Cutting Class: CAFA Creates a Host of Considerations for In-House Counsel

Looking to weaken the field of magnet jurisdictions and dial down the heat of judicial hellholes, five years ago last month the Class Action Fairness Act of 2005 (CAFA) took effect, creating a federal forum for most significant class actions, which previously were often brought--and would remain--in state court.

To the extent CAFA's primary goal was to move significant class actions out of state courts, the class action bar says it has worked out as Congress intended.

Although five years is short to form a final judgment on the act's effectiveness, the Federal Judicial Center has tracked federal filings of diversity of citizenship class actions--cases plaintiffs could have chosen to file in either state or federal court.

In an interim release comparing data from CAFA's first two years, from 2005 to 2007, to the immediate pre-CAFA period beginning in 2001, the FJC found plaintiffs filed as original proceedings in federal courts an average of roughly 300 more cases per year--an increase to 34.5 such filings per month from the previous average of 11.9 per month.

The study's authors emphasize, however, that they can't say whether CAFA shifted cases from state to federal courts.

Beyond the numbers, the act has raised new questions, created new disputes and shifted attention to new points of focus, as plaintiffs lawyers continue to adjust and adapt their practices.

"CAFA has been a qualified success," says Archis Parasharami, co-chair of Mayer Brown's consumer litigation and class action practice. "If the goal was to get more cases into federal court that previously may have been in state court, that is happening--but not as much as people anticipated, and at a greater cost to the parties."

Side Effects

The modest increase of diversity class action filings, spread among the federal courts, isn't enough to make a huge impact or strain federal court resources. Tom Willging, an author of the ongoing FJC study, says there's no evidence things will ramp up.

"Things seem to have settled," he says. "It may be that CAFA made changes that have become irrelevant to the way people are practicing."

One aim of CAFA was to control personal injury class actions, for instance, but Willging notes that plaintiffs lawyers, in response to CAFA and other developments, seem to be adjusting and filing personal injury cases in forms of aggregation that are not class actions. Another reason the impact may be less visible than predicted is CAFA's $5 million threshold--defendants can remove cases to federal court once it's determined the amount in controversy in the case is $5 million or more, an amount many plaintiffs simply cannot meet.

Looking at the impact on the flip side--filings in state courts--one study suggests another way plaintiffs lawyers are adjusting. Steven Gensler, a professor at the University of Oklahoma College of Law, looked at pre- and post-CAFA filings in Oklahoma, a state that CAFA proponents cited as a target of CAFA because of its reputation as an abusive jurisdiction that was friendly to class actions.

Gensler, who worked with the FJC to design the study, found a measurable reduction in Oklahoma filings post-CAFA, which would suggest those filings were migrating to the federal courts in Oklahoma. But that was not the case.

"Initially, it would seem to suppose that CAFA is having the effect of moving the class action docket from state to federal courts--at least until you start looking at the federal court data for Oklahoma," Gensler says. "If CAFA was having a direct docket transfer effect, lawyers who would have filed in Oklahoma state court would instead file in the Western District of Oklahoma, but it turns out that Oklahoma's federal court filings were sinking at the same time."

One hypothesis is that the plaintiffs bar realized that if they file a national class action in a state court that has liberal class certification standards, the defendant will almost definitely remove to the federal court. But the Western District of Oklahoma falls in the 10th Circuit, which is more stringent about class certification, Gensler says.

So to avoid the uphill battle of getting class certification in the 10th Circuit, smart plaintiffs lawyers are filing directly in federal courts in order to choose their jurisdiction, also avoiding the 2nd and 7th circuits, two other jurisdictions known for being more conservative in certifying classes. Meanwhile, filings in the 3rd, 9th and 11th circuits--all known for more liberal certification standards--have skyrocketed.

"Even though national filings are up, post-CAFA there's a huge disparity between the circuits," Gensler says. "At the end of the day, it may be that CAFA just changed the level at which lawyers play the forum-shopping game."

Price is Right

One factor in that forum-shopping game is what Parasharami calls the No. 1 issue under CAFA for business and plaintiffs alike: determining whether the $5 million "amount in controversy" requirement is met. This area of CAFA has generated the most litigation, Parasharami says.

"The circuits have reached completely different sets of views when the plaintiff affirmatively says that damages are less than $5 million in the complaint," he says.

For instance, the 3rd and 9th circuits, those burgeoning federal magnet jurisdictions, say that when plaintiffs claim their complaint is worth less than $5 million (as opposed to cases where plaintiffs make no claim of the amount at stake), defendants must prove "to a legal certainty" that the amount at issue is more than $5 million. Some corporate defense lawyers argue such a high bar to federal court removal goes against CAFA's purposes.

In contrast, elsewhere defendants must prove their claims exceed $5 million to "a preponderance of the evidence," a much easier standard to meet.

Moreover, many defendants don't want to be put in the awkward situation of fighting to prove that the plaintiffs have hefty claims.

"The defendant is essentially announcing to the world that, at least if certain things are proved to be true, then there's a lot of money in this case," Parasharami says. "Companies are between a rock and a hard place."

Legal Co-Evolution

In a similar loophole, the defense bar must also navigate the "fail-safe" class actions many plaintiffs lawyers have turned to in a bid to avoid removal to federal court. In a fail-safe class action, class members are defined by the merits of the claims--such as "all consumers defrauded" by a certain company.

"What's problematic is that to remove, you have to prove in essence that the violations took place, because if not, then by definition the consumer or employee isn't a member of the class," Parasharami says.

The defense bar, of course, is developing strategies of its own. In 2008 a federal court allowed the defense in a wage and hour case to estimate a putative class of all non-exempt employees, such a broad outer boundary that it basically removes any admittance of liability.

It's yet to be seen whether any of these adaptations to CAFA will create issues of their own that may negate the act's benefits. People studying CAFA emphasize the jury's still out on whether it achieved its purposes. That said, although CAFA did create new issues for plaintiffs and defendants alike, it has so far proved to be a moderate success.

"I would give it between a B and a B-plus," Parasharami says. "Most of the related problems are not related to the drafting of the statute. My sense is that the courts will continue to play a major role in how this plays out--the Supreme Court to date has issued nothing on the statute, and there are three to four conflicts among circuits [on CAFA issues]."

Contributing Author

Melissa Maleske

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