received indications of state court class action abuse. Over the past
eighteen months, Congress has been bombarded with warnings that
something is badly amiss with class actions. The alarm bells have been
ringing. Almost daily, there are press reports about class actions
being used to deny (not protect) due process rights--instances in which
the legitimate interests of both class members and defendants are being
ignored or injured.
In October 1997, this Subcommittee held a hearing on class action
abuses. Last year, the Subcommittee on Intellectual Property and the
Courts of the House Judiciary Committee held two such hearings (one in
March and another in June). The record that emerged from those three
sessions indicates that the alarm bells are ringing for good cause:
state court class action abuse is rampant.
Those earlier hearings amply documented several serious problems:
Some courts (particularly state courts) are not properly
supervising proposed class settlements. The result is that
class counsel become the primary beneficiaries; the class
members (the persons on whose behalf the actions were brought)
get little or nothing--or worse. For example, at all three
hearings last year, there was discussion of the now infamous
Bank of Boston class action settlement. At this Subcommittee's
October 1997 hearing, both Senator Herb Kohl (D.--Wis.) and his
constituent, Martha Preston, a member of the class, described
the settlement as a ``bad joke.'' \1\ At a March 1998 House
hearing, Ralph G. Wellington, a Philadelphia attorney,
elaborated, noting that the state court in that case approved a
class settlement under which
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\1\ Opening Statement of Sen. Herb Kohl, ``Class Action Lawsuits:
Examining Victim Compensation and Attorneys' Fees,'' S. Hrg. 105-504
(Oct. 30, 1997).
[m]ost of the 700,000 [class members] received minimal direct
economic benefit; some received no direct benefit at all.
Indeed, most had their mortgage escrow accounts * * * deducted
in order to pay several million dollars to the class counsel
who had been approved to protect their interests. In short,
having been included in a lawsuit they never envisioned, they
had their own money from their own escrow accounts taken to pay
class counsel for what many believe to have been a very dubious
benefit.\2\
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\2\ Unless otherwise noted, quotations attributed to witnesses at
the ``March 1998 Hearing'' are from the prepared statements of those
persons submitted for the hearing.
According to several data sources, there has been an
explosion in the number of state court class actions in recent
years. Witnesses tied this phenomenon to the tendency of
certain state courts to have an ``anything goes'' attitude
toward class actions. At the March 1998 House hearing, Rep.
James Moran (D.--Va.) observed that ``[o]pportunistic lawyers
have identified those states and particular judges where the
class action device can be exploited.'' And offering specific
examples, he decried the fact that ``legitimate business
enterprises * * * are being severely harmed by existing class
action practice'' and that ``[i]n other cases, where businesses
may be legitimately at fault, injured consumers receive little,
while the plaintiffs attorneys are enriched.'' Similarly, John
W. Martin, Jr., then the Vice President-General Counsel of Ford
Motor Company, observed that ``[t]he real purpose of the vast
majority of class action lawsuits is to make money--not for
consumers, but for the lawyers bringing the suit.'' Noting
specific state court examples, he urged that ``[a]s a result,
consumers are exploited and rarely receive substantial awards,
while class action counsel frequently walk away with
millions.''
The lax attitude toward class actions manifested by some
state courts has constitutional (due process) ramifications.
For example, Mr. Martin cited cases in which state courts had
engaged in ``drive-by class certification[s]''--situations in
which judges ``grant[] plaintiffs' motion to certify his claims
for class treatment before the defendant even has a chance to
respond to the motion (or, indeed, has even been served with
the complaint).''
He also expressed concern about the `` `I never met a class
action I didn't like' phenomenoe''--state courts that ``employ
standards that are so lax that virtually every class
certification motion is granted, even where it is obvious that
the case cannot, consistent with basic due process principles,
be tried to a jury as a class action.'' He cited examples of
cases in which state courts had certified classes that federal
courts had found uncertifiable. In some of those cases, the
federal court cited due process or other constitutional reasons
for finding class certification inappropriate; yet, the state
courts charged ahead.
Because the class action device is such a powerful tool, it
can give an attorney unbounded leverage. John L. McGoldrick,
Senior Vice President and General Counsel of Bristol-Myers
Squibb Company, observed at the March 1998 House hearing that
where class actions are not properly controlled by the courts
handling them, there can be ``the perverse result that
companies that have committed no wrong find it necessary to pay
ransom to plaintiffs' lawyers because the risk of attempting to
vindicate their rights through trial simply cannot be justified
to their shareholders. Too frequently, corporate decisionmakers
are confronted with the implacable arithmetic of the class
action: even a meritless case with only a 5 percent chance of
success at trial must be settled if the complaint claims
hundreds of millions of dollars in damages.''
The fundamental problem is the failure of some state courts
to manage class actions so as to avoid the considerable
potential for abuse. Rep. Moran testified that ``[m]any state
courts lack the complex litigation training, experience and
resources necessary to deal with [interstate class actions]''
and that ``state court judges, who are elected in most states,
are more prone to bias when the defendant is a large, out of
state corporation.'' As Mr. McGoldrick put it, ``[i]n some
places, state court judges do not appreciate the raw power of
the class action device and the need to circumscribe its usage.
As a result, the rights of both defendants and the class
members on whose behalf the actions were brought get ignored.''
This situation has encouraged the all too frequent filing of
frivolous class actions in state courts. For example, Mr.
Martin offered specific examples illustrating that due to the
erosion of state court class action standards, ``class actions
that are being filed assert claims that are utterly without
merit (or marginal at best).'' And he noted that in interviews
conducted for a study on class actions by the RAND
Corporation's Institute for Civil Justice, ``many attorneys
(including some plaintiffs' counsel) observed that `too many
non-meritorious [class action lawsuits] are [being] filed and
certified' for class treatment.''
The current situation in which class action litigation is
being focusing in state courts is resulting in enormous waste,
inconsistent results, and the risk of harm to class members'
interests. More specifically, both Mr. McGoldrick and Mr.
Martin noted the problems created whenever overlapping or
``copycat'' class actions are filed, a frequent occurrence.
When such ``copycat'' cases are pending in different federal
courts, they may be consolidated before a single judge through
the Judicial Panel on Multidistrict Litigation, thereby
ensuring uniform management of the litigation and consistent
treatment of all legal issues. But when duplicative class
actions are filed in two or more state courts in different
jurisdictions, the ``competing'' class actions must be
litigated separately in an uncoordinated, redundant fashion
because there is no mechanism for consolidation of state court
cases. As a result, state courts may ``compete'' to control the
cases, often resulting in harm to all parties involved. Counsel
also ``forum shop,'' going from court to court trying to obtain
a different result on class certification or other issues. And
class counsel in the various cases may compete with each other
to achieve a settlement, a phenomenon that can work to the
disadvantage of the class members.
Mr. Martin observed that ``[t]he `anything goes' mentality
in state courts has led to a sad reality: as a practical
matter, the most important question determining the outcome of
a class action lawsuit has now become, not the merits of the
claims or the propriety of class treatment, but whether the
case can successfully be removed to federal court.'' He then
offered numerous examples of ways in which lawyers who file
class action lawsuits manipulate their pleadings to keep their
purported class actions out of federal court (e.g., by naming
defendants who defeat diversity but who have no real role in
the litigation, by waiving class claims that might give rise to
federal jurisdiction, by changing claims after the one-year
removal deadline has passed).
b. the state court class action crisis has not abated
Little has changed since last year's class action-related hearings,
except that we now have more data confirming that the state court class
action crisis is for real. Most notably, a new publication--Class
Action Watch--recently printed the results of a survey of major company
experiences with class actions.\3\ In particular, the survey found that
the number of class actions pending against the responding companies
had increased dramatically over the ten-year period 1998-1998. As
indicated by other data collection efforts, that growth was most
pronounced among state court class actions. Over the ten-year period,
the number of state court class actions pending against the respondents
rose by 1,042 percent--a greater than ten times increase.\4\ In
contrast, the growth of pending federal cases was substantially less--
only around 338 percent.\5\
---------------------------------------------------------------------------
\3\ Analysis: Class Action Litigation--A Federalist Society
Survey,'' Class Action Watch (Federalist Society Litigation and
Practice Group, Class Action Subcommittee) at 1 (Vol. 1, No. 1).
\4\ Id. at 5.
\5\ Id.
---------------------------------------------------------------------------
The survey also provided strong support for the contention that if
state courts in a particular locale begin manifesting an ``laissez-
faire'' attitude toward class actions, they will become a magnet for
such matters. For example, the survey noted that for years, the level
of class action activity in Texas was relatively low. But of late, some
Texas intermediate appellate courts have issued class certification-
related decisions suggesting that Texas courts have a lower threshold
for class certification than do our federal courts (even though Texas
has adopted the federal class action rule and supposedly follows
federal class action precedents). The effects of these decisions are
not surprising. While the surveyed companies had experienced a 110
percent growth in the number of pending Texas state court class actions
in the five-year period 1988-1993, that growth recently has accelerated
dramatically.\6\ In the more recent five-year period (1993-1998), those
companies reported a 338 percent increase in the number of class
actions pending against them in Texas state courts.\7\
---------------------------------------------------------------------------
\6\ Id. at 7.
\7\ Id.
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The survey also indicated that as the Texas courts seemingly became
less rigorous about class actions, they were more frequently being
called upon to hear class actions involving non-Texas residents. For
example, the survey noted that both in 1988 and 1993, certified classes
were almost always confined to Texas residents.\8\ By 1998, however,
nationwide class actions were relatively common in Texas state
courts.\9\
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\8\ Id. at 8.
\9\ Id. The survey also contains data supporting the view of Mr.
McGoldrick and others noted above that class actions provide
extraordinary leverage to force settlements, regardless of whether
those settlements make sense for either the class members or the
defendants. Id. at 7-8.
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c. other problems with state court class actions are emerging
Over the past year, several other problems attributable to state
court class actions have become increasingly apparent. I would like to
focus on just two:
1. Overly broad classes put class member rights at risk
Because of the entrepreneurial motivations that underlie most class
actions, it is not surprising that counsel try to make them as broad as
possible. In short, why sue for a class of 1,000 people when you can
sue for a class of 20 million people? A 20-million person class gives
an attorney far more leverage against the defendant. And it creates the
potential for a much larger pot of attorneys' fees (with no
significantly larger investment).
The problem with this approach is that it causes the entire lawsuit
to proceed on a lowest common denominator basis. The ``average'' claim
becomes the claim by which the entire action is judged; class members
with larger, more serious claims are simply lumped into the group and
not given individual attention. Further, to make the litigation work as
a class action, class counsel begin ``shaving off'' (i.e., waiving) the
more complicated claims that may preclude trying the matter on a class
basis. For example, certain legal theories requiring individual proof
(e.g., fraud claims requiring individual demonstrations of reliance)
may be thrown overboard. Likewise, claims for certain types of injuries
(e.g., personal injury, property damage) may be excluded from the scope
of the action. These ``shortcuts'' can be devastating for certain class
members.
Let me use as an example a recently filed class action lawsuit that
has garnered considerable attention--the now infamous ``toothbrush''
class action. According to a press release, this lawsuit, which is
pending in state court in Chicago, assails the American Dental
Association and several toothbrush manufacturers for failing to warn of
the risk of a toothbrush-related injury known as ``toothbrush
abrasion'' \10\ According to a press report, the ``hard evidence'' that
backs this lawsuit is, in significant part, a toothpaste commercial
that claimed that 36 million people brushed their teeth too hard.\11\ I
suspect that a lot of people have reacted to this lawsuit in the manner
of one letter to the editor:
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\10\ The attorneys who brought the lawsuit have even set up a
website regarding the action--at ``www.toothbrush.com.'' Among other
things, it advises that if one suspects that he/she has toothbrush
abrasion, they should ``[f]irst, take care of your health'' and then
second, call for more information about the lawsuit at 1-877-SORE GUMS.
\11\ Not Too Abrasive, But Suit Causes Ache, Chicago Tribune, April
14, 1999, at Business 1.
I wonder if one can sue this attorney and his client for being
abrasive and irritating. Any attorneys out there want to take
up the challenge? We could make it a class-action suit against
all ridiculous lawsuits such as this.\12\
---------------------------------------------------------------------------
\12\ Rubs the Wrong Way, Chicago Sun-Times, April 22, 1999, at 30.
Admittedly, I know little about this lawsuit. But if it is like
most actions of this general type, the proposed class includes (a) a
few people who actually claim to have suffered physical injury and (b)
millions of people who simply claim to be at risk of injury. This
paradigm poses two major problems. The people who claim actual injury
are going to get lost in the lawsuit. If the matter actually gets
adjudicated or settled on a class basis, the focus will be on the
biggest group--the people who supposedly are just ``at risk.'' If the
case is tried, the jury likely would find for the defendants under this
apparently bizarre theory. Or if the case is adjudicated in plaintiffs'
favor or is settled, the remedy will focus on the ``at risk'' group
(e.g., something like warnings and/or new toothbrushes). But what
happens if somebody out there actually sustained physical injury? What
if there actually are a few people who rightfully should have been
warned by a dentist that they have a very rare dental situation
requiring an unusual dental hygiene regimen?
Unless those persons are properly notified of what is going on in
the lawsuit and closely follow the content of the notices (assuming
that is possible), they will be out in the cold. If the case is tried
and the class loses, their rights to pursue their claim's for actual
injury likely will be extinguished. Or even if plaintiffs win or obtain
a settlement, the relief probably will not address their actual injury
at all. And they will not be able to obtain individualized relief
because the class victory or the settlement will preclude them from
seeking more.
In some cases, class counsel seek to avoid these potential results
by excluding people who actually have sustained personal injury,
limiting the purported class to people who are merely at risk. But that
approach creates another similar problem. If the case proceeds on a
class basis and the class loses, all of the class members probably will
be precluded from pursing claims if in fact they do experience actual
injury in the future, in which case they may have a more compelling
individual case to present to a jury. (For example, in the toothbrush
case, if a jury found the warnings provided by the defendants to be
adequate, each class member presumably would be precluded from arguing
to the contrary in a personal injury action in the future.) Likewise,
if the case is resolved (by settlement or trial) on the basis of
minimal relief, each class member likely would be precluded from later
asserting claims against the defendants if the risk came to fruition--
if they discover later that they have actually experienced dental
injury of some sort.
Federal courts have become sensitive to this problem and
increasingly have refused to proceed with class actions that put class
members' rights at risk in this manner.\13\ In contrast, state courts
generally have been oblivious to this problem. Indeed, I am not aware
of any state court that has even attempted to address this issue.
---------------------------------------------------------------------------
\13\ See, e.g., In re Ford Motor Co. Bronco II Prod. Liab. Litig.,
177 F.R.D. 360, 368 (E.D. La. 1996) (denying class certification
because requested relief ``does not encompass death, injury, property
damage or other consequential damage''; noting that ``by attempting to
tailor their action in such a way as to improve their ability to
establish commonality, class representatives may in fact create an
adequacy problem''); Feinstein v. The Firestone Tire and Rubber Co.,
535 F. Supp. 595, 600-01 (S.D.N.Y. 1982).
---------------------------------------------------------------------------
2. State courts are ``federalizing'' substantive and procedural law
I have heard criticisms that S. 353 would ``federalize'' all class
actions. That criticism overlooks a perversity of the current class
action landscape--class actions have already been federalized by the
state courts.
When I say ``federalized,'' I do not mean that the federal
government has come in and told states what they are supposed to do.
What I am talking about is ``false federalism''--the current situation
in which one state court goes around telling the other 49 state courts
what their laws should be. When state courts preside over class actions
involving claims of residents of more than one state (especially
nationwide class actions) as they are increasingly inclined to do, they
end up dictating the substantive laws of other states, sometimes over
the protests of officials in those other jurisdictions.
A shining example appeared on page 29 of the September 27, 1998
edition of the New York Times. In a full-page article, the Times
reported on a multi-billion dollar class action pending in a rural
county court in down state Illinois.\14\ The headline says: ``Suit
Against Auto Insurer Could Affect Nearly All Drivers.''
---------------------------------------------------------------------------
\14\ In the trial court, the action is captioned Snider v. State
Farm Mut. Auto. Ins. Co., No. 97-L-114 (Ill. Cir. Ct., Williamson
County).
---------------------------------------------------------------------------
The article says that all kinds of people are ``alarmed'' about
this lawsuit. Public Citizen is ``alarmed.'' Ralph Nader is
``alarmed.'' The Attorneys General of Massachusetts, New York,
Pennsylvania, and Nevada are ``alarmed.'' The National Association of
State Insurance Commissioners is ``alarmed.'' Why are all of these
people ``alarmed?'' Their concern is that the rural county court in
Illinois is on the verge of telling all of the other states what their
auto insurance laws are going to be. In the context of a nationwide
class action, that court is set to decide whether auto insurance
companies' use of ``aftermarket'' auto parts (as opposed to auto parts
made by the ``original equipment manufacturer'' (``OEM'')) in repairing
insureds' vehicles is fraudulent behavior. The problem is that some
states encourage or require insurance companies to use non-OEM parts, a
policy intended to lower insurance rates. Nevertheless, the Illinois
court is set to apply Illinois law to all other fifty states, and
according to the Times article, may thereby ``overturn insurance
regulations or state laws in New York, Massachusetts, and Hawaii, among
other places.'' In short, this Illinois county court, which was elected
by and is accountable only to the 61,000 residents of Williamson
County, Illinois, is going ``to make what amounts to a national rule on
insurance.'' The Illinois Supreme Court has declined to stop the
court;\15\ the U.S. Supreme Court has also refused to intervene.\16\
---------------------------------------------------------------------------
\15\ See Insurance Indus. Litig. Reporter, April 1, 1998, at 18
(noting that the Illinois Supreme Court had denied petitions to halt
the action).
\16\ See Speroni v. State Farm Mut. Auto. Ins. Co., 119 S. Ct. 276
(1998).
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Another example of this phenomenon is a class action now pending in
the state court for Coosa County, Alabama.\17\ That suit was brought on
behalf of the over 20 million people who have certain types of airbags
in their motor vehicles. The lawyers therein are asking that the court
order that the design of those federally-mandated airbags be declared
faulty. That court may be the ablest and the most conscientious in our
judicial system. But from a federalism policy standpoint, this
situation defies logic. Why should an Alabama state court tell 20
million people in all 50 states what kind of airbag that they may have
in their cars? What business does an Alabama state court have in
presiding over this purportedly nationwide action when fewer than 2
percent of the claimants are Alabama residents and none of the out-of-
state defendants even do business in the court's district? That Alabama
court is accountable only to the 11,000 residents of the county that
elects the court. Nevertheless, if counsel in that case have their way,
that court will be dictating national airbag policy.
---------------------------------------------------------------------------
\17\ This lawsuit is captioned Smith v. General Motors Corp., et
al., Civ. A. No. 97-39 (Cir. Ct. Coosa County, Ala.). Although the
trial court initially certified a nationwide class in this action
before the defendants were even served, the court subsequently lifted
that order.
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Under the current situation, procedural class action law has also
been federalized to a large extent--in the same perverse way. Even
though only a minority of state courts are routinely failing to
exercise sound judicial judgment on class action issues, those courts
have become magnets for a wildly disproportionate share of the
interstate class actions that are being filed. In short, attorneys file
their class actions in the minority of courts that are most likely to
have a ``laissez-faire'' attitude toward the class device. That
distinct minority of state courts are essentially setting the national
norm; they are effectively dictating national class action policy.
The new Class Action Watch testimony (discussed previously) tends
to confirm this observation. But anyone doubting that this phenomenon
is occurring need look no further than the testimony of Dr. John B.
Hendricks at the March 1998 House hearing. He offered a docket study of
state court class actions in one jurisdiction showing (a) that class
actions had become disproportionately large elements of the dockets of
some county courts, (b) that many of the class actions were against
major out-of-state corporations lacking any connection with the forum
county, and (c) that the proposed classes in those cases typically were
not limited to in-state residents and often encompassed residents of
all 50 states. Dr. Hendricks identified one state court judge who had
granted class certification in 35 cases over the preceding two years.
As Dr. Hendricks stated, ``[t]hat's a huge number of cases when one
considers that during 1997, all 900 federal district court judges in
the United States combined certified a total of only 38 cases for class
treatment.'' The study failed to uncover any instance in which that
judge had ever denied class certification. Clearly, that court alone
was playing a radically disproportionate role in setting national class
action policy.\18\
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\18\ The Alabama Supreme Court has recently issued several rulings
that may dampen this behavior. But when such action is taken in one
state, counsel simply move the class action show to another
jurisdiction where the courts have shown a lax attitude toward
regulating the class device.
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II. S. 353 Is A Modest, Well-Reasoned Answer To The State Court Class
Action Crisis
From the record now before Congress, one could develop strong
support for far reaching (some would say ``radical'') responses to the
state court class action crisis. For example, Congress could enact
federal legislation simply prohibiting state courts from using the
class action device at all. Or Congress could perform major surgery on
the class device itself (e.g., change procedural rules to allow class
actions to be used only to pursue injunctive relief (not monetary
damages) and thereby eliminate the economic incentives that encourage
abuse of the device).
Instead, S. 353 takes a middle-of-the-road course, proposing very
modest changes. Nevertheless, its multi-pronged approach should be
effective in addressing many of the most serious class action problems
that have been identified.
a. provisions expanding federal jurisdiction
At the March 1998 House hearing, the witnesses were asked their
views about a suggestion that the state court class action crisis could
be quelled by expanding federal diversity jurisdiction to accommodate
more class actions with interstate implications:
Prof. Susan Koniak, a member of the faculty at the Boston
University Law School who described herself as being from the
``plaintiffs' bar,'' responded that expanding federal
jurisdiction over class actions would be
a good idea. There's the polybutylene pipe case, which is one
of the biggest class actions, was in Union City, Tennessee, in
the state court, where no one could get there, you couldn't fly
in to object. And that's common. Often these [state] courts are
picked, and they are in the middle of nowhere. You can't have
access to the documents and I don't think it's a full answer,
but I think it should be done.\19\
---------------------------------------------------------------------------
\19\ See Federal News Service Transcript, Mass Torts and Class
Actions: Hearing before the Subcomm. on Intellectual Property and the
Courts, House Comm. on the Judiciary (March 9, 1998), at 19 (``FNS
Transcript'').
Former U.S. Attorney General Dick Thornburgh concurred,
---------------------------------------------------------------------------
noting that
[m]ost of the complaints that arise out of alleged inequitable
treatment in these suits in state courts are in states where
the judges are elected, and must * * * depend on contributions
which come from potential party litigants.
He stated that an expansion of federal jurisdiction over class actions
is warranted because ``federal courts have shown a much greater
propensity to bring some sensible adjudication to the creation of
classes and the progress of class cases.'' \20\
---------------------------------------------------------------------------
\20\ Id. at 19-20.
In her prepared oral remarks, Elizabeth Cabraser, a leading
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plaintiffs' class action attorney, opined that
much of the confusion and lack of consistency that is currently
troubling practitioners and judges and the public in the class
action area could be addressed through the exploration, the
very thoughtful exploration, of legislation that would increase
federal diversity jurisdiction, so that more class action
litigation could be brought in the federal court. Not because
the federal courts necessarily have superior judges, but
because the federal courts have nationwide reach; they have the
statutory mechanisms that they need to manage this litigation,
so litigation can be transferred and coordinated in a single
forum.\21\
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\21\ Id. at 33-34.
Both Mr. Martin and Mr. John Frank indicated their support
for expanding federal diversity jurisdiction over purported
class actions. And Mr. McGoldrick concluded the inquiry by
---------------------------------------------------------------------------
telling the Subcommittee:
[Y]ou have heard [today] from professors, from plaintiff's
lawyers, from defense lawyers, from consumer representatives,
from business people, from a whole range. And it is striking to
me that those of us who frequently disagree--my friend Ms.
Cabraser and I frequently disagree--but you've heard from
everyone the notion that diversity jurisdiction, increasing the
ambit of it to permit class actions, is a good idea. And it
seems to me that that's something this committee should weigh
heavily in its deliberations.\22\
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\22\ Id. at 42.
S. 353 embraces the simple, elegant response to the state court
class action crisis considered by this diverse group of witnesses--a
correction of the fact that federal courts lack jurisdiction to
adjudicate interstate class actions, lawsuits that typically involve
millions of dollars in dispute among thousands of parties residing in
multiple jurisdictions. That change would aid resolution of the current
state court class action crisis by eliminating restrictions that have
forced both unnamed class members and defendants to have their claims
heard before some tribunals that are ill-equipped to handle complex
litigation and otherwise less vigilant about due process rights.
Further, as Ms. Cabraser noted at the March 1998 House hearing, the
change would make available in most class actions the ``statutory
mechanisms'' that federal courts (but not state courts) may wield ``to
manage [class] litigation,'' so that overlapping, competing class
actions ``can be transferred and coordinated in a single forum.'' \23\
And most importantly, the change would contribute to greater uniformity
in the standards for deciding whether a controversy may be afforded
class treatment.
---------------------------------------------------------------------------
\23\ See 28 U.S.C. Sec. 1407 (statute providing for transfer and
consolidation of actions through multidistrict litigation mechanism).
---------------------------------------------------------------------------
As drafted in S. 353, this solution would be implemented without
undesirable side-effects. The bill would not alter any party's
substantive legal rights. The bill would not permit removal of truly
local disputes; such matters would remain within the exclusive purview
of the relevant state courts. And the bill would not preempt state
courts' authority to hear class actions of any sort; if the parties
prefer to litigate a particular interstate class action before an
appropriate state court, they may do so.
The jurisdictional changes envisioned in S. 353 are entirely
consistent with the current concept of federal diversity jurisdiction.
At present, the statutory ``gatekeeper'' for federal diversity
jurisdiction--28 U.S.C. Sec. 1332--essentially allows invocation of
diversity jurisdiction in cases that are large (in terms of the
``amount in controversy'') and that have interstate implications (in
terms of involving citizens from multiple jurisdictions). By nature,
class actions typically fulfill these requirements. Because they
normally involve so many people and so many claims, class actions
invariably put huge sums into dispute and implicate parties from
multiple jurisdictions. Yet, because section 1332 was originally
enacted before the rise of the modern day class action, it did not take
account of the unique circumstances presented by class actions. As a
result, that section, as a technical matter, tends to exclude class
actions from federal courts.\24\ That technical omission would be
corrected by S. 353.
---------------------------------------------------------------------------
\24\ At present, class actions not presenting federal questions
often may not be brought in or removed to federal courts under
diversity jurisdiction theories because of two U.S. Supreme Court
decisions interpreting section 1332. First, in Snyder v. Harris, 394
U.S. 332, 340 (1969), the Court ruled that in determining whether the
parties satisfied the diversity prerequisite, a court should look only
to the named parties (ignoring the unnamed class members). That ruling
allows class proponents to avoid federal diversity jurisdiction by
naming as plaintiffs parties who are non-diverse with a defendant, even
though a significant number of the unnamed class members (if not the
vast majority of class members) do not share the defendant's
citizenship. Second, in Zahn v. International Paper Co., 414 U.S. 291
(1973), the Court held that the ``amount in controversy'' requirement
in section 1332 is satisfied in a purported class action only if each
and every member of the purported class is shown separately to satisfy
the jurisdictional amount threshold (presently $75,000). That ruling
means that even though class actions invariably are huge controversies,
involving millions (or billions) of dollars of claimed damages, they
cannot be heard in federal court. For example, an action involving
100,000 class members may put millions of dollars at stake, but it
would not be subject to federal jurisdiction unless each class member
had $75,000 at issue or a total of $7.5 billion for the purported
class!
---------------------------------------------------------------------------
S. 353 would make this correction by amending 28 U.S.C. Sec. 1332
(the diversity jurisdiction statute) to extend federal diversity
jurisdiction to cover any class action (with an aggregate amount in
controversy in exceeding $75,000) in which there exists ``partial
diversity'' between plaintiffs (including all unnamed members of any
plaintiff class) and defendants, an approach wholly consistent with
Article III of the Constitution.\25\ This expanded jurisdiction,
however, would not encompass disputes that are not interstate in
nature--cases in which a class of citizens of one state sue one or more
defendants that are citizens of that same state would remain subject to
the exclusive jurisdiction of state courts. Further, federal courts
would be required to abstain from hearing certain local cases and state
action cases. Thus, contrary to what has been argued by some critics,
the bill would not move all class actions into federal court.
Consistent with existing diversity jurisdiction precepts, it would
preserve exclusively to state court jurisdiction what are primarily
local controversies.
---------------------------------------------------------------------------
\25\ See, e.g., State Farm Fire & Cas. Co. v. Tashire, 386 U.S.
523, 530-31 (1967) (``in a variety of contexts, [federal courts] have
concluded that Article III poses no obstacle to the legislative
extension of federal jurisdiction, founded on diversity, so long as any
two adverse parties are not co-citizens''). In State Farm, the Court
noted that the concept of ``minimal diversity'' providing the basis for
diversity jurisdiction in the class action context had already been
discussed in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921).
On several subsequent occasions, the Court has reiterated its view that
permitting the exercise of federal diversity jurisdiction where there
is less than complete diversity among the parties is wholly consistent
with Article III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185,
199-200 (O'Connor, J., dissenting) (``Complete diversity * * * is not
constitutionally mandated.''); Newman-Green, Inc. v. Alfonzo-Larrian,
490 U.S. 826 (1989) (``The complete diversity requirement is based on
the diversity statute, not Article III of the Constitution.''); Owen
Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978) (``It is
settled that complete diversity is not a constitutional
requirement.''); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class
action brought under Fed. R. Civ. P. 23, only the citizenship of the
named representatives of the class is considered, without regard to
whether the citizenship of other members of the putative class would
destroy complete diversity).
---------------------------------------------------------------------------
The amendments also would facilitate the removal to federal court
of any purported class action that falls within the additional grant of
federal diversity jurisdiction over class actions described above. The
bill would not change the existing diversity jurisdiction removal
procedures applicable to purported class actions, save for three
exceptions intended to correct some of the tactics used by counsel to
avoid federal jurisdiction over interstate class actions.\26\ In
addition, the bill would authorize unnamed class members (not just
defendants) to remove cases. This even-handed change would allow class
members to move cases to federal court (within a reasonable time after
notice is given) if they are concerned that the state court has not or
will not adequately protect the absent class members' interests.
---------------------------------------------------------------------------
\26\ First, the legislation would amend 28 U.S.C. Sec. 1441(b) to
confirm defendants' ability to remove all purported class actions
qualifying for federal jurisdiction under the revised section 1332 (as
discussed above) regardless of the state in which the action was
originally brought.
Second, 28 U.S.C. Sec. 1446(b) would be amended to provide that a
defendant could remove a putative class action at any time (even at a
date more than one year after commencement of the action), so long as
the action is removed within 30 days after the date on which the
defendants may first ascertain (through a pleading, amended pleading,
motion order or other paper) that the action satisfies the
jurisdictional requirements for class actions (as set forth in the
proposed section 1332(b)). This provision is intended to prevent
parties from filing cases as individual actions and then recasting them
as purported class actions (or as broader class actions) after the one-
year deadline for removal has passed.
Third, S. 353 would amend 28 U.S.C. Sec. 1446(a) to allow any class
action defendant to remove an action. At present, an action typically
may be removed only if all defendants concur. This provision is
intended to address situations in which local defendants with little at
risk or defendants ``friendly'' to the named plaintiffs may preclude
other defendants with substantial exposure from gaining access to
federal court.
---------------------------------------------------------------------------
To avoid leaving before federal courts controversies not warranting
the attention of the federal judiciary, the legislation would require a
federal court to dismiss any case (that is in federal court solely due
to the expanded diversity jurisdiction provisions) that it has
determined may not be afforded class treatment. However, the bill
specifies that an amended action may be refiled in state court.
Further, the bill also protects the interests of the unnamed class
members by specifying that federal tolling law will apply to the
limitations periods on the claims asserted in the failed class action.
b. the notice provisions
The bill contains provisions (a) requiring that any formal, court-
ordered notice to the class contain a ``short summary written in plain,
easily understood language'' and (b) otherwise detailing the required
contents of such notices. Further, the bill requires that the Attorney
General of the United States and the attorneys general of any states in
which class members reside be notified of any proposed class action
settlement. As noted above, many state courts have not been vigilant
about protecting the rights of unnamed class members, particularly
those with claims that arguably may be more significant than the claims
of the average class member. Further, some courts have not adequately
balanced attorney compensation with what has been achieved for the
class.
Many of these problems will be alleviated if the federal courts are
allowed to hear more interstate class actions. However, expanding
public awareness of proposed class actions and proposed settlements
thereof will lessen the possibility that class actions will injure the
unnamed class members that they are intended to benefit.
c. attorney's fees provisions
As was detailed previously, attorney's fees are the root cause of
the tidal wave of class actions that we are experiencing and of the
most serious class action abuses that we are seeing. S. 353 would limit
such fees to a ``reasonable percentage of the amount of'' (a) damages
actually paid to the class, (b) future financial benefits to the class
attributable to the cessation of alleged improper conduct, and (c)
costs actually incurred by defendants in complying with terms of any
order or agreement. Reasonable lodestar fees will be available in any
event.
These are very modest fee limitations. They do not address the fact
``percentage of fund'' fee awards in class actions are usually wholly
unwarranted. Allowing plaintiffs' counsel to receive a significant
percentage of the recovery in an individual lawsuit might be justified
as bearing some relationship to the amount that an attorney
legitimately should expect for prosecuting the claim (particularly when
the attorney and his/her client presumably have agreed on the
percentage). But a major purpose of a class action device is to achieve
efficiencies--to prosecute large numbers of claims simultaneously with
substantially reduced effort for all involved. Thus, counsel
prosecuting a class action cannot reasonably expect a substantial
percentage of whatever fund is created as a result of prosecuting a
whole class of claims--there must be a substantial discount reflecting
the efficiency of the class exercise. Otherwise, counsel are receiving
a major, totally unjustifiable windfall.
In short, if enacted, the attorney's fees provisions in S. 353 will
not substantially slow the engine driving class action growth. However,
the bill's provisions are modest steps in the right direction. They do
have the potential to curtail some of the more egregious fee abuses,
especially the tendency by some counsel to claim fees on the basis of
theories of speculative, amorphous benefits to the class.
III. Conclusion
Thank you again for the opportunity to comment on S. 353. I
respectfully urge the Subcommittee to recommend the bill favorably to
the full Judiciary Committee.
Senator Grassley. Thank you very much for your testimony.
The Senator from Alabama, would you lead off?
Senator Sessions. Thank you.
Mr. Morrison, you talked about lawyers not talking to their
clients in these cases. They don't know who they are. When I
was attorney general, there was an election contest actually
involving the very justice I just mentioned who made that
closing argument before he was president of the Alabama Trial
Lawyers Association. But at any rate, the lead plaintiff on the
case was dead for 6 months. They filed a class action in the
name of only one plaintiff, as I recall, so obviously they
hadn't been consulting with their client. And there is just no
pattern of that.
Mr. Morrison. There is no pattern.
Senator Sessions. I mean, the lawyers take over the case,
and it is their case and they run it and there is no input from
the client.
Mr. Morrison. That is right, exactly, Senator Sessions, and
that is how you get coupon settlements, $.08 settlements,
future vague medical monitoring settlements. Those aren't about
the health and welfare and well-being of so-called victims.
Those are about the entrepreneurial litigator cashing out. In
essence, what many lawyers have found--and let's just call a
spade a spade--is that having a class action is better than
having a ``dot com'' company go public in these days. That is
what it is all about.
Senator Sessions. Big money, that is for sure.
I would like to ask you, Mr. Beisner, about this power. I
remember back in law school, Dean Harrison used to ask a
question: in the conflict of laws, may the isle of Tobago bind
the whole world? Can a county in Chicago actually do this, a
county court, in effect, under our system of respect for
verdicts in many cases, be able to do that?
Mr. Beisner. My understanding, although I am not involved
in the case, is that this is going to happen. The Illinois
Supreme Court has declined to intervene, and indeed the parties
involved took the issue to the U.S. Supreme Court, which also
declined to intervene. So it is going to happen.
Senator Sessions. Under the current state of law, this
complex public policy question will be decided by a county
court in Illinois?
Mr. Beisner. That is correct.
Senator Sessions. With regard to the question of the mass
tort, this is something I am not sure I can articulate the
difference. What is the difference in the problem that we as
policymakers deal with when you have a breast implant-type
situation, which I guess was filed as a class action--or let's
take asbestos that was not. Is there a distinction here?
Mr. Beisner. Well, I think that if you are talking about
the difference between mass torts and the use of class actions
in that context and class actions generally--and I don't want
to over-generalize here, but I think the main difference is
that frequently or most often in a mass tort situation, you
have people who are saying I have been injured in some way. You
often in those cases have the sorts of people who may well go
to a lawyer and say, I have a problem, would you please try to
find a remedy here.
These are claims that at least to some extent are going to
be filed and are going to be part of the system anyway, and the
challenge to the courts in those circumstances is how are we
going to process those. When you are talking about non-mass
tort class actions, I think you are often there getting more
into the arena of lawyer-manufactured cases. Those are the
instances where the claim is probably most apparent only in the
mind of the lawyer who brought the case and where the vast
majority of people out there probably don't care a whit about
whether this claim is asserted.
Senator Sessions. Now, asserted that you have 60 or 100
cases like this. Are you serious? I mean, you personally are
working on 100 cases?
Mr. Beisner. Yes.
Senator Sessions. Give me an example of what you are
talking about, the kind of litigation.
Mr. Beisner. I can give you an example of one which is in
your home State of Alabama, in Coosa County, to be
straightforward about that. And this is a case----
Senator Sessions. I don't think that was one of the six
counties.
Mr. Beisner. No, it is a different one.
Senator Sessions. But it is not much bigger than those.
Mr. Beisner. It was a class action involving well over 20
million in all 50 States, and it is basically anybody who has
an airbag in their vehicle. And they brought this lawsuit
against GM, Chrysler and Ford, and they are basically asking
that GM, Chrysler and Ford send back $500 to all of these
people because they claim the airbag is defective in those
vehicles.
So what you have there is the potential that in this one
court, where the judge has been elected by the 11,000-or-so
residents of Coosa County, he will be presiding over this
multi-billion-dollar trial, if the judge decides to go forward
with it, deciding whether or not basically everybody's airbag
out there is defective. And, indeed, that judge and that court
will be setting our Federal airbag policy.
Senator Sessions. Well, I think that is extraordinary, and
it does raise serious questions. I think those are the kinds of
decisions that may--well, let me ask you, it didn't get in
Coosa county because the plaintiffs and the defendants somehow
agreed that this would be a good place to try it? One party got
to select the county, is that right?
Mr. Beisner. That is correct.
Senator Sessions. So, presumably, they searched all over to
find the county they wanted to file in. They could have filed
it in any county virtually in the United States?
Mr. Beisner. That is correct, and we attempted to remove it
to Federal court because none of the auto company defendants
really do any business--there aren't even any auto dealers in
that county. But because they named as a defendant an auto
dealer in Alabama, we were unable to remove that case to
Federal court.
Senator Sessions. Mr. Chairman, that is a dramatic
statement. What he has said is, as I understand it--correct me
if I am wrong--this statement that you have a right to remove
is really a hollow thing because you can almost always in a
case like this add a non-diversity defendant.
Mr. Beisner. And I could assure you the auto dealer who was
named in that lawsuit didn't have a great deal to do with how
the airbag in those vehicles was designed.
Senator Sessions. But because he was a defendant, there was
not complete diversity?
Mr. Beisner. That is correct.
Senator Sessions. Mr. Morrison, how do you see that as a
policy?
Mr. Morrison. Senator, as a policy what is happening is
sham defendants, fraudulent defendants, are being joined in to
prevent removal to Federal court. And I was struck earlier when
the testimony of the Justice Department was finished and you
were asking questions about the six counties in your State. If
you had those same six counties and you had an extraordinarily
high incidence of cancer, the public would want you to look
into it and figure out what was going on.
What you have is the legal equivalent of a high incidence
of cancer in those six counties because people are self-
selecting those counties, designing lawsuits to stay in those
counties, and taking the class actions in those specific
counties. Alabama is not the only place. I could name counties
just about in every State where there is a friendly jurist or a
friendly loosening of the rules that takes place, where people
will design the case to stay before that judge, get it
certified, get the blackmail settlement and basically go public
with the attorneys' fees.
Senator Sessions. I understood it, I think, but I did not
really comprehend the depth of it that a plaintiff who has got
an action in every airbag in America can search the whole
United States to find the single county where there may be only
one judge that he knows is favorable and bring the lawsuit
there and get a verdict that binds the world. It is really
pretty dramatic and I appreciate you sharing that with us.
Senator Grassley. I will start with Mr. Morrison. I have
just got a couple of short questions. Both the Justice
Department and Professor Daynard have suggested that if this
bill is passed, some people will not get their day in court.
Are they right?
Mr. Morrison. No, sir. I couldn't disagree more with that
suggestion. This bill--and I think the genius of the bill is it
doesn't have anything to do with the substantive rights of the
individual. It doesn't change that individual's rights. If the
individual has a claim under South Carolina law, my home State,
or a claim under Michigan law, where I grew up, then that claim
still exists and they have the right to pursue that claim
vigorously in the Federal court, with full respect for that
substantive law, or in the State court if that is the
appropriate place for it and it is an appropriate State class
action.
Moreover, the door is not slammed. I think Professor Frank
said it best. There are plenty of class actions that are, in
fact, local class actions. A local water pollution case, a
local water rights case, a local case against a county or a tax
assessor where something has gone wrong--those are local State
class actions and should be brought.
This bill does nothing to diminish the substantive legal
rights of one human being. What it does allow for is a fair
adjudication of those rights in an appropriate forum. What it
does allow for is the removal of interstate class actions. That
is all it does. It is a very modest proposal with no damage to
alleged victims.
Senator Grassley. Mr. Beisner, your comments?
Mr. Beisner. I am not sure there is much I can add to what
Mr. Morrison said, but I think that one of the things we need
to recognize is that the reason why in Federal courts, as
Professor Daynard was suggesting earlier, some class actions
are not certified is because frankly in a lot of instances the
plaintiffs' counsel become over-ambitious with what they are
doing. They try to mix together people whose claims really
aren't common, and the Federal courts have been calling counsel
on that and saying we are not going to allow you to do that.
Frankly, that is the issue that I think is presented in a
lot of these cases. I think that if the classes are properly
crafted, that issue would not exist. And so to suggest that
State courts are allowing classes Federal courts are not, I
don't think is a fair comparison. I think that the problem is
that the Federal courts are beginning to say you have got to
craft these classes more carefully, and they are right from a
due process standpoint.
Senator Grassley. Mr. Beisner, let me ask you, the Justice
Department, as you heard, suggests that the passage of the
diversity removal provisions in the bill would somehow infringe
on the State courts' ability to offer redress to their
citizens. Is that accurate?
Mr. Beinser. Again, I think the answer to that question
really goes back to what Mr. Morrison was saying earlier. It
will not prevent States from providing redress. Substantive law
would not be affected by this bill. States may pass whatever
statutes they wish to provide remedies for whatever sort of
wrongdoing may exist out there. This won't affect that in the
least.
Senator Grassley. I thank you all for coming today. I think
that this hearing has shown that there is a real problem with
class actions. I think the Senator from Alabama has been
impacted very heavily by this testimony, and I think that we
should move forward with our bill to address this phenomenon. I
think that fundamental fairness demands it, and I look forward
to working with other Senators on the Judiciary Committee and
with Senator Kohl and others to make this bill a reality. And I
receive in advisement the suggestions of people today, the
witnesses that we have had who have been willing to help as
well.
Thank you all very much. The subcommittee is adjourned.
[Whereupon, at 4:02 p.m., the subcommittee was adjourned.]
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