The Class Action Reform Act (CAFTA) turned ten years old a month ago.  Introduced by Senator Chuck Grassley (R-Iowa) in early 2005, it passed overwhelmingly in both houses of Congress, and was signed into law on February 18, 2005.  This Act reformed two problem areas associated with class action lawsuits.

Review

First, CAFTA loosened diversity jurisdiction for certain class action lawsuits to reduce forum-shopping by plaintiffs.  Federal diversity jurisdiction was expanded to allow out-of-state defendants to remove a class action lawsuit filed in state court to federal court if: (1) at least $5 million aggregate amount-in-controversy, and (2) at least one member of the class is a citizen of a different state than one defendant, or (3) any member of the class is a foreign resident and any defendant is a domestic resident (or vice-versa).    Furthermore neither of the following requirements can apply: (1) 2/3 of the plaintiffs are from the state in which the lawsuit was originally filed, or (2) there are less than 100 plaintiffs in the lawsuit.  The effect of this innovation alleviated the burden for out-of-state defendants from litigating in “magnet states” where courts apply loose class certification standards which make class action lawsuits easier to initiate and settle.

Second, CAFTA changed the way “coupon settlements” are audited and redeined in plaintiffs’ lawyer fees in conjunction with these settlements.  A coupon settlement is when a defendant offers class members coupons or promises for products or services instead of a monetary settlement.   The problem with coupon settlements is that their value could not always be gauged by class members or judges, which led to concerns that the settlement may be of no value to class members.  CAFTA reformed this process by providing that an independent expert may audit coupon settlements prior to judicial approval of the settlement.  The Act also requires greater scrutiny by federal judges of attorney’s fees to determine if they are excessive in a coupon settlement.  The judge can reduce excessive fees.

Looking Forward

The U.S. Chamber of Commerce’s Institute for Legal Reform recently offered a series of proposals to strengthen CAFTA.   They include:

1. Tying plaintiffs’ attorney fees to actual class member recovery in all class actions. This will protect plaintiffs against excessive fees.
2. Expand federal jurisdiction to include class actions filed in state court that overlap with federal multidistrict proceedings (MDL proceedings). Federal law allows federal cases involving identical questions of fact pending in separate jurisdictions to be transferred to an MDL proceeding in order to coordinate and consolidate pretrial proceedings. Currently plaintiffs’ attorneys circumvent virtually identical MDL proceedings by keeping class actions in state court.  The Institute for Legal Reform suggests the creation of a mechanism to allow non-diverse state court class action claims to benefit from MDL proceedings similar to how CAFTA eliminated the need for complete diversity in class actions (See 28 U.S.C. 1332(2)(2)(A)-(C)).
3. Change the standard of review that Federal District Courts use to determine if the $5 million minimum amount in controversy has been met when a party seeks removal of a class action lawsuit from state to federal court. Currently there is a circuit spit as to whether the correct standard of review for the amount in controversy requirement is the “legal certainty” standard or the “preponderance of the evidence” standard.  The Institute for Legal Reform suggests that Congress make it clear that the “preponderance of the evidence” standard was the correct test under CAFTA.
4. Federal Rule of Civil Procedure 23(f) allows a party to appeal an order granting or denying class-action certification within 14 days after the order was entered. In recent years the federal appellate courts have only granted 1/4 of the petitions seeking interlocutory review.  The Institute for Legal Reform has found that the federal circuits vary widely on the percentage of petitions they grant interlocutory review.  This decline can be devastating to defendants who are often forced to settle after class certification even if the claims against them are meritless.  The Institute for Legal Reform recommends that Congress consider establish a uniform standard for Rule 23(f) or make interlocutory review mandatory.

For a more detailed analysis see the Institute for Legal Reform’s informational paper on the subject.