May 01, 2017 Articles

Class Actions 101: Does the Fairness in Class Action Litigation Act of 2017 Spell Doom for Class Actions as We Know Them?

Some consumer advocates worry that the bill will destroy class action litigation altogether.

By Paul Karlsgodt

On March 9, 2017, the House of Representatives passed H.R. 985—the Fairness in Class Action Litigation and Furthering Asbestos Claim Transparency Act of 2017—by a vote of 220 to 201. The bill has been praised by business interests as a necessary check on abuses in class action litigation and derided by consumer advocates as a tool to destroy consumers’ ability to protect themselves against corporate abuses. Some are worried that the bill will destroy class action litigation altogether. In this edition of Class Actions 101, we explore some of the history of H.R. 985, the likelihood of its passage into law, and its potential impacts on class action litigation if enacted.

A Brief History of the Fairness in Class Action Litigation Act
The Fairness in Class Action Litigation Act of 2017 is the sequel to the Fairness in Class Action Litigation Act of 2015, a similar bill that also passed in the House but was defeated when Republicans in the Senate could not muster the 60 votes needed to overcome a Democratic filibuster. The 2015 bill was introduced in response to a spate of what had become known as “no injury” class actions, exemplified by the recent trend in suing food manufactures for false advertising for statements made on their product labels, regardless of whether any significant number of proposed class members even paid attention to the statements on the product label when they purchased the product. Various iterations of the bill have included different provisions aimed at curbing perceived abuses in the class action system, but the central feature has been a requirement that all the members of the proposed class have suffered injuries of the same type and scope as the named plaintiffs.

Features of the Proposed Law as Passed by the House

Provisions relating to “type and scope” of claimed injuries. The centerpiece of the legislation would create a new statutory requirement for class certification in damages class actions, to be codified as 28 U.S.C. § 1716 and titled “Class action injury allegations.” It would require a federal court to conduct a rigorous analysis of whether the plaintiff had affirmatively demonstrated that “each proposed class member suffered the same type and scope of injury as the named class representative or representatives” before certifying a class action seeking “monetary relief for personal injury or economic loss.”

Prohibitions on conflicts of interest. Another new statutory provision, titled “Conflicts of interest,” would require plaintiff’s counsel to state in the complaint whether any of the proposed class representatives have a family or business relationship with the attorneys and, if so, to explain the circumstances in which the plaintiff agreed to serve as class representatives and any other class action in which the plaintiff served in a similar role. (Curiously, the draft legislation refers to plaintiffs’ counsel as “class counsel”—as opposed to “putative class counsel,” for instance—which would be a misnomer because the provision deals with requirements that must be met at the pleading stage, before any class has been certified.) It also would prohibit class certification in any class action in which the proposed class representative is a relative or employee of class counsel.

Requirements relating to ascertainability, distribution of class benefits, and attorney fees. A section titled “Class member benefits” would codify the concept of “ascertainability” as a requirement for class certification. As articulated in the courts, ascertainability looks to whether there is an objective, administratively feasible way of identifying class members and notifying them of the availability of the class action and any class benefits. There is currently a split among the federal circuits about whether ascertainability should be a prerequisite for class certification and, if so, whether a relaxed or heightened standard should apply in determining whether it is met. The proposed law would codify the standard that requires heightened proof. It would also require the court to find that there is a method for distributing any monetary award or settlement benefits “directly to a substantial majority of class members.”

The proposed law has several new requirements relating to the award of attorney fees. One provision would prohibit any determination or payment of attorney fees in a class action settlement until after distribution of a monetary recovery to class members is completed. Under existing procedure, it is common for attorney fees to be determined at the final fairness hearing and paid shortly thereafter, even though settlement claims administration may still be ongoing. Another section would limit the total fees to “a reasonable percentage of any payments directly distributed to and received by all class members.” Currently, fees are often determined using either the “lodestar” method, in which the attorneys are paid based on a calculation of the number of hours reasonably expended, or a percentage of a common fund that may or may not be distributed to class members in its entirety, or they are simply negotiated separately from any class benefits available as part of the settlement. Finally, the new law would require that any fees awarded based on a judgment or settlement for injunctive or other equitable relief cannot exceed “a reasonable percentage of the value of the equitable relief.”

Provisions requiring an accounting of money distribution data. The bill contains several provisions requiring class counsel in a class action settlement to provide an accounting of the amounts claimed as part of the settlement before being eligible to recover attorney fees. The accounting must include information about the size of the class, the number of class members who received payment, and the range of payments, among other statistics. The accounting is to be provided to the director of the Federal Judicial Center, who would be required to provide an annual report to Congress on the statistics compiled from the settlement accountings.

Restrictions on issue classes. In a trend best exemplified by cases involving claims for breach of warranty against the manufacturers of allegedly moldy washing machines, courts have increasingly been relying on Federal Rule of Civil Procedure 23(c)(4) as a way of resolving discrete issues of fact or law that are common to a class of plaintiffs, even though other aspects of the dispute would be left for resolution in individual proceedings. The “Issue classes” provisions of H.R. 985 would put an end to this trend by requiring that the prerequisites of Rule 23(a) and (b) (numerosity, typicality, commonality, adequacy, predominance, superiority, etc.) be satisfied as to the case as a whole before the court may certify a class with respect to particular issues under existing Rule 23(c)(4).

Stays of discovery in class actions. The proposed law would require all discovery in a putative class action to be stayed until after an initial dispositive motion, such as a motion to dismiss, transfer, or strike class allegations, has been resolved. The stay could be lifted, in the trial court’s discretion, if particularized discovery were necessary to preserve evidence or prevent undue prejudice. The provision also would not apply in certain securities class actions. Currently, some federal courts and complex divisions of state courts follow this approach anyway, and federal courts can effectively order a stay by delaying the issuance of an order setting a Rule 16 scheduling conference. However, many other courts currently apply a reversed presumption that discovery should move forward almost immediately, absent good cause for a stay.

Third-party litigation funding disclosure requirements. Another growing trend in the U.S. courts is the emergence of litigation-funding providers who provide financial support to litigants pursuing private litigation in exchange for a contingent payment if the litigation is successful. Litigation funding is common in other parts of the world, especially in those countries where the “loser pays” fee-shifting rule creates a risk of exposure to the party pursuing litigation if it is not successful. H.R. 985 contains a provision that would require “class counsel” in a class action to identify any person or entity who has a contingent right to receive compensation from a settlement or judgment. (Again, presumably, the reference to “class counsel”—as opposed to “putative class counsel”—is just inartful drafting, as the provision seems to require the disclosure at the beginning of a case, before any class is certified.)

Appeals of class certification orders. The final provision of the bill would make class-certification orders appealable as of right. Currently, Rule 26(f) of the Federal Rules of Civil Procedure allows appeals of orders granting or denying class certification, but the appeals are accepted only in the discretion of the circuit courts of appeals.

Other provisions relevant to class action procedure. In addition to the portions of H.R. 985 that deal directly with the procedure governing class certification, class action settlements, and appeals, there are a few other provisions in the bill that would affect class action practice. The bill would revise the removal statute to avoid situations where the joinder of plaintiffs in personal injury and wrongful death actions has the effect of destroying diversity jurisdiction under 28 U.S.C. § 1332(a). It would also introduce new requirements to 28 U.S.C. § 1407, the statute governing multidistrict litigation (MDL), including a requirement that the attorney for each plaintiff seeking damages for personal injury in an MDL consolidated proceeding must provide evidentiary support for his or her client’s claimed injuries within 45 days after the case is transferred. The bill would allow the transferee judge to dismiss the plaintiffs’ case if the submission is found to be insufficient.

What Are the Prospects of H.R. 985 Becoming Law?
Like the current bill, the 2015 iteration of the Fairness in Class Action Litigation Act also passed in the House of Representatives. But the 2015 bill ultimately died in the Senate. The obvious change that has occurred between then and now is the election of a pro-business Republican president who is likely to sign the bill into law if it reaches his desk. However, the current bill still faces challenges in the Senate. Republican supporters in the Senate would likely have to obtain 60 votes in order to overcome a Democratic filibuster, something they were unable to do in 2015. Some political commentators have suggested that this and other proposed judicial reforms will not be given high priority in the Senate anytime soon, especially given what is expected to be a contentious process for many of President Trump’s political appointments. So, while the Fairness in Class Action Litigation Act in its current iteration appears closer than ever to becoming reality, it is by no means a foregone conclusion that any of its reforms will ever be passed into law.

What Are the Possible Effects on Class Action Litigation if H.R. 985 Becomes Law?
Although the stated goal of H.R. 985’s sponsors is to eliminate incentives for lawyer-driven class actions, whether it would actually achieve that goal as a practical matter is a matter of some debate.

The “type and scope” requirement would certainly be another key tool for defendants to avoid class certification in many types of class actions, especially in food-labeling cases and other so-called “no injury” class actions decried by the bill’s sponsors. However, that does not necessarily mean that plaintiffs’ attorneys would stop looking for creative ways to pursue those cases. Moreover, the presence of significant variations in injury among class members already provides a strong basis for defeating class certification, even given Rule 23’s existing predominance and superiority requirements, as illustrated by the Supreme Court’s decision in Amchem Products, Inc. v. Windsor, 521 U.S 591 (1997). Thus, it is unclear how codifying the “type and scope” requirement will change how courts actually resolve class-certification motions. In the short term, the law would likely generate significant litigation over the meaning of the words “type and scope,” with some courts taking a restrictive view and others taking a more liberal view of that phrase, potentially leading to forum shopping.

The settlement restrictions of H.R. 985 would certainly make federal class actions much more difficult to settle, but that does not necessarily mean that fewer class actions would be filed, especially in the short term. And it certainly does not guarantee that businesses will be burdened any less with litigation expense. The settlement restrictions may instead have the effect of forcing more cases to judgment and trial, increasing litigation expense for businesses and reducing their options to limit litigation risk. Many of the proposed settlement reforms are already being adopted by individual judges in various parts of the country. It remains to be seen whether more restrictions on class action settlement approval will affect the incentives to bring class action lawsuits in the first place.

Even if the law has the intended effect of reducing the amount of class action litigation in the federal courts, a potential side effect could be to drive more plaintiffs’ attorneys to pursue more class actions in state court on behalf of only those class members who reside in the state in which the defendant is headquartered, where there are barriers to removal under the Class Action Fairness Act (CAFA). This was a tactic often seen in the immediate aftermath of the 2005 passage of CAFA.

Certain of the proposed reforms, such as reforms to clarify the requirements pertaining to ascertainability and issues classes, were previously the subject of proposed changes to Rule 23 itself. Even if H.R. 985 never becomes law, these are issues that could be resolved by the U.S. Supreme Court over the next several years.

Paul Karlsgodt – May 1, 2017