[Congressional Record Volume 144, Number 61 (Thursday, May 14, 1998)]
[Senate]
[Pages S4911-S4914]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Kohl):
  S. 2083. A bill to provide for Federal class action reform, and for 
other purposes; to the Committee on the Judiciary.


                     the class action fairness act

  Mr. GRASSLEY. Mr. President, I rise today to introduce a bill that 
will help fight class action lawsuit abuses. This bill, which Senator 
Kohl and I are introducing today, will go a long way toward ending 
class action lawsuit abuses where the plaintiffs receive very little 
and their lawyers receive a whole lot. It will also preserve class 
action lawsuits as an important toll that bring representation to the 
unrepresented and result in important discrimination and consumer 
decisions.
  My Judiciary Subcommittee held a hearing last Fall that exposed and 
discussed the problem of certain class action lawsuit settlements. Let 
me give you an example of a class action lawsuit settlement that I find 
particularly disturbing. In an antitrust case settled in the Northern 
District of Illinois in 1993, the plaintiff class alleged that multiple 
domestic airlines participated in pricefixing beginning at least as 
early as January 1, 1988. This pricefixing resulted in plaintiffs 
paying more for airline tickets that they otherwise would have had to 
pay.
  The settlement in this case gave a coupon book to all of the 
plaintiffs. These coupons varied in amount and

[[Page S4912]]

number, according to how many plane tickets the plaintiffs had 
purchased. These coupons can be used toward the purchase of future 
airline tickets. The catch is that the plaintiff still has to pay for 
the majority of any new airline ticket out of his or her own pocket. 
This means that only $10 worth of coupons can be used towards the 
purchase of a $100 dollar ticket; up to $25 worth of coupons can be 
used towards the purchase of a $250 ticket; up to $50 worth of coupons 
can be used towards the purchase of a $500 ticket, and so on. In 
addition, these coupons cannot be used on certain blackout dates, which 
seem to include all holidays and peak travel times.
  The attorneys, interestingly enough, did not get paid in coupons. The 
plaintiffs' attorneys got paid in cash. They got paid $16 million 
dollars in cash. If the coupons were good enough for their clients, I 
wonder why coupons were not good enough for the lawyers.
  Another egregious class action lawsuit settlement was discussed by 
one of the witnesses in my subcommittee hearing. Ms. Martha Preston was 
a member of the class in Hoffman versus BancBoston, where some of the 
plaintiffs received under $10 dollars each in compensation for their 
injuries, yet were docked around $75 or $90 for attorneys' fees. This 
means that attorneys that they had never met, who were supposed to be 
representing their best interests, agreed to a settlement that cost 
some of the plaintiffs more money than they received in compensation 
for being wronged.
  These lawsuit abuses happen for a number of reasons. One reason is 
that plaintiffs' lawyers negotiate their own fees as part of the 
settlement. This can result in distracting lawyers from focussing on 
their clients' needs, and settling or refusing to settle based on the 
amount of their own compensation.
  During our hearing, evidence was presented that at least one group of 
plaintiffs' lawyers meets regularly to discuss initiating class action 
lawsuits. They scan the Federal Register and other publications to get 
ideas for lawsuits, and only after they have identified the wrong, do 
they find clients for their lawsuits. Rather than having clients 
complaining of harms, they find harms first, and then recruit clients 
with the promise of compensation.

  The defendants are not always innocent, though. Plaintiffs' lawyers 
say that they are approached by lawyers from large corporations who 
urge them to find a class and sue the corporation. The corporations may 
use this as a tool to limit their liability. Once this suit is 
initiated and settled, no member of the class may sue based on that 
claim. In other words, if a corporation settles a class action lawsuit 
by paying all class members $10 as compensation for a faulty car door 
latch, the plaintiffs can no longer sue for any harm caused by the 
faulty door latch. this is one way of buying immunity for liability.
  The Preliminary Results of the Rand Study of Class Action Litigation 
states 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 Glassley/Kohl Class Action Fairness Act does the following:


                             plain english

  Notice of proposed settlements (as well as all class notices) in all 
class actions must be in clear, easily understood English and must 
include all material settlement terms, including the amount and source 
of attorney's fees. One thing that I knew before our hearing, but that 
witness testimony confirm, is that the notice most plaintiffs receive 
are written in small print and confusing legal jargon. Even one of the 
lawyers testifying before my subcommittee said that he couldn't 
understand the notice he received as a plaintiff in a class action 
lawsuit. Since plaintiffs are giving up their right to sue, it is 
imperative that they understand what they are doing and the 
ramifications of their actions.


                   notice to state attorneys general

  The Class Action Fairness Act requires that State Attorneys General 
be notified of any proposed class settlement that would affect 
residents of their states. The notice give a state AG the opportunity 
to object if the settlement terms are unfair.


                attorneys' fees based on actual damages

  Our bill requires that attorney's fees in all class actions must be a 
reasonable percentage of actual damages and actual costs of complying 
with the terms of a settlement agreement.


          removal of multistate class actions to federal court

  This bill provides that class acting lawsuits may be removed to a 
federal court by a defendant or unnamed class member if the total 
damages exceed $75,000 and parties include citizens from multiple 
states. Currently, only defendants can seek removal, and only if each 
name plaintiff has at minimum a $75,000 claim and complete diversity 
exists between all named plaintiffs and defendants, even if only one 
class members is from the same state as a defendant. The bill also 
eliminates the ability of a lone class action defendant to veto 
removal, and it forecloses class attorneys from avoiding removal by 
raising a class action claim for the first time only after the suit 
already has been pending for a year. Removal still must be sought 
within 30 days from when there is notice of the class claim.


                mandatory sanctions for frivolous suits.

  This section of our bill will reduce frivolous lawsuits by requiring 
that a violation of Rule 11 of the Federal Rules of Civil Procedure, 
which penalizes frivolous filings, will require the imposition of 
sanctions. The nature and extent of sanctions will remain 
discretionary.
  We need this bill. We need this reform. Both plaintiffs and 
defendants are calling for reform in his area. This bill is not just 
procedural reform; this is substantive reform of our courts system. 
This bill will remove the conflict of interest that lawyers face in 
class action lawsuits, and ensue the fair settlement of these cases.
  Mr. KOHL. Mr. President, Senator Grassley and I today introduce the 
Class Action Fairness Act of 1998. This legislation addresses a growing 
problem in class action litigation--too many class lawyers put their 
self-interest above the best interests of their clients, often 
resulting in unfair and abusive settlements that shortchange class 
members while the class lawyers line their pockets with high fees.
  Let me share with you just a few disturbing examples.
  One of my constituents, Martha Preston of Baraboo, Wisconsin, was an 
unnamed member of a class action lawsuit against her mortgage company 
that ended in a settlement. While at first she got four dollars and 
change in compensation, a few months later her lawyers surreptitiously 
took $80--twenty times her compensation--from her escrow account to pay 
their fees. In total, her lawyers managed to pocket over $8 million in 
fees, but never explained that the class--not the defendant--would pay 
the attorneys' fees. Naturally outraged, she and others sued the class 
lawyers. Her 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.
  Class lawyers and defendants often engineer settlements that leave 
plaintiffs with small discounts or coupons unlikely ever to be used. 
Meanwhile class lawyers reap big fees based on unduly optimistic 
valuations. For example, in a settlement of a class action against 
major airlines, most plaintiffs received less than $80 in coupons while 
class attorneys received $14 million in fees based on a projection that 
the discounts were worth hundreds of millions. In a suit over faulty 
computer monitors, class members got $13 coupons, while class lawyers 
pocketed $6 million. And in a class action against Nintendo, plaintiffs 
received $5 coupons, while attorneys took almost $2 million in fees.
  Competing federal and state class actions engage in a race to 
settlement, where the best interests of the class lose out. For 
example, in one state class action the class lawyers negotiated a small 
settlement precluding all other suits, and even agreed to settle 
federal claims that were not at issue in state court. Meanwhile, a 
federal court found that the federal claims could be worth more than $1 
billion, while accusing the state class lawyers of ``hostile 
representation'' that ``surpassed inadequacy and sank to the level of 
subversion;'' ``vigorous disparagement'' of the value of the federal 
claim in order to sell the settlement to

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the state court; and pursuit of self-interest in ``getting a fee'' that 
was ``more in line with the interests of [defendants] than those of 
their clients.''
  Class actions are often filed in state courts that are more likely to 
certify them without adequately considering whether a class action 
would be fair to all class members. On several occasions, a state court 
has certified a class action although federal courts rejected 
certification of the same case. And in several Alabama state courts, 38 
out of 43 classes certified in a three-year period were certified on an 
ex parte basis, without notice and hearing. One Alabama judge acting ex 
parte certified 11 class actions last year alone. Comparably, only an 
estimated 38 class actions were certified in federal court last year 
(excluding suits against the U.S. and suits brought under federal law). 
This lack of close scrutiny appears to create a big incentive to file 
in state court, especially given the recent findings of a Rand study 
that class actions are increasingly concentrated in state courts.
  Class lawyers often manipulate the pleadings in order to avoid 
removal of state class actions to federal court, even by minimizing the 
potential claims of class members. For example, state class actions 
often seek just over $74,000 in damages per plaintiff and forsake 
punitive damage claims, in order to avoid the $75,000 floor that 
qualifies for federal diversity jurisdiction. Or they defeat the 
federal requirement of complete diversity by making sure at least one 
named class member is from the same state as a defendant, even if every 
other class member is from a different state.
  Out-of-state defendants are often hauled into state court to address 
nationwide class claims, although federal courts are a more appropriate 
and more efficient forum. For example, an Alabama court is now 
considering a class action--and could establish a national policy--in a 
suit brought against the big three automakers on behalf of every 
American who bought a dual-equipped air bags in the past eight years. 
The defendants failed in their attempt to remove to federal court based 
on an application of current diversity law. And, unlike federal courts, 
states are unable of consolidate multiple class actions that involve 
the same underlying facts.
  These examples show that abuse of the class action system is not only 
possible, but real. And part of the problem are the incentives and 
realities created by the current system.
  A class action is a lawsuit in which an attorney not only represents 
an individual plaintiff, but, in addition, seeks relief for all those 
individuals who suffered a similar injury. For example, a suit brought 
against a pharmaceutical company by a person suffering from the side 
effects of a drug can be expanded to cover all individuals who used the 
drug. A class action claim may proceed only if a court certifies the 
class, and certification is permitted only if the class procedure will 
be fair to all class members. Prospective class members are usually 
sent notice about the class action, and are presumed to join it, unless 
they specifically ask to be left out.
  Often, these suits are settled. The settlement agreements provide 
money and/or other forms of compensation. The attorneys who brought the 
class action also get paid for their work. All class members are 
notified of the terms of the settlement, and given the chance to object 
if they don't think the settlement is fair. A court must ultimately 
approve a settlement agreement.
  The vast majority of these suits are brought and settled fairly and 
in good faith. Unfortunately, the class action system does not 
adequately protect class members from the few unscrupulous lawyers who 
are more interested in big attorneys' fees than compensation for 
their clients, the victims. The primary problem is that the client in a 
class action is a diffuse group of thousands of individuals scattered 
across the country, which is incapable of exercising meaningful control 
over the litigation. As a result, while in theory the class lawyers 
must be responsive to their clients, the lawyers control all aspects of 
the litigation.

  Moreover, during a class action settlement, the amount of the 
attorney fee is negotiated between plaintiffs' lawyers and the 
defendants, just like other terms of the settlement. But in most cases 
the fees come at the expense of class members--the only party that does 
not have a seat at the bargaining table.
  In addition, defendants may use class action settlements to advance 
their own interests. A settlement will generally preclude all future 
claims by class members. So defendants have ample motivation to give 
class lawyers the fees they want as the price for settling all future 
liabilities.
  In light of the incentives that are driving the parties, it is easy 
to see how class members are left out in the cold. Class attorneys and 
corporate defendants sometimes reach agreements that satisfy their 
respective interests--and even the interests of the named class 
plaintiffs--but that sell short the interests of any class members who 
are not vigilantly monitoring the litigation. And although the judge is 
supposed to determine whether the settlement is fair before approving 
it, class lawyers and defendants ``may even put one over on the court, 
a staged performance. The lawyers support the settlement to get fees; 
the defendants support it to evade liability; the court can't vindicate 
the class's rights because the friendly presentation means that it 
lacks essential information.'' Kamilewicz v. Bank of Boston Corp., 100 
F.3d 1348, 1352 (Easterbrook, J., dissenting) (7th Cir. 1996).
  Although class members get settlement notices and have the 
opportunity to object, they rarely do so, especially if they have 
little at stake. Not only is it expensive to get representation, but 
also it can be extremely difficult to actually understand what the 
settlement really does. Settlements are often written in long, finely 
printed letters with incomprehensible legalese, which even well trained 
attorneys are hard pressed to understand. And settlements often omit 
basic information like how much money will go towards attorney's fees, 
and where that money will come from. In Martha Preston's case, one 
prominent federal judge found that ``the notice not only didn't alert 
the absent class members to the pending loss but also pulled the wool 
over the state judge's eyes.''
  We all know that class actions can result in significant and 
important benefits for class members and society, and that most class 
lawyers and most state courts are acting responsibly. Class actions 
have been used to desegregate racially divided schools, to obtain 
redress for victims of employment discrimination, and to compensate 
individuals exposed to toxic chemicals or defective products. Class 
actions increase access to our civil justice system because they enable 
people to pursue claims that collectively would otherwise be too 
expensive to litigate.
  The difficulty in any effort to improve a basically good system is 
weeding out the abuses without causing undue damage. The legislation we 
propose attempts to do this. It does not limit anyone's ability to file 
a class action or to settle a class action. It seeks to address the 
problem in several ways. First, it requires that State attorneys 
general be notified about proposed class action settlements that would 
affect residents of their states. With notice, the attorneys general 
can intervene in cases where they think the settlements are unfair.
  Second, the legislation requires that class members be notified of a 
potential settlement in clear, easily understood English--not legal 
jargon.
  Third, it limits class attorneys' fees to a reasonable percentage of 
the actual damages received by plaintiffs and the actual costs of 
complying with settlement agreements. This will deter class lawyers 
from using inflated values of coupon settlements to reap big fees, even 
if the settlement doesn't offer much practical value to victims. Some 
courts have already embraced this standard, which parallels the recent 
securities reform law.
  Fourth, it permits removal to federal court of class actions 
involving citizens of multiple states, at the request of unnamed class 
members or defendants. This provision eliminates gaming by class 
lawyers to keep cases in state court. It reinforces the legitimate role 
for diversity jurisdiction--to establish the federal courts as the 
proper forum for lawsuits directly affecting residents from diverse 
states. Diversity jurisdiction makes little sense if a $76,000 claim by 
one out-of-state plaintiff qualifies for federal jurisdiction but a

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multimillion dollar class action bundling thousands of $74,000 claims 
by out-of-state citizens cannot be brought in federal court, and if 
remote state courts can make decisions affecting nationwide classes of 
citizens.
  Finally, it amends Rule 11 of the Federal Rules of Civil Procedures 
to require the imposition of sanctions for filing frivolous lawsuits, 
although the nature and extent of sanctions remains discretionary. This 
provision will deter the filing of frivolous class actions.
  Let me emphasize the limited scope of this legislation. We do not 
close the courthouse door to any class action. We do not require that 
State attorneys general do anything with the notice they receive. We do 
not deny reasonable fees for class lawyers. And we do not mandate that 
every class action be brought in federal court. Instead, we simply 
promote closer and fairer scrutiny of class actions and class 
settlements.
  We are aware that some are critical of provisions in this bill. For 
example, there is concern that attorneys' fee provision does not 
adequately address settlements which offer primarily injunctive relief. 
For this reason, this bill should be viewed as a point of departure, 
not a final product.
  But Mr. President, right now, people across the country can be 
dragged into lawsuits unaware of their rights and unarmed on the legal 
battlefield. What our bill does is give regular people back their 
rights and representation. This measure may not stop all abuses, but it 
moves us forward. It will help ensure that good people like Martha 
Preston don't get ripped off.
  Mr. President, Senator Grassley and I believe this is a moderate 
approach to correct the worst abuses, while preserving the benefits of 
class actions. It is both pro-consumer and pro-defendant. We believe it 
will make a difference.
                                 ______