Plaintiffs Find Loopholes In Class Action Fairness Act

When President Bush signed the Class Action Fairness Act into law Feb. 18, saying it "marks a critical step toward ending the lawsuit culture in our country," Republicans and Democrats alike applauded after three years of intense debate in Congress about the rights of businesses and consumers. It remains to be seen, however, whether that temporary bipartisan bonhomie was premature.

Some legal experts believe the legislation will end the plethora of multi-state class action lawsuits in so-called "judicial hellholes," such as Madison County, Ill., and Barbara County, Ala., where juries return huge verdicts and judges approve settlements that are favorable to the plaintiffs' lawyers but don't leave much for class members.

Others are doubtful, arguing the Act is going to present little more than a speed bump for plaintiffs' lawyers.

"It is not going to have that much of a negative impact from our perspective," says Jim McHugh, a partner who heads the class action department at The Beasley Firm .which markets itself as Philadelphia's premier catastrophic injury firm. "The federal courts are going to be the big players, but if you want to be in state court in mass torts, you still should be able to secure jurisdiction there under the Act."

Even the Act's framers agree that the plaintiffs' bar will not be completely deterred by the legislation.

"Plaintiffs' lawyers are very smart people and they've devised ways in the past to get around what they view as roadblocks and I'm sure there will be efforts to do that. We'll just have to see what happens," says Stan Anderson, chief legal officer of the U.S. Chamber of Commerce, who led the business coalition efforts to promote the drafting and passage of the bill.

Keeping It In State

The most significant change the Act creates is forcing more multi-state class actions into federal court, which are considered fairer to corporations.

"You feel that federal judges are more equipped to handle the types of complex issues that are involved in these types of cases," says Jeff Kelsey, managing director of litigation for Federal Express Corp. "In the state systems, quite frankly, you don't always have that comfort level with either the trial court or the appellate court."

Plaintiffs' attorneys want to keep class actions out of federal court because it's usually cheaper to try a case in state court and because juries in a local community are more likely to be sympathetic to their clients.

"If I have a Philadelphia plaintiff who was hurt at the navy yard, Philadelphia folks should be thinking about that case," McHugh says. "It shouldn't be farmers out in western Pennsylvania who are involved in that decision."

Under the Act, federal courts will have jurisdiction over any class action in which there are more than 100 class members and more than $5 million at issue, so long as at least one defendant and one plaintiff are from different states. Under the prior rule, if any plaintiff and any defendant were from the same state, then the case couldn't be heard in federal court under diversity jurisdiction

Finding Loopholes

Plaintiffs' attorneys can get around the Act by breaking up larger class actions into smaller ones. If a class has 99 people, instead of 100, theoretically plaintiffs could file two class actions and stay in state court, according to Stanley Parzen, partner at Mayer Brown Rowe and Maw, who deals with financial class actions and mass actions both in state and federal courts. But McHugh doesn't see this as a problem.

"The overwhelming majority of large class actions are already in federal court," he says. "I've never heard of 100 cases being tried all at the same time. It's almost as if it [the Act] doesn't apply to anything that could actually happen as far as I can tell."

Another option for plaintiffs' attorneys is to limit the class members to only or mostly citizens of the state where they file the case.

"If they file a suit in Illinois, only on behalf of Illinois residents, then that will stay in the state court," says Robert R. Ambler Jr., a member of Womble Carlyle Sandridge & Rice, who deals with securities and consumer class actions and corporate control litigation.

Another strategy is constructing a class with two-thirds of the plaintiffs from the state where a corporation is located and sue. The definition of a corporation's location is either its principle place of business or where it's incorporated. In a heavily populated state such as California it would be very easy to construct such a class.

Under the Act, a federal district court may decline to exercise jurisdiction over a class action in which more than one-third but less than two-thirds of the class members and the primary defendant are citizens of the forum state. "You sort of define your class by state," Parzen says. "The plaintiffs' attorney has the ability to do that by how they define the class."

If plaintiffs' attorneys stipulate that there's less than $5 million at issue, they also can keep the case from being moved to federal court. That is unlikely to happen, though, because most class action plaintiffs' lawyers aren't interested in pursuing such a small amount of money. In addition, the lawyers may not be as afraid of the federal courts as the defense bar might think.

Federal Forum Shopping

Legal experts say that federal forum shopping by plaintiffs' attorneys is a likely outcome of the Act.

"The southern district of New York may be a place where folks look because that does bring in a lot of people that ordinarily would be hearing state court cases," McHugh says. They are also looking at federal jurisdictions in Los Angeles, Chicago or Philadelphia where the cases may be concentrated "because you're looking to have a representative jury."

Parzen agrees. He believes that plaintiffs' attorneys also will look for a federal court that might be more sympathetic to certifying a class that could potentially have multiple state laws at issue.

"In a securities context for instance, in the 4th and 5th Circuits if you have individual representations and the plaintiff has to show reliance, that individual issue is very likely going to doom a class action in those circuits without any doubt whatsoever," he says. "In the 2nd circuit, it's not quite as clear. You might be able to do it anyway."

Federal cases, however, are much more costly to both plaintiffs and defendants because expert depositions aren't normally necessary in state court.

"Corporate America ordinarily hires top experts in their field, and I'm sure that the cost of having them deposed, preparing them before trial is not going to be inexpensive," McHugh says. "It's triple the cost associated both with regard to lawyers fees and expert fees."

In the end, much remains to be seen as to how the Act will play out. Plaintiffs' attorneys are sure to be champing at the bit for their next move, while the Act's framers are now on the sidelines.

"There certainly are some carve outs that were negotiated through a period of time and so we'll have to see whether those carve outs are used inappropriately or whether the trial bar devises some other strategy to deal with the passage and the congressional intent here," Anderson says.

While plaintiffs' attorneys may no longer be able to file as many large class actions because of the Act, they don't see it slowing down their efforts. But the stakes certainly will be higher when cases do go to federal court, and ultimately corporate defendants are going to spend more money defending themselves in federal courts where stricter rules come into play.

Ultimately, the courts will decide the Act's fate.

"As with any new law that is going to make a change in how things have happened in the past there are going to be items that are going to be litigated," Kelsey says. "We're just not going to know how some of it is going to be interpreted until somebody goes to court and writes a brief and we get decisions."

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