Within weeks of being sworn in to his second term, President George W. Bush signed the Class Action Fairness Act. The new law, which breezed through both houses of Congress, was viewed as a key pro-business issue.
In essence, the act changes the rules for class-action lawsuits, in which large groups of people with similar claims prosecute jointly in a single court case. The new laws are designed to shift many class-action lawsuits from state courts to federal courts, where conditions are perceived to be more favorable to businesses facing suits.
Smart Business reviewed the new law with Jonathan A. Loeb, a partner and co-chair of the business litigation department of Alschuler Grossman Stein & Kahan LLP.
Why are class-action lawsuits such a problem for businesses?
Ordinarily, lawsuits are decided by the parties directly affected. In a class action, there's not the one-on-one direct response to each contention that the other side makes. Instead, you're forced to litigate through representatives and deal with the issues the representatives make. Sometimes when you're in a class action, you don't get the ability to litigate every issue.
Class actions present the possibility of a huge damage award because the representatives are acting on behalf of a large group of people. So, in short, there's a departure from the way we normally litigate. The stakes are higher because the plaintiffs are representing a group of plaintiffs. And, finally, we have a system where, until recently, some state jurisdictions were notoriously being very friendly to plaintiffs and awarding large judgments.
How does the new law benefit businesses?
Under the new law, it will be easier for businesses to move a case from state court to federal court. Class-action suits with 100 plaintiffs or more, with parties from different states and with damages estimated at more than $5 million can now be removed to federal court unless they fall into a few limited exceptions.
The law did not substantively affect mass tort actions or the ability of state courts to continue handling actions where there are less than 100 plaintiffs.
Why do businesses prefer federal court?
Under federal court rules, it's easier for judges and more likely for judges to grant a request from defendants to throw out the suit or parts of the suit prior to trial in the summery judgment rulings.
Plaintiffs prefer state courts because only six jurors hear federal civil cases, and their decision must be unanimous. In state courts, a case can be won if only nine out of 12 jurors agree. That's perceived as being easier to accomplish.
Finally, judges generally have to give permission for a class action to continue. Federal courts have been more restrictive than state courts. The standards are often very similar, but it seems to be more rigorously applied by the federal courts.
What protection does the act provide?
The protection the act provides for businesses is perceived to be very great. There are a lot of issues yet to be litigated, and the perception may not bear out to be true. While the business lobby very much pushed for this legislation, because there are unresolved issues, it's too soon to conclude it will be a slam-dunk victory.
What steps should managing executives take to prepare for this law?
There's not much they can do because the law is not applied retroactively. However, there are a few circumstances where it's beneficial for businesses from a retroactive standpoint. Where a plaintiff fails to name a known defendant and then seeks to later add them to the lawsuit, that type of amendment would not relate back to the original filing date and would be covered by the act. That may give the opportunity to remove a lawsuit to federal court.
In terms of preparing for the law, this is an issue for businesses to be aware of. Executives [need to] understand the act's implications because of its ability to get cases out of state court.
Will this add or reduce costs for businesses being sued?
It's expected to reduce costs for businesses and for consumers who purchase goods and services from the companies being sued in class-action lawsuits. The act is designed to reduce litigation costs and eliminate or reduce the tort tax, this implicit cost added to goods and services by companies faced with class-action lawsuits.
The jurisdictional changes will reduce costs for businesses by enabling them to get cases into federal courts. Another provision of the act will also benefit businesses because it will deter lawyers from bringing weak lawsuits. It is generally the weaker cases that result in coupon settlements.
Previously, lawyer fees were based on the total amount of coupons issued. The act now requires that any award of plaintiff's attorney fees attributable to the value of the coupons must be based on the number of coupons actually redeemed, as opposed to the value of all coupons available.
Jonathan A. Loeb is a partner and co-chair of the business litigation department of Alschuler Grossman Stein & Kahan LLP. Reach him at email@example.com or (310) 255-9179.