They're making a federal case out of it ... in state court.

• Author: Beisner, John H.
• Position: Interstate class actions

ABSTRACT

Because of an anomaly in the federal diversity jurisdiction statute (28 U.S.C. [section] 1332), relatively few interstate class actions can be heard by federal courts. For that reason, county or district state courts that are accountable only to their local electorates handle the vast majority of interstate class actions--cases typically involving thousands of persons nationwide whose claims are purportedly worth millions of dollars, are premised on the varying laws of many states, and raise important national policy issues with interstate commerce ramifications. There is growing recognition that this situation should be corrected by amending [section] 1332 to expand federal diversity jurisdiction over interstate class actions. With that change, such cases could be assigned to federal courts that have national accountability. However, some lawmakers have questioned whether the problems presented by the anomaly are sufficiently grave to warrant congressional action. This article (a) reviews recent debates on this interstate class action jurisdictional issue and (b) examines new empirical data indicating that legislative action on this issue is overdue.

1. INTRODUCTION

   In the last Congress, both houses carefully examined a key judicial policy question: should interstate class actions (that is, large-scale lawsuits with significant interstate commerce implications involving the residents and laws of multiple States) normally be heard by local county courts (that is, by judges typically elected by the residents of the court's locality) or by federal courts (that is, by judges nominated by the President of the United States and confirmed by the duly elected Senators of all fifty states)? These discussions were prompted by introduction of legislation intended to widen the scope of federal diversity jurisdiction over interstate class actions. (1) After several detailed hearings, (2) that legislation passed the House. (3) Senate hearings were also held on the subject, (4) and the Senate Judiciary Committee ultimately endorsed enactment of a bill parallel to that passed by the House. (5) However, the full Senate never considered the measure, and the jurisdiction expansion proposals did not become law. The legislation has been reintroduced in the current session of Congress. (6)

2. THE IMPETUS FOR EXPANDING FEDERAL JURISDICTION OVER INTERSTATE CLASS ACTIONS

   The prospect of expanding federal jurisdiction over class actions has taken center stage because of an anomaly in current law that normally causes interstate class actions filed in state courts to remain there, notwithstanding their inherently federal character. In structuring our judicial system, the Framers established that federal courts would hear cases presenting federal law issues (that is, lawsuits asserting claims based on the Constitution, federal statutes or treaties, or involving the federal government as a party), while leaving to state courts the task of adjudicating local questions arising under state laws. However, the Framers did not stop their line-drawing there. In Article III of the U.S. Constitution, they authorized the extension of federal jurisdiction to one category of cases arising under state law: so-called "diversity" cases, defined as suits "between Citizens of different States." In enacting the Judiciary Act of 1789, (7) Congress exercised that authority, specifically empowering federal courts to hear diversity cases that met certain criteria. Such cases are thus firmly entrenched in the federal jurisdictional landscape.

   The Framers established the concept of federal diversity jurisdiction out of concern that local biases would render state courts ineffective in adjudicating disputes between in-state plaintiffs and out-of-state defendants. (8) In short, they feared that non-local defendants might be "hometowned." Diversity jurisdiction was designed not only to diminish this risk, but also "to shore up confidence in the judicial system by preventing even the appearance of discrimination in favor of local residents." (9) The Framers reasoned that some state courts might discriminate against interstate commerce activity and out-of-state businesses engaged in such activity and that federal courts therefore should be allowed to hear diversity cases so as to ensure the availability of a fair, uniform and efficient forum for adjudicating interstate commercial disputes. (10) Thus, since the nation's inception, diversity jurisdiction has served to guarantee that citizens of different states have a means of resolving their legal differences on a level playing field in a manner that nurtures interstate commerce. As one constitutional scholar has argued, "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." (11)

   In enacting the diversity jurisdiction statute, Congress did not exercise the full authority granted under Article III for diversity jurisdiction. Under 28 U.S.C. [section] 1332, an action is subject to federal diversity jurisdiction only where the parties are "completely" diverse (that is, where no plaintiff is a citizen of the same state where any defendant is deemed to be a citizen) and where each plaintiff asserts claims that put in controversy an amount in excess of a specified threshold--currently set at $75,000. In short, [section] 1332 essentially allows federal courts to hear cases that are large (that is, cases with large "amounts in controversy") and that have interstate implications (that is, cases involving citizens from multiple jurisdictions).

   Class actions would usually be expected to meet these criteria because they (a) place substantial amounts into controversy (insofar as they encompass many people with many claims) and (b) involve parties from multiple jurisdictions. Yet, because [section] 1332 was originally enacted before modern day class actions existed and therefore does not take account of the unique circumstances that such cases present, [section] 1332 tends to exclude class actions from federal courts, while welcoming much smaller single-plaintiff cases having few (if any) interstate ramifications.

   Section 1332 has two exclusionary dimensions. First, as noted above, it has been interpreted to require "complete" diversity, so that diversity jurisdiction is lacking whenever any single plaintiff is a citizen of the same state as any single defendant. (12) Wisely, the federal courts have determined that in class actions, this complete diversity inquiry should be made only regarding the parties actually named in the actions; the citizenship of unnamed class members is disregarded. (13) If not interpreted in this manner, [section] 1332 would effectively bar all non-federal question class actions from federal court. This is because it is normally impossible to prove the citizenship of all unnamed class members at the outset of a case, given that their identities are generally unknown at that juncture. Still, this commonsense interpretation of [section] 1332 poses a problem, since a plaintiff can readily avoid federal jurisdiction by simply including a non-diverse named plaintiff or defendant in the complaint.

   Second, an even greater impediment is posed by the manner in which the jurisdictional amount requirement is applied in class actions. While for complete diversity purposes, a court looks only at the named parties, the jurisdictional amount requirement has been interpreted as applying to both the named plaintiffs and all unnamed class members. Thus, courts have held that a class action satisfies the jurisdictional amount requirement only if it can be shown that each and every member of the proposed class has separate and distinct claims exceeding $75,000. (14) Although some federal courts have questioned the breadth and current vitality of this rule, (15) this difficult-to-satisfy prerequisite still bars most interstate class actions from federal court. Indeed, in many class actions, plaintiffs seek to avoid federal court by making affirmative allegations that their proposed class action does not satisfy the diversity jurisdictional amount prerequisite.

   As the Senate Judiciary Committee concluded last year, the combination of these factors leads to a "nonsensical result," whereby

   a citizen can bring a "federal case" by claiming $75,001 in damages for a simple slip-and-fall case against a party from another State, while a class of 25 million people living in all 50 States and alleging claims against a manufacturer that are collectively worth $15 billion must usually be heard in State court (because each individual class member's claim is for less than $75,000). Put another way, under the current jurisdictional rules, Federal courts can assert diversity jurisdiction over a run-of-the-mill State law-based tort claim arising out of an auto accident between a driver from one State and a driver from another, or a typical trespass claim involving a trespasser from one State and a property owner from another, but they cannot assert jurisdiction over claims encompassing large-scale, interstate class actions involving thousands of [claimants] from multiple States, and hundreds of millions of dollars ... cases that have significant implications for the national economy. (16) Emerging from the discussion of this subject is a growing recognition that this jurisdictional anomaly should be corrected:

   * The leading treatise on federal civil procedure has declared that current principles governing federal diversity jurisdiction over class actions make no sense: "The traditional principles in this area have evolved haphazardly and with little reasoning. They serve...