Erie, the class action fairness act, and some federalism implications of diversity jurisdiction.

• Author: Marcus, David

ABSTRACT

The Class Action Fairness Act of 2005 (CAFA) expands diversity jurisdiction to allow most significant class actions based on state law to proceed in federal court. Hoping to limit the application of state law through class actions, CAFA's supporters believe that federal judges harbor a collective animosity toward the large, multistate class actions the statute targets. CAFA has no substantive component, and it does not tighten Rule 23's certification requirements. Nonetheless, if supporters are right about judicial preferences and their likely impact on certification decisions, CAFA will weaken the regulatory reach of state law.

Arguments about diversity jurisdiction and judicial preferences made during CAFA debates bear a number of striking resemblances to arguments made for and against diversity jurisdiction during the decades leading up to Erie Railroad v. Tompkins. Many Progressive Era lawyers believed that, although no positive law instructed them to do so, federal judges shared a set of policy preferences that made them particularly receptive to corporate interests. As an expression of these preferences, the general common law attracted attention for its interference with the application of state law. By destroying the general common law, Erie limited the implications of judicial preferences for the federalism balance of power.

This Article examines the similar justifications given for diversity jurisdiction during the decades leading up to Erie and during the debates over CAFA. It describes a shift in approaches to choice-of-law problems in class actions as evidence of a hostility in federal courts toward the cases that come within CAFA's reach. The Article then uses Erie to criticize CAFA's federalism implications. Erie stands for the proposition that Congress, not judicial preferences unmoored from positive law, should bear responsibility for the displacement of state law. To achieve its intended effect, CAFA will rely on a perceived hostility toward large state law class actions in federal courts rather than a positive instruction from Congress. The statute thus contradicts Erie's message about the proper role federal judges should play in the federalism balance of power.

INTRODUCTION I. FEDERALISM AND THE CATEGORIES OF FEDERAL JURISDICTION II. ERIE AND FEDERALISM A. The Progressive Era Debate over Diversity Jurisdiction and Swift 1. Local Bias 2. Uniformity 3. Business and Diversity Jurisdiction B. Erie's Constitutional Spirit III. THE CLASS ACTION FAIRNESS ACT AND DIVERSITY JURISDICTION'S FEDERALISM IMPLICATIONS A. Background to CAFA 1. The Rise and Fall of the Multistate Class Action in Federal Court 2. Regulatory Reform and CAFA 3. CAFA B. Rationales for CAFA 1. Local Bias 2. Uniformity 3. Interstate Federalism and Choice of Law a. Interstate Federalism and the Probusiness Federal Courts b. Does Federal Court Hostility Exist? C. CAFA's Unconstitutional Spirit? CONCLUSION INTRODUCTION

In 1923, Louis Brandeis complained to his protege, then-Professor Felix Frankfurter, that few of his colleagues on the U.S. Supreme Court "realize that questions of jurisdiction are really questions of power between States and Nation." (1) At the time, Brandeis, a committed federalist, was dissenting repeatedly as the Supreme Court, under the guidance of Chief Justice William Howard Taft, vigorously asserted the power of the federal judiciary to protect interstate commerce from the reach of state law. (2) This federal judicial activism laid bare what Brandeis and Frankfurter knew well: fights over the boundaries of federal jurisdiction had serious implications for the allocation of sovereign power between states and the federal government. (3)

Since 1938, one head of federal jurisdiction--diversity jurisdiction, as provided for in 28 U.S.C. [section] 1332 (4)--seems much removed from these questions of power. Because of Erie Railroad Co. v. Tompkins, Brandeis's valedictory blow for state sovereignty, federal judges no longer can use general common-law-making powers to displace state law. (5) Federal judges become instruments of state law, minus the local bias that taints their state counterparts.

Erie notwithstanding, many lawyers continue to believe that the choice of forum for state law causes of action matters in ways that cannot be accounted for by the local bias justification for diversity jurisdiction. (6) In any particular case, federal procedural rules might favor one side or the other, and practitioners know that procedure can decide cases. (7) Personalities of particular judges obviously factor into the choice as well. In addition, many lawyers share beliefs about the federal judiciary that go beyond the procedural posture of particular cases or the reputations of individual judges. Recently, for example, class action lawyers who represent plaintiffs have demonstrated a preference for state courts, whereas their adversaries think that federal judges share attitudes that better serve their clients' interests in complex mass litigation. (8)

Empirical data necessary to confirm that federal judges share a set of common motivations is notoriously difficult to gather. (9) But the notion that the members of the federal judiciary share some set of preferences with respect to particular types of cases is not without precedent. Burt Neuborne famously postulated that preferences and predilections shared by federal judges set them apart from state judges in the way they handle constitutional cases. (10) If sociological and psychological phenomena can drive decision making in some systematic way in constitutional litigation, a shared set of preferences may possibly drive decision making in diversity litigation as well.

If federal judges truly differ in some systematic way from their state counterparts, these collective motivations create federalism implications for diversity jurisdiction. Particularly when federal judges systematically favor defendants in categories of disputes for which state law provides the rule of decision, the federal exercise of jurisdiction may mean that state law will receive less enforcement than if cases stay in state court. Diversity jurisdiction then affects the power of states to regulate the types of conduct that become the subject of these disputes. The assertion of federal jurisdiction thereby alters the federalism balance, and does so without a positive law enacted through the democratic process.

One imperfect measure of shared judicial preferences is the perception about these preferences held by actors--namely practitioners and legislators--whose opinions on these matters weigh heavily on the scope and practical effect of federal jurisdiction. Two important episodes in the history of diversity jurisdiction give examples of perceptions of shared federal judicial preferences and how lawyers and lawmakers believed these preferences impacted decision making in some systematic way. During the first--the debates over the general common law and diversity jurisdiction during the decades leading up to Erie--many lawyers believed that the federal judiciary as a whole harbored procorporate, antiregulatory tendencies that limited the reach of state law. (11)

The second episode involved the debates leading up to the enactment of the Class Action Fairness Act of 2005 (CAFA). (12) CAFA changed the requirements for diversity jurisdiction for class actions. Instead of requiring complete diversity, CAFA allows litigants into federal court if they are minimally diverse, that is, if one class member hails from a different state than one defendant. (13) Also, CAFA creates an aggregate amount-in-controversy requirement, changing the one-time rule for diversity jurisdiction that required each class member to satisfy 28 U.S.C. [section] 1332's amount-in-controversy requirment. (14) CAFA supporters hope that this federalization of multistate class actions will result in fewer certified classes and thereby relieve defendants of liability for state law causes of action. (15) Their faith in the statute rests on what they perceive to be an emergent hostility in the federal courts toward multistate class actions that allege state law causes of action.

These two episodes do more than illustrate the idea that shared judicial preferences may drive decision making in diversity cases. Striking similarities between the respective debates over the proper scope of diversity jurisdiction suggest that the interests of corporate defendants, which federal judges were perceived to have favored during the decades before Erie, match the present-day interests that diversity jurisdiction advances. Moreover, the exercise of jurisdiction in diversity cases furthered and continues to further these interests in similar ways, by limiting the regulatory reach of state law.

Finally, the endpoint of the first episode, the Erie decision, offers both a way to appreciate CAFA's federalism implications and a basis to criticize the statute. Erie came at the end of an era during which Progressive lawyers lamented the tendencies of federal judges to favor certain classes of litigants. The general common law, in Brandeis's estimation, licensed federal judges in diversity cases to encroach unconstitutionally on state sovereign prerogatives. (16) It gave them a mechanism to turn their preferences into law. Erie, by destroying this mechanism, took judicial substantive preferences out of the federalism equation and left the political branches to decide when and how to displace state rules of decision.

CAFA, in one sense, does the opposite of Erie. It empowers shared preferences as to the proper scope of class certification in a manner that supporters hope will weaken the regulatory reach of state law. In other words, the statute inserts shared judicial preferences into the federalism equation, albeit indirectly, through a procedural mechanism. In so doing, it strengthens the nonpolitical branch to impact the allocation of...