The Class Action Fairness Act of 2005.

• Author: Kolinski, John T.

The Class Action Fairness Act of 2005 (1) was signed into law by President Bush on February 18, 2005. Pursuant to [section] 9, it "shall apply to any civil action commenced on or after the date of enactment of this Act."

The act is the culmination of more than a decade of effort by interested persons to reform the law relating to class action lawsuits. Although virtually everyone involved in the continuing debate concedes that class action lawsuits have been a powerful and productive tool in curbing abuses both by government (i.e., civil rights, prisoner rights, enforcement of federal statutes and regulations) and corporations (defective products and myriad forms of consumer fraud), there has been growing concern about abuses of the class action process. The act attempts to address and correct certain abuses without adversely affecting the positive role class actions have played in preserving freedoms and protecting consumers from a host of genuine "bad acts," many of which might not otherwise have been confronted and corrected. (2)

The most obvious impact of the act is to allow a much larger number of class actions, previously barred from removal to federal court, to be removed by a defendant to federal court. Forum shopping and judge shopping have always been matters of concern to the overall administration of justice by our court system. State court judgments are entitled to full faith and credit under the U.S. Constitution. The wide fluctuation in approaches to resolving legal issues is to be expected from state to state, but is less acceptable and more problematic in areas where these decisions have impact and application beyond the state's borders, as class action judgments and settlements frequently do. The old saying that "the railroad never loses a case to a farmer in New York City and never wins one in Kansas" helps explain both the reason removal to federal courts was originally instituted and its expansion in the class action setting under the act.

Plaintiffs might be rebuffed again and again in certain state court jurisdictions from having the desired class certified, but if they found even one state court judge who was favorably inclined to grant class certification, the success or even the anticipation of success in that class certification battle by plaintiff could "force" defendants to settle rather than risk a staggering adverse class action judgment. Such a judgment could have implications nationwide, far beyond the boundaries of any given state. Because of existing requirements that each plaintiff must meet the amount in controversy requirements for removal, the defendants were usually prevented from removing these cases to federal court even if plaintiffs did not name a nondiverse defendant. As will be discussed, the availability of removal to federal court has been vastly increased by the act in a variety of ways which now make state court judge shopping much more difficult and much less effective in all but truly localized class actions.

This article will explain what the act says; what it means to you and your clients; and alert you to certain issues which may arise based on its language, some of which may not have been intended by Congress, not that anybody has ever really understood what "Congressional intent," means. (3)

The substance of the statute is set forth in [subsection] 3, 4, and 5. (4) Section 3 provides for additional judicial scrutiny of so-called "coupon" settlements in which class members receive a coupon for discounts on goods or services from the settling defendants, as well as limitations on the manner in which attorneys' fees may be calculated in such cases. Its provisions will be added as Ch. 114 of PartV of the U. S. Code at 28 U.S.C. [section] 1711 through [section] 1715.

Section 4 adds a new [section] (d) to 28 U.S.C. [section] 1332 expanding original "diversity" jurisdiction in the federal courts to include certain types of class actions in which the aggregated claims of the class exceed $5,000,000. It provides guidance to the district courts regarding how to determine which actions are encompassed by the new rules and which class actions may and "shall" be remanded to state court pursuant to [section] 5. It also creates a new category of "mass actions," which further enhance the defendants' prospects for removal of significant individual claims previously sought to be cloaked from removability.

Section 5 adds [section] 1453 to Ch. 89 of Title 28 (28 U.S.C. [section] 1453) entitled "Removal of class actions." It expands removal jurisdiction for class actions in which the aggregated claims exceed $5,000,000. It also provides for federal appeal of district court decisions ordering and denying remand to state court of class actions removed pursuant to this newly created section.

Attorneys' Fees Based on "Coupon" Settlements Restricted

Section 3 of the act addressed the concern that many class action lawsuits provided "windfalls" for the lawyers representing the plaintiff class but little or nothing of substance for the plaintiff class itself. (5) Because of the binding nature of many class action judgments on the plaintiff class, defendant corporations had strong incentives to settle class action complaints quickly and as quietly as possible by paying "tribute" to plaintiff's class counsel in exchange for a "coupon" settlement which cost the defendant practically nothing and ensured freedom from future lawsuits by people who more often than not had no idea they were part of the class in the first place.

After defining certain terms used throughout the chapter, (6) [section] 3 addresses "coupon settlements."

Sec. 1712. Coupon settlements

(a) Contingent Fees in Coupon Settlements--If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney's fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.

(b) Other Attorney's Fee Awards in Coupon Settlements--(1) In General--If a proposed settlement in a class action provides for a recovery of coupons to class members, and a portion of the recovery of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee award shall be based upon the amount of time class counsel reasonably expended working on the action. (2) Court Approval--Any attorney's fee under this subsection shall be subject to approval by the court and shall include an appropriate attorney's fee, if any, for obtaining equitable relief, including an injunction, if applicable. Nothing in this subsection shall be construed to prohibit application of a lodestar with a multiplier method of determining attorney's fees. (Emphasis added.)

(d) Settlement Valuation Expertise--In a class action involving the awarding of coupons, the court may, in its discretion upon the motion of a party, receive expert testimony from a witness qualified to provide information on the actual value to the class members of the coupons that are redeemed.

There are three significant changes to the law encompassed by [section] 3.

First, attorneys' fees can no longer be based on the inflated potential cost to defendant of coupon redemption. Typically, only a small percentage--usually one to 10 percent--of settlement coupons are ever redeemed. The attorneys' fees awarded must be based on the "redeemed" value of coupons, not the total possible value. It is unclear whether this requires or permits the court to wait for a period of time to allow redemption to occur before making this fee award or whether the court may "estimate" the redeemed value in advance based on expert testimony and other evidence. Assuming the latter to be a permissible approach as appears to be the case, it is unclear whether the court may award an "estimated" fee subject to a proviso for a fee adjustment, upward or downward, if the amount of redeemed coupons is greater or lesser than anticipated.

Second, plaintiff class attorneys cannot circumvent the "redeemed value" diminution in attorneys' fees by deciding not to use "coupon value" to determine attorneys' fees. If coupons are part of the award to plaintiff class, and if plaintiff class attorneys do not use the value of the coupons redeemed to determine the value of the result on which their fees are to be based, "any attorney's fee award shall be based upon the amount of time class counsel reasonably expended working on the action." Although the statute expressly does not disapprove the use of a lodestar (which sounds awkward but is not the same thing as expressly approving lodestar awards), the fees must be "time based" and not "value based" unless the "redeemed value" of the coupons awarded is used.

Third, Congress is plainly suggesting that it wants the courts to do a better job of protecting plaintiff class members rather than awarding unwarranted windfalls to plaintiff class attorneys. At the same time, however, Congress wants the federal courts to provide this laudable protection and "heightened scrutiny" despite the ever-increasing caseloads being handled by the federal judiciary, which the act has just increased, possibly dramatically. The act did not come with any additional federal district court judges. (7)

Attorneys' Fees Must Correspond to Benefits

Sec. 1713. Protection against loss by class members

The court may approve a proposed settlement under which any class member is obligated to pay sums to class counsel that would result in a net loss to the class member only if the court makes a written finding that nonmonetary...