These attributes include changes to federal court diversity jurisdiction, removal procedures, calculation of attorneys' fees to successful plaintiffs' counsel in class actions, rules for “coupon” settlements, and procedures for court approval of class-action settlements.

As one purpose of the bill's sponsors was to prevent “forum shopping” in what are perceived as plaintiff-friendly state courts, the law gives federal courts minimal diversity jurisdiction over any class action involving at least one member from a state other that that of any defendant (so long as the lawsuit involves claims of $5 million or more).

If forum shopping occurs and a class action is filed in state court, this expansion of federal jurisdiction will enable defendants to remove class-action lawsuits from state court to federal court more easily. Under prior law, a defendant could not remove a class action from state court to federal court if at least one plaintiff and one defendant had the same citizenship ties in the same state. This created a practical barrier to removal in almost any nationwide class action.

The law also gives added protection to defendants by streamlining removal procedures. However, it also sets new tests for removal based on a “two-thirds” rule. When two-thirds of the plaintiffs and the primary defendant are in one state, the federal court must decline jurisdiction and remand the case back to state court.

Several factors grant leeway to federal courts to decline jurisdiction in a variety of circumstances when more than one-third but less than two-thirds of the plaintiffs are from a particular state and a primary defendant is in that state.

The law also regulates and establishes rules for payment of attorneys' fees to plaintiffs' counsel upon the settlement of a class action involving payments of coupons. Coupons are given when consumer class actions are settled with class members receiving something of limited value such as a $50 coupon toward purchase of a product or service.

Where this occurs, the law requires that any recovery of attorneys' fees must be calculated based on the value of coupons redeemed by the class, rather than the value of the total coupons in the settlement. This is to correct what proponents of the law decried as abuses in settling class actions where plaintiffs' attorneys recovered inordinate amounts of attorney fees and class members got coupons worth virtually nothing.

In settlements with coupons, where attorney fees are not calculated based on the coupon returns, the law specifies that any award of attorneys' fees shall be based on the amount of time the lawyers reasonably expended working on the case. The award of attorneys' fees as well as the value of the coupons also must be approved by the court.

The new law greatly enhances the transparency of class-action settlements and the role of federal courts in reviewing and approving the settlement terms. In a coupon settlement, the court may approve a settlement where class members receive a “net loss” due to the small value of the coupons and the higher value of attorneys' fees only where the judge determines specifically that the settlement is fair, reasonable and adequate for class members.

The court also may exercise its discretion to require that a portion of unredeemed coupons be distributed to one or more charitable organizations.

The law became effective immediately upon its enactment. By its terms, it now applies to any lawsuit filed after Feb. 18, 2005. However, it does not apply retroactively to lawsuits pending on the date of the law's enactment. The legislative history suggests that it will not apply to a state court lawsuit filed before but removed by a defendant after Feb. 18, 2005.

While backers of the law trumpeted their victory, it is too early to tell if the law's impact will bear out their celebration. Plaintiffs' lawyers undoubtedly will need to re-think their case-filing strategies, but it is doubtful that the law will stifle the ingenuity and creativity of the class-action bar in prosecuting meritorious lawsuits.

The law makes it significantly easier for plaintiffs to file class actions in federal court. This will help plaintiffs in conservative jurisdictions where state courts have been less hospitable to class actions. The new law also eliminates what had been a persistent unresolved issue of federal jurisdiction in terms of whether the monetary value of the claims of potential class members can be aggregated to calculate the “amount in controversy” threshold (which, prior to enactment of the law, was $75,000).

The law aims at consumer fraud class actions and “coupon” settlements, and provides a ready means for removal of such lawsuits to federal court and more vigorous judicial oversight in settling such matters. A likely consequence is that instead of bringing a mega-class action on a nationwide basis, plaintiffs' lawyers will bring multiple class actions concurrently in several state courts (which a defendant will then remove to federal court) and/or federal court.

Plaintiffs' lawyers likely will then seek to have the class actions coordinated through the federal statute that allows for multidistrict litigation, in which two or more similar cases are consolidated for discovery and settlement purposes in a single federal district court. Thus, plaintiffs most likely will continue to achieve nationwide litigation goals and impose the risk and exposure upon a defendant that come with such a legal stratagem.

The transparency required by the law in the settlement context, however, will change the types of attorneys' fee awards which some state courts have allowed in coupon settlement situations.

To remove or not to remove to federal court that is the question. Removal issues under the new statute are sure to present thorny legal problems for courts and litigants alike. The legislation creates skirmish points which are likely to be litigated in earnest as the statutory language is interpreted by reviewing courts.

The one-third/two-thirds issue on removal likely will present difficulty for courts attempting to apply the law. The status and location of class members is not always readily apparent or capable of precise calculation, especially at the beginning stages of a lawsuit when the removal analysis will be undertaken in considering defense motions to remove and plaintiffs' motions to remand.

Furthermore, such information is very difficult to construct at the start of a class action. In essence, it may require defendants to undertake significant discovery at the start of a case on satellite issues which are normally not addressed in certification situations.

Discretionary calls are sure to confound litigants and judges, too. In deciding whether to exercise or decline jurisdiction, the new statute directs courts to consider the “interests of justice” and the “totality of circumstances,” including factors such as what law will govern claims, whether plaintiffs' counsel pled the claims so as to avoid federal jurisdiction, where the alleged injuries and damages arose, whether the case involves “national interests,” and if similar class actions were filed in the past three years.

These amorphous standards likely will result in significant litigation fights in the removal/remand process.

While the Class Action Fairness Act of 2005 is likely the result of compromise and give and take between proponents of reform and a desire for the status quo, litigation of class actions will be shaped significantly in the coming year by the changes imposed on how class actions are brought, litigated and settled.

Because so-called “coupon” settlements are disfavored under the law and held up to much more rigorous judicial scrutiny, it is likely that the days of such settlements are numbered. This may drive up the price of class action settlements, since plaintiffs' counsel and the courts will presumably prefer and insist on all-cash settlements.

Gerald L. Maatman Jr. is a partner with Seyfarth Shaw LLP in Chicago.

Flag: EPLI Update

Head: What About Employee Suits?

The Class Action Fairness Act of 2005 will not impact employment discrimination litigation to any great degree. Most such cases are litigated in federal courts.

Likewise, pattern and practice lawsuits prosecuted by the U.S. Equal Employment Opportunity Commission are not impacted by the law, since such lawsuits are not controlled by Rule 23 of the Federal Rules of Civil Procedure.

State law-based wage and hour class actions filed against employers in state courts likely will be impacted by the new law as attempts to carve out civil rights and wage and hour class actions failed during debates on the measure.

At least where large nationally based employers are concerned, mega-class actions over wage and hours issues will be covered by the statute. This may force plaintiffs to focus on litigating smaller-scale wage and hour class actions if they wish to prosecute their cases in state court and block removal efforts by employers.

A plaintiffs' counsel may attempt to avoid the new law by confining a wage and hour class action, for example, to California residents, based on California state law.

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.