Class Action Fairness Act:

Copyright 2004 Dechert LLP. All rights reserved. MaterialsDelay have been abridged from Is laws, courtIn decisions, the and administrative Details rulings and should not be considered as legal opinions on specific facts or as a substitute for legal counsel.

by Carolyn H. Feeney, Peter M. Ryan, and Will W. Sachse Dechert LLP

The Antitrust Practitioner Vol. 2, May 2005

Originally published in The Antitrust Practitioner, a publication of the American Bar Association Section of Antitrust Law’s Civil Practice and Procedure Committee, Volume 2, May 2005. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. www.dechert.com The Class Action Fairness Act: Delay Is In the Details Carolyn H. Feeney, Peter M. Ryan &Will W. Sachse1 he newly-enacted and long- JURISDICTIONAL DISPUTES gregate.”15 This subject will undoubtedly awaited Class Action Fairness The Senate Report confi dently asserts require at least “limited discovery” and 16 T Act of 2005 aims to promote that “the jurisdictional standards of [the “some fact-fi nding.” “prompt recoveries for class members Class Action Fairness Act] will simplify— The Senate Report states that “juris- with legitimate claims” and to “benefi t not complicate—a court’s jurisdictional dictional determinations should be made society by encouraging innovation and inquiries” and dismisses as “absolutely largely on the basis of readily available in- lowering consumer prices.”2 But will groundless” any contention that the Act formation,” and suggests that the parties 17 the Act really result in speedier and less might “complicate and delay the fi nal enter into “factual stipulations.” Op- expensive resolution of class actions, resolution of jurisdictional inquiries.”6 posing parties, however, will not always as Congress intends? Or will it spawn The Report notes that the Act’s liberal stipulate to jurisdictionally dispositive 18 delay and greater cost? Unfortunately, diversity provisions will eliminate “time- facts. Without fairly extensive discov- the latter seems more likely. The already consuming” fraudulent joinder disputes ery, in many cases it simply will not be overburdened federal court system will and that it will be “much easier” to possible to determine with any degree of not easily absorb the demands of ad- determine the amount in controversy confi dence even the approximate number ditional complex class actions. The Act because individual claim amounts can and citizenship of “the members of all will change—but not eliminate—dis- be aggregated to reach the $5 million proposed plaintiff classes in the aggre- putes over the propriety of federal court jurisdictional threshold.7 gate.” jurisdiction. And the new legislation At the same time, however, the Act The Senate Report asserts that may also make class action settlements will create a host of new and different— “[a]llowing substantial, burdensome more time-consuming, expensive and but perhaps equally fertile—grounds for discovery on jurisdictional issues would diffi cult. All of these factors may lead to litigation. Indeed, in some cases federal be contrary to the intent of these provi- further delay and increased costs. jurisdiction may turn on the meaning of sions to encourage the exercise of federal jurisdiction over class actions.”19 In other OVERBURDENED FEDERAL COURTS such inherently vague terms as: ◆ “the primary defendants,”8 words, the harder it is to determine the The Act will enable federal direct number and citizenship of all proposed 9 purchaser claims and related state indirect ◆ “distinct nexus,” class members, the more the drafters purchaser and consumer protection law 10 ◆ “substantially larger,” thought the district court should simply claims to be adjudicated together, in exercise jurisdiction. ◆ “substantial number,”11 one forum. While this concentration But this will not necessarily hap- 12 could in theory result in administrative ◆ “signifi cant relief,” pen. Although the Act itself does not effi ciencies, those effi ciencies may never ◆ “signifi cant basis,”13 and assign burdens of proof, the Senate materialize if federal courts lack the time Report explicitly advocates a presump- ◆ “principal injuries.”14 and resources to manage their increased tion of jurisdiction, stating that “it is the caseloads effectively. Even before the Parties will undoubtedly clash over the intent of the Committee that the named Act’s passage, more than 5000 class meaning of these terms, none of which is plaintiff(s) should bear the burden of actions were pending in federal courts defi ned in the Act. demonstrating that a case should be 3 around the country, and new class Ambiguities aside, determining juris- remanded to state court (e.g., the burden actions were being fi led at the rate of diction under the Act may be a complex, of demonstrating that more than two- more than 2000 a year.4 Of the more drawn-out process, requiring parties thirds of the proposed class members are than 286,000 civil cases pending in and courts to grapple with the contours citizens of the forum state).”20 How are federal courts, nearly 36,000—12.6 of the asserted claims, the membership courts to reconcile this with the long- percent—had been pending three of the proposed class, and the relative standing principles that federal courts 21 years or longer.5 Without additional culpability and importance of the defen- are courts of limited jurisdiction, that a resources, the backlogs can only be dants at an early stage of the litigation. presumption against federal jurisdiction Indeed, one linchpin of the required exists,22 and that courts must strictly con- expected to increase. jurisdictional analysis is an assessment of strue statutes conferring jurisdiction and the citizenship and number of “members resolve any doubts against jurisdiction?23 of all proposed plaintiff classes in the ag-

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The Antritrust Practitioner Page 11 Volume 2, May 2005 Other jurisdictional provisions may not be readily accessible to the settling One effect of this change will be to also contribute to delay. For example, defendant. make early coupon settlements exceed- the Act specifi cally exempts class action If a settling defendant needs addi- ingly rare, if not extinct. When negoti- defendants from the usual one-year time- tional time to assemble the contents of its ating a coupon settlement, it is impos- limit for removal.24 Thus removal may notice—as is often likely to happen—the sible to know what the ultimate rate of become possible at a relatively late stage, parties must delay fi ling the settlement redemption will be. Why would class as facts become known (or as parties are with the court. The Act requires the counsel agree to be compensated on the added and dropped) over the course of a notice to be served “[n]ot later than 10 basis of a circumstance largely beyond state court litigation. days after a proposed settlement of a class their control? They are much more likely The Act also provides for interlocuto- action is fi led in court.”30 This timing is to prefer the certainty of a fee award ry appellate review of remand decisions.25 rigid; there is no room for fl exibility. based on “the amount of time class coun- Although the appellate court must gener- The Act may result in additional delay sel reasonably expended working on the ally complete any such review within 60 not only between the date a settlement is action.” Of course, the more time they days, this time period may be extended reached and the date it is fi led with the invest, the higher the potential fee award. “for any period of time” by mutual agree- court, but also from that point forward, And so the Act reduces the incentives for ment of the parties, or by up to 10 days to the date of fi nal approval. To give the class counsel to negotiate a coupon settle- “for good cause shown.”26 appropriate federal and state offi cials an ment early in the litigation. opportunity to object, the Act provides Some might view this as a good thing. ROADBLOCKS TO SETTLEMENT that “[a]n order giving fi nal approval of Indeed, one concern underlying the Act The Act may affect the timing and value a proposed settlement may not be issued was the possibility of collusive settle- of class action settlements, drawing out earlier than 90 days after” they are served ments between class counsel and defen- the process and making them more with the mandated notice.31 Although dants. As the Senate Report noted: expensive.27 For instance, the Act’s new nothing in the Act requires courts to [T]he Committee has become aware notice provisions may lengthen the wait until the end of this 90-day period of numerous class action settlements approval process. These provisions— to direct notice of the settlement to the approved by state courts in which which apply to all class actions in members of the class, nothing prohibits most—if not all—of the monetary federal court—require each defendant it either, and courts may fi nd it the saf- benefi ts went to the class counsel, participating in a proposed settlement to est course. Otherwise, an objection by rather than the class members serve a notice of the proposed settlement federal or state offi cials could lead to an those attorneys were supposed to be on both “the appropriate Federal offi cial” amendment requiring the resending of representing. These settlements include (generally the Attorney General of the class notice, at considerable expense. many so-called “coupon settlements” in United States) and “the appropriate The Act’s restrictions on coupon which class members receive nothing State offi cial” (generally the state attorney 32 settlements may also make settlements more than promotional coupons to general) for each state in which a class more expensive and harder to reach, purchase more products from the member resides.28 particularly early in litigation. While the defendants.36 For the most part, the contents of the Act does not prohibit coupon settle- notice are straightforward—they include ments, it limits the attorney’s fees that But the Act did not condemn coupon such items as a copy of the complaint, class counsel can recover as a result. In settlements per se, implicitly recogniz- the settlement agreement, any other particular, an attorney’s fee award must ing that in some instances they can be contemporaneous agreements, and the be based on either “the value to class “fair, reasonable and adequate for class proposed or fi nal class notice. But the members of the coupons that are re- members.”37 Coupon settlements can settling defendant must also provide deemed”33 or “the amount of time class also be more economical for defendants. (1) “if feasible, the names of class mem- counsel reasonably expended working on The Act—perhaps inadvertently—makes bers who reside in each State” (or else the action.”34 If a proposed settlement them less so, by setting up incentives that “a reasonable estimate of the number of provides for injunctive relief as well as will effectively limit their availability to class members residing in each State”) coupons to class members, then the fee later stages of litigation, after class coun- and (2) “the estimated proportionate award may be based on a combination of sel have put in enough time to justify a share of the claims of such members to these two factors.35 But no longer can a substantial fee award. 29 the entire settlement.” In many in- court approve fees based on the value of stances—such as when the class includes the coupons to the defendant or the value persons or entities who purchased from of the coupons that are issued. other defendants—this information may

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The Antritrust Practitioner Page 12 Volume 2, May 2005 CONCLUSION to signifi cant portions of the proposed 32 The Act does not defi ne the term The Class Action Fairness Act will not class in the action . . . . “coupon settlements.” Would the term be construed to include, for example, necessarily lead to faster or better results S. REP. NO.109-14, at 43. a promotional offer not refl ected in a for class members or defendants. The 9 28 U.S.C. § 1332(d)(3)(D). Act may exacerbate some of the problems “coupon”? 10 Id. § 1332(d)(3)(E). it was intended to solve. 33 The Act specifi cally contemplates 11 Id. that this issue may require expert [Endnotes] 12 Id. § 1332(d)(4)(A)(i)(II)(aa). testimony. 28 U.S.C. § 1712(c). 1 Carolyn H. Feeney is a partner in 13 Id. § 1332(d)(4)(A)(i)(II)(bb). Upon the motion of any party, a court Dechert LLP’s antitrust/competition 14 Id. § 1332(d)(4)(A)(i)(III). has discretion to “receive testimony group, and Peter M. Ryan and Will 15 See, e.g., id. § 1332(d)(3). from a witness qualifi ed to provide W. Sachse are associates in the group. information on the actual value to the 16 S. REP. NO. 109-14, at 44. Janice L. Shipon also assisted with class members of the coupons that are 17 research for this article. Id. redeemed.” Id. 18 2 Act § 2(b)(3). Creative and industrious plaintiffs’ 34 28 U.S.C. § 1712(a) & (b)(1). counsel will attempt to fi nd ways 3 See Administrative Offi ce of the U.S. 35 Id. § 1712(c). around the strictures of the Act by, for Courts, Judicial Business 2004 at Table 36 example, fi ling a series of class actions S. REP. NO.109-14, at 15. X-4 (U.S. District Courts – Class 37 in jurisdictions around the country, 28 U.S.C. § 1712(e). ◆ Action Civil Cases Pending, by Nature adding one or more local defendants of Suit and District, as of Sept. 30, in each jurisdiction, and restricting 2004) (available at www.uscourts.gov/ the class defi nition to residents of judbus2004/contents.html). that jurisdiction. See 28 U.S.C. 4 See id. at Table X-5 (U.S. District § 1332(d)(4). Counsel may also try Courts – Class Action Civil Cases to artfully plead class actions or mass Commenced, by Basis of Jurisdiction actions involving 99 or fewer plaintiffs, and Nature of Suit, During the 12- in which case the Act’s jurisdictional Month Period Ending Sept. 30, 2004). provisions would not apply. See id. 5 See id. at Table C-6 (U.S. District § 1332(d)(5)(B). Courts – Civil Cases Pending, by 19 S. REP. NO. 109-14, at 44. District and Length of Time Pending, 20 Id. at 43. as of Sept. 30, 2004). 21 See, e.g., Kokkonen v. Guardian Life Ins. 6 S. REP. NO. 109-14, at 68. Co. of Am., 511 U.S. 375, 377 (1994). 7 Id. at 69-70. 22 See, e.g., Turner v. Bank of N. Am., 4 8 See, e.g., 28 U.S.C. § 1332(d)(3). The U.S. (4 Dall.) 8, 11 (1799). dictionary defi nes “primary” as “fi rst or 23 See, e.g., United States ex rel. Holmes v. highest in rank, quality or importance; Consumer Ins. Group, 318 F.3d 1199, principal,” THE AMERICAN HERITAGE 1216 (10th Cir. 2003). COLLEGE DICTIONARY 1086 (3d ed. 24 1993), but the Act’s drafters appear 28 U.S.C. § 1453(b). to have had something less precise in 25 Id. § 1453(c). mind. According to the Senate Report: 26 Id. § 1453(c)(3). 27 [T]he Committee intends that For further discussion of the effects of “primary defendants” be interpreted the Act on settlements, see Charles B. to reach those defendants who are the Casper, Settlements Under the Class real “targets” of the lawsuit – i.e., the Action Fairness Act, in this symposium. defendants that would be expected 28 Id. § 1715(a) & (b). to incur most of the loss if liability 29 Id. § 1715(b)(7). is found. Thus, the term “primary 30 Id. § 1715(b). defendants” should include any 31 Id. § 1715(d). person who has substantial exposure

The Antritrust Practitioner Page 13 Volume 2, May 2005