Class Action Reform: How Far and How Fast?

January 25, 2005

Proceedings:
MR. GREVE:  Hello.  I’m Michael Greve.  I'm with the American Enterprise Institute, and its Liability Project and Federalism Project.  I welcome all of you to this event on class action reform, which starts with, by AEI standards, an unconscionable delay of 7 minutes.

As the title of this event indicates, "Class Action Reform:  How Far and How Fast?", we're not here to discuss the pros and cons of class action reform, in general, and there's a reason for that.  There's a bill that will be introduced in the Senate very shortly that by recent counts has upwards of 70 votes, and if 70 Senators, including presumably some members of the Democratic Party, agree that class action reform is needed, there's no point in discussing the pros and cons yet again.  That time has passed.  Even unlikely suspects, Public Citizen, Senator Leahy, support class action reform in some way, shape or form, and the real question is what form should this take?  How should we go about this?

I'll make a few brief remarks and then introduce our speakers.  I think one way to focus this is, what are the problems with modern class actions and what is this proposed bill or some bill like it going to do about it, and what should we do about it?  And by the likes of the sponsors of the bill and the congressional findings and recitations and so forth, I think one can sensibly separate the objectives into three.

There is first the objective that gave the bill the Class Action Fairness Act or Reform Act its name.  We're worried about fairness to litigants.  That problem has occurred in many, many federal class actions especially over settlements that involve coupon payments, often exorbitant lawyers' fees, and no meaningful relief for the class or for some class members, and I think a lot of people agree that something ought to be done about that.

The second problem that people are worried about is that class actions are frequently filed in state courts and there is a worry about state court bias.  There are two reasons why one might think that the state courts might be biased against corporate defendants.  One is that the cases frequently involve out-of-state defendants, and the state courts have an incentive to transfer wealth from those defendants to in-state parties.  And the second reason is that the state courts are not just any state courts, they're the state courts chosen by plaintiffs' lawyers.  And so the proposed solution to that problem is to remove a good number of cases that pose a risk of state court bias to federal court.  That involves questions of removal jurisdiction and diversity jurisdiction that I think, as we'll find out, are crucial and central to this bill, and a reasonable question to ask there I think is, does this bill or do some bills like it cover enough cases and the right kinds of cases?  And that goes in particular to the questions of class action certification because that is where the bias manifests itself most dramatically, not in the substantive outcomes in state courts but in questions of class certification in the first place.

And the third thing that has been recited by the sponsors of this bill and in the bill itself is there are cases that are styles of national cases that involve questions of national economic commerce which you might not want or would not want in state court even if state courts acted without bias.  Cases with national classes or multistate classes frequently compel courts to apply different state laws to different portions of the class, and there are reasons to believe that federal courts might be in a better position to manage those kinds of questions.  Then there are multiple class actions that cover the same claim and the same issues, and in cases of these overlapping class actions, it might be easier to coordinate the cases in federal courts than in state courts.  So again, there you want to ask yourself:  what does this bill do to address that problem?  If it doesn't do an adequate job, what would do a better job?

I don't want to leave this subject without one more cosmic remark, and it's this:  the natural tendency is to view this as a simple dispute between the trial lawyers and the unions on the one hand, and corporate America on the other, and the only question is:  who wins and who loses, or on what terms do these parties manage to compromise?  There's, of course, a good deal of wisdom and objectivity and good sense in that observation, but I think there's a little more at stake here, something like a conflict of visions about what diversity jurisprudence and what federal courts are supposed to accomplish in the first place.

From the original constitutional perspective--and you see this both in the Constitution itself and in the Federalist Papers, and in Madison's writings and in Hamilton's writings, the overriding constitutional question is:  how do you prevent states from interfering with national commerce and how do you prevent them from home cooking out-of-state parties?  The general constitutional solution is a norm of nondiscrimination.  There are a half-dozen constitutional clauses that incorporate that principle of nondiscrimination. That is to say, you're getting to do business in one state on the same terms as that state's citizens in one form or another, but the core instrument, the basic institutional means by which the Founders sought to accomplish that objective and to protect the nation's commerce was diversity jurisdiction.  You want to afford contracting parties an unbiased forum and an unbiased law.

The competing vision there is to say--and which began to take hold, I think, in the 1920s-- that whatever worries we might have had at the outset over state court bias, they are now no longer a concern.  And second, in some ways this concern over state court bias, this unwarranted concern over state court bias under the conditions of a modern integrated economy leads to unduly nationalist outcomes and, moreover, to unduly pro-corporate outcomes because it's always the corporate defendant that can choose his forum.

So beginning in the twenties there were calls to abolish diversity jurisdictions all together and to chain federal courts to state law.  It started in the twenties.  The capstone of that development was of course in 1938, the decision in Erie Railroad.  I just want to impress upon you that this is not ancient history.  The young man, who as a very young man at Harvard, was entrusted by Justice, then Professor, Frankfurter to crank up the reasons for abolishing diversity jurisdiction all together was none other than Henry--later the much regarded, very highly regarded Judge--Friendly, who later then went on to clerk for Brandeis, and who in 1964 still wrote a very famous article on why the basic scheme of the New Deal, that is to say expanded power of state courts and federal courts chained to state law, was beautifully simple and simply beautiful.  And it's astounding actually to see how close that vision came to a complete victory.  In 1976 a very highly regarded member of the American Bar made an impassioned plea to abolish diversity jurisdiction.  That was not some trial lawyer.  That was my former colleague, Judge Bork.  The House of Representatives in 1978 considered a bill to abolish diversity jurisdiction all together.  And as late as 1998 Chief Justice Rehnquist still said: look, there's nothing wrong with state courts.  The worries about bias are all together exaggerated and unwarranted and we ought to tread carefully here.

So, in one sense, the bills that are now waiting introduction are a step from a brink, and the question is: is that just sort of some carve out for the sort of unique area of class actions, or does that move indicate a broader rethinking of the general way in which we think about state courts and federal courts and state law and federal law? Just a thought.

I'll now introduce my speakers in the order in which they will speak, each for about 15 minutes or so.  Thereafter, I'll have some probing, if not necessarily relevant, questions to the panel members, and after that we'll have questions from the audience which we'll try to answer as best as we can.

Robert Gasaway is going to go first.  He's an old friend of AEI, a frequent speaker at AEI events.  He's a partner with a Washington law firm, Kirkland & Ellis, and he's watched both the tort reform debate in the nation's capital very closely, and has great practical experience in defending class actions.

David McIntosh will go next.  He's a partner at Mayer, Brown, Rowe & Maw here in Washington, and as many of you will know, most of you will hopefully remember, David McIntosh was from 1995 to 2001 a member of Congress, a member of the House of Representatives from Indiana.  Prior to that he was the Executive Director of the President's Council on Competitiveness under the first Bush administration.

And finally, Stuart Taylor is a columnist for the National Journal and a contributing editor of Newsweek, and he writes widely about legal affairs, legal policy, the courts, and Congress.

Without much further ado, Rob, please.

MR. GASAWAY:  Thank you, Michael.

"Class Action Reform:  How Far and How Fast?"  Obviously, as a predictive question, there are people here from the Congress and the Press who have a better sense of whether Class Action reform is going to happen or not or how fast it will happen, if it does.  So I'm going to talk about the normative matter — how far and how fast should it proceed?  From the perspective of a defense lawyer, it's as much as possible as quickly as possible.  So the question quickly boils down to whether this particular bill that we think is going to move is as much as you can get, and is moving it quickly now the best possible strategy?

Because there's a trimester system under the bill, Michael asked me to lay out the bill’s provisions and comment briefly on how they would change existing law.  I'm going to start with the diversity jurisdiction provisions.  Those are the provisions that are intended to and will move cases from state court into federal court.  A comment here:  as a practical matter, those of us who have defended class actions in state court often would prefer to defend those cases in federal court.  So any experienced class action litigator has probably had the experience of trying to get a case into federal court, and because of current law, probably also had the experience of failing to get it to stick in federal court.

The rule that is included in the bill in play is fairly innovative when viewed in terms of overall American jurisprudence.  It's a hard-and-fast minimal diversity rule.  That means that unless all plaintiffs and all defendants come from a single state, the case can be heard in federal court.  So as a practical matter, all of the plaintiffs must be from Maryland and all of the defendants being sued must be Maryland, and the case must be brought in Maryland; otherwise, the defendant or any one of the defendants can take that case to federal court.  Now, a comment here.  That's not strictly correct.  The bill does leave open the possibility that a class of Maryland plaintiffs could sue all Maryland defendants in California.  But there are separate doctrines that take care of that under the rubric of forum nonconviens and due process.  So as a practical matter the basic rule, fairly innovative, is that all plaintiffs, all defendants, must be from the same state, and sue in that state's courts, or else there is federal jurisdiction.

Now that's the rule.  What are the exceptions?  Well, the first group of exceptions is threefold.  One is for cases where two-thirds of the class is in the forum state and one-third is outside of it, and that may be a fairly administrable rule.  But there's also a provision that says the “primary” defendants must be from that state.  Look for litigation to be contested over the question of who is and is not a primary defendant.  The thought here is obvious at an intuitive level.  If the center of gravity of a case on both the plaintiff side and the defendant side is in a particular state, you should be able to sue in that state's court.  Most of the defendants are in Maryland.  If two-thirds of the class is in Maryland you should be able to sue there.

As a practical matter, I think sorting out who is a “primary” as opposed to a “nonprimary” defendant is going to be challenging for the courts.  As I sit here, I cannot think of an analog in other areas of case law that you would naturally point to determine what the “primary” test means.

Other exceptions are more straightforward, one for small classes of less than 100 people and another one for suits against states, state officials, or other government officials where relief by federal courts would be foreclosed.  That sounds like various types of sovereign or other immunities.  So those are the principal mandatory exceptions.

Now, the optional exception is even more complicated.  That applies in the case where one-third to two-thirds of the plaintiffs are from out-of-state (a middle tranche of cases).  And then there's a five-factor balancing test for determining federal jurisdiction.  Question:  is there a national or interstate commerce interest in the case?  Presumably that weighs in favor of federal jurisdiction.  Is the case governed by other states' laws?  Presumably this factor weighs in favor of federal jurisdiction.  Whether there's a plurality of plaintiffs from the forum state?  Presumably that weighs in favor of state jurisdiction.  And then there are these two additional factors.  One is, have the plaintiffs artfully pled to gain federal jurisdiction?  Well, presumably we don't want to reward artful pleading, so that weighs in favor of federal jurisdiction, but don’t be surprised if plaintiffs lawyers try to read it the other way.

And finally, whether other similar actions have been or may be filed?  Presumably if there are a lot of actions, this shows that it's an interstate issue, that it's a federal issue, and it goes to federal court.  But again look for creative arguments to the contrary from plaintiffs lawyers.

So five-factor balancing tests always produce litigation, and this one likely will be no exception.

Now, removal.  Some of the most important provisions are the removal provisions.  One straightforward one is that any defendant can remove without the consent of other defendants.  That's huge.  Why is that huge?  Not necessarily because defendants have differing views about what form would be better and quibble about that, but as a practical matter in the defense of these cases you get conversations that go along these lines:  Well, we'd all like to be in federal court in this particular case, but if we remove, the federal jurisdictional basis for removal may not stick, we're going to get remanded, and the state court judge is going to look askance.  So it's a tactical decision and oftentimes, as anything else, the burden of inertia keeps cases in state court.  Under this law, the most aggressive litigant can take the case into federal court.

And finally, for the federalism issue, a major departure from current practices, the idea that a home state defendant can remove.  The ordinary theory of federalism is that almost always you have a state court available to you.  You may have to travel there.  You may be dealing with a company with principal place of business in Maryland, incorporated in Delaware, and you may be in California.  But you have two state court forums open at all times —- you as a plaintiff can travel from California and sue in either Maryland or Delaware.  This bill marks a departure from that rule and allows even a company that's headquartered in Maryland, say, with a principal place of business in Delaware to remove cases brought in the Maryland and Delaware state courts to federal court.

Now, briefly, back to the question how far, how fast?  Is this a good bill?  Is this bill the best it can be?  Let me evaluate those issues on four dimensions and give you thoughts on each.  First of all, the jurisdictional provision; will this bring more suits into federal court and will abuses on average be less in federal court than in state court?  Answer:  yes and yes.  It seems inconceivable to me that there will not be more cases that will stick in federal court after removal or will be filed in federal court originally.  Although there are of course many instances where state courts are as fair or even fairer than federal courts, I think on balance the perception of many is that federal courts tend to avoid the worst instances of unfairness.  So that's a plus.

What about litigation cost?  This will lead to more litigation.  Obviously, applying the five-factor test, deciding what a primary defendant is, before you even get into the other provisions, is going to require litigation.  But again, these sorts of litigation expenditures tend to be incurred only after a defendant has disagreed with the forum choice of the plaintiff.  So from the standpoint of the business community, it’s their decision to incur those costs and fight for the federal forum, and so if they want to fight for the federal forum, and there are open questions of policy as to whether they should have it, why not ask the business to prove that the federal forum is appropriate.  According to the terms of the law, I do not think that cost is a minus for the bill.

The third factor is the add-on provisions.  All of these provisions about coupon settlements, about bounties and negative recoveries, about geographic discrimination and some others, these are add-on provisions.  And in class action reform bills they tend to come in three forms:  poison pills, sleepers, and really significant additional benefits.  I don't think there are any poison pills in here.  There's nothing that I see that I say, "Oh, the trial lawyers have that and that's going to be a very significant benefit to them."  So the only question is, is the significance of the add-ons or whether they're sleepers.  Some of the add-ons draw giggles from corporate counsel, sort of, "Yeah, that's going to make a lot of difference; that's really going to help."  But some of them I think are potentially significant if implemented and interpreted correctly, so the add-ons are another plus.

So what's the argument that can be made against the bill if any?  What the bill does give up is our right as a legal system, I think, to get to the best possible rule for class actions jurisdiction.

Let me take a step back.  The current rules against federal jurisdiction over class actions are hampered by the idea of aggregating diverse claims.  There's a minimum amount-in-controversy requirement for suits in federal court of $75,000.  This bill would codify an amount-in-controversy minimum of $5 million.  So people who are in favor of class action reform will find it harder to make the argument that if you have a numerous enough class, each with a small claim, and it comes out to a total of over $75,000, there should be federal jurisdiction.  The almostalways perceptive Seventh Circuit has said this result is paradoxical, and it is.  It's based on a case from 1973 called Zahn v. International Paper.  I believe that case was wrongly decided, but it's very, very, very difficult for reasons having to do with review jurisdiction to ever overturn Zahn.  So even if you would agree with me that Zahn’s wrongly decided, there are cases removed from state courts to federal courts that are appropriate vehicles for arguments disagreeing with Zahn, but where the argument that Zahn is wrong not made, because (A) you're going to lose in the federal district court, and (B) you're not going to be able to get appellate review of that decision.  And so all you're going to do is make both the federal judge and the state judge think you are wasting their time.

If you're giving up anything with this bill you're giving up a sophisticated strategy that would allow Zahn to be overturned and what I think the true rule under the 1966 amendments to Rule 23 to be put into place.  I haven't necessarily figured out what that sophisticated litigation strategy is, so on balance this may well be far enough and fast enough.

MR. GREVE:  Rob, thank you very much.

David?

MR. McINTOSH:  Thank you, Michael, for setting this up, and Rob for giving us that excellent summary of the bill.

I want to focus my comments on three things.  One is a little bit more on this federalism question because when I was in Congress we introduced a bill that was aimed at putting in presumptions in favor of federalism on federal regulations and legislation that caused a great deal of consternation in the business community because they were at that same time working on several strategies towards preemption of regulatory areas where there were these type of litigation problems in the states.  Our intention of the bill wasn't to effect that particularly, but the subjects did collide and there was a lot of discussion that went back and forth.

Second, a little bit of insight about the politics.  Being a former member you can comment perhaps more candidly than a sitting member on what goes on up there, and at least I can share with you some of the lessons that I learned that may be applicable here.

And then finally, a little bit on an idea that I've been thinking about for a long time and never taken actions or any steps on, but may be helpful, not necessarily in this legislation, which I think is on a track to go or no-go as written and compromised to, but for future tort reform or litigation reform efforts.

On the federalism question--and Michael, I think you set this up with that wonderful conference where Judge Bork and Dan Troy laid out some originalist arguments for when it's appropriate for the federal government to assert its authority.  In this case it strikes on two grounds, one, protecting the original intention of that diversity jurisdiction provision in Article III and whether the founders had in mind one person suing one other person, and would I think be shocked if they were told, well, diversity jurisdiction's being defeated because the real defendant may be a New York corporation in Alabama but they're adding a local drugstore to make sure there is a defendant on both sides.

And then second, it's clear that with class actions where you've got members of the class from all over the country, that the state is asserting its authority far beyond its own borders and having an effect on interstate commerce as a result of that.

So from my point of view, which is pro-federalism, I think there's no problem with this bill.  I think it's a clear example of Congress changing the diversity jurisdiction rule in a way that will have an intended effect of reducing class actions as a way of bringing lawsuits that are perhaps frivolous or nuisance or costly.

Some of my conservative friends who want more tort reform complain that it's been watered down, and the five-factor that Rob so eloquently elaborated on will mean that you don't really get that much reform and you get a lot of lawsuits after the bill's passed.  This is what I think a little bit of political reality can help us analyze what's going on.  It's very clear that it's a high priority for the Republican leadership in both houses, but particularly the Senate because that's where it was stuck last year, and for the President and the new administration.  They've all stated that they plan to take action on it.  I'm not--well, I guess what we'll see in the coming month is whether a pattern that I noticed back in the early '90s working in product liability reform of what I call sort of the rope-a-dope strategy on the side of the supporters of the plaintiffs' attorneys, which is give enough votes to appear that there is some action being taken but never quite enough to get that magic number of 60 and have cloture.

Some could say that was what was going on last year with it.  I think a more likely explanation for last year was partisan presidential politics, where they wanted some issues raised and were using this as a vehicle to do that.  And I think--this may sound overly cynical--but the reality is that the trial lawyers have a great deal of support among the Democratic caucus, provide a great deal of fund raising, and they're not going to give up that base of support that easily.  I suspect this has played itself out over a number of years, a number of versions, that we're likely to see if there are in fact 70 sponsors that you get to that 60 votes in February and can move forward.  That would be my hope.

The upside to this effort and having to go through several votes and seeing the bill change, I'll pass on two different bits of wisdom that older statesmen had given me when I was up there in Congress.  One was from Dan Quayle actually on this issue of tort reform when we started in '94.  His advice was bring it up in as many different ways as possible because you need to have members get used to voting on this issue.  They're not used to it, or at least weren't then, and that what's happening here in the Senate is people getting used to voting for a pro-tort reform provision even if it's not the one that everybody thinks may be the ideal provision.

The second is from Al Simpson, who told me at one point, "David, you've got to figure out whether you're going to stand up for principle and lose, or compromise and see part of what you want to accomplish passed into law."  And I think that applies here where it is a compromise.  It's one that can pass and will move the ball forward in terms of tort reform, and you know, Al was leaving the question to me, as a very junior member when he was stating it, but the clear implication was if you've been here a while you'll see that you're not going to get 100 percent of what you want, but you can move the ball forward with a compromise.

That being said, I think looking forward, we've got to remember that there are other reforms on the table, and one thing that I think we can draw as a lesson from this conceptually is here we're seeing the question of how to deal with excessive lawsuits being dealt with by removing it from state courts into federal courts, and that's a jurisdictional question.  But another way to solve some of these problems is through the substantive provision or getting to the substantive provisions of law through a choice of law regime, and one of the things that I've often thought is sort of a soft version of preemption was instead of replacing the state law with a federal law, replace it with the state in which the defendant resides or operates.  An example of this is in corporate governance where everybody's a Delaware corporation because they want to be governed by Delaware corporate law, and the state of Delaware has created value to itself by balancing out the interests of the shareholders and management, and developed a very refined and sophisticated set of corporate laws that people affirmatively seek to have applied to themselves.

Looking at that in some of the areas in which you see these class actions, if you applied it and could find what is understood to be a fair basis of determining where the defendant resides, instead of replacing that with a federal substantive law, you can replace all the different states with one state and get some of the benefits of uniformity that many of the tort reformers seek when they seek preemption without having a complete takeover of an area by the federal government.

It's an approach that I've always though was elegant and fruitful.  Politically it's never had that much traction, but I think perhaps now, as we're looking beyond this bill, it might be an area that folks could look at for some additional reforms.

Thank you, Mike.

MR. GREVE:  David, thank you.

Stuart, please?

MR. TAYLOR:  Thank you for having me.

I know a great deal less than my co-panelists about this subject, so I'll paint a few broad brush strokes.  First I think in terms of the outlook, to confirm what I think's been indicated, the skids have been greased, the bill is moving down the track.  There isn't very much doubt that even the Democrats who don't like it much--and I spoke to a couple of Democratic staffers today--are resigned to the fact that this bill will become law, it will become law soon, and it probably won't be amended in any significant way.  The bill is basically the passed bill from last year.  And it could have become law last year but for various complicated battles over amendments.  The votes are there.  The votes were there last year to support it, reflecting how many compromises have been reached to allay the concerns of just enough Democrats to make it filibuster proof over the years and somewhat disappointing to some tort reformers because of those compromises.

I think the need for this is utterly clear.  The Washington Post, not exactly a radical pro-business lobby, has described the way class actions sometimes work as an extortion racket, and has said of this bill--and I'm reading from an editorial a few days ago--"Opponents object that the bill would restrict the right to sue.  This is nonsense.  The only problem with this bill is that it takes a modest step."

I think a few disappointments, which aren't going to change anything and perhaps work for the future if this bill isn't taken as having solved the problem, as to the modesty of this achievement, are first I think on the coupon settlement provision.  As I read it, I'm not sure whether that's one of the ones that defense lawyers are sniggering at, but on that and other abuses where plaintiffs' lawyers basically get a lot of money and the class gets very little, the solution is, well, there will be a hearing, the court will have a hearing.  Well, that's very nice.  It's nice that they'll have a hearing, but it doesn't look as though it's going to give, for example, an appeals court any very good purchase on overturning a bad settlement if the district judge approves it.

And the possibility that a district judge will approve it increases because I think this bill does little or nothing about federal forum shopping.  The Second Circuit has a much more receptive attitude towards class actions, for example, than the Seventh Circuit does, and plaintiffs in large class actions who are going to get dragged into the federal courts can probably rig it so that they get dragged into a federal court that will be sympathetic to them, not in the extortion racket sense of, say, Madison County, Illinois or Jefferson County, Mississippi, but still a lot of room for forum shopping, more room than there needs to be for forum shopping.

Another possibility that this leaves open, as one of the folks sitting up here pointed out to me earlier is, well, if you're a plaintiffs' lawyer and you don't want to get dragged into federal court, can you use artful pleading, a term that was used earlier.  For example, say, "we'll file in California and our class will be everybody who lives in California, Alaska, Hawaii, Montana, Oregon and the state of Washington."  Well, it's pretty easy to get two-thirds of your class members in California if you're doing that kind of a thing, and therefore, you could see a proliferation of regional class actions designed to avoid the removal provisions that in some ways might be more inefficient, not necessarily more abusive, but more inefficient than what we have now.  There are some things that should be decided by national class actions, and I think this bill, unfortunately, leaves open the possibility that some of them will stay in state courts.

There is something I'm uncertain about, and perhaps one of the experts here can clear me up.  What happens if, let's say, the lawsuit is filed in State X, and the defendant removes to federal court, and the federal court decides not to certify a class action because there isn't enough commonality or any of the many discretionary factors that federal courts can use to say, we're not going to certify this?  Is that the end of it, or can the plaintiffs' lawyers say, "Well, we're taking this class action back to state court?"  I'm not sure how that turns out.  Perhaps someone else is more sure than I am.

And something, I think, that's a missed opportunity in this bill.  I called a couple of my tort reform gurus this morning, Lester Brickman of Yeshiva Law School and Jeff O'Connell of University of Virginia Law School.  And Lester, not claiming to have huge expertise, pointed to an argument he made in a Law Review article sometime ago, the gist of which is we don't really know very much about what's out there in terms of class actions.  There's no clear reporting system, particularly for state class actions, particularly for those that are settled, so that you can have a broad national database with which to evaluate the costs and the benefits of class actions.

You have plaintiffs' lawyers and consumer groups saying, "This is a wonderful check on malevolent corporate activity."  You have corporations complaining about abusive lawsuits of which there clearly are some, but it's hard to be sure whether they're a rare exception or a common rule, and as Lester Brickman wrote a while ago, the conclusion on the cost benefit analysis is at least as much an article of faith as a matter of empirical reality, just as it has become increasingly clear that on the whole, punitive damages have little deterrence effect and indeed appear to inhibit improvements in product safety.  So too empirical and analytic attention to aggregated litigation including class actions may reveal a similar dysfunctionality but the data, as far as I know, aren't there.  As far as I know, this bill doesn't do much to give us access to those data, and therefore, looking forward, we'll still be arguing in the dark over future changes more or less as we are now.

I guess then that just brings me to one general point I'll make--and Jeffrey O'Connell made this point.  Class reform I think is particularly hard even conceptually, putting aside the political, difficulties because I think there's little doubt that if we had no class actions at all there would be a broad range of corporate misconduct that would totally escape the check of litigation, the regulatory effect, the compensatory effect.  If every plaintiff suffers a loss of a couple hundred bucks or a couple bucks or a couple thousand bucks, it's not worth anybody's while to litigate even though the aggregate losses to all plaintiffs could be enormous.  So we have to have class actions.

Presumably we have to have some kind of a mix of state and federal class actions.  There are a lot of them that are filed under state law based largely internally to the state, but once you create a beast like this to solve the problem it's created to solve, it's enormously difficult to avoid its becoming something that's gamed by plaintiffs' lawyers to extort money from corporations, collusive settlements, or to put them under the threat of the company litigation.  And there isn't any law that you could possibly draft that could solve that problem perfectly.

I think this law is worth doing.  It's better than nothing.  I don't see any real negatives to it from the public interest standpoint, but I worry about whether the opportunity to do more is going to be lost for a very long time based on the argument that, well, we've solved that problem.

Thanks.

MR. GREVE:  Thank you very much, Stuart.

I thank all of the participants for staying well within the limits prescribed to them.

Let me give you all a chance to comment on each other's remarks and, in particular, maybe address some of the questions that Stuart raised at the end about the likely effects and the workability of the bill, to which I want to add a few more questions.  It seems to me that any intervention like this, in a very complicated political and legal environment, will have sort of second-order consequences, some of them unintended--most of them, actually, unintended.  But I'd like, if you would, some of you, maybe all of you, to speculate a bit about it.

My first question is this.  Parallel to this piece of legislation, there has, of course, been a longstanding effort to rethink federal class action rules themselves--the Rule 23 procedures.  And that has been a perennial political football that nobody wants to handle.  Whenever it comes up, the Judicial Conference and the Supreme Court tend to say, "Oops, ah, no, we don't want to do this because it's all substantive changes.  Whatever we tinker with the rules here will have substantive effects on the parties, and it's really for Congress."

And then it goes to Congress, and Congress says, "Civil procedure?  Never heard of it.  We don't want to deal with it.  It's all really the court's business, and don't we have experts?"

So the net effect of this is, once these cases increasingly hit the federal courts, more and more questions, there will be more demand, it seems to me, for uniformity, especially in light of the existing differences between the circuits and the individual district courts that Stuart alluded to.

The second question is let's stick with the federal courts.  Over the past years, decades, actually, the Supreme Court, has, for the most part, eschewed any effort to bring some sense of order into what, by now, have become quite flagrant conflicts among the circuits.  It's more often than not punted.  So a question, will this increase over the long haul or medium haul, whichever way you want to look at it, the pressure on the higher-level courts to bring some order and some uniformity to class action jurisprudence?

And the third question is once it becomes obvious how much here hangs, and this is really, Rob mentioned this, but I want to re-emphasize, the price that you pay for compromise here, it seems to me, is handing over an enormous amount of discretion to federal district courts.  Despite the sort of clarity of the initial rule, minimal diversity, the exceptions are huge and, of course, the class actions will be gained so as to fall under one or the other exemption.  And the question is what did Congress actually mean to have entertained in federal court?  That question, the five-factor balancing test and a whole lot of other stuff falls into the discretion of federal district courts.

So, that being so, will everybody recognize, three, four years from now, in the business community, among the trial lawyers, that state supreme courts and state judges aren't the only judges worth fighting over?  Should we also pay attention to federal judges?  And I don't mean just the Supreme Court, but does it matter who actually superintends L.A. and surrounding counties somewhere in California?  Do these district courts matter?  And, if so, will you see more intense fights along those political lines among the concerned interest groups?

Who wants to go first?

MR. McINTOSH:  Let me pick up on the last point.  The business community was very slow in coming to the conclusion that they should interject themselves into the state court process, where many of the judges and Supreme Court justices are actually elected.  So it's quite appropriate to have their activities going on.  And the assumption behind your question was will the business community change its view of the federal appointments, which has been, for the most part, one of laissez-faire.  It's not particularly bearing on our direct policy interests who the appointments are, and we don't want to get into the battles over social issues which seem to be driving it.

I would predict that if this does pass and is effectively put into operation, with some careful supervision undoubtedly by the courts at the federal level, that you will see a great deal of interest into who the appointments are that are being made to the federal bench on these issues and that similar, as people came to realize that it matters what happens at the state level, that it will begin to matter more at the federal level.

MR. GASAWAY:  I'll tackle a couple of your questions.  The first was the effect of this on the judicial rulemakers.

It seems to me that Mike has hit the really important point about this reform.  The assumption is that justice is done in class actions, substantive justice, in litigated cases in federal court.  If you read this bill, what it does is bring cases into federal court, and it makes sure there aren't collusive settlements.

But going back to Stuart's comment about why we need a class action device, it is very hard to see anything here that remedies any perceived ill of bad outcomes in litigated cases.  That's fairly astounding when you think about substantive legal reform and you take that whole category of responses off the table.  The assumption that federal courts get litigated cases right may or may not be true, but it is an assumption of this bill and that is one astounding fact.

Now, the question is what effect will this have on the judicial rulemakers?  Well, there are two things.  I think I agree with Lester Brickman, whom Stuart talked to:  there's no mechanism for collecting data, and that may be an opportunity missed.

On the other hand, the opportunity taken is to prod the judicial conference and the administrative office to weigh in on recommendations on issues, particularly class action settlements.  And I think Mike's question assumes more broadly that that's a gentle nudge, along with ancillary and related provisions, to try to get the experts back into this game.

I don't know this game very well, but if I had to hazard a guess, I would say that rulemakers will be unnecessarily hesitant to step in.  This bill has been through many drafts in many Congresses.  It's been often amended.  It looks, as the Supreme Court likes to say, like contending political and social forces have come to rest where things are, and my guess is that, unfortunately, and lamentably, the experts on the judicial rulemaking bodies will not weigh in, pick up the ball, and carry it forward.

Another question that Mike asked that might be helpful or I might have a comparative advantage on is the question of higher court review; why don't the Supremes seem to take very many class action cases?  What will happen under the new law?  My guess is that they will take a few more because there will be widely varying interpretations of key provisions.  I alluded before to what does "primary" mean?  Does it mean numbers?  Does it mean importance?  Potential liability?  It's hard to say with certainty how those terms will be interpreted.

And it does seem that whether it's that example or another example, there will be some fundamental questions, on which courts will be spread so far across the map, that the Supreme Court will feel obliged to weigh in if there is not clarification by the rulemakers.

On the other hand, the basic reason why the Supreme Court stays away from these cases, I think, will continue to hold; namely, inherently, as long as you have Rule 23 in anything like its current form, you have factors like commonality, typically, numerosity, and adequacy, you've got predominance and superiority, you've got all these factors that are very squishy, it is very difficult to get the sort of clean circuit splits that prompt Supreme Court review.  And I think that's going to continue under this bill.

So will you get some semblance of order?  I think there will probably be a few cases where the approaches are so divergent they'll weigh in.  But will you get anything like uniformity?  I would guess that uniformity will actually go down.  Because of these discretionary tests the difference between the federal circuits, if anything, will increase.

MR. TAYLOR:  A couple of thoughts that are vaguely responsive.

One, while reading the latest Supreme Court plea to Congress to please clean up this asbestos mess that keeps landing on our doorstep, I kind of wished I had an opportunity to ask them, "Well, you guys are running the country when it comes to abortion, school prayer, gay rights, racial preferences, state sovereign immunity, pornography, campaign finance, and a few other things.  Can't you do a little bit to clean up the litigation system?  Isn't litigation what you guys are supposed to be good at?"  But I've never had the opportunity to do that, except perhaps in print.

And, for some reason, the Court, as you say, it's not easy to clean up the litigation messes that exist in class actions, but, gee, you would think some of the other things they've tackled aren't that easy either.  That doesn't stop them.  And it does strike me as ironic that in the one field of their supposed greatest competence they seem to be so diffident.

The other thought that comes to mind is what seems a somewhat different congressional attitude toward federal district judges in two contexts:

Consider the sentencing guidelines which the Supreme Court recently struck down or struck down the mandatory feature to make them discretionary.  In that area, ever since 1984, the direction of Congress has been, in essence, saying we can't trust these federal district judges.  They create wild disparities in similar cases.  They are softer than we would like to be.  In lots of cases, they depart downward.  Therefore, we keep passing laws like the 2003 Protect Act to require de novo review of certain departures.  And the Congress has made a huge project of trying to force consistency and certain standards on the federal courts.

Justice Breyer, in his creative remedy last week in the Booker case, the sentencing case, swept away a lot of that.  And there are a lot of House Republicans, in particular, who are right now ready to try and sweep away what Justice Breyer just did and throw in more mandatory things.  But when it comes to this issue, class actions, the idea seems to be, well, if we can just get it out of Madison County and send it to those federal district judges who we have such high regard and trust for, their consistency in particular, we have been there, solved that.  And it just seems a little odd.  I think they've been much too prescriptive in the criminal sentencing area and not prescriptive enough in the civil justice area.

MR. GREVE:  Just by way of brief comment, and I'll open this to the audience in a minute.  I don't know what the current status is, but in some versions of this bill, and I believe it's in the latest Senate version, there is, in fact, a sort of implicit recognition that they don't really trust the federal district courts because there is an immediate interlocutory appeal provision to the appeals courts which could be a huge, huge thing especially for defendants, in all sorts of ways.  I mean, it's one more upward pump.  In that case, you don't even have to be nervous about Madison County because Frank Easterbrook will fix it.

We'll now open the floor to audience questions.  Please raise your hand, I'll call you on you.  Michael Petrino has a microphone, if you could wait for that, and prior to your questions identify yourself by name and possibly affiliation, we'd be grateful.

Please.  The gentleman needs no introduction.  Ed Warren, Kirkland & Ellis.

QUESTIONER:  Ed Warren.  I think, Mike, you may have answered a question that I had, but let me pose it because I think the question about district judges is at the heart of this. I don't want the perfect to be the enemy of the good, but--I don't know much about this and just listening to it--I would be concerned about the way this thing is going to play out.

I guess the first question is, is a decision by a district judge to remand a removal petition automatically appealable or is it only appealable via mandamus discretion and, consequently, your concern, Mike, about district court judges is very well placed?

Even if there is an automatic appeal, you still have the problem, which I think is posed by the way this statute is written, and that is that it's such a balancing test that what the court of appeals is eventually going to say, it seems to me almost certainly, is that the district court judges have immense discretion in implementing this test.  It's going to be like Daubert squared, where the district court judge has a lot of discretion on the admission of scientific evidence under Daubert.  It seems to me this kind of balancing test is going to be an abusive discretion kind of test and, consequently, even if there is an immediate appeal, the rule that is likely to emerge from the courts of appeals is going to be one affording great discretion.

The last question that I had, which is related to what's this really going to accomplish, is why isn't a smart plaintiffs attorney--this is a little bit like what Stuart was suggesting--going to fashion his or her case in such a way that the case is invulnerable to removal--your California example--and then try to get a verdict, collateral estoppel, or a successful settlement in the California court in Stuart's example, and then just parlay that into the next case?

Because the problem here, in essence, is corporate defendants are reluctant to try these cases on the merits because of all the consequences in the financial markets, and in the press and so forth.  And so the inducement to settlement and to liquidating for the problem is so immense that I think that's their penchant and will continue to be their penchant, irrespective of this bill.

So I've got kind of a technical question first and a second question about isn't the response of the plaintiffs attorneys simply to do what I just suggested?

MR. GASAWAY:  Ed, I'll take a whack at your technical question.  I do think that there's additional review under 1453(c).  I'm not sure that it's drafted exactly the way it should be drafted, but I do think it will provide for additional review.

MR. McINTOSH:  Let me just, Ed, this isn't directly on point, but somewhat.  When we passed welfare reform, for example, the change in people's attitude towards that at the implementation level had more to do with the national exercise of passing a bill, having it signed by the president after several vetoes because there was a change in the way people looked at it as not being an entitlement.  Still plenty of opportunities in the way the program was written for people to abuse the system, but there was an impression created, by those implementing it, that times have changed.

And I think we don't like to think about that in the legal system, but judges are human, like everyone else, and will see this as an act that says, okay, class actions are not to go unfettered.  There are limits.  And I think you'll see in a lot of the discretionary decisions at the district court or even at the state level some change in the way they approach using that tool.

MR. TAYLOR:  I don't really have the expertise to respond to Ed's points.  I have just one thought that comes to mind.  I would think the logical solution to the problem of the California hypothetical, the well-planned effort to escape federal court, would be for the state court to say this is a national class action that you have gerrymandered for your own purposes, and we're not going to play that game.  But, of course, if we trusted the state courts to do this right, we probably wouldn't have this bill in the first place.

MR. GREVE:  I do want to follow up on this, and I apologize in advance about this question, which seems to get excessively into the weeds and the practicalities of this.  But if you don't think it's worth at least considering the details and the mechanics of this, I'll give you one example, which is the so-called Supplementary Jurisdiction Act.  Now, this is a congressional statute governing what used to be called pendent jurisdiction of state law claims in federal court.  That wasn't even the statute that was controversial in Congress.  I believe it passed unanimously because it was written by 80 civil procedure experts and people who teach federal courts, and really we are the experts.  It's clean.  It's nice.  It has caused endless litigation in federal courts.  The Supreme Court is now scheduled to hear these things.

If a statute like that causes endless litigation, you can only imagine what this will cause.  I'm not saying that by way of disparaging the statutory effort.  I'm saying by way of it's worth thinking about the details.  So I just want to give you hypotheticals along the lines that Stuart, and others, and Ed suggested.

Some plaintiffs’ lawyer strolls into court and says, "Here's a class that I can sustain in state court."  It's the California example or some example like that.  And the defendants say, "Oh, no, no, no, no, wait a minute, it's not because our view of the plaintiff class here looks very, very different."  And you can easily imagine cases like that, where both sides try to massage the class.

Now, who hears that in the first instance? The state court?  Or can you immediately move to get this into the federal court and say you ought to exercise either your original jurisdiction and mandatory jurisdiction or your discretionary jurisdiction, depending on what kind of case this is?  If you have to fight it out in state court first, is the federal court then bound by the state court's findings as to the residence and provenance of the plaintiffs, the defendants?  How does that actually work?

And, finally, assuming--and these cases, mind you, will come up a whole lot.  Imagine the situation where a federal court says, "Yeah, if I just add up the defendants and add up the plaintiffs here, it's clear that this belongs in federal court because I have original jurisdiction, which I cannot decline."

The very next step, conceivably in the very same ruling, is I deny class certification, and the reason why I deny class certification is that everybody here comes from different states, and the outcome will depend on the law which differs from state to state, and therefore it's not a common class.  Out of here.  Has that been binding on the state court or is it possible, then, to sustain a class under a more liberal class action regime in some state?

Just questions.  I don't know the answers.

MR. GASAWAY:  On the removal, I don't see any change from the current procedure, which is that you file a removal petition in federal court and that immediately divests the jurisdiction of the state court.  I think that the bill’s factors will be applied by the federal district judges.  I think that's clear.

I think your second question, which Stuart touched on earlier, is going to be heavily litigated, to say the least.  I think that the best view of it is, if you have the same class action, you file it.  Federal jurisdiction still exists, right?  So, if you file that second class action, your defendant removes it, and a second class certification is denied.  Then, they can only go forward with the named plaintiffs.

And then the question would be, well, what if there's a copycat suit that's slightly different?  How does that get applied in the context of both the removal to federal court and the class certification decision.  We have talked about Judge Easterbrook's feeling that you can't have an infinite number of bites at the apple.

But I do think, going back to what Stuart said, this idea of gamesmanship, of the numerical rules, it's just going to be critical.  If you think about it, in the discretionary area, one question is whether you got into that range of one-third/two-third by artful pleading?  And I think that if you did--it should be a compelling factor in favor of federal jurisdiction.  I think that's how courts will apply it.

But what the plaintiffs bar will say, and there are answers to this, but what they will say is, okay, the very fact that that's discretionary means that there's mandatory jurisdiction over a 66-percent and up class.  So, I'm a plaintiffs’ lawyer in Madison County.  And I figure out that if I have a class that includes all Illinois residents, plus the St. Louis area, which is right across the river, that comes out to about 80-percent Illinois, 20-percent Missouri.

Now, that's artfully pled, but, remember, artful pleading was a factor under the discretionary remand standards applicable to classes with 33 to 66 percent of their members from the same state.  I'm above the 66-percent threshold, so maybe it's artfully pled, but I get jurisdiction.  And those are the kinds of things that are going to spawn the litigation that Mike was talking about, I predict.

MR. GREVE:  Yes, ma'am, please.

QUESTIONER:  I just wanted to see if there were any comments from the panel on other, another bill that was introduced in the House last year called, "The Lawsuit Abuse Reduction Act."  I believe it was H.R. 4571.  It passed the House, but it was so close to elections that it never made it to the Senate for discussion.

What it is, is it amends the Federal Rules of Civil Procedure Rule 11 and imposes mandatory sanctions for frivolous lawsuits and also eliminates the possibility of forum shopping, in terms of limiting the jurisdiction to the sight of the injury or a connection between the plaintiff or the defendant and how you, if you are familiar with that bill, if you think it may come up, and how do you think it complements or hinders this current class action reform bill.

MR. McINTOSH:  I guess I would just comment I have not seen that one listed on the list of top three legal reform agenda items that they are going to be pushing to get through the Senate.  I think the next one is probably medical malpractice and then, depending on what Chairman Specter is able to do on asbestos, perhaps some bill related to that issue.

Each one of these is an enormous effort, and so if they're not in the queue, I think it's unlikely that it will get time on the Senate floor.

MR. GREVE:  David, you're the right person to answer this question, which I think points to a very big question.  Is the view in the business community that this will be momentum-creating, that is, we'll get this under our belt and then let's go immediately to the next one or is there fear that, once you get one of these beasts passed, everybody will be so exhausted that everything else will fizzle or somewhere in between?

MR. McINTOSH:  I think the view in the business community is it will be momentum-generating.  You break through that magic number of 60 and the hold on any bill getting voted on in the Senate.  Remember, these are folks who watch the stock market, and look at plateaus and getting through certain numbers, and psychology creates momentum.

And I think what you'll see up on the Hill is there is pent-up demand for the rest of these issues, that a lot of members are saying, "Yeah, this is nice.  I'm for class action reform, but I'm really more interested in this other area of legal reform."  So both of those together I think will tend to create more momentum than everybody saying, "I've had it.  Too much lobbying on both sides of this one.  Let's not talk about it for a while."

MR. TAYLOR:  Two quick points.  I'm not deeply familiar with the legislation you suggested either, but efforts to get the courts, through Rule 11 or any other means, to sanction people for bringing frivolous lawsuits, I think, are a huge uphill battle.  The courts, I think, construed the Rule 11 we have very narrowly.  They don't like doing that.  A frivolous lawsuit is almost impossible to find in some courts.  It doesn't take much.  That's why every time I read a media account saying we have to stop these frivolous lawsuits, I think you're kind of playing into the trial lawyers' hands.  There are no frivolous lawsuits, by many definitions.  There are lots of unwarranted lawsuits.  But a frivolous lawsuit has to be one that no judge, including a judge in Madison County, I suppose, could possibly see as having merit, and that's not easy to define.

On momentum, my guess is that the two other big proposals--asbestos and malpractice reform--will stand or fall on their own merits.  You might create, if class action is passed, it might create some momentum on asbestos reform, and that really comes down to some very hard bargaining between a lot of stakeholders, business against business, business against insurance.  This insurance company against that insurance company, all of them against labor.

And Senator Specter apparently is, because there seems to be something of a stalemate over whether $140 billion is enough, Senator Specter is apparently going to put some kind of a safety valve at the back end; i.e., if the money runs out, then the litigation can start up again, which eventually might lead the business community to think, Why should we put up $140 billion if we're just going to be back in the soup once it's gone?

Malpractice reform: the people I've asked about it who seem to know think it's got essentially no chance of going anywhere and is dead and is widely viewed as dead for this Congress, that there are several Republicans who have their doubts about the $250,000-punitive damage cap, and I suppose, to editorialize a little bit, I think that's a missed opportunity for the administration to come forward with a proposal that would limit transaction costs and limit lawyer fees, while having something for injured patients, as well as for defendants.

This bill has very little, if anything, for injured patients in it.  It's going to make it a hard sell politically.  I predict it will fail.

MR. GREVE:  Secretary Coleman, please.

QUESTIONER:  If I leave here with this impression, am I correct?  This bill is really one directed toward jurisdiction, whether you're in the federal system or the state system, but there is nothing in the bill which affects whether the class should be certified or not.  And if that's so, unless the practice has changed a lot since I used to do this, once you defeated certification, you went home because the plaintiffs lawyer dropped the case.  So why wouldn't that be the thing the business community is more interested in rather than what court you're in?

MR. GASAWAY:  Question No. 1, is this mostly about jurisdiction?  As I said before, yes, jurisdiction and settlements.

Michael's question about interlocutory appeal, that's obviously huge.  It's my understanding, Stuart, that that was in the House version, but not the Senate's version, and that will not be included in the bill that people are saying is fast tracked.  So even the question of reducing the discretion to apply the class certification factors I think is not going to happen in the version of the bill that we're told will move.

Then, the question becomes why does the business community focus on jurisdiction?  And I think there's an easy answer and a good one.  It goes back to a comment that Stuart made, there are clearly merits-based arguments that have a grounding both in experience and economic theory for class actions, and that is the negative value suit; the case in which you have many small claims, and it costs more to prosecute the claim than you're going to recover on the claim.  How do you bring those claims into court and get a remedy under a system that has the American rule, as the presumption, rather than English rule?

And for better or for worse, at least since the 1966 amendments, one of our answers to the small claims situation has been class actions.  And so the idea of eliminating class actions I think would be a political nonstarter.  And then as you start cutting back substantively on the class actions, then the other side, politically, will say, well, here is a class action that would have been certified under the old substantive rules.  It can't be certified under the new substantive rules, and, look, this is really a meritorious class action.  The person here really did bilk people.

I know there have been Internet schemes that have been alleged to be pure frauds and that the class action device, shorn of its jurisdictional unfairness, and shorn of its collusive settlements, is seen as a good response for those abuses.

So I can support the idea that jurisdiction and settlements is where you should look both politically and as a matter of the public policy merits.

QUESTIONER:  The 108th Congress saw, particularly on the House side, a number of tort reform or litigation reform-type bills that actually included elements of limiting the court's ability to hear certain types of cases or what as some refer to as court stripping.  And I'm wondering to what extent, if you are aware, do you think that the 109th Congress will use this as a tool in their types of reform actions as well?

MR. McINTOSH:  This is an area I'm a little less familiar with.  I know the bills you are referring to.  I'm going to hazard a guess that I think Congress's appetite for court stripping legislation is less than other types of litigation reform.  There's a reluctance among members to use that provision in the Constitution, and so I think it would be difficult to get through both bodies, especially with the Senate 60-vote majority.

MR. TAYLOR:  I would agree.  Also, I think it's, I mean, the court-stripping bills, unless I've missed some, are about entirely different issues.  They're not about whether a lot of people should get some damages.  They're about social issues, gay marriage, things like that. And I think there's some enthusiasm in the House for those, but very little chance they'd get through the Senate.

QUESTIONER:  I apologize.  I'm just trying to educate myself.  I think what you were referring to is the situation where you may try a case, the Court will rule that it's not a class, not certifiable, and then you're back in court the next day in another state or another court trying it all over again.  Is that the provision that you just indicated, in response to Mr. Coleman's question, that there was a provision in the House-passed bill to effect that and there was not in the Senate?

MR. GASAWAY:  The one that I was talking about Michael mentioned review at the appellate court level of the decision whether to certify a class or not.  And as I understand it, that provision was in the House bill.  That's within the same lawsuit.  We're not talking about follow-on lawsuits here like you're talking about, just appellate review of the class certification decision.

QUESTIONER:  Well, was that addressed?

MR. GASAWAY:  As I understand it, that will not be a provision of the bill that the Senate passes.

QUESTIONER:  Right.  But was that addressed in the debate over the last couple of years, where you, basically--I mean, I think it's the Easter--I've forgotten the judge's name--

MR. GREVE:  Easterbrook.

QUESTIONER:  --where he basically said, Look, you can keep trying these cases, trying these cases, and sooner or later you're going to win.  It's like playing Russian Roulette.

MR. GASAWAY:  Yes.  As far as I know, there is no provision that directly addresses that question in the bills that are on the table, and I'm looking at House 1115 from the last Congress, and then the current Senate bill.  And, also, as far as I know, that was not a primary topic of discussion, but, David, you've been closer.

MR. McINTOSH:  My sense is that Easterbrook pointed out a problem that I don't think in the legislation they were going to address.  They were going to leave that up to the courts to figure it out in a series of lawsuits.

MR. GREVE:  This may be a quibble, but you're getting some incidental protection, right?  If more of these kinds of follow-on cases, if you don't win in one forum, you file in the next, and then the next, and eventually you win, if more of them are removable and relatively easily removed to federal court, then, indeed, you have a coordination mechanism at that level, namely, the multi-district panel, which you don't have at the state court level.  Now, that assumes a whole lot, but isn't it right to think that there's some implicit protection here?

MR. GASAWAY:  Let me hazard a guess there.  That's a practical effect of the substantive provisions not an express substantive provision.  And so what I want to make clear is I don't think there is any language, as far as I know, that would address it directly.  Would a multi-panel, multi-district process work?  Most of the time, multidistrict litigation involves the consolidation for pretrial purposes of pending lawsuits.  It doesn't address the follow-on context.

But even apart from those points, I think you still have a good point which is, as a practical matter, the federal system has less disuniformity between courts, even if the Second Circuit differs in some ways from the Seventh Circuit, than the state court systems.

So, at that level, bringing cases into a federal court, even if it becomes no more cohesive, and even if multi-district and other procedures don't work at making it more cohesive, will have the practical effect of lessening disuniformity.

QUESTIONER:  Warren Belmar, Capitol Counsel Group, an attorney here in town.  I assume that what you were saying about the right to appeal a district court judge's decision on a class certification question would not eliminate the interlocutory appeal rights or the discretionary appeal.  The statute doesn't address it and doesn't it make it final as a right for appeal by the losing side, but I assume there is still power in the district court judge to certify it.

MR. GASAWAY:  Yes.  I think that it leaves preexisting law in place.

QUESTIONER:  So that, again, enhances the discretionary power of the district judge on granting or not granting an interlocutory appeal.  And one observation that leads to a question with respect to the greater uniformity, I hope that comity among district judges doesn't become as representative of Senatorial courtesy in the Senate Judiciary Committee, but I'm not quite sure that there's as much comity as we'd like to believe among federal judges.  There are some with very different opinions.

But in all of your comments, you're talking about the differences in different circuit courts, learned judges trying to resolve some very difficult questions of interpretation.  Isn't this the ultimate invitation to judicial activism by telling the Supreme Court that the Congress has really not clarified what they mean so we will look to you to, in essence, legislate by telling us what multiplicity means or what this means or what that means?  And isn't it a shame that we have the view that to ask the Congress to focus on and address complicated legal issues involving these resolutions is something that we feel hesitant to ask the Congress to do?

Stuart's observation earlier certainly was right on that the courts could do it, but I don't think it's really the place for the courts.  If these are really substantive judgment issues, then someone should keep presenting it to the Congress to have them pass judgment on it.

MR. GASAWAY:  I'll hazard two quick responses.  Question No. 1, would it be better to have more legislation and more clarity?  I agree completely.

Does that translate into judicial activism?  I think one of the interesting things that you find in practicing before federal district courts, as opposed to reading higher court opinions, is how your impressions of higher court issues, as handled by district courts, really often don't translate all the way down to the types of issues that we find in business practice.  I think it's very difficult to take our instinctive categories of charges of activism, back and forth, on the hot-button issues and use them to classify federal district judges.  When you get down to sort of the concrete practicalities of litigation that's important to business it is difficult to use those classifications as sure predictors.  That's certainly been one of the lessons that I've learned in 10 years of practice.

MR. GREVE:  One quick addition to this.  One of the things that makes your sort of concern here pressing is that the way, as I understand it, David is the expert on congressional procedure, you crammed this through without any hearings in the committees.

And if the House then does the same, just picks it up and runs with it and says, "Amen," you're not going to have a big conference report on it either.  So, in effect, you have really no elucidation, nothing to rely on when this stuff hits the courts, right?  Because all of the legislative history is about bills that failed, bills that weren't approved, right?  I think that is a genuine tradeoff and a genuine cost of going this sort of fast-track procedure, whatever you guys call that.

MR McINTOSH:  There is a lot of work that was done on the prior bill that can be put in there into a report, but you're right.  I mean, it's going to reduce the likelihood of amendments in the way that they're going to move forward.  What held it up last time, in fact, was a question over what nonrelated amendments would be allowed or not allowed as it moved to the floor.  And so you will see some less debate, but I think the legislative history of it will harken back to what was meant as the committees passed the provisions the first time.

MR. TAYLOR:  Just a quick comment on what judicial activism is.  As I see it, if Congress gives a broad delegation of power to the courts and says, “Okay, here are the five factors you should use to decide if you're in between the two trimesters” and doesn't particularize it all so that it's anybody's guess what it really means, the Supreme Court and the appellate courts bring some consistency to that by saying, “Well, I guess we're going to have to make up the standard, since Congress didn't really help us much.”  The only alternative is every district judge in the country making up his or her own standards.

So I think, if it's activism for the Supreme Court and the appellate courts to take charge in that sort of a situation, which is the rule rather than the exception, it's a necessary kind of activism.  The alternative is huge disparities all over the country in every district court.

QUESTIONER:  [Off microphone.]

MR. McINTOSH:  One of the things that will be changed in this bill, if it passes, is that normally you'll have a whole bunch of plaintiffs from various states and a defendant, maybe, say, it's in Alabama.  There's a suit over a drug produced by Pfizer, a New York or Delaware entity, so you've got a potential for diversity there.  Oftentimes in the class action pleading, they'll include an Alabama drug store owner and say, “Okay, we don't have complete diversity because you've got some plaintiffs and some defendants in the same state.”  It's appropriate for Alabama to make the decision about whether there should be a class action lawsuit.  This bill would d change that to say, if you met all of those five-factor tests and other things, nonetheless, even though there isn't complete diversity, you've got some defendants and some plaintiffs from the same state, it'll move to federal court.

QUESTIONER:  [Off microphone.]

MR. McINTOSH:  It's as Rob described it, minimalist diversity, and I'll let you pick up from there.

MR. GASAWAY:  I think that in the interpleader context, the court has already held that the constitutional diversity requirement you find in Article III requires minimal diversity.  And so there would be an amendment to Section 1332, specifically Section C, that would expand the statutory diversity jurisdiction, in the class action context, in certain circumstances, to the constitutional limit.  So the current 1332 is being interpreted as a matter of statutory interpretation to disallow some suits that the Constitution and Article III would permit.  But that's a good question.

MR. GREVE:  Yes?

QUESTIONER:  Hi.  My name is Jason.  I'm an intern here at AEI in the Trade Department and an aspiring risk manager.

My question pertains to regulatory implications.  Jurisdiction and settlements.  How would the passage and adoption of this bill affect or influence how insurance is regulated?  I see this as perhaps a primer, given the state-federal tensions in insurance regulation further down the road, if adopted, to reform how the insurance industry is both regulated, but also how risk managers select and modulate their insurance towers and purchase their products.

Thank you.

MR. McINTOSH:  That's a very good question.  The division of federal and state authority in insurance regulation is really an historical accident if you look at the way the commerce clause is being interpreted and applied in all other industries.  It is one that, for the most part, the industry has wanted to be regulated at the state level and yet, in recent years, you have seen increasing pressure among the regulated community for a federal charter and an option there.

In the insurance regulatory area, the parallel would be there's a good likelihood we're going to see, some form of dual regulation that increases with the federal charter probably not preempt and remove all state charters, and so, in the same way you've got a question of jurisdiction.  Whether it's a federal or a state court, there will have to be rules that determine which one you apply under.

Now, if you look at banking as an example, where you've got dual charters, there, it's essentially a matter of discretion by the regulated entity which charter do they want.  And oftentimes, if you look back at the history of banks, they will be state chartered, then they'll move to federal charter, and then they'll move back to state chartered, depending on the regulatory climate.

So that's not happening here in the class action, but there are different models that you could do in terms of that sorting out question of which level you regulate it at.

MR. GREVE:  Could I just ask one sort of quick follow-up question?  As I understand these bills, and this may be another one where I'm slightly behind the curve on the various bills, but it's my understanding that certain claims are excluded from the coverage of this bill.  That includes securities claims under the Private Securities Litigation Reform Act, and I believe it excludes internal governance cases, that is to say, sort of there's implicit protection for the Delaware courts here.

Other than that, is there anything to which this bill doesn't apply?  And, conversely, is there some surprising application that it might have?  And, again, I don't know whether these provisions now are in or out as we speak, but in some versions there was an inclusion of mass tort claims that are not, technically speaking, class actions either under federal or state law.  And the big enchilada out there, as I understand it, is the question are the asbestos claims affected?

MR. GASAWAY:  I'm not clear on that.  I do think that, if I've got the right bill on top here, mass claims are in the Senate version and a mass claim is basically a claim with more, presumptively, I guess, more than 100 plaintiffs.  I can think of two different types of mass claims, the 17200-type claim in California, where you don't necessarily have class certification, and then the very numerous joinders that you sometimes get in West Virginia, Mississippi, and elsewhere.

I believe that it is, as I read it, intended to pick up both of those, and I believe it's in the final bill, but I'm not entirely confident of that.

MR. TAYLOR:  It would be a pretty bad omission if it weren't, would it not?

Could I ask a question of my colleagues?  I'm imagining what an opponent of the bill would say, in response to some of the points being made, in particular, Rob, when you said that the business community seems pretty unanimous in preferring to handle these cases in federal rather than in state court, why doesn't that constitute a statement that consumers would be better off in state courts?  I don't think you mean that, but I'd love to have it clarified.

MR. GASAWAY:  I think that, over the long term, and this gets to Jason's point about risk management, business is best served by certainty and stability in the rule of law.  I think that business can handle laws that substantively are more or less “pro-consumer.”  But I think it's much more difficult to handle laws that are capricious.

And the perception is that in federal court you get a range of decisions, some better, some worse, but that the worst of the worst, the very tail end of the distribution is cut off--that is, that the worst, most capricious, most ultimately unjust sorts of decisions that can occur and go unremedied in state courts do not occur in federal courts.  What this bill really is intended to do is to cut off that unjust tail.  Those unjust suits hurt business directly and hurt consumers indirectly.  So both consumers and business should support the legislation.

MR. McINTOSH:  Stuart, let me amplify one other more an economist point than a legal point.  If you view what's happening here is a calculation by businesses providing a product or a service on the ultimate costs of their product in different geographic areas, the implementation costs of that far outweighs for them uniform costs that Rob pointed out that may be higher than in some of those jurisdictions.

So it's likely that the consumer is going to end up benefitting in two ways:  One, there will be a likelihood of a standard that is very beneficial to the consumers being federal or standards that would be reached by the federal courts, but in addition that uniformity lowers the overall cost of the product and services to them.

QUESTIONER:  You sort of got at what I was trying to get at a second ago when you talked about the underlying reason for this is some sort of uniformity of judgments.  But this whole bill, is the basis of this bill sort of an anecdotal crisis?  Are there any facts or figures that have quantified how many of these local state juries and what kind of judgments they put out?

And the other question is, when the bill passes, what are some unintended consequences that you could imagine springing from this bill that conceivably could be as onerous as the present system?

MR. McINTOSH:  To go to your second question first, the unintended consequences that I see are a problem are the uncertainties of what the provisions mean.  The goal is to get uniformity and predictability, but we could be unleashing up to a decade's worth of lawsuits while that is being ironed out in the federal courts because of the way the bill has multifactors and fairly subjective tests under those factors.

To digress, but to make the point, when I was in Congress, we were arguing for changes to the Delaney Rule.  I don't know if any of you remember that.  It was a rule, essentially, in regulation that said if you have any amount of a carcinogen, it can be regulated rather than--de minimis amounts as well.

The business community had been fighting for a long, long time agriculture in particular, to get that changed.  Finally, Congress, with a Republican Congress, was going to do it.  And the way it passed because you had to, ultimately, even in the House, you've got to have some bipartisanship to go along with it, was Henry Waxman added a provision that all of the existing approvals for various pesticides would be reviewed, a very little innocuous provision in there.

I remember looking at this and saying, "I'm not sure this is a good deal."  Everybody in the business community because they'd been working for a long, long time on Delaney Clause reform, was in favor of it and said, "Sure.  If that's what Henry wants, we'll give it to him, as long as we get our reform."  Well, then, you know, 10 years later, they're still fighting out, in a lot of those cases, the review of those substances.

Your question is a good one and a perceptive one.  There can be, in the compromise process, things that people don't think of as that significant that, after the fact, end up governing how the act is applied.

MR. TAYLOR:  As to whether it's an anecdotal crisis, I think maybe it is, but that that's not an indictment of the need to solve it.  I'm looking at a policy report, dated March 2003, on the act by Walter Dellinger, who is for the act, and it's very well argued and a good piece of carefully researched advocacy.

And I was struck by the fact that when he's listing horrible cases, he introduces them by saying, "According to press reports, numerous other class settlements that have been approved by state courts have been criticized for their one-sided (i.e. lawyers-only) benefits," and then there's a long list, and it's a pretty compelling list.

But I think this goes back to the point I attributed earlier to Lester Brickman.  I don't think there are any data on class actions, that I'm aware of, that would tell you one way or another whether there's a crisis beyond an anecdotal crisis.  That's part of the problem that I wish this bill was going to solve, but it doesn't seem that it is.

MR. GREVE:  Just to add quickly to this because those kinds of empirical matters are part of what AEI's Liability Project is supposed to do.  The data are lousy, and the studies of the data are not much better, in particular, the data from the state courts are very, very incomplete so that all you have is very impressionistic.

That having been said, there are some studies, there's a Rand study from, I believe, 1998, as to the outcomes and the application of class action procedures in state and federal courts which comes to the conclusion, to put it gently, that, by and large, there is less randomless and arbitrariness at the tail end of Rob's description.  There's some fairly good evidence, although not I wouldn't call it complete and systemic.

There are some interesting and I think highly suggestive econometric studies of state court bias which, indeed, find that it is quite pronounced and most pronounced in cases where state courts are elected.  The data now are a little ancient, but Eric Helland and Alex Tabarrok, who did that original study, I believe are working on more recent data itself.

I'll just add this, and this is sort of total ad lib, but it seems to me that what we really are hearing about here is a matter that everybody, more or less, agrees on, which is that corporations will do better in federal courts, and plaintiffs lawyers will do better in state courts.  And now the question is what belongs where?

I have never seen anybody seriously question that.  And that is, in fact, I mean, if you look through the literature that comes from EPMA and from other groups, if you look through the Law Reviews, that is the basic bone of contention.  That is what they say straight out--federal courts aren't anti-consumer plaintiffs, they're pro-corporate.  We get better results in state courts.  That alone ought to be a sufficient reason for leaving the system in place as it is.

So, on that basic dimension, where the evidence is most anecdotal there is, nonetheless, agreement on the facts or factoids.

We'll take one more question.

QUESTIONER:  Hi.  I'm Cathy Shaw from National Public Radio.  And maybe since it's coming to the end, it's a good time to summarize.

I would like to ask the panel members that want to, to summarize in a way that will help a less-technical audience understand the basic importance of this legislation, the things that it can accomplish and the reason why that's important.

MR. GREVE:  A terrific question: you've done much better than I could have done so I invite all of our panelists to take a whack at it, please.

MR. GASAWAY:  I think it's important because I do think that it will cut off some of the most egregious cases in terms of the rule of law being violated in jurisdictions other than federal court.  I think that's what this bill is all about.  I don't think it's about trying to take away consumer rights, and I don't think it's about trying to cut back on meritorious class actions.

I think there has come to be a realization that the class action criteria have to be fairly discretionary, and, because of that, the question of who is exercising the discretion becomes very important.  Many, indeed most, state court judges do it responsibly, but some do not.  I think the interests of uniformity, predictability, and justice are all going to be served by the enactment of the legislation.

MR. McINTOSH:  I guess I would say the most important thing, and it's a modification on what Michael was saying, is that we may assume that federal courts are better for corporations and state courts are better for plaintiffs, but that may not be the case where the state court is in the state where the corporation is located and very influential.  Eli Lilly, in my home state of Indiana, is a well-regarded corporate citizen, and in the state courts in Indiana, could presume to do at least as well as it would in a federal court out in California or somewhere else.

The reason I mention it, in those terms, is I think the real benefit of the statute is a restoration or at least an affirmation of the true purpose of that diversity clause in Article III, that what we're trying to do is get to the right balance or at least a most neutral judge in these cases where you can have interests that are geographically different.

And what we're saying here is we're going to move them into the federal courts where we think there is less systematic bias than in a state court where you've got that type of diversity that is otherwise being defeated in the class action proposal or as it stands today.

MR. TAYLOR:  I'll tackle it at a very general level.  I think there is broad consensus in Congress, among Democrats as well as Republicans, on a couple of premises: One, we need the class action device to deter various forms of corporate misconduct, particularly when the damage to any one of the many people who are harmed is so small that it isn't worth that person's interest to sue so we have to have class actions.  Second, sometimes, perhaps often, plaintiffs’ lawyers use the class-action device in ways that are primarily designed to benefit the lawyers not the consumers, most notoriously where consumers get a bunch of coupons that are almost worthless, and the lawyers get millions and millions of dollars for having brought the suit.

The abuse of the system of that kind is most obviously facilitated when the plaintiffs’ lawyers can shop among the 50 states and the thousands of counties for sympathetic state judges who may help them do what they want, whether for ideological reasons or perhaps because the judges are bought and paid for with campaign contributions.

I think there is also a fair consensus that this is less of a problem in federal court, that federal judges, on average, are probably of higher quality than state judges, partly because they have life tenure, and they are less likely to be in the pocket either of plaintiffs’ lawyers or defendants, in part, because they don't campaign for election.

I think that creates a fairly broad consensus that a lot of these cases, particularly cases with national impact, are better off in federal court than in state court.  The basic thrust of this article is to push more of them into federal court.  And I think the reason it's going to pass with substantial democratic support, is that there is a fairly broad consensus for doing that much, but the consensus stops there, in terms of all of the finer points we've been talking about as to how many you should push into federal court, what the rules ought to be and so forth.

So this is a modest step, but a step in the right direction which I think you'll find 60 or 70 members of the Senate will ultimately conclude.

MR. GREVE:  It is the position of the Washington Post that this bill does not go remotely far enough.  It's the rough consensus of this panel that this is pretty good, as these things go.  Once again, an event at the American Enterprise Institute has ended up far on the left of the Washington Post editorial page.  You may take that for what it's worth.

I thank you all for coming, and please join me in thanking our participants for a very stimulating and educational debate.

[Applause.]

[Whereupon, the proceedings were adjourned.]