Federal Laws Addressing Liability

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Class Action Fairness Act, S. 5

On February 18, 2005, President Bush signed the Class Action Fairness Act, S. 5. The core part of the Class Action Fairness Act would allow defendants to remove what were formerly nondiverse state law class actions if minimal diversity exists (i.e., one member of the class and one defendant are citizens of different states), the class involves more than 100 people, and the aggregate amount in controversy exceeds $5 million. This effectively would foreclose the fraudulent joinder of local defendants, such as retailers or distributors, to defeat complete diversity and prevent removal. The bill also would foreclose the tactic of pleading damages of less than $75,000 per class member to block removal.

The Act provides for two exceptions to federal jurisdiction - one discretionary and one mandatory. The Act grants discretion to federal courts to decline jurisdiction over class actions in which more than one-third, but less than two-thirds of the proposed class members, and the "primary defendants" are citizens of the forum state based on certain factors. The Act requires federal courts to decline jurisdiction when either of two tests is satisfied. First, federal courts must decline jurisdiction where (1) more than two-thirds of the plaintiffs are from the forum state; (2) at least one defendant whose conduct forms a "significant basis" for the claims and from whom "significant relief" is sought is a citizen of the forum state; (3) the principal injuries occurred in the forum state; and (4) during the three-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons. Second, federal courts must decline to exercise jurisdiction over any class action in which two-thirds or more of the proposed class members and the primary defendants are citizens of the forum state.

The Act also provides a Consumer Class Action Bill of Rights that protects class members from abusive settlements. This would include closer judicial review of non-cash settlements; protection for class members from abusive settlements in which they actually pay, rather than receive, money to cover legal fees; assurance that all class members get equal treatment; and more understandable notification to class members regarding settlement. In addition, a lawyer's contingency fee in coupon class action settlements would be determined based on the value to class members of coupons that are actually redeemed, rather than the total award.