The class action bill recently signed into law by President Bush expands federal jurisdiction over class action lawsuits by creating major procedural changes in the Federal Rules of Civil Procedure.

The act establishes federal jurisdiction over class actions when plaintiffs as a group seek more than $5 million and have “minimal diversity” – where at least one plaintiff and one defendant are citizens of different states.

Previously, a class action filed in state court could only be removed if the amount in controversy per plaintiff was greater than $75,000 and complete diversity existed between all plaintiffs and all defendants.

Victor Schwartz, general counsel for the American Tort Reform Association in Washington, D.C., said plaintiffs’ attorneys would often add a home-state defendant to keep a case in state court. For example, in a pharmaceutical case, the plaintiff might name the local pharmacy where he or she purchased the drug.

“It was almost impossible to prove fraudulent joinder,” he said.

However, under the new law class actions can only remain in state court if:

• two-thirds of the plaintiffs and a defendant all reside in the same state;

• the plaintiffs are seeking “significant relief” from the in-state defendant; and

• the defendant’s conduct was a “significant basis” for the plaintiffs’ claims.

This exception will likely lead to a lot of litigation, said Boston defense attorney Donald R. Frederico, because “significant” is not defined.

This means “a lot of parties are going to be fighting over [its] meaning and interpretation,” predicted Frederico, a partner at McDermott Will & Emery.

Another area in dispute is the legitimacy of those cases filed just prior to the bill’s signing on Feb. 18, said Anthony Sabino, Professor of Law at St. John’s University Tobin College of Business in New York.

The legislation received bi-partisan support, passing 279 to 149 in the House and 72 to 26 in the Senate.

But not surprisingly, lawyers strongly disagree about its impact.

Schwartz praised the new law, claiming that state judges, who are often elected, “were certifying classes that shouldn’t have been certified.” The switch to federal court will create a more neutral setting, he said.

Frederico agreed.

“Before, state courts were prone to certify nationwide classes, and any time an industry was targeted by class action lawyers, there were likely to be parallel class actions going on at the same time,” he said. “I think [the act] will decrease the number of class actions.”

However, New Orleans plaintiffs’ attorney Russ Herman believes that the jurisdictional changes will deprive consumers of access to the courts.

In an “attempt to put the trial lawyer out of business,” Congress has made “a horrible mistake for middle America,” he said.

And Sally Greenberg, Senior Counsel at Consumers Union in Washington, D.C., said the act has “radically transformed the consumer protection system. Plaintiffs’ attorneys will [still] attempt to bring their cases in federal court because they have no other option, but it’s going to be much harder.”

A Matter Of Interpretation

Plaintiffs’ lawyers like Greenberg foresee possible problems with federal courts attempting to interpret state law.

“Federal court judges are much more comfortable with federal law,” she said. “State courts are geared to interpret state unfair and deceptive practices acts or environmental laws.”

Further, according to Greenberg, no federal circuit court has ever certified a multi-state consumer class action, while six circuits and 26 U.S. District Courts have expressly denied certification.

This suggests that the transfer of cases to the federal system “creates a more favorable climate for defendants” and will greatly decrease plaintiffs’ chances of obtaining relief.

The addition of class actions will also over-burden the already short-staffed federal judiciary, she said.

But Frederico dismissed these concerns. “The federal bench is as highly qualified to handle class actions as the state courts,” he said.

Other Major Changes

Another major change under the new law is that federal judges are now required to approve class action settlement agreements and review plaintiffs’ attorneys’ fees.

According to defense attorneys like Schwartz, the act changes courtrooms but doesn’t take away consumers’ rights.

“If there is a plane crash or a hotel fire or another situation where the facts in common outweigh the facts not in common, then a federal court will certify the class,” he said.

In his view, many consumers were frustrated with some aspects of the previous system, and the act addresses those concerns with changes related to settlements and the payment of class attorneys.

Under the new law, class action settlements that result in non-cash payments to plaintiffs (typically coupons) must now be approved by a court. The act also provides that attorney fees should be based on the value of coupons actually redeemed, not the total amount issued by the defendant.

Because the time period for redemption could last for years after a settlement, this will discourage plaintiffs’ attorneys from accepting a coupon deal.

The law also provides that in non-cash, non-coupon settlements such as a health care fund for the plaintiffs, lawyers will be paid for the actual hours worked on the case.

But plaintiffs’ lawyers say the focus on the unscrupulous behavior of a few attorneys in non-cash settlements is misplaced, because the defense bar has been the stronger proponent of these kinds of arrangements.

“What we hear from plaintiffs is that defendants are the ones really pushing hard for coupons, knowing that most people are not going to redeem them,” said Greenburg.

And Sabino, who also practices at Sabino & Sabino in Mineola, N.Y. and has represented both sides in class actions, noted that the new law doesn’t bar coupon settlements outright.

“With a good claim and a good class and a coupon settlement that gives value to the injured parties, the court will approve it,” he said.

Questions or comments can be directed to the writer at [email protected].