EVENTS

Date:	Tuesday, January 25, 2005
Time:	2:00 PM -- 4:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

January 2005

Class Action Reform: How Far and How Fast?

The Bush administration has made liability reform a top priority. Senator Charles Grassley (R-IA) plans to address the most urgent problem by introducing a bill to reform class action suits. While there is broad agreement on the need for improvements, many uncertainties remain. What are the main provisions of this bill? How effective will it be in stemming class action abuse? What are the bill’s chances of becoming law? Panelists at a January 25 AEI conference discussed and explained this vital piece of legislation.

Michael S. Greve
AEI

There are three objectives to this bill: the first objective is fairness to litigants; the second is limiting state court bias against out-of-state defendants; and the third is resolving cases of national economic importance and multi-state jurisdictions which federal courts may be better able to adjudicate. The natural tendency is to view this as a dispute between the trial lawyers and the unions on the one hand, and corporate America on the other hand. This observation makes sense, but I think there is a little more at stake here. From the original constitutional perspective the overriding question is how do you prevent states from interfering with national commerce and how do you prevent them from abusing out-of-state parties. A half-dozen constitutional clauses incorporate the principle of non-discrimination. You want to afford the contracting parties an unbiased forum and an unbiased law, but beginning in the 1920s there were calls to abolish diversity jurisdiction and to chain federal courts to state law. Even jurists like Judge Robert Bork and Chief Justice William Rehnquist have, at one point or another, expressed their doubts about diversity jurisdiction or cautioned against maligning state courts. The question is whether this bill represents a move away from abolishing diversity jurisdiction towards a rethinking of state-federal relations or if it is just some sort of carve out for the unique area of class actions.

Robert R. Gasaway
Kirkland & Ellis LLP

From the perspective of a defense lawyer, the answer to how far, how fast is as much as possible as quickly as possible. My task here is to comment on the provisions of the bill and how they might change existing law. The proposed rule is a hard-and-fast minimal diversity rule; unless all of the plaintiffs and all of the defendants come from a single state, the case can be heard in federal court. The rule has three exceptions. First, if two-thirds of the class is from in-state and one-third from out-of-state, the jurisdiction falls in the forum state--if the primary defendant is also from that state. As a practical matter, determining what the primary defendant is as a matter of law will require mountains of litigation. Other exceptions are more straightforward: one for small classes of less than 100 people and the other for suits against state officials. The optional exception for a class of two-thirds in-state plaintiffs is more complicated and requires a five-factor balancing test, which will, undoubtedly, produce litigation in order to clarify the meaning of these provisions.

There is also a removal provision that allows any one defendant without the consent of the others to remove the case to federal court. This allows aggressive litigators the ability to attempt to gain standing in federal court without drawing the ire of the state judge against all defendants if the removal attempt fails. Finally, with regard to federalism, the bill, buried in the text, allows home state defendants to remove to federal court, which represents a large departure from practice.

If there is anything the bill gives up, it is an opportunity to overturn a bad precedent, in my opinion, which sets a minimum damages requirement for removal to federal court. Overall, however, this is an important bill because it cuts the tail off the ultimately capricious state court decisions and restores some stability and regularity to the judicial decisions which hurt business directly and consumers indirectly. Business can handle “consumer-oriented law” but only if applied consistently.

The Honorable David M. McIntosh
Mayer, Brown, Rowe & Maw LLP

I want to focus my comments on three things. The first is the federalism question, which consists of two points. One illustrative example of the problem is when plaintiffs add a pharmacy located in their home state in order to sue an out-or-state corporation in that state’s courts. The other problem is when one state presides over a nationwide class action. The second point is on the politics. It is clearly a high priority for the administration and seems likely to pass with a potential seventy votes in the Senate. Some of my conservative friends think this bill is watered down, but I think the political realities dictate that the bill is the best forthcoming and the result of several different versions. It is a compromise, but a good one which moves the ball down the field. The third point is that there may be further reforms from here. Another way to solve some of these problems is through a choice of law regime. Litigation would move to the state in which the defendant resides. If we can get an understanding of a fair basis for determining where the defendant resides, you may get some of the benefits of uniformity that tort reformers seek when they encourage removal.

Overall, this is a good bill which attempts to restore the true purpose of the diversity clause of Article III of the Constitution. It tries to strike the right balance by finding the most neutral judge, state or federal, when you have interests that are geographically different.
     
Stuart S. Taylor
National Journal and Newsweek

I will paint a few broad brush strokes. First, I spoke to some Democratic staffers who are resigned to the fact that this bill is going to become law soon and will not be amended in any significant way. Even the Washington Post, hardly a radical pro-business lobby, sees the need for tort reform. I think a disappointment with the bill is the coupon settlement provision which requires a hearing to determine the fairness of the settlement but does not give an appeals court good purchase on overturning a bad settlement if the district judge approves it. Also, the bill does very little on federal forum shopping, thereby making the second circuit, which has a more receptive attitude toward class actions, a more likely place for plaintiffs in large class actions to aim. The bill does not foreclose the possibility of artful pleading to keep class actions in state court. We might see regional class actions, for instance ones that include California consumers, in order to manipulate the opt-out provision that allows cases to be tried in state court if the class consists of two-thirds in-state residents. A missed opportunity of this bill, pointed out to me by Lester Brickman, is that we do not know very much about these class actions because there is no reporting system, especially for state class actions.

I think there is little doubt that we need class actions to deter various forms of corporate misconduct. However, once this mechanism is created to solve the problem, it is difficult to avoid plaintiffs’ lawyer manipulation, which is often to the detriment of their clients and consumers.

AEI research assistant Michael Petrino prepared this summary.