Within weeks of being sworn in to his second term, President George W. Bush signed the Class Action Fairness Act. The new law, which breezed through both houses of Congress, was viewed as a key pro-business issue.
In essence, the act changes the rules for class-action lawsuits, in which large groups of people with similar claims prosecute their claims jointly in one court case. The new laws are designed to shift many class actions from state courts to federal courts, where conditions are seen as more favorable to businesses facing suits.
Smart Business reviewed the new law with Jonathan A. Loeb, a partner and co-chair of the business litigation department of Alschuler Grossman Stein & Kahan LLP.
Why are class action lawsuits such a problem for businesses?
Class actions were intended to promote efficient resolution of claims in cases involving multiple parties with similar claims, and to avoid repetitious litigation and inconsistent judgments. However, class action litigation is a departure from the manner in which we typically litigate because representative parties litigate on behalf of absent class members. Ordinarily, the class member who is the original plaintiff retains control.
Class actions, therefore, often deprive defendants of the ability to fully and effectively litigate every issue that might otherwise be litigated in an individual case because the focus is on issues common to all class members.
The result is that businesses often face claims involving substantially more money — because more plaintiffs have joined in making the claim — but are often denied the opportunity to litigate to the extent they otherwise would in an individual case.
Finally, we have a system where, until recently, some state jurisdictions were notorious for being very friendly to plaintiffs and awarding large judgments.
How does the new law benefit businesses?
It will be easier for businesses to move a case from state court to federal court. Class action suits with 100 plaintiffs or more, with parties from different states and damages estimated at more than $5 million, can now be removed to federal court unless they fall into a few limited exceptions.
The law did not substantively affect mass tort actions or the ability of state courts to continue handling actions where there are fewer than 100 plaintiffs.
Why do businesses prefer federal court?
Under federal court rules, it’s easier for judges and more likely for judges to grant a request from defendants to throw out the suit or parts of the suit prior to trial in what’s called summary judgment rulings.
Plaintiffs prefer state courts because only six jurors hear federal civil cases, and their decision must be unanimous. In most state courts, a case can be won if only nine out of 12 jurors agree. That’s perceived at being easier to accomplish.
Finally, judges generally have to give permission for a class action to continue. Federal courts have been more restrictive than state courts. The standards are often very similar, but seem to be more rigorously applied by the federal courts.
What protections does it provide?
The protection the act provides for businesses are perceived to be very great. There are a lot of issues yet to be litigated, and the perception may not bear out to be true. While the business lobby very much pushed for this legislation, because there are unresolved issues, it’s too soon to conclude it will be a slam dunk victory.
What steps should executives who run companies take to prepare for this law?
There’s not much they can do because the law is not applied retroactively. However, there are a few circumstances where it’s beneficial for businesses from a retroactive standpoint.
Where a plaintiff fails to name a known defendant and then seeks to later add them to the lawsuit, that type of amendment would not relate back to the original filing date and would be covered by the act. That may give the opportunity to remove a lawsuit to federal court.
Will this add or reduce costs for businesses being sued?
It’s expected to reduce costs for businesses and for consumers who purchase goods and services from the companies being sued in class-action lawsuits. The act is designed to reduce litigation costs and eliminate or reduce the tort tax, which is an implicit cost added to goods and services by companies faced with class-action lawsuits.
The jurisdictional changes will reduce costs for businesses by enabling them to get cases into federal courts.
Another provision of the act will also benefit businesses because it will deter lawyers from bringing weak lawsuits. It is generally the weaker cases that result in coupon settlements.
Previously, lawyer fees were based on the total amount of coupons issued. The act now requires that any award of plaintiff’s attorney fees attributable to the value of the coupons must be based on the number of coupons actually redeemed as opposed to the value of all coupons available.
Jonathan A. Loeb is a partner and co-chair of the business litigation department of Alschuler Grossman Stein & Kahan LLP. Reach him at [email protected] or (310) 255-9179.
