SPEAKERS CONTENTS INSERTS
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59–976
1999
CLASS ACTION JURISDICTION ACT OF 1998
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND INTELLECTUAL
PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
ON
H.R. 3789
JUNE 18, 1998
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Serial No. 121
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
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CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
Subcommittee on Courts and Intellectual Property
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HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
BILL McCOLLUM, Florida
CHARLES T. CANADY, Florida
JAMES E. ROGAN, California
MARY BONO, California
BARNEY FRANK, Massachusetts
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
MITCH GLAZIER, Chief Counsel
BLAINE MERRITT, Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ROBERT RABEN, Minority Counsel
EUNICE GOLDRING, Staff Assistant
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C O N T E N T S
HEARING DATE
June 18, 1998
TEXT OF BILL
H.R. 3789
OPENING STATEMENT
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
WITNESSES
Beisner, John H., Esq., O'Melveny & Myers, LLP
Birnbaum, Sheila L., Esq., Skadden, Arps, Slate, Meagher & Flom, LLP
Grossman, Stanley M., Esq., Pomerantz, Haudek, Block & Grossman
Middleton, Richard H., Esq., Middleton, Mixson, Adams & Tate
Moran, Hon. James P., a Representative in Congress from the State of Virginia
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Wolfman, Brian, Esq., Public Citizen Litigation Group
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Beisner, John H., Esq., O'Melveny & Myers, LLP: Prepared statement
Statement of John W. Martin, Jr., Vice President-General Counsel, Ford Motor Company before the Courts and Intellectual Property Subcommittee of the House Committee on the Judiciary hearing on mass torts and class actions, March 5, 1998
Statement of Dr. John B. Hendricks, on behalf of the U.S. Chamber of Commerce, before the Subcommittee on Courts and Intellectual Property of the House Committee on the Judiciary hearing on mass torts and class actions, March 5, 1998
Statement of John L. McGoldrick before the Subcommittee on Courts and Intellectual Property of the House Committee on the Judiciary hearing on mass torts and class actions, March 5, 1998
Birnbaum, Sheila L., Esq., Skadden, Arps, Slate, Meagher & Flom, LLP: Prepared statement
Grossman, Stanley M., Esq., Pomerantz, Haudek, Block & Grossman: Prepared statement
Middleton, Richard H., Esq., Middleton, Mixson, Adams & Tate: Prepared statement
Wolfman, Brian, Esq., Public Citizen Litigation Group: Prepared statement
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CLASS ACTION JURISDICTION ACT OF 1998
THURSDAY, JUNE 18, 1998
House of Representatives,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10 a.m., in Room 2226, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] presiding.
Present: Representatives Howard Coble, Edward A. Pease, Bill McCollum, Charles T. Canady, James E. Rogan, Barney Frank, John Conyers, Jr., Zoe Lofgren and William D. Delahunt.
Staff Present: Blaine Merritt, Counsel; Veronica Eligan, Staff Assistant; and Robert Raben, Minority Counsel.
OPENING STATEMENT OF CHAIRMAN COBLE
Mr. COBLE. Good morning, ladies and gentlemen. The subcommittee will come to order.
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Members will recall that the subcommittee initially scheduled a markup on H.R. 3789 on June 4. The markup was postponed because some Members had continuing questions about the bill which was drafted in response to our March 5 oversight hearing on mass torts and class actions.
I hope that the constructive criticism that we hear today will enable us to develop whatever supplemental or amendatory language is needed to fine-tune the bill and thereby generate support for its favorable consideration.
I will add that it has never been my intent to push or rush this legislation through the subcommittee. If any interested Member or party has concerns about any bill before us, I only ask that we receive relevant commentary in advance of the subcommittee action. The last point is specifically important when we specifically request certain parties to participate in the development of legislation.
I also note that it is my intent to mark up H.R. 3789 on Wednesday, June 24. In this regard our work today is most important since I sincerely prefer that we cooperate as much as possible in drafting changes to the bill. Unlike much legislation up here, it appears to me that all parties to this discussion are genuinely interested in improving the legislation.
A friend of mine criticized me for having postponed the previous markup. I made it clear to all parties that I invited comment. There was plenty of advance notice prior to the last scheduled markup. Well, the silence was deafening. No one came forward, and I think it was only reasonable for me to assume since no one knocked my door down in opposition, I concluded that silence was acceptance.
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Well, came the day of judgment for markup, then the objections conversely were equally deafening, and it would have been nice if I could have heard from those people prior—I am not griping about that, I am just thinking out loud.
There are some people perhaps in this room who view this legislation as superb. There are others who view it as potentially damaging to the point that it will dismantle or destroy or Federal judicial system. The truth probably, friends, lies somewhere in the middle.
Many observers with whom I have discussed this legislation on both sides view it as black or white. They see no subtle shades of gray. I think there may be subtle shades of gray.
I am looking forward to hearing from you all today. As you all know, and I say this to my good friend from Virginia, who is one of the sponsors of the bill, if you bear with us, we do try to adhere to the 5-minute rule.
I have written testimony from each of you. We will examine it again and again. It will not be casually discarded. When that red light illuminates into your face, you will know that your 5 minutes has expired, and the hangman's noose is waiting nearby. I say that in jest.
105TH CONGRESS
2D SESSION
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H. R. 3789
To amend title 28, United States Code, to enlarge Federal Court jurisdiction over purported class actions.
IN THE HOUSE OF REPRESENTATIVES
MAY 5, 1998
Mr. HYDE (for himself, Mr. MCCOLLUM, Mr. SMITH of Texas, Mr. CANADY of Florida, Mr. BRYANT, Mr. PEASE, and Mr. MORAN of Virginia) introduced the following bill; which was referred to the Committee on the Judiciary
A BILL
To amend title 28, United States Code, to enlarge Federal Court jurisdiction over purported class actions.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE AND REFERENCE.
(a) SHORT TITLE.—This Act may be cited as the ''Class Action Jurisdiction Act of 1998''.
(b) REFERENCE.—Whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of title 28, United States Code.
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SEC. 2. JURISDICTION OF DISTRICT COURTS.
(a) EXPANSION OF FEDERAL JURISDICTION.—Section 1332 is amended by redesignating subsections (b), (c), and (d) as subsections (c), (d), and (e), respectively, and by inserting after subsection (a) the following:
''(b) The district courts additionally shall have original jurisdiction of all civil actions, regardless of the sum or value of the matter in controversy therein, which are brought as a class action or comparable representative action and in which—
''(1) any member of a proposed plaintiff class or other person on whose behalf the action is brought is a citizen of a State different from any defendant; or
''(2) any member of a proposed plaintiff class or other person on whose behalf the action is brought is a foreign state, as defined in section 1603(a), or a citizen or subject of a foreign state and any defendant is a citizen of a State; or
''(3) any member of a proposed plaintiff class or other person on whose behalf the action is brought is a citizen of a State and any defendant is a citizen or subject of a foreign state.''.
(b) CONFORMING AMENDMENT.—Section 1332(c) (as so redesignated) is amended by inserting after ''Federal courts'' the following: ''pursuant to subsection (a) of this section''.
SEC. 3. REMOVAL OF CLASS ACTIONS.
(a) IN GENERAL.—Section 1441(b), is amended by inserting the following sentence after the first sentence in that subsection: ''Any civil action of which the district courts have original jurisdiction on the basis of the jurisdictional provisions of section 1332(b) also shall be removable without regard to the citizenship or residence of the parties (except as provided in section 1332(b)).''.
(b) REMOVAL BY SINGLE DEFENDANT.—Section 1446(a), is amended by inserting at the end the following: ''Actions removed on the basis of the jurisdictional provisions of section 1332(b) may be removed by any defendant, regardless of whether the removal is joined by any other defendant. Any class action removed to Federal court shall be deemed as brought under Rule 23 of the Federal Rules of Civil Procedure and treated as such''.
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(c) ELIMINATION OF 1-YEAR LIMITATION ON REMOVAL OF CLASS ACTIONS.—The second sentence of section 1446(b), is amended by striking ''section 1332'' and inserting ''section 1332(a).''
SEC. 4. JURISDICTION OVER FAILED CLASS ACTIONS.
(a) AMENDMENT.—Chapter 85 is amended by adding at the end the following new section:
''§1369. Jurisdiction over failed class actions
''If a district court determines that any action subject to its jurisdiction solely under the provisions of section 1332(b) may not proceed in any respect as a class action or comparable representative action under Rule 23 of the Federal Rules of Civil Procedure or other applicable law, the court shall dismiss the action for lack of subject matter jurisdiction.''.
(b) TECHNICAL AMENDMENT.—The table of sections of chapter 85 is amended by adding at the end the following:
''1369. Jurisdiction over failed class actions.''.
SEC. 5. APPLICABILITY.
The amendments made by this Act shall be applicable to all litigation pending in any district court of the United States or any court of any State as of the date of enactment of this Act, except that any removal of an action pursuant to chapter 89 of title 28, United States Code, on the basis of the jurisdictional provisions of section 1332(b) of such title must occur within 60 days of the date of enactment of this Act if the action has been pending for more than 30 days as of the date of enactment of this Act.
Mr. COBLE. Jim, if you will come forward. We will start with Jim Moran, the distinguished gentleman from the Eighth District of Virginia.
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Jim, you and Henry Hyde are the two lead dogs, if you will, on this legislation. Others have cosponsored it as well, but it is good to have you back. And, Jim, if you can confine your oral testimony to 5 minutes, it would be appreciated.
STATEMENT OF HON. JAMES P. MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. MORAN. I will try to do that, Mr. Chairman, and I do bear in mind what they say about lead dogs: Unless you are the lead dog, the view never changes.
I very much appreciate the comments that you just made and your inviting me back here to testify about a very important bill. Three months ago when I appeared before the subcommittee to discuss abuses with our class action system and the need to rationalize the class action system, we talked about the need to change the diversity and remove statutes in the interest of fairness to both plaintiff class members and defendants, and to allow removal of class actions that appropriately belong in the Federal court.
And in response to the March 5 hearing, the Chairman of the full Judiciary Committee, Mr. Hyde, introduced H.R. 3789, which incorporates my proposal from that hearing. And I am proud to be an original cosponsor of that bill because it addresses the most egregious abuses of the class action device, and it is an important step in rationalizing and making our class action system fairer.
It is significant because it provides a solution to the problem without affecting the substantive rights of any plaintiffs. The bill only affects where the case will be heard, not whether it will be heard. Unlike some other recent reform bills, this legislation does not close the courthouse doors on any plaintiffs and doesn't prevent anyone from having their case heard. It assures that the rights of plaintiff class members and defendants will be protected, and the diversity principle will be honored.
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We all agree that certain cases belong in Federal court. The Constitution gives Congress the very important power to circumscribe the jurisdiction of the Federal courts. Interstate class actions are a perfect example of the types of cases where we should use that power. Multistate class actions belong in Federal court because of the diversity of the parties and because of the mechanisms that exist to deal with complex, multistate, multiparty litigation in the Federal court system.
Additionally, cases where an in-state class sues an out-of-state defendant should be in Federal court because of the diversity principle, because in class action lawsuits it is the requirement for complete diversity of jurisdiction that is the real culprit in causing the often bizarre results that I referred to in March. I am not going through any of those horror stories today.
By mandating that all plaintiffs and all defendants be from different States to get a case into Federal court, Federal jurisdiction is too easily defeated. Enterprising lawyers simply enlist plaintiffs from the same State as the defendant to keep their case out of Federal court.
This legislation will improve uniformity and efficiency of our judicial system by allowing for the consolidation of multistate class actions in similar causes of action in Federal court. By allowing removal, the Federal multidistrict panel process will permit competing and overlapping cases to be consolidated for more efficient consideration.
The bill doesn't weaken the ability of citizens who suffer legitimate injuries from having their cases consolidated and tried under the more efficient and economical class action lawsuit. The bill does not encroach on the jurisdiction of our State courts to adjudicate State class action lawsuits; that is, where the plaintiffs, defendants and the issues all concern one State. The bill does not create new or undue barriers for the Federal court system. The bill does eliminate the ability of a small group of plaintiffs and plaintiff lawyers to gain our legal system to extort settlements from defendants. It is another action this committee can take to reform our legal system and to thereby make our economy more efficient.
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Finally, I would like to address an issue raised at the last hearing by Mr. Delahunt from Massachusetts. There is no doubt that the workload and vacancies of the Federal judiciary are a serious problem. I strongly agree that we should fill the vacancies on the Federal court immediately and do not believe that the Senate should continue with this delay that has been going on with confirming Federal judicial nominations. But while many Federal courts have problems handling the caseload, I don't think that workload considerations should be used as an excuse to keep cases out of Federal courts that would legitimately belong there. We should draw the jurisdiction of the Federal courts based on legal concepts, not administrative or resource issues. Fair treatment for Federal judges and increased funding for the Federal judiciary should be addressed in their own context, not as an objection to sensible legislation.
I thank you for allowing me to testify today. I strongly urge the subcommittee to support H.R. 3789 when it marks it up, and I appreciate the opportunity to testify before you. Thank you.
Mr. COBLE. Jim, thank you for being back with us. You beat the 5-minute buzzer.
Mr. COBLE. Mr. Frank, do you have an opening statement?
Mr. FRANK. I just want to get further into this, so I have no questions. I appreciate your energy, and we are going to be seriously thinking about this, so we should just proceed.
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Mr. COBLE. I will be glad to call the first panel.
Do you have an opening statement?
Mr. FRANK. No.
Mr. COBLE. If the first panel will come forward. Mr. Richard Middleton is a partner at the law firm of Middleton, Mixson, Adams & Tate, located in Savannah, Georgia. He is the vice president of the Association of Trial Lawyers of America and has been on the executive committee of that organization since 1993.
Next is Mr. John Beisner, who is a partner at O'Melveny & Myers. His practice involves the defense of purported class actions and other complex litigation. He is the coordinator of the litigation regulatory practice in the firm's Washington office.
Our next witness is Sheila Birnbaum. She is a partner in the New York firm of Skadden Arps. Ms. Birnbaum represents corporations in complex mass tort and insurance litigation and has lectured extensively across the country and has authored numerous Law Review articles.
Our next witness for today is Brian Wolfman. He is a staff attorney at Public Citizen Litigation Group. Mr. Wolfman appears before regulatory agencies and the Federal courts regarding public health and safety issues, and Mr. Wolfman represents plaintiffs in class actions against the government involving public benefit, housing and foster care programs. He teaches as well a class in appellate advocacy at the American University School of Law and at Georgetown University Law Center.
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Our final witness on this panel and for today is Mr. Stanley Grossman. Mr. Grossman is the senior partner of the firm of Pomerantz, Haudek, Block & Grossman, and has represented plaintiffs in securities and antitrust class actions. Mr. Grossman serves as a director of the Class Action Digest and is the former president of the National Association of Securities and Commercial Law Attorneys, known popularly as NASCAT.
We have written statements from each of you, and I ask unanimous consent that they be submitted into the record in their entirety. If you will keep a sharp lookout on the red light, we will be appreciative. We are on a short leash here. We are trying to wrap up prior to the July 4 work period, so if you can confine your statements to the 5 minutes, we will be appreciative, and it really makes no difference who we start with.
Mr. COBLE. Why don't we start with ladies first. Ms. Birnbaum.
STATEMENT OF SHEILA L. BIRNBAUM, ESQ., SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP
Ms. BIRNBAUM. Thank you, Mr. Chairman. I would like the thank the Chairman and the entire subcommittee for inviting me to appear this morning. The views I express here are my personal views based on over 25 years of experience in defending actions first in the products liability area and then in the mass tort and class action area. I am a member of the Advisory Committee of the Civil Rules of Judicial Conference and a member of the Mass Tort Working Group, but I want to make it perfectly clear that the views that I express today are my own and not the committees or anyone else's.
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This act that you have before you would be a significant step in ending some of the abuses that have been going on in the State courts. I think as the Institute for Civil Justice indicated in a recent survey that it did, there has been a mass exodus from the Federal courts to the State courts in class action litigation in the last 2 or 3 years, and those of us who have defended those cases can clearly verify that this exodus is exactly what is going on. Not only do you have these class action cases, you have multiple State court cases filed at about the same time in various States.
What you are facing as a corporation or as a defendant is not just Federal class action cases whenever there is the potentiality of a mass tort, but you are facing State court class actions in a number of States, and we can predict what States will be the focal point of litigation because they are the same States and the same counties and the same judges, and what we have is a system that has run amuck.
This bill, without changing any substantive rights, would create some type of rational system in place of the one that we have now. What is happening today through artful pleading, plaintiff's lawyers are using the present system to get out of the Federal courts because of their concerns under Federal procedures, that there may not be class certification, while if they can put these same cases in State courts in front of certain judges, they could get class certification regardless of the merits or due process, and, in some cases, regardless of the class action rules procedure.
Now, I am not suggesting that this is a problem all over the country, that State court judges are not competent to handle cases. But what I am suggesting is through artful pleading, through a use of the process, we now have a system that is really gone amuck, and this can be corrected without changing any of the substantive rights of parties.
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What this bill would do would be to allow national types of class actions with interstate commerce implications to be handled in the Federal courts. There would be consistency. If cases could be removed to the Federal court then through the process of the multidistrict jurisdiction panel, those cases could all be consolidated in one jurisdiction with one decision instead of multiple decisions on a state-by-state basis where the plaintiff's lawyer doesn't even have clients, or perhaps he has only one local person, which the plaintiff's lawyer then uses to create a national class action.
The unfairness to the other potential class members cannot be understated here. Even though we represent defendants and it sounds a little cynical to talk about due process rights of absent class members, those are important issues, because if I am living in New York, I don't want an Alabama court necessarily deciding my rights under Alabama law when I am a New York resident. And that is what happens in these matters, and sometimes there may be a collusive resolution of cases which is not in anybody's best interests.
So I think what this bill would do would be what the founders of the Constitution had in mind, eliminate some of the local bias that occurs in some places and create uniformity of decision-making in the Federal courts where these national class actions should be decided.
So I recommend that with some of the tinkering that may have to go on to achieve a consensus here, that this bill be adopted and be passed on to the House.
Thank you so much.
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Mr. COBLE. Thank you Ms. Birnbaum. When you say the fine-tuning, that may be necessary. I thank you for your comments.
[The prepared statement of Ms. Birnbaum follows:]
PREPARED STATEMENT OF SHEILA L. BIRNBAUM, ESQ., SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP
I would like to thank the Chairman and the entire Subcommittee for inviting me to appear before you this morning to discuss the Class Action Jurisdiction Act of 1998. I am here today to express my personal views which are based on over 25 years of experience teaching in this field and defending numerous class action lawsuits. I am a member of the Advisory Committee on Civil Rules of the Judicial Conference and the recently formed Mass Tort Working Group. However, I should note that I am not here today on behalf of either committee and that the views expressed are my own.
The Class Action Jurisdiction Act of 1998 is a significant step forward toward correcting serious abuse which defendants are experiencing in many state courts throughout the country. The problem I am alluding to is forum shopping for class action lawsuits. As the federal courts continue to deny class certification of mass tort and product liability actions, plaintiffs' class action lawyers are filing the vast majority of new class actions in state courts. These lawyers ''artfully'' plead their cases to take advantage of procedural technicalities in the current removal statute which enables them to avoid adjudication in the federal courts. Plaintiff class action lawyers will typically seek out ''select'' state court judges who quickly certify class actions with seemingly little or no consideration to the appropriateness of class certification under the rules or the due process rights of the defendant and absent class members.
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In many of these cases the state courts will certify national classes against large multinational corporations with little or no connection to the state. In the wake of this mass exodus to the state courts the rights of out-of-state non-resident defendants to have the controversy removed and heard in a federal court is denied. The Class Action Jurisdiction Act of 1998 responds to the technical circumvention of the federal removal procedures and will enable the federal courts to appropriately maintain jurisdiction over these classes that are of national scope.
I believe that the class action device is not appropriate for use in cases involving mass torts. Over the past three years as the federal courts have considered this question they have consistently denied certification of mass torts class actions, In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir. 1995), cert. denied, 116 S. Ct. 184 (1995), Castano v. American Tobacco, Corp., 84 F.3D 734 (5th Cir. 1996), In re American Medical Systems, Inc., 75 F.3d 1069 (6th Cir. 1996). The plaintiffs' class action bar has responded by filing the vast majority of their tort class action cases in state courts. If these cases were filed in federal court or removed to the federal court many would, under present class action jurisprudence, not be certified. This provides a huge incentive to the plaintiff's class action attorney to do whatever it takes to make their case ''removal proof.'' The result in many cases is that a single state court judge will certify a class action on behalf of thousands and in some cases millions of class members residing in all 50 states. In addition to the size of the class and complexity of the case, the amount in controversy is typically in the multi-millions or multi-billions of dollars.
This trend toward filing class actions in state courts was recently observed by Rand's Institute for Civil Justice (ICJ). The ICJ noted that ''class action activity has grown dramatically over the past 2–3 years'' and that the ''recent growth has been concentrated in the state courts, as plaintiffs and defendants both see increased unwillingness among federal judges to certify or sustain certification of class actions.'' Deborah Hensler, et al. Preliminary Results of the Rand Study of Class Action Litigation 15 (May 1, 1997). The dramatic increase in the number of certified cases is directly related to the great ease some state court judges have in granting certification of cases, many of which are meritless. In some cases certifications have been granted even before defendants have been served with a complaint or given an opportunity to file an answer. This practice of ex parte certification, common in some state courts, truly offends the notion of due process and fundamental fairness.
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The motivation for plaintiffs' class action lawyers to file and keep these cases in state courts is obvious. A quick class certification provides the lawyer with the leverage to demand huge tribute from non-resident corporate defendants. Many in the judiciary have referred to this practice as ''legalized blackmail.'' This abuse is compounded by the fact that these cases should not have been certified as class actions in the first instance.
On March 5, 1998, Dr. John B. Hendricks, a local Alabama businessman, appeared before this subcommittee on behalf of the U.S. Chamber of Commerce and provided testimony regarding state court class action abuse. Dr. Hendricks submitted a report to the subcommittee prepared by Stateside Associates which studied recent class action filings and certifications in Alabama.(see footnote 1) The Stateside Report provided data collected from the court files in six rural Alabama counties in which researchers from Stateside Associates reviewed court files covering a two year period. The report demonstrates the extent of the problem in just six counties in one state.
The following are some of the findings documented in the Stateside Report:
1) 91 putative class actions were filed in the six rural counties during the two years studied.
2) 43 class actions were certified in these six counties in the period covered.
3) At least 28 of the certified class actions were nationwide class actions and the primary target defendants were large multinational corporations.
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4) The Circuit Court Judge in Greene County, Alabama, certified 30 class actions alone during the two year period studied. In one of the two years class action filings represented nearly 10% of all of the actions filed in Greene County.
In Dr. Hendricks' prepared statement provided to the committee he pointed out that the zealous certification of class actions in Greene County, Alabama is even more startling when compared with only 38 class actions which were certified in 1997 by more than 900 district court judges in the federal courts.(see footnote 2)
It is exactly this type of bias leveled at out-of-state class action corporate defendants which led to the creation of diversity jurisdiction and provides support for the enactment of H.R. 3789. Diversity jurisdiction was established to protect the citizens of one state from the biases that might be engendered in litigating in another state against a citizen of that state.(see footnote 3) In light of the financial stakes at issue in class actions, the motivation for local bias is even greater then in single action cases. Multinational corporations are discriminated against in some state courts which appear to be biased in favor of the local plaintiff's attorney or local class representative who may vote or even participate in the election of local judges. The Congress should step in and provide the protection which the Framers of the Constitution envisioned would be guaranteed when they created federal court removal based on diversity jurisdiction.
The legislation you are considering today attempts to eliminate the procedural loopholes which enable plaintiffs' class action lawyers to circumvent the spirit if not the letter of federal diversity jurisdiction. H.R. 3789 will provide original jurisdiction over class actions to the federal courts in cases in which there is minimal diversity. The elimination of the ''complete diversity requirements'' is an important step which will reform the current practice of plaintiffs' class action counsel naming ''sham'' resident defendants whose only purpose for being sued is to destroy diversity.
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The bill would also eliminate the $75,000 jurisdictional minimum. Class actions by definition are matters in controversy which exceed the current jurisdictional minimum of $75,000. They are cases with enormous monetary consequence to a defendant and H.R. 3789 recognizes that they are appropriate cases for consideration by the Federal courts, even if the individual class member's claim does not reach the $75,000 threshold. This change will eliminate the practice by some plaintiffs' class action lawyers who plead that the amount in controversy is below $75,000 when the case is filed and subsequently amend the complaint to assert higher damages after the one year bar for removal expires.
The Class Action Jurisdiction Act of 1998 provides a practical solution to the bias experienced by out-of-state corporate defendants in some state courts. H.R. 3789 does not provide the class action defendant with any new rights or privileges, it merely closes the loopholes that keep these complex cases with national implications from being removed to the federal courts. The Class Action Jurisdiction Act simply makes good sense.
Mr. COBLE. Mr. Beisner.
STATEMENT OF JOHN H. BEISNER, ESQ., O'MELVENY & MYERS, LLP
Mr. BEISNER. Thank you. I appreciate the opportunity to appear before the subcommittee this morning. As an attorney, I spend most of time defending class actions. Over the last 18 years, I have been involved in defending over 200 class actions filed in the Federal and State courts of 28 States, and I am here today to bear witness to some of the things that are going on in State courts.
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I won't belabor the point that the class action device has gone astray in our State courts. At the March 5 hearing this subcommittee amassed a full record indicating, I believe, that class action abuse in our State court system is real and rampant.
But at that March 5 hearing the committee also heard a surprisingly uniform chorus from a diverse group of witnesses. They pointed out that you could solve this problem by allowing more class actions to be heard in Federal courts, and that is the solution before the subcommittee today.
So why can't interstate class actions be heard in Federal courts now? Well, the jurisdictional statutes presently state that if you bring a class action under a Federal jurisdiction theory, it can stay in Federal court only if there is complete diversity; that is, if all of the plaintiffs have citizenship different from all of the defendants. And by plaintiffs we mean all of the named plaintiff class members.
Further, the statute requires that each of the class members have a claim worth $75,000 or more. So under that system if I am a Virginia resident, and I slip and fall in front of a building owned by a D.C. resident downtown here, and I hurt my neck, and I claim the damages are worth $75,000, my little lawsuit can be heard in Federal court.
Just the opposite is true in interstate class actions. Right now I am defending a class action that was filed in a State court in Coosa County, Alabama. That case was filed on behalf of 25 million U.S. citizens who own air-bag-equipped vehicles. Billions of dollars are at issue. The case can't be heard in Federal court. Why is that? The lawyers who brought the lawsuit decided to bring in a bunch of local dealers in the lawsuit. Those local dealers didn't design the air bags. They didn't make the air bags. They have no business being in that lawsuit. But they are there to prevent that lawsuit from being heard in Federal court, to make sure that it won't be subject to diversity jurisdiction.
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There is another problem in getting a case into Federal court. As I said before, the law right now—our Federal jurisdictional statutes—state that each class member has to have a claim worth $75,000. With that case with 25 million people, to get the case removed to Federal court, you have got to say the damages in this case are almost $2 trillion. You heard me right; $2 trillion. It is a big lawsuit, but there is no lawsuit quite that large.
What does that mean? It means there is a large lawsuit involving millions of dollars and 25 million Americans, about 10 percent of the U.S. population living in all 50 States, whose claims can't be heard in Federal court. It means if plaintiffs in that case have their way, the 25 million class members will have their claims decided by one State court judge. That judge was elected by the 11,000 residents of this particular county. He is not accountable to 99.9 percent of the class members, and certainly not accountable to any of the defendants. He was never nominated by a President. He was never confirmed by the Senate. And yet in this nationwide class, he is going to tell California what its law is on the issues in this lawsuit, and no California court is going to be able to touch that. And he is going to decide whether Massachusetts residents in this case win or lose, and there is nothing that any court in Massachusetts can do about it. In fact, if there is a group of Massachusetts residents who want to bring their own class action somewhere else, he can stop it by managing to reach judgment in that case before the Massachusetts court is able to act.
And this one judge, elected by the 11,000 residents of this one county, can basically be setting Federal air bag policy with respect to these existing vehicles. If your constituents write you and tell you that they don't like the policy he sets, there is nothing this committee or Congress can do about it.
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Clearly a case like this belongs in Federal court. Federal courts are supposed to interpret the laws of various States. They have mechanisms for asking State supreme courts how they interpret the laws of their own States, something State courts don't have. Federal courts, as Ms. Birnbaum mentioned, have mechanisms for coordinating overlapping conflicting class actions.
So I say in conclusion, H.R. 3789 is a simple, elegant solution to this problem. It allows both plaintiffs and defendants to bring these cases in Federal courts where they belong.
Thank you, Mr. Chairman.
Mr. COBLE. Thank you, Mr. Beisner.
[The prepared statement of Mr. Beisner follows:]
PREPARED STATEMENT OF JOHN H. BEISNER, ESQ., O'MELVENY & MYERS, LLP
SUMMARY
At its March 5, 1998, hearing on ''mass torts and class actions,'' this Subcommittee gathered considerable evidence of a severe crisis regarding state court class actions. Witnesses offered data showing that there is an explosion in the number of such cases being filed, prompted largely by an ''anything goes'' attitude about class actions among some state courts. Some observed that certain state courts operate without basic class certification standards and in disregard of fundamental due process requirements, resulting in injury to both unnamed class members (the people that class actions are supposed to benefit), as well as corporate defendants. Others expressed frustration that there is no mechanism for achieving coordination of overlapping, ''competing' class actions (i.e., cases in which the same claims are asserted on behalf of basically the same classes) that are proceeding simultaneously in state courts around the country.
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Among the March 5 hearing witnesses (who represented widely varied interests), there was broad agreement that the wisest, least disruptive solution would be to expand federal diversity jurisdiction over class actions, allowing more such cases to be heard in federal courts. As one witness noted, ''you have heard today from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking to me that . . . you've heard from everyone the notion that . . . increasing the ambit of . . . diversity jurisdiction . . . to [encompass more class actions] is a good idea.''
H.R. 3789 would remedy the current state court class action crisis by simply correcting the fact that federal courts are presently without jurisdiction to adjudicate most interstate class actions, lawsuits that typically involve millions of dollars in dispute among thousands of parties residing in multiple jurisdictions. This change would have the additional benefits of (a) making more broadly available the statutory mechanisms by which federal courts (but not state courts) may coordinate overlapping, competing class actions and (b) creating greater uniformity in class action standards by focusing such litigation in our unitary federal judicial system (as opposed to having it strewn among the diverse state court judicial systems of 51 different jurisdictions).
H.R. 3789 would achieve these benefits without undesirable side-effects. The bill would not alter any party's substantive legal rights. The bill would leave purely local disputes within the exclusive purview of the relevant state courts. And the bill would not require federal court adjudication of any class action; the bill would leave intact state court authority to hear class actions if the parties prefer a state forum.
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The case for expanding federal court jurisdiction over putative class actions is overwhelming. H.R. 3789 should be enacted.
STATEMENT
Thank you for inviting me to participate in today's discussion about H.R. 3789, the Class Action Jurisdiction Act of 1998.
So that there is no mistake, let me underscore my biases at the outset. I am a partner in a large law firm, and I make my living defend my purported class actions. Over the past 18 years, I have been involved in the defense of over 250 class action lawsuits before the federal and state courts of 28 states. On the basis of that class action-related experience in a wide variety of judicial settings, I wish to share a few thoughts about H.R. 3789.
The State Court Class Action Crisis
Over the past nine months, Congress has been bombarded with warnings that something is badly amiss with class actions. The sirens have been sounding. Almost daily, there are press reports about class actions being used to deny (not protect) due process rights—instances in which the legitimate interests of both unnamed class members and defendants are being injured.
Congress itself has amassed a substantial record confirming what the news reports make clear: steps must be taken to curb class action abuses. This Subcommittee played a leading role in developing that record through a hearing it held on March 5, 1998. Although scheduled as a general oversight hearing on the very broad subject of ''mass torts and class actions,'' it was not surprising that most of the witnesses targeted one issue—the rampant abuse of the class action device in certain state courts. For example:
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In his prepared statement, the first witness—Rep. James Moran (D.–Va.)—focused on ''the growing problem of class action lawsuits filed in our state courts.'' In particular:
He cited an Institute for Civil Justice study indicating ''a dramatic increase in class action activity over the past two to three years,'' most of it occurring in state courts.
He observed that ''[o]pportunistic lawyers have identified those states and particular judges where the class action device can be exploited.''
And, offering specific examples, he decried the fact that ''legitimate business enterprises . . . are being severely harmed by existing class action practice'' and that ''[i]n other cases, where businesses may be legitimately at fault, injured consumers receive little, while the plaintiffs attorneys are enriched.''
Observing that ''[m]any state courts lack the complex litigation training, experience and resources necessary to deal with [interstate class actions]'' and that ''state court judges, who are elected in most states, are more prone to bias when the defendant is a large, out of state corporation,'' Congressman Moran declared that these serious problems should be addressed by expanding federal court jurisdiction over class actions.
Ralph G. Wellington, a Philadelphia attorney, testified in great detail about the now infamous Bank of Boston class action. According to Mr. Wellington's prepared statement, the state court in that case approved a class settlement under which
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[m]ost of the 700,000 [class members] received minimal direct economic benefit; some received no direct benefit at all. Indeed, most had their mortgage escrow accounts . . . deducted in order to pay several million dollars to the class counsel who had been approved to protect their interests. In short, having been included in a lawsuit they never envisioned, they had their own money from their own escrow accounts taken to pay class counsel for what many believe to have been a very dubious benefit.
John P. Frank, a Phoenix practitioner who served on the Committee on Civil Procedure that drafted the current Fed. R. Civ. P. 23, contributed numerous examples of class actions (particularly state court class actions) that had gone astray.
John W. Martin, Jr., Vice President-General Counsel, Ford Motor Company, proffered data demonstrating an ''explosion'' in the number of purported class actions being filed in state courts. And in his prepared statement,(see footnote 4) he made several other points:
He urged that the increase in class action filings ''is largely attributable to state courts that manifest a laissez-faire attitude about class actions,'' ignoring both basic class certification rules and due process requirements.
Offering specific examples, Mr. Martin noted that due to the erosion of state court class action standards, ''class actions that are being filed assert claims that are utterly without merit (or marginal at best).'' And he noted that in interviews conducted for a study on class actions by the highly regarded RAND Corporation, ''many attorneys (including some plaintiffs' counsel) observed that 'too many non-meritorious [class action lawsuits] are [being] filed and certified' for class treatment.''
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Mr. Martin asserted that ''[t]he real purpose of the vast majority of class action lawsuits is to make money—not for consumers, but for the lawyers bringing the suit.'' Noting specific examples from state court cases, he charged that ''[a]s a result, consumers are exploited and rarely receive substantial awards, while class action counsel frequently walk away with millions.''
Mr. Martin provided evidence that defendants in state court class actions ''are being denied fundamental due process rights.'' For example, he noted that some state courts engage in ''drive-by class certification[s]'' in which ''a state court judge grants plaintiffs' motion to certify his claims for class treatment before the defendant even has a chance to respond to the motion (or, indeed, has even been served with the complaint).'' He also expressed concern about the '''I never met a class action I didn't like' phenomenon''—state courts that ''employ standards that are so lax that virtually every class certification motion is granted, even where it is obvious that the case cannot, consistent with basic due process principles, be tried to a jury as a class action.'' He cited examples of cases in which state courts had certified classes that federal courts had found uncertifiable.
Mr. Martin discussed respects in which state courts are unable to serve as effective arbiters of interstate class actions. In particular, he noted that when overlapping or ''copycat'' class actions are filed in different federal courts, they may be consolidated through the Judicial Panel on Multidistrict Litigation. But when duplicative class actions are filed in two or more state courts, the ''competing'' class actions must be litigated separately in an uncoordinated, redundant fashion because there is no mechanism for achieving consolidation of state court class actions and avoiding inconsistent results. He also criticized multi-state class actions in which one state court is required to interpret the laws of many other states and resolve the claims of out-of-state citizens. As he put it, ''[w]hat business does a California court have dictating to New Jersey what its laws mean and how the claims of its citizens should be resolved?''
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Mr. Martin observed that ''[t]he 'anything goes' mentality in state courts has led to a sad reality: as a practical matter, the most important question determining the outcome of a class action lawsuit has now become, not the merits of the claims or the propriety of class treatment, but whether the case can successfully be removed to federal court.'' He then offered numerous examples of ways in which lawyers who file class action lawsuits manipulate their pleadings to keep their purported class actions out of federal court (e.g., by naming defendants who defeat diversity but who have no real role in the litigation, by waiving class claims that might give rise to federal jurisdiction, by changing claims after the one-year removal deadline has passed).
In a similar vein, Dr. John B. Hendricks, a businessman, offered a docket study of state court class actions in one jurisdiction showing (a) that state court class actions are increasing in number, (b) that such cases have become disproportionately large components elements of the dockets of some county courts, (c) that many of the cases being filed are against major, out-of-state corporations, and (d) that the proposed classes in these cases typically are not limited to in-state residents and often encompass residents of all 50 states. Confirming Mr. Martin's observation that there are state courts that have never encountered a class action they would not certify, the study presented by Dr. Hendricks identified one state court judge who had granted class certification in 35 cases over the past two years. As Dr. Hendricks stated, ''[t]hat's a huge number of cases when one considers that during 1997, all 900 federal district court judges in the United States combined certified a total of only 38 cases for class treatment.'' The study failed to uncover any instance in which that judge had ever denied class certification.(see footnote 5)
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John L. McGoldrick, Senior Vice President and General Counsel of Bristol-Myers Squibb Company, joined the chorus urging that ''class action abuses are most pervasive in state courts.'' In his prepared statement Mr. McGoldrick made several key points:
''Especially in recent years, the class action device has experienced serious abuse, often with the perverse result that companies that have committed no wrong find it necessary to pay ransom to plaintiffs' lawyers because the risk of attempting to vindicate their rights through trial simply cannot be justified to their shareholders. Too frequently, corporate decisionmakers are confronted with the implacable arithmetic of the class action: even a meritless case with only a 5% chance of success at trial must be settled if the complaint claims hundreds of millions of dollars in damages.''
''In some places, state court judges do not appreciate the raw power of the class action device and the need to circumscribe its usage. As a result, the rights of both defendants and the class members on whose behalf the actions were brought get ignored.''
''This situation is ironic because the history of the U.S. Constitution makes clear that interstate class actions are the paradigm for the kind of dispute that should be subject to federal diversity jurisdiction. Yet, although federal courts presently are empowered to hear what are basically small, local disputes, statutory restrictions on federal diversity jurisdiction prevent federal courts from adjudicating most class actions.''
''The frustrations created by these restrictions [on federal diversity jurisdiction] are exacerbated by the fact that there is presently confusion among our federal courts about which purported class actions are subject to federal diversity jurisdiction.''
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Mr. McGoldrick therefore urged Congress to ''consider legislation that would generally permit federal courts to hear class actions with interstate commerce implications.'' He noted that such a step ''would strongly promote the three goals the framers of the Constitution sought to achieve in establishing diversity jurisdiction in the first place: (a) to foreclose locality discrimination; (b) to prevent bias against interstate commercial enterprises; and (c) to enhance public confidence in the judicial system.''(see footnote 6)
The Identification Of A Solution
The witnesses at the March 5 hearing were asked their views about Mr. Moran's opening suggestion that the state court class action crisis could be quelled by expanding federal diversity jurisdiction to accommodate purported class actions with interstate implications:(see footnote 7)
In response, Judge Anthony Scirica, who sits on the U.S. Court of Appeals for the Third Circuit and is a member of the Judicial Conference's Advisory Committee on Civil Rules, noted that in a similar vein, the
Judicial Conference has supported, in principle, the creation of federal jurisdiction that would rely on minimal diversity jurisdiction to consolidate multiple litigation, in state and federal courts, in cases involving personal injury, and property damage arising out of a single event.(see footnote 8)
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Prof. Susan Koniak, a member of the faculty at the Boston University Law School who described herself as being from the ''plaintiffs' bar,'' responded that expanding federal jurisdiction over class actions would be
a good idea. There's the polybutylene pipe case, which is one of the biggest class actions, was in Union City, Tennessee, in the state court, where no one could get there, you couldn't fly in to object. And that's common. Often these [state] courts are picked, and they are in the middle of nowhere. You can't have access to the documents and I don't think it's a full answer, but I think it should be done.
Former U.S. Attorney General Dick Thornburgh concurred, noting that
[m]ost of the complaints that arise out of alleged inequitable treatment in these suits in state courts are in states where the judges are elected, and must . . . depend on contributions which come from potential party litigants. And I think the record is replete that those abuses really give rise to a skewing of the purpose of litigation. . . .
Mr. Thornburgh added that an expansion of federal jurisdiction over class actions is warranted because ''federal courts have shown a much greater propensity to bring some sensible adjudication to the creation of classes and the progress of class cases. . . .''
In her prepared oral remarks, Elizabeth Cabraser, a leading plaintiffs' class action attorney, opined that
much of the confusion and lack of consistency that is currently troubling practitioners and judges and the public in the class action area could be addressed through the exploration, the very thoughtful exploration, of legislation that would increase federal diversity jurisdiction, so that more class action litigation could be brought in the federal court. Not because the federal courts necessarily have superior judges, but because the federal courts have nationwide reach; they have the statutory mechanisms that they need to manage this litigation, so litigation can be transferred and coordinated in a single forum.
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Both Mr. Martin and Mr. John Frank indicated their support for expanding federal diversity jurisdiction over purported class actions. And Mr. McGoldrick concluded the inquiry by telling the Subcommittee:
[Y]ou have heard [today] from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking to me that those of us who frequently disagree—my friend Ms. Cabraser and I frequently disagree—but you've heard from everyone the notion that diversity jurisdiction, increasing the ambit of it to permit class actions, is a good idea. And it seems to me that that's something this committee should weigh heavily in its deliberations.
In sum, this Subcommittee's March 5 hearing not only documented the severe abuses of the class device that are occurring in state courts, but it also put the spotlight on a simple, elegant solution: expand federal court jurisdiction to embrace a larger array of purported class actions.
Implementation Of The State Court Class Action Crisis Solution: H.R. 3789
From the record developed at this Subcommittee's March 5 hearing, one could develop strong support for far reaching (some would say ''radical'') responses to the state court class action crisis. Congress could enact federal legislation simply prohibiting state courts from using the class action device at all (essentially what is being proposed in the securities litigation context in S. 1260, the Securities Litigation Uniform Standards Act of 1998, already passed by the Senate). Congress could severely restrict the availability of class action attorneys' fees, which are arguably the driving force behind the state court class action crisis. Or Congress could perform major surgery on the class device itself (e.g., change procedural rules to allow class actions to be used only to pursue injunctive relief (not monetary damages) and thereby eliminate the economic incentives that encourage abuse of the device).
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H.R. 3789, however, embraces what is by far the most modest approach suggested at the March 5 hearing—simply correcting the fact that federal courts lack jurisdiction to adjudicate interstate class actions, lawsuits that typically involve millions of dollars in dispute among thousands of parties residing in multiple jurisdictions.
This change would aid resolution of the current state court class action crisis by eliminating restrictions that have forced both unnamed class members and defendants to have their claims heard before some tribunals that are ill-equipped to handle complex litigation and otherwise less vigilant about due process rights. Further, as Ms. Cabraser noted at the March 5 hearing, the change would make available in most class actions the ''statutory mechanisms'' that federal courts (but not state courts) may wield ''to manage [class] litigation,'' so that overlapping, competing class actions ''can be transferred and coordinated in a single forum.''(see footnote 9) And most importantly, the change would contribute to greater uniformity in the standards for deciding whether a controversy may be afforded class treatment, with those standards being set and applied by our unitary federal judicial system (as opposed to the diverse state court judicial systems of 51 different jurisdictions). The bill reflects a simple, narrow remedy for a growing major problem.
H.R. 3789 would achieve its solution without undesirable side-effects. The bill would not alter any party's substantive legal rights. The bill would not permit removal of truly local disputes; such matters would remain within the exclusive purview of the relevant state courts. And the bill would not require federal court adjudication of any class action; parties could litigate an interstate class action in state court if all sides so agreed.
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Moreover, the changes envisioned in H.R. 3789 are entirely consistent with the current concept of federal diversity jurisdiction. The current statutory ''gatekeeper'' for federal diversity jurisdiction—28 U.S.C. §1332—essentially allows invocation of diversity jurisdiction in cases that are large (in terms of the ''amount in controversy'') and that have interstate implications (in terms of involving citizens from multiple jurisdictions). By nature, class actions typically fulfill these requirements. Because they normally involve so many people and so many claims, class actions invariably present huge amounts in controversy and implicate parties from multiple jurisdictions.(see footnote 10)
H.R. 3789: How It Works
Functionally, H.R. 3789 would achieve its purpose by amending 28 U.S.C. §1332 (the diversity jurisdiction statute) to extend federal diversity jurisdiction over interstate class actions. That amendment would grant federal court jurisdiction over any class action (regardless of the amounts in controversy) in which there exists ''partial diversity'' between plaintiffs (including all unnamed members of any plaintiff class) and defendants. However, as noted above, this expanded jurisdiction would not encompass disputes that are not interstate in nature—cases in which a class of citizens of one state sue one or more defendants that are citizens of that same state would remain subject to the exclusive jurisdiction of state courts.
The amendments also would facilitate the removal to federal court of any purported class action that falls within the additional grant of federal diversity jurisdiction over class actions described above. The bill would not change the existing diversity jurisdiction removal procedures applicable to purported class actions, save for two exceptions:
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First, the legislation would amend 28 U.S.C. §1441(b) to confirm defendants' ability to remove all purported class actions qualifying for federal jurisdiction under the revised section 1332 (as discussed above) regardless of the state in which the action was originally brought.
Second, 28 U.S.C. §1446(b) would be amended to provide that a defendant could remove a putative class action at any time (even at a date more than one year after commencement of the action), so long as the action is removed within 30 days after the date on which the defendants may first ascertain (through a pleading, amended pleading, motion order or other paper) that the action satisfies the jurisdictional requirements for class actions (as set forth in the proposed section 1332(b)). This provision is intended to prevent parties from filing cases as individual actions and then recasting them as purported class actions (or as broader class actions) after the one-year deadline for removal has passed.
Third, H.R. 3789 would amend 28 U.S.C. §1446(a) to allow any class action defendant to remove an action. At present, an action typically may be removed only if all defendants concur. This provision is intended to address situations in which local defendants with little at risk or defendants ''friendly'' to the named plaintiffs may preclude other defendants with substantial exposure from gaining access to federal court.
To avoid leaving before federal courts controversies not warranting the attention of the federal judiciary, the legislation (in the proposed new section 1639 of title 28) would require a federal court to dismiss for want of federal jurisdiction any case which it has determined may not be afforded class treatment in any respect.
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H.R. 3789: Comments On Specific Issues
Although the notion of expanding federal diversity jurisdiction was broadly endorsed at this Subcommittee's March 5 hearing, it is my understanding that a few thought-provoking questions and concerns have been raised about H.R. 3789. Interestingly, those concerns have not involved frontal challenges to the core concept of the bill—the idea of opening federal courthouse doors more broadly to class actions. Instead, the inquiries have focused largely on drafting and other technical issues that should not deter Congress from enacting the bill.
I am pleased to have this opportunity to comment on certain aspects of the bill and on some of the questions that have been raised:
Constitutionality Of ''Minimal Diversity''
Some persons with whom I have spoken have expressed the assumption that the ''complete diversity'' prerequisite for federal diversity jurisdiction derives from the Constitution. In reality, that prerequisite is purely statutory. See Strawbridge v. Curtis, 3 Cranch 267 (1806) (noting that the complete diversity requirement derives from ''[t]he words of the act of congress,'' not the Constitution itself). H.R. 3789 would change this statutory ''complete diversity'' rule for class actions and would allow the exercise of federal diversity jurisdiction over putative class actions where only ''partial diversity'' exists.
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Such a provision would be wholly consistent with Article III of the U.S. Constitution. The U.S. Supreme Court has observed that ''in a variety of contexts, [federal courts] have concluded that Article III poses no obstacle to the legislative extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are not co-citizens.'' State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530–31 (1967) (citing American Fire & Cas. Co. v. Finn, 341 U.S. 6, 10 n.3 (1951); Wichita R.R. & Light Co. v. Public Util. Commn., 260 U.S. 48 (1922); Barney v. Latham, 103 U.S. 205, 213 (1881)).(see footnote 11)
Limitations On State Court Class Actions
Some persons have asked whether H.R. 3789 would end most (and potentially all) state court involvement in consumer class actions, because even intra- state consumer class actions would contain putative class members from out of state and thus warrant federal jurisdiction under H.R. 3789. This question misapprehends how class actions work.
Under H.R. 3789, a class consisting of citizens of one state may sue one or more defendants who are also citizens of that state in state court under state laws, and such a class action could not be removed to federal court. For example, if certain citizens of Tennessee bring a state law-based class action against a Tennessee bank and they wish to have their claims heard in a Tennessee state court, they may propose a class limited to Tennessee citizens. The key is that the parties bringing the lawsuit control the issue—if they want to have a fundamentally local dispute heard in state court, they may do so simply by limiting the class they wish to represent to citizens of the same state as the defendant.
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Counsel bringing class action lawsuits engage in this sort of limiting activity every day. Counsel frequently limit their proposed classes to the citizens of a single state and specifically exclude citizens of other jurisdictions (even though such persons may have purportedly similar claims), They employ that tactic to improve their chances of obtaining class certification—that is, to avoid arguments that class certification should be denied because of the involvement of varying state laws of multiple jurisdictions. See, e.g., In re American Medical Sys., Inc., 75 F.3d 1069, 1085 (6th Cir. 1996) (noting the difficulty of certifying a matter for class treatment where varying state laws would apply).
Mid-Litigation Removals
At a June 4 Subcommittee discussion of H.R. 3789, some Members suggested that if a class action is brought in state court and is limited to citizens of one state suing defendants who are citizens of that same state (so as to preclude removal), the defendant would be able to remove the case if at a later point in the litigation, some of the class members moved to a different state. There is no basis for such a concern.
It is black letter law that ''whether federal diversity jurisdiction exists is determined by examining the citizenship of the parties at the time the action is commenced.'' 13B C. Wright & A. Miller, Federal Practice and Procedure §3608, at 448–49 (1998). Thus, if a person who was a member of the class at the outset changes citizenship, that development should not affect the question whether federal jurisdiction exists.
To confirm that this principle would apply to H.R. 3789, the legislative history might include language noting that consistent with current law, changes in the citizenship of members of the class originally described in the complaint would not permit removal. However, the legislative history should also make clear that if the class proponents change the class definition to add to the class persons who would bring the case within federal jurisdiction (e.g., by changing the matter from a single-state action against an in-state defendant to a nationwide class), removal would be permitted. In short, the legislative history should stress that if the class proponents structure the class action to fall outside federal jurisdiction, that structure will be honored unless changed.
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Even without this legislative history, class proponents wishing to avoid the theoretical ''moving class member'' problem could simply define their class to include only persons who are citizens of the state at both the time of commencement of the action and at the time of judgment. Under such a definition, if someone moved out of state during the pendency of the action, they would simply exit the purported class. This sort of ''flexible'' class definition is commonly used in current practice. For example, in product liability class actions in which the plaintiffs seek a repair or replacement of an allegedly defective product, the class is often defined in terms of persons who are ''current owners'' of the product. If a persons sells his/her product to somebody else while the action is pending, he/she leaves the class because they no longer have a claim. In other cases, class definitions exclude persons who, during the pendency of any action, may conclude to pursue their claims on an individual basis. Under such definitions, a person deciding to pursue claims on his/her own would simply leave the purported class.
Jurisdictional Amount
The bill's federal jurisdictional provisions do not include a ''jurisdictional amount'' requirement. Such an ''amount in dispute'' threshold for invoking federal diversity jurisdiction is unnecessary in class actions. By definition, the dollar amounts at issue in class actions are large, typically dwarfing what is at stake in non-class actions that are subject to federal diversity jurisdiction. Thus, as discussed previously, class actions satisfy the general principle reflected in the current 28 U.S.C. §1332 that only relatively large controversies (measured in terms of the amount in controversy) should be allowed into federal court under a diversity jurisdiction theory.
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A significant ''amount in controversy'' threshold—$1 million for all claims of all purported class members in the aggregate—theoretically could be added to H.R. 3789 as a prerequisite for invoking federal diversity jurisdiction over class actions. But it is difficult to imagine a purported class action that would not meet this threshold. Such a provision thus would serve only to spawn unnecessary disputes over whether a case actually meets the ''amount'' threshold and would cause parties and courts to waste time adjudicating the obvious.
''Comparable Representative Action''
The proposed amendment to 28 U.S.C. §1332 would grant federal jurisdiction over certain lawsuits ''which are brought as a class action or comparable representative action.'' Under this language, class actions that state courts might now or in the future choose to call something other than ''class actions'' would still be within the scope of section 1332. To avoid any confusion, the word ''representative'' might be dropped so that the statute would speak of ''class actions or comparable actions.'' Alternatively, the word ''equivalent'' might be substituted for ''comparable,'' so that the statute would refer to ''class actions or equivalent actions.''
''Other Person''
The proposed amendment to 28 U.S.C. §1332 states that the question whether the diversity requirement was satisfied would be determined by looking to the citizenship of ''any member of a proposed plaintiff class or other person on whose behalf the action is brought.'' This language tracks the ''other representative action'' phrase discussed above, taking account of the possibility that some state courts may at some point call their ''class actions'' something else. Deletion of the phrase would not change the bill's substance, and this point might better be addressed in legislative history language.
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''Any Defendant'' Removal
The bill would permit any defendant to remove a class action to federal court (as opposed to requiring that all defendants concur in removal). This is an important facet of H.R. 3789 because in class actions, there is a risk that defendants will be named who are not ''real'' defendants and whose sole function is to refuse to concur in removal of a case so as to prevent the other defendants from obtaining access to federal court. These ''quasi-defendants'' may have very little exposure relative to the other defendants in the case or may be persons who plaintiffs plan to drop from the case before trial. Such defendants should not be allowed to preclude other defendants with substantial exposure from removing the case.
Rule 23 Treatment
The bill provides that ''[a]ny class action removed to federal court shall be deemed as brought under Rule 23 . . . and treated as such.'' As I read it, this sentence merely provides that a state court class action complaint that may not be pleaded in accordance with federal court class action practices would, after removal, still be treated as a proposed class action by the federal court. This is another point that might be better addressed in the legislative history, and dropping this language would not effect a significant change in the bill.
Elimination Of One-Year Restriction
The bill's elimination of the one-year deadline for removing class actions to federal court is another important feature of H.R. 3789.
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At present, there are two deadlines for removing purported class actions to federal court. First, under 28 U.S.C. §1446(b), a defendant must remove a case within thirty days after receiving the complaint if the complaint reveals the existence of federal jurisdiction over the matter. After that thirty-day period has expired, a defendant may remove a case only if the plaintiffs present ''an amended pleading, motion, order, or other paper from which it may first be ascertained that the case is one which is or has become removable.'' In other words, after those first thirty days, a class action cannot be removed unless the lawsuit is altered (e.g., by plaintiffs adding claims, by plaintiffs redefining the parties or the class) or plaintiffs reveal matters denoting the existence of federal jurisdiction that were not included in the original complaint. In short, after the initial thirty-day period, the removability of a case is generally controlled by the actions of the plaintiffs or their counsel.
The second removal deadline in 28 U.S.C. §1446(b) states that no matter what plaintiffs do after their action has been pending for one year, it may not be removed on the ground that there is federal diversity jurisdiction over the lawsuit. In class actions, this second deadline has resulted in considerable abuse of process. As was demonstrated in testimony at the March 5 hearing, counsel frequently plead around federal jurisdiction when they first file their class actions. Then, after the one-year removal period passes, counsel delete these restrictions, and the real lawsuit reveals itself.
Even if H.R. 3789 were enacted in all other respects, there would remain a major risk of subterfuge. A party could plead a non-removable class action (e.g., an action on behalf of a purported class of Tennessee residents against a Tennessee corporation). Then, at the stroke of midnight a year after the complaint was filed, counsel could turn his/her lawsuit into a nationwide class action that should be subject to federal jurisdiction under H.R. 3789's provisions but that cannot be removed because of the one-year removal bar.
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''In Any Respect''
The proposed section 1369 in H.R. 3789 states that ''[i]f a district court determines that any action subject to its jurisdiction solely under the provisions of section 1332(b) may not proceed in any respect as a class action . . ., the court shall dismiss the action for lack of subject matter jurisdiction.'' As I read this language, if a court determines that there is no respect in which a removed case may proceed as a class action, the case shall be dismissed. On the other hand, if the court determines that there is some respect in which class treatment is appropriate (e.g., a limited class), the case may remain in federal court. The idea is to ensure that if a court decides to afford class treatment to any aspect of a case, it will remain subject to federal jurisdiction.
Dismissal
In looking at the proposed section 1369 in the bill, some have questioned whether dismissal is the appropriate remedy when a judge determines that an action cannot proceed as a class action.
This provision would ensure that cases in which the named plaintiffs' claims—standing alone—do not satisfy federal jurisdictional requirements would not remain in federal court. Typically, class certification is one of the first items a court will address in a purported class action. If a federal court essentially decides to dismiss the class claims (which is usually the whole reason for filing such an action in the first place), it makes good sense to dismiss the action, since the lawsuit's core purpose has been eliminated.
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Named plaintiffs in failed class actions often have little interest in pursuing their claims individually and often discontinue litigating. If they do wish to continue litigating, however, they may simply refile their case in state court. There are legions of cases (including the U.S. Supreme Court's rulings in the American Pipe and Crown Cork cases) holding that the claims of such parties would not be deemed time-barred if they refile their claims. The legislative history might reflect that H.R. 3789 is not intended to alter those existing tolling precedents.
Class Member Removal
A few persons have suggested that unnamed class members and/or persons who intervene as plaintiffs in class actions should be given the same right to remove that would be afforded to defendants under H.R. 3789. Although I am doubtful that a plaintiff removal provision would be used very frequently, it is conceivable that there would be circumstances in which allowing unnamed class members or plaintiff-intervenors to remove would be consistent with the purposes of the class action device.
Effects On State Laws
A very positive attribute of H.R. 3789 is that is does not change substantive law in any respect. It addresses a serious problem with present class action problems by simply changing judicial forums, not substantive law. It may be advisable to affirm this point in the legislative history.
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Applicability
As drafted, H.R. 3789 would apply to already pending cases and would permit their removal to federal court. Some have asked whether the bill's applicability should be limited to cases filed after a certain date.
At the March 5 hearing on mass torts and class actions, the Subcommittee heard overwhelming evidence that serious state court class action abuses are occurring in currently pending cases. In some cases, both class members and defendants are having their due process rights denied at this time. If H.R. 3789 is not made applicable to such cases, Congress will be turning a blind eye to the injustices presently occurring in those matters.
It should be stressed, however, that the core purpose of H.R. 3789 is to deal with an ongoing problem with rampant state court class action abuses. Thus, even if the bill were limited to cases filed after a date certain, it still would be a very positive step toward cleaning up those abuses.
Eleventh Amendment Issues
I understand that some persons may have expressed concern that H.R. 3789 may pose a constitutional problem by allowing State governments that are class action defendants to remove their cases to federal court and then claim that the federal court is constitutionally unable to order the State to provide relief under Eleventh Amendment immunity principles. This concern is unwarranted.
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''[A] state is not a 'citizen' of any state, and when a state is a real party in interest, [a] case cannot be removed on the basis of diversity [jurisdiction].'' C. Wright & A. Miller, Federal Practice and Procedure §3723, at 324–25 (1998) (citing Stone v. South Carolina, 117 U.S. 430, 433 (1886); Postal Tel. Cable Co. v. Alabama, 155 U.S. 482, 487 (1894); Minnesota v. Northern Secs. Co., 194 U.S. 48, 63 (1904); Brown v. Francis, 75 F.3d 860, 865 (3d Cir. 1996) ('''The rule that a state is not a ''citizen'' for diversity [jurisdiction] purposes is a long-standing one; it enjoys a history of acceptance, which remains undiluted by the passage of time.' '') (citation omitted).) In other words, because a State itself can never be a citizen of any State, no ''member of a proposed class'' could ever be a ''citizen of a State different from'' a State government defendant. Thus, H.R. 3789's proposed changes to 28 U.S.C. §1332 would not provide a defendant State government with a basis for removing a plaintiff class action brought against it.
Indeed, to remove a case on the basis of the proposed changes to section 1332, the State would have to argue that it is not a ''real party in interest'' to the litigation, an argument that would destroy any Eleventh Amendment immunity that the State may wish to assert. See, e.g., Ramada Inns, Inc. v. Rosemount Memorial Park Ass'n, 598 F.2d 1303, 1308–09 (3d Cir. 1979) (Seitz, J., concurring) (noting that Supreme Court precedent required ''that the real party in interest inquiry . . . be applied to both the eleventh amendment and diversity [jurisdiction] issues''); PYCA Indus., Inc. v. Harrison County Waste Water Mgmt. Dist., 81 F.3d 1412, 1416 (5th Cir. 1996); University of Rhode Island v. A.W. Chesterton Co., 2 F.3d 1200, 1203 (1st Cir. 1993); Northeast Fed. Credit Union v. Neves, 837 F.2d 531, 534 (1st Cir. 1988); Ronwin v. Shapiro, 657 F.2d 1071, 1073 (9th Cir. 1981). It would be pointless for a state to remove a case in order to assert Eleventh Amendment immunity because in removing the case, it would be admitting that such immunity could not properly be invoked in that case.
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It may be advisable to confirm this understanding of the effect of H.R. 3789 in its legislative history.
Conformity With 1998 Securities Bill
The Securities Litigation Uniform Standards Act of 1998, S. 1260, which has been passed by the Senate and is now before the House, addresses the fact that securities class action lawsuits have shifted from federal to state courts in a manner that has prevented the Private Securities Litigation Reform Act of 1995 from fully achieving its objectives. In part, that legislation deals with federal court vs. state court jurisdiction over certain types of class actions.
S. 1260 and H.R. 3789 both address serious abuses of the class action device that are occurring in state courts. S. 1260 differs, however, in that it concerns only one type of state court class action—those involving securities-related claims. And unlike H.R. 3789, S. 1260 would alter substantive law—it would flatly prohibit certain kinds of state law-based securities class actions. Nevertheless, the bills contain some provisions on federal jurisdiction and removal issues that theoretically could pose a risk of conflicts, depending on the final form of both bills.
To avoid any such conflicts, a provision could be added to H.R. 3789 to exclude from its federal diversity jurisdiction expansion those class actions concerning ''covered securities'' (as defined in S. 1260), allowing S. 1269 to govern exclusively any jurisdictional determinations over such matters.
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Conclusion
For all of the foregoing reasons, I respectfully submit that the case for expanding federal jurisdiction over putative class actions is overwhelming. H.R. 3789 should be enacted.
STATEMENT OF JOHN W. MARTIN, JR.
VICE PRESIDENT-GENERAL COUNSEL, FORD MOTOR COMPANY
BEFORE THE COURTS AND INTELLECTUAL PROPERTY SUBCOMMITTEE
OF THE HOUSE COMMITTEE ON THE JUDICIARY HEARING
ON MASS TORTS AND CLASS ACTIONS (MARCH 5, 1998)
I thank the Subcommittee for this opportunity to speak today about the serious abuses that are occurring in state court class actions.
Let me begin by sharing with you Ford Motor Company's recent experience with class actions, and in particular, state court class actions. What we are experiencing is typical of what other consumer product manufacturers (particularly motor vehicle manufacturers) are now facing.
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A. The Proliferation Of Class Action Lawsuits.
In the last several years, the number of putative class action lawsuits filed against Ford has skyrocketed. In 1990, only eight putative class action lawsuits were pending against the Company. By the end of 1995, however, over 50 such lawsuits were pending, and by the end of 1997, that number had increased to over 100.
These figures parallel the surge in class action lawsuits that other companies are experiencing. Based on data from recent hearings, the Federal Judicial Conference's Advisory Committee on Civil Rules has observed that over the past three years, U.S. companies have experienced 300% to 1,000% increases in the number of purported class actions filed against them.(see footnote 12) And a study by the highly regarded RAND Corporation confirms this trend.(see footnote 13)
With the growth of class action lawsuits has come increased legal exposure to Ford (and companies like it). The types of legal claims asserted, the number of products and services at issue, and the amounts sought have all burgeoned. For instance, in 1996, a class action was filed against Ford purportedly on behalf of more than 23 million vehicle owners (or almost nine percent of the population of the United States at that time). Lawsuits of this size are unprecedented in the history of Ford Motor Company. Not surprisingly, the amounts collectively demanded in these actions have also increased. It is no longer unusual for Ford to be served with a class action lawsuit seeking damages of a billion dollars or more.
B. The Erosion of Class Action Standards.
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Given the immense stakes involved in these class actions against Ford, and the fact that the vast majority of named and unnamed plaintiffs live outside Delaware (where Ford is incorporated) and Michigan (where Ford is headquartered), one might think that these class actions would generally be filed and litigated in the federal district courts. After all, a core function of the federal courts is to adjudicate claims between the citizens of different states that involve substantial amounts of money. But the majority of class actions against Ford and other companies in recent years has been filed in state courts. The RAND Report notes that the ''doubling or tripling of the number of putative class actions'' has been ''concentrated in the state courts.''(see footnote 14)
SUPRA NOTE 2, AT 15.
The reason for this explosion of state court class actions is straightforward. State courts in a number of jurisdictions have exhibited a laissez-faire attitude toward class action lawsuits—that is, many local courts are willing to certify for class treatment cases that do not comport with the basic class action requirements.(see footnote 15) Recognizing this opportunity, the class action plaintiffs' bar has ''voted with its feet.'' They have taken their lawsuits to state courts that are less likely to exercise the rigorous case management that is necessary to (a) prevent the class action device from being used improperly against defendants and (b) ensure that all parties (including unnamed class members) receive due process. Indeed, some state courts actually have certified proposed classes identical to ones rejected outright by federal courts. Having discovered an open door in state courts, plaintiffs' counsel are filing class action lawsuits that they never would have attempted to bring just a few years earlier.
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In interviews for the RAND Report, many attorneys (including some plaintiffs' counsel), observed that ''too many non-meritorious [class action lawsuits] are [being] filed and certified'' for class treatment.(see footnote 16) As a result, corporations (both large and small) are being forced to expend substantial resources defending an onslaught of cases, most of which do not come close to satisfying the class action prerequisites. By readily obtaining certification of huge classes in state courts, plaintiffs' attorneys are able to create enormous financial exposure and to thereby force settlements of cases that otherwise would not be taken seriously.
C. Unwarranted Lawsuits Driven By Lafters.
In many instances, the purported class actions that are being filed assert claims that are utterly without merit (or marginal at best). Many of these cases are driven solely by lawyers' desire to make money, not by real concerns expressed by real consumers. Plaintiffs' lawyers eager for large fee awards scan the newspapers and tabloid news shows looking for controversies that can be turned into class actions: debates about the utility of certain consumer products, corporate decisions that upset certain individuals or interest groups. Virtually every event in public life these days seems to become the subject of a class action lawsuit.
For example, within days after the fight in which Mike Tyson bit Evander Holyfield's ear, lawsuits were filed. These were not actions by Holyfield, the only person who really got hurt. They were class actions filed on behalf of pay-per-view cable television subscribers on the theory that they did not get their money's worth because the fight was cut short.
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Another example is a case that was brought against Ford in New York state court by the Milberg Weiss firm, one of the better known plaintiffs' class action firms in the country. That case involved an honest mistake Ford had made—it had put a slightly overstated price on the window stickers for certain Ford Explorer vehicles it had sold.(see footnote 17) As soon as we discovered the mistake, we began sending letters to our affected customers apologizing for the error and enclosing checks that more than compensated them for the pricing error. Nonetheless, fully knowing that this refund program was already well underway, Milberg Weiss filed a class action charging that Ford had committed fraud. Even worse, it asked the court immediately to enjoin Ford from continuing its refund efforts—presumably so that the plaintiffs' lawyers could get a cut of the refund money (even though they played no role in prompting that voluntary refund effort). In this case, the court properly dismissed the case. But it still required Ford to unnecessarily expend time and corporate resources on a lawsuit that clearly serves no legitimate purpose.
As further evidence of the contrived nature of these class actions. it should be noted that the named plaintiffs often are the lawyers themselves, their relatives, or their employees.(see footnote 18) Or they are plaintiffs lured into a suit by an advertisement placed by lawyers urging them to let the lawyers file a lawsuit on their behalf. These purported ''victims'' of the defendant's misconduct typically neither know nor care much about the matters in these lawsuits.
D. Exploitation Of Consumers.
The real purpose of the vast majority of class action lawsuits is to make money—not for consumers, but for the lawyers bringing the suit. As a result, consumers often are exploited and rarely receive substantial awards, while class action counsel frequently walk away with millions. For instance:
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The Baton Rouge (La.) Advocate reported that in a settlement of a state court class action involving toxic pesticide fumes from a chemical plant, the residents of a New Orleans neighborhood each received a few thousand dollars. But the class action lawyers walked away with over $25 million in legal fees and expenses.
An article in the San Diego Union Tribune criticized the settlement of a state court class action in which the author had received 93 cents and her class counsel had received $140,000.
The Chicago Tribune reported that one state court class action settlement with a mortgage bank yielded an $8.5 million payment to the class attorneys, but a $91.33 debit to the class members' mortgage escrow accounts.
These reports are particularly disturbing because they reveal how grossly the class action device has been distorted. The class action device was intended to protect consumers. It was not created to enable lawyers to get rich.
Indeed, many of the lawsuits are so disingenuous that when consumers learn about the suits; many often want no part of them. For example, in the product liability arena with which Ford is most familiar, virtually none of the putative class members have actually experienced a tangible injury. Instead, the theory of the claim is that all purchasers of the allegedly defective product should be paid money today because there is a risk that their product may malfunction at some indefinite time in the future. Our experience has been that, on those occasions when the views of the absentee class members become known, many of them say that they want no part of the lawsuit and/or disagree with the allegations made therein.
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E. Denials Of Due Process In State Court Class Actions.
Consumers are not the only parties being abused by class actions. As defendants in state court class actions, U.S. companies are being denied fundamental due process rights. Let me describe a few of types of problems defendants commonly incur in these courts.
Some state courts ignore the due process rights of out-of-state corporate defendants. In these jurisdictions, the defendant is not given a fair opportunity to contest the claims made against it. The most outrageous example of this is the ''drive-by class certification'' in which a state court judge grants plaintiffs' motion to certify his claims for class treatment before the defendant even has a chance to respond to the motion (or, indeed, has even been served with the complaint).
Ford has been a frequent victim of this practice. For example, in one lawsuit filed against Ford in a Tennessee state court,(see footnote 19) the complaint was filed on July 10, 1996. Plaintiffs filed several inches of documents with their complaint. Astoundingly, by the time the court closed that same day, the judge had entered a nine-page order granting certification of a nationwide class of 23 million owners of Ford, Lincoln, and Mercury vehicles—one of the largest class actions ever certified by any court.(see footnote 20) In the order, the court stated that it had conducted ''a probing, rigorous review'' of the matter. I am not sure how you could possibly do that in a few hours on the day a case is filed. And I am quite sure that you could not do ''a probing, rigorous review'' when the defendant was never even notified about the lawsuit before that order was entered and was provided no opportunity to tell its side of the story.
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When we checked on the class certification practices of this court, we found that Ford had not been the only due process victim. Only a few days earlier, the same plaintiffs' attorney had filed another multistate class action—that one alleging antitrust violations in the music/compact disc industry.(see footnote 21) Once again, in that major class action, the trial court had entered an order granting class certification on the same day the complaint had been filed, long before the defendants were notified of the lawsuit and certainly before they had been afforded any opportunity to respond to the request for class certification.
Another common problem with state court class actions is the ''I never met a class action I didn't like'' phenomenon. Although most state courts will at least give the defendant a chance to respond to a class certification motion, many of them employ standards that are so lax that virtually every class certification motion filed is granted, even where it is obvious that the case cannot, consistent with basic due process principles, be tried to a jury as a class action. Here again, Ford has been a victim of this phenomenon.
In 1993, several purported class actions were filed against Ford alleging that Bronco II sport utility vehicles are ''defective'' because they are ''unstable'' (i.e., they may, under certain conditions, ''roll over.'') All but one of these lawsuits were removed to federal court and consolidated in the U.S. District Court for the Eastern District of Louisiana. After several years of discovery and motion practice, plaintiffs moved to certify a nationwide class action. Ford opposed that motion, and extensive briefing on the propriety of class treatment was submitted to the court. After consideration, the court denied the motion early last year. In a lengthy, thoughtful opinion that I commend to the Committee's attention, Chief Judge Sear identified a long series of reasons why trying the case as a class action would deprive both Ford and unnamed putative class members of their due process rights.(see footnote 22)
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Unfortunately, there was one Bronco II class action that did not make it to Judge Sear's court. That case, Rice v. Ford Motor Co.,(see footnote 23) had been filed in Alabama state court by many of the same lawyers who were involved in the federal court proceeding. Ford removed the case (which was virtually identical to the others) to federal court, but it was remanded to the same Alabama state court. After Judge Sear denied class certification in the consolidated Bronco II cases, the Rice plaintiffs asked the Alabama state court to certify a class anyway. The judge granted their motion, issuing an order that completely ignored all the due process problems upon which Judge Sear's contrary decision was based.
The judge who granted class certification in Rice is well-known to those who practice on both sides of the class action bar. As was noted in a recent study conducted by Stateside Associates, that judge certified at least 35 cases for class treatment during 1996–1997, almost as many as were certified by all 900 federal trial court judges combined during calendar year 1997. And the Stateside researchers were unable to find any case in which the judge had ever denied class certification. In short, in this Alabama state court (and many others like it), the outcome of a class certification motion (no matter how flawed) is virtually a foregone conclusion, with little protection of defendants' due process rights.
F. Inadequacies Of State Courts As Arbiters Of Interstate Class Actions.
At bottom, state courts are simply not the appropriate tribunals for many class action lawsuits, particularly those with interstate commerce dimensions. In many (if not most) instances, state court class action cases involve putative class members from multiple jurisdictions suing defendants from outside the forum state. This engenders the bizarre situation in which a state court in one state (e.g., California) is interpreting the state law of another (e.g., New Jersey) and resolving the claims of New Jersey residents. What business does a California court have dictating to New Jersey what its laws mean and in resolving the claims of its citizens? This raises substantial federalism concerns.
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Other state courts have adopted a different, equally unsatisfactory approach. They are applying their own state's laws to all claims asserted in a purported class action, even though the class is comprised primarily of out-of-state residents and even though the laws of those class members' respective home states may be radically different.(see footnote 24)
In addition to these problems, many state courts have neither the complex litigation experience nor the support staff necessary to address the complex., technical issues normally presented by class actions. And perhaps most importantly, they lack any mechanism for coordinating parallel litigation.
Constant certification of class actions in state courts subjects defendants to multiple lawsuits in different states based on the same facts and purported causes of action. Once one case is certified, plaintiffs' counsel in other states (who are often working in concert) often file ''copycat'' lawsuits in other states, and use the grant of class certification in the first state to bolster their case. Because state courts have no mechanism to consolidate cases, as do the federal courts, defendants are unfairly required to expend substantial resources defending multiple lawsuits. In such circumstances, there is no mechanism for achieving coordination and avoiding inconsistencies in results. Indeed, in some instances, the two state courts are forced to compete, each vying to control the litigation. Besides being wasteful, this situation is quite unfair, potentially giving the same classes several bites at the apple against a class action defendant.
If, however, overlapping or similar class actions are filed in two different federal courts, the multidistrict litigation process permits the transfer and consolidation of those cases for pretrial purposes, particularly the coordination of discovery. This is a much more efficient and effective system that does not needlessly waste judicial or corporate resources.
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G. Use Of Manipulative Pleading Tactics To Evade Federal Jurisdiction.
The ''anything goes'' mentality in state courts has led to a sad reality: as a practical matter, the most important question determining the outcome of a class action lawsuit has now become, not the merits of the claims or the propriety of class treatment, but whether the case can successfully be removed to federal court. Because of the lackadaisical way in which some state courts treat class actions, a class action that stands virtually no chance of succeeding in a federal court can result in a multi-million (or billion) dollar judgment if it ends up in state court. Thus, the fight over the existence of federal jurisdiction becomes, as a practical matter, the whole ballgame.
The lawyers who file class action lawsuits recognize this. Accordingly, they have become increasingly adept at manipulating their pleadings to keep their putative class actions out of federal court.
For example, in some instances a complaint is filed that, fairly read, gives rise to a claim under some federal statute, thereby qualifying the case for the assertion of federal question jurisdiction. To disguise this fact, the complaint will omit any explicit reference to the federal claim, or may even expressly disclaim any intent to pursue an available federal claim.
On the diversity side, lawyers who want to keep a high-stakes class action out of federal court often manipulate the parties in an attempt to destroy complete diversity. Under traditional principles of diversity jurisdiction as applied to class actions, ''complete diversity'' exists only if the state of citizenship of all named plaintiffs is completely different than the state of citizenship of all named defendants. To destroy this, lawyers whose primary target is an out-of-state deep-pocket corporation sometimes name a token defendant who resides in the same state as one or more of the named plaintiffs. For example, a lawyer wanting to sue Ford in Texas state court may name as a co-defendant a Texas-based employee of Ford, or a Ford dealer located in Texas.
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The inherently fraudulent nature of this tactic is obvious: although all putative class members may have bought a Ford vehicle (and therefore may conceivably have a claim against Ford), few (if any) of the putative class members had any dealings with the token in-state defendants, meaning that a classwide judgment against these defendants is impossible. As all parties recognize, Ford is the only real target of the lawsuit. The in-state defendants are there only to facilitate the remand of the action to state court on the basis of the ''absence of complete diversity.'' Once the jurisdictional battle is over, these defendants usually fall by the wayside.
Alternatively, lawyers sometimes include on the plaintiffs' side of the case a named plaintiff who lives in the same state as the defendant. Thus, Ford has been served with a complaint in Alabama state court which purports to be brought by three Alabama residents and one Michigan resident. Again, the manipulative intent here is clear. Why would a Michigan resident who has a grievance against a Michigan-based company travel all the way to Alabama to file her lawsuit? Obviously, the reason is that her lawyers are trying to prevent Ford from defending against this inherently nationwide controversy in a federal court.
The ''amount-in-controversy'' prong of the federal diversity requirement also is the subject of frequent manipulation. The U.S. Supreme Court's decision in Zahn v. International Paper(see footnote 25) has been interpreted as holding that, in a putative class action, the ''jurisdictional amount'' requirement (now $75,000) is met only if each and every putative class member's individual claim is worth that amount. Exploiting this general rule, class action complaints often declare over and over again that all putative class members seek less than the jurisdictional amount (sometimes $74,999).
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In recent years, some exceptions to the basic Zahn rule have developed. For example, some federal courts of appeals have held that class actions that seek punitive damages in excess of the jurisdictional amount may meet the amount-in-controversy requirement.(see footnote 26) In response, class action complaints now purport to ''waive'' any and all claims that might conceivably give rise to a punitive damage award (or at least limit punitive damages to a lesser amount).
These kinds of ''claims-shaving'' tactics raise disturbing issues of adequacy-of-representation and due process. While a single plaintiff suing solely in his own name surely is the ''master of his complaint'' and may limit the claims he asserts or the relief he seeks in order to stay in state court, a litigant (and his counsel) who seeks to represent large numbers of other people in a class action is constrained by his fiduciary obligations to the absentee members of the class. As several courts have recognized, it is inherently improper for a class action lawyer to unilaterally ''waive'' otherwise available claims that absentee claimants might wish to assert simply in the name of forum-shopping.(see footnote 27) Nevertheless, it happens every day—class counsel sacrifice the claims of unnamed class members in order to keep their cases in state courts.
Clever lawyers can exploit still other tricks to deprive an out-of-state class action defendant of its right to defend itself in a federal forum. For example, under current law, all defendants must consent to the removal of a case to federal court. If one defendant objects, the case cannot be removed. Accordingly, plaintiffs' lawyers sometimes join a ''plaintiff-friendly'' person or entity as a defendant, with the understanding the nominal defendant will use his status to veto any removal attempt.
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Another abuse stems from the requirement that any lawsuit be removed to federal court within one year after its ''commencement.'' Lawyers sometimes quietly file putative class actions in state courts that have no deadline for providing service, and then decline to serve the defendant until the one year deadline has expired. Alternatively, they include statements in their complaint designed to insulate the case from removal (such as assertions that only a nominal per-claimant amount is sought), wait one year, and then file an amended complaint that raises the amount-in-controversy or eliminates other impediments to removal only after the one year deadline has expired.
These pleading tactics (and others like them) invariably are employed in purported class actions that, by virtue of the inherent diversity of the real parties in interest and the amounts actually at stake, ought to be litigated in federal court. They are complicated lawsuits that require the substantial resources and expertise that the federal courts are uniquely situated to devote to them (and that state courts, which spend most of their time handling smaller matters, are not institutionally well-suited to handle). They are also lawsuits that present exceedingly high-stakes for the defendant, and therefore give rise to the risks of parochialism and prejudice that the federal court system is designed to prevent (but that, regrettably, infect some state court systems).
These types of pleading tactics are intended to disguise the inherently federal character of these lawsuits. They elevate the deliberately manipulated ''form'' of the lawsuit over its actual substance. They ought not be allowed. Many class actions—truly large cases with interstate commerce implications—plainly belong in the federal courts. Accordingly, I urge this Subcommittee to consider revising the diversity jurisdiction statute (28 U.S.C. §1332) and the case removal statutes (28 U.S.C. §1441, 1446) as they relate to class actions, to ensure that putative class actions that properly belong in federal courts are in fact brought in (or are readily removable to) federal courts.
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Conclusion
Without question, state court class actions now loom as substantial litigation threats to Ford Motor Company and other U.S. corporations, large and small. For this reason, curbing state court class action abuses should be a major legislative priority. The trends were are experiencing and the abuses we are being forced to undergo should not be permitted to continue.
Once again, I thank the Committee for its attention, and for the attention it is devoting to the problem of abuses of the class action device. I look forward to working with you to develop a comprehensive congressional solution to this problem that will ensure that the class action device is used only for legitimate purposes.
STATEMENT ON MASS TORTS AND CLASS ACTIONS
BEFORE THE SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY
OF THE HOUSE COMMITTEE ON THE JUDICIARY
ON BEHALF OF THE U.S. CHAMBER OF COMMERCE
BY DR. JOHN B. HENDRICKS, MARCH 5, 1998
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I thank you for the opportunity to talk with you today about class actions.
I am Dr. John B. Hendricks, the founder and President of Alabama Cryogenic Engineering, Inc., a small research and development company, located in Huntsville, Alabama. I am here today as a member of the United States Chamber of Commerce—the world's largest business federation, representing more than three million businesses and organizations of every size, sector, and region. More than 96 percent of our members are small businesses with 100 or fewer employees, 71 percent of which have 10 or fewer employees. I serve on the Chamber's Council on Small Business, the principal advisory body to the Chamber on small business matters.
I have a Ph.D. in Physics from Rice University, a Masters in Physics from Southern Methodist University and a Bachelors of Science in Electrical Engineering from the University of Alabama, in Tuscaloosa. I was a Research Professor of Physics at the University of Alabama, Huntsville from 1972 to 1984. 1 started Alabama Cryogenic Engineering in 1984 to do research and development in support of activities of the National Aeronautics and Space Administration. Today, the new focus of our business is on developing improvements in medical x-ray systems and in advanced concepts for rocket propulsion. We are a relatively small operation, currently employing four persons. But with a new orientation that is seeking broader commercial application of the technology that we have developed, we are definitely looking to expand.
As a physicist, I am accustomed to going to meetings, talking about cryogenics, and seeing at least some in the group respond with blank stares, having no idea what I am talking about. Today, the tables are turned a little bit. For better or worse, it looks like I am the only non-lawyer appearing before you. On these mass torts and class action issues, I surely do not understand everything that is being said. But this much I can tell you—class actions have become a noose around the neck of American business.
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Let me begin by making a heartfelt confession. My home state—Alabama—is a ''speed trap.'' I am not talking about one of those set-ups in which a motorcycle cop hides behind a billboard and then chases after out-of-state folks who drive by going a little over the speed limit. I am talking about a situation in which some lawyers in my home state snare out-of-state companies for a shakedown, even when they are not doing anything wrong. This shakedown occurs in the form of state court class actions.
In a number of our smaller Alabama counties, class actions have become a major business—a real cottage industry. For example, I grew and went to the University of Alabama in Tuscaloosa County. The county next door—Greene County—is a prime example of where class actions have become big business. Greene County is Alabama's least populated county, and it has always been looking for ways to generate revenue. In the 1950's, when my county was dry, Greene County did a land office business selling liquor until the 1960's, when my county started permitting liquor sales. In the 1980's, Greene County got special permission from the State to open up dog racing tracks—as a way to help a poor county. And now that dog racing is not drawing in the money, Greene County's new business is class actions.
As in a lot of other places, the local courts in Greene County, which are the courts for most everything (divorce pleas, petty theft prosecutions, and dog bite cases), have also become the home of some of the largest, most complicated lawsuits pending in any U.S. court today. And the number of those cases has been growing rapidly in recent years in Greene and in other Alabama counties.
In some of those cases, the claims are for billions of dollars. For example, I understand that there is one case pending in the Circuit Court of Coosa County (the state's third least populous county) in which a few local lawyers are seeking to require the three largest U.S. automakers to refund the cost of all the air bags ever sold. In a lot of courts, those lawyers would have been tossed out on their ears for filing nonsense like that. Not so in Coosa County. Upon receiving the case, the court there immediately certified a class consisting not only of Alabama residents, but of all owners of the millions of air bag-equipped vehicles nationwide. And the court took that step before the auto companies were even told that they had been hit with the lawsuit. (The court has now been required to withdraw its order, but it remains a bad omen.)
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Not surprisingly, the lawyers involved have announced publicly that they intend to extend their little lawsuit to include all international auto manufacturers as well. In Alabama, our class action bar does not discriminate against any out-of-state corporation—they'll sue anybody, domestic or foreign.
Why is this happening? Several members of our state plaintiffs' bar have figured out that many of our state trial court judges—all of whom are elected—would be very flexible about class actions if asked to do so. Indeed, ''flexible'' understates the situation.
Recently, I became aware of a study prepared by an organization called Stateside Associates (''Stateside''). Stateside researches state government issues, and they undertook an effort to go to local courthouses and to get a first-hand look at what was going on with class actions. According to their report (which I am submitting with my testimony*), they made inquiry in a number of jurisdictions in which there appear to be a lot of state court class actions—Illinois, Tennessee, Texas, California, Florida, and Alabama. (*Materials on file with subcommittee.)
They soon learned, however, that because of limitations on state court docketing systems (the records that the courts keep about the nature of the cases before them), it was difficult to isolate purported class actions for closer analysis. The major exception was Alabama, in which the state courts have computerized docketing systems that make it relatively easy to figure out which cases on the docket are purported class actions.
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Armed with a letter from the Chief Justice of the Alabama Supreme Court asking the cooperation of local court clerks, Stateside researchers visited selected circuit courts around the state to assess the state court class action business. That resulted in the Stateside report, the highlights of which are as follows:
The number of class actions being filed in Alabama state courts appears to be increasing. For example, the Stateside research indicates that in the Circuit Court of Marengo County, no purported class actions were filed in 1995. But seven class actions were filed in that court during 1996; at least nine were filed there during 1997.
These purported class actions typically are not disputes between Alabama residents and Alabama companies. The defendants are both major out-of-state corporations (such as Allied-Signal, A.H. Robbins Corp., American Home Products, Associates Financial Services, AT&T, AVCO, BankOne, BellSouth, Carnival Cruise Lines, Chrysler Corporation, Citicorp, Commercial Credit Corp., Federal Express, Ford Motor Company, General Electric, General Motors Corporation, General Motors Acceptance Corporation, Georgia Pacific, H&R Block, Lucent Technologies, Norwest Financial, Prudential Insurance, Quaker State Corp., State Farm Insurance Companies, Transamerica, and United Technologies).
The proposed classes in these cases normally are not limited to Alabama residents. Some are nationwide (involving persons from all 50 states); most are multistate actions (involving persons from several states other than Alabama).
In some counties, class actions comprise a surprisingly large percentage of the total number of cases filed in these courts of general jurisdiction. For example, in recent years, almost 10% of the civil cases filed in the Circuit Court of Greene County, Alabama, were purported class actions.
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The Alabama state courts are acting like federal courts in the sense that the class actions filed there increasingly are being brought by out-of-state counsel. For example, the counsel who filed the purported class actions identified in the Stateside study included attorneys from Arkansas, California, Florida, Illinois, Mississippi (whose state courts do not recognize class actions), Missouri, New York, Pennsylvania, and Texas.
Perhaps the most disturbing finding of the study is that, as I suggested before, some Alabama state court judges show absolutely no restraint in certifying cases for class treatment. Most noteworthy is the lone judge who presides over the Seventh Judicial Circuit of Alabama, which encompasses Greene, Sumter, and Marengo Counties.
Shockingly, Stateside's researchers were unable to find any case over the last three years in which that judge has denied a request that a case be heard as a class action. And during 1996 and 1997, that judge granted motions to certify classes in 35 cases. (The other cases were either removed to federal court before the court took any action on class certification issues or were never the subject of a motion for class certification.)
Let me put that number in perspective. I am advised that in 1997, all 900 federal district court judges in the United States combined certified a total of only 38 proposed classes.(see footnote 28) Only 38. Meanwhile, just one state court judge in Alabama alone certified essentially that same number of cases over just a two-year period!
That court is so lax that it apparently is incapable of saying ''no'' to a class certification motion. And that laxity has become so notorious that the court has become a magnet for purported class actions from counsel both within and without Alabama.
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I do not want anybody to leave this hearing with the impression that only Alabama courts serve this ''speed trap'' role. From my conversations with people who run other companies like mine, I can tell you that this phenomenon is happening in other states, particularly Louisiana, Florida, Tennessee, Illinois, and California. And Alabama lawyers, beginning to worry that they are creating too much notoriety for the Alabama judicial system, have begun filing their purported class actions in the state courts of other jurisdictions.
To conclude, let me make two points:
First, what is going on in Alabama is essentially illegal taxation. If you are an out-of-state company and want to sell a product or provide a service in Alabama, you are likely going to have to pay homage to the local class action bar by becoming a defendant in a purported class action and by ultimately paying attorneys' fees. As such, state court class actions in Alabama are essentially levying on interstate commerce a tax that goes directly into the pockets of the class action lawyers who run the scheme. To say the least, that is bad policy. One way or another, the costs of that tax gets passed on to consumers in the form of higher prices. But more importantly, it offends our federal notions of free interstate commerce. This system of improper taxation has spread to other states, and if unchecked, will spread further. This trend must be stopped, something only Congress can do.
Second, I cannot overemphasize the fear that operators of smaller corporations (particularly companies like mine that are looking to get further involved in the design and manufacture of consumer goods) have about the risk of being hit with a class action. We talk with each other. Bigger companies have some capacity to resist these lawsuits. But when a smaller company is hit, the class counsel come swarming around and tell you that if you do not pay the money they demand for a quick settlement, they will own the keys to your company in short order. In short, the purported class actions often create settlement pressures that cannot be withstood. When faced with either (a) risking the loss of a business that one has worked so hard to build or (b) entering into a settlement (usually a settlement that provides little meaningful relief for people in the class but big dollars for the lawyers), smaller or mid-sized companies often have no choice but to follow the path of less risk—go ahead and pay off the blackmail demand posed by the class action. Again, this practice must be stopped, something only Congress can do.
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This problem is not going to be solved by simply ''permitting'' Alabama to put its own house in order. That will not happen. And as I stressed before, this is not just an Alabama problem. Lots of state court class actions are being filed elsewhere. Wherever they happen, they make waves well beyond the state where the litigation is filed—the interstate business of an out-of-state company is affected, as well as the affairs of the many unnamed class members who live outside the state where the case is filed.
To address this serious problem, Congress need not take the intrusive step of forcing state courts to change their class action rules or of otherwise meddling in state court affairs. The real problem here is that under the current rules, companies that get sued cannot get their cases moved to federal courts, where there does not seem to be as many of these really bad abuses. Many of these problems would just disappear if the class actions that present big interstate disputes could be heard in federal court if any of the parties want to move them there. It is as simple as that, and I hope Congress makes that happen.
BIOGRAPHY
Dr. John B. Hendricks
Ph.D., Physics, Rice University 1966
M.S. Physics, Southern Methodist University, 1962
B.S. Electrical Engineering, University of AL 1959
Dr. Hendricks is the President and founder of Alabama Cryogenic Engineering, Inc. Prior to founding ACE, Inc., Dr. Hendricks was a Research Professor of Physics at the University of Alabama, Huntsville, and led the development team that designed and built the superfluid helium cooling system for the Infrared Telescope (IRT), successfully flown on Spacelab 2 in 1983. Dr. Hendricks' current research areas include cryogenic cooling systems for use in zero gravity, miniature heat exchangers, and mechanical cryocoolers. Dr. Hendericks is a nationally recognized authority on space cryogenic systems and cryocoolers, has held continuous independent finding since 1970, and since founding ACE, Inc. has been PI on 30 Phase I SBIR programs and 11 Phase II programs. Dr. Hendricks has authored roughly 25 publications in his research areas and has been awarded three patents for cryogenic devices. Dr. Hendricks was conference chairman of the 1991 Cryogenic Engineering Conference in Huntsville, AL. Selected relevant publications include:
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1. ''Characterization of Superfluid Porous Plug Performance'', J.B. Hendericks and G.R. Karr, Proceedings of ICEC9, Butterworth, UK, 49 (1982).
2. ''Design and performance of Transfer Assembly for the Infrared Telescope for Spacelab 2'', G.R. Karr and J.B. Hendericks, Advances in Cryogenic Engineering 29, 669 (1984)
3. ''The Liquid-Vapor Transition in Porous Plug Operation'', J.B. Hendericks and R.G. Karr, Advances in Cyrogenic Engineering 31, 849 (1986)
4. ''The Minimum Temperature of the Vortex Cryocooler,'' J.B. Hendericks, Advances in Cryogenic Engineering 35, 1341 (1989)
5. ''Heat Transfer and Flow Friction in Perforated Plate Heat Exchangers'', M.J. Nilles M.E. Calkins, M.L. Dingus and J.B. Hendericks, (199), Experimental Heat Transfer, 10 p. 238
6. ''A Neodymium, Plate Regenerator for Low Temperature Gifford-McMahon Cycle Refrigerators'', J. Chafe, G.Green, and J.B. Hendericks (1996), Paper P–14, Presented at 9th Int. Cryocooler Conf.
COMPANY PROFILE
Alabama Cryogenic Engineering, Inc. was founded in 1984 to pursue contract Research and Development in support of National Aeronautics and Space Agency (NASA) space research programs. The primary focus was on very low temperature systems such as Infra-Red Sensors. The company extended its R&D efforts to active refrigeration to be used in Strategic Defense Initiatives (SDI) space systems. The company has recently changed the focus of its R&D programs to include improvements in medical x-ray systems and in advanced concepts for rocket propulsion. All these applications make use of a proprietary metal fabrication technique that was developed in company R&D programs. The company currently employs four persons.
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TESTIMONY OF JOHN L. MCGOLDRICK BEFORE
THE SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY
OF THE HOUSE COMMITTEE ON THE JUDICIARY HEARING
ON MASS TORTS AND CLASS ACTIONS (MARCH 5, 1998)
I appreciate the opportunity to participate in the Subcommittee's discussion today on mass torts and class actions.
My views on class actions have been formed by more than 30 years spent as a private practitioner defending such cases on a variety of subjects, including mass tort, product liability, employment, and securities suits. More recently, my responsibilities as Senior Vice President and General Counsel of the Bristol-Myers Squibb Company have caused me to consider not only the legal, but also the business consequences of the class action device.
1. The Existence Of Class Action Abuse Is Indisputable.
It is clear beyond peradventure that the class action device has experienced serious abuse, often with the perverse result that companies that have committed no legally cognizable wrong find it necessary to pay ransom to plaintiffs' lawyers because the risk of attempting to vindicate their rights through trial simply cannot be justified to their shareholders. All too frequently, corporate decisionmakers are confronted with the implacable arithmetic of the class action: even a meritless case with only a 5 percent chance of success at trial must be settled, from the defendant's point of view, if the class complaint alleges hundreds of millions of dollars in damages. Only recently have some courts realized how radically a decision to certify a class changes the dynamics of a lawsuit. As Chief Judge Posner of the U.S. Court of Appeals for the Seventh Circuit has observed, the mere issuance of an order certifying a case for class treatment ''often, perhaps typically, inflict[s] irreparable injury on the defendants.''(see footnote 29)
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Despite this, I know there are some who still question whether there is any real ''abuse'' of the class action. From personal experience, I can tell you there is. I personally have sat in corporate boardrooms and seen senior management of major American companies make the decision—after shaking their heads in disgust at the legal system—to pay what amounts to blackmail in order to settle truly meritless lawsuits. Often, this decision is made shortly after the company's lawyers have informed these senior executives that the chance of a judgment for the plaintiffs on the merits of the case is quite small. This compounds the irony, and the social wastefulness, of the executives' frequent decision to pay large sums to settle class actions instead of using the money for research, product development, employee benefits, or other more socially useful purposes.
Sometimes, of course, large companies choose to litigate class actions vigorously. But this decision is very costly as well, and often is only made after a company's management decides there are non-monetary concerns that require the company to fight the class allegations against it. For example, manufacturing companies with outstanding reputations for quality may also choose to litigate rather than settle class actions because the perceived blemish on their reputation may exceed, in nonmonetary terms, the risk-adjusted cost of taking their case to a jury.
Whether companies choose to settle or to litigate class actions, the result is basically the same: a wealth transfer from American business to American lawyers, often with little countervailing benefit to society. When companies pay ransom to settle meritless class actions—as they clearly do—they spend money that could have been applied to more socially useful purposes. When companies pay to litigate class actions, they spend far more money than it would take to defend the few arguably meritorious individual cases on which the class action is based. In either case, ''abuse'' occurs in a very real sense.
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II. The Root Cause Of Most Class Action Abuses Is The Absence Of A Federal Forum.
A. Class Action Abuses Are Most Pervasive In State Courts.
I do not say to you today that the federal judiciary has been perfect in its management of purported class actions or that there is no need for reform at the federal level. But the stark reality is that the vast majority of class action abuse happens in cases pending before state courts.
I will not enumerate those abuses here; my understanding is that other witnesses will be providing this Subcommittee will provide ample evidence in that regard. But there is one piece of data that most clearly confirms where the problem resides. In recent months, both the Advisory Committee on Civil Rules and the Institute for Civil Justice have highlighted evidence (a) that a tidal wave of new purported class actions is hitting corporate defendants(see footnote 30) and (b) that this tidal wave is has been concentrated in state courts, not federal.(see footnote 31)
This onslaught of new class actions is not occurring because of a sudden erosion of corporate morals. And this tidal wave is not being confined to state courts merely because their clerks' offices are more conveniently located or charge lower filing fees. Instead, this phenomenon is attributable to a relatively small cabal of plaintiffs' lawyers who have simply discovered that many state courts will give them carte blanche to wield the class action bludgeon to coerce settlements, even though the lawsuits are frivolous or do not resemble a real class action.
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In my view, the root cause of much current class action abuse is that these purported cases simply do not belong in state courts. Make no mistake. There are many superb state court judges. However, for whatever reason, there are state court judges in some places who do not appreciate the raw power of the class action device and the need to limit its usage to cases in which the aggregated processing of claims is necessary and can be achieved without jeopardizing the due process rights of any party, plaintiff or defendant. These judges are well known to and beloved by the ring of plaintiffs' lawyers who have become among our nation's richest citizens by exploiting the class action device. As a result, some of these courts have ignored the rights of not only defendants, but also the unnamed class members on whose behalf the claims were supposedly asserted. Moreover, in many instances, the state courts simply do not have the resources and experience necessary to manage these highly complex cases in a professional manner.
B. Interstate Class Actions Are The Paradigm Case For Federal Diversity Jurisdiction.
Without question, most of these purported class actions are precisely the kinds, of cases that the framers of our Constitution had in mind when they established the concept of federal diversity jurisdiction. Indeed, the notion that class actions with interstate commerce implications should be heard in our federal courts (whenever a plaintiff or a defendant so desires) is strongly indicated by all three rationales underlying the diversity jurisdiction concept:
Foreclosing Locality Discrimination—In large part, diversity jurisdiction was established by the framers of our Constitution to guard against locality discrimination; that is, to protect the citizen of one state from the biases that might be engendered in litigating a case in the courts of a different state.(see footnote 32) As James Madison put it, diversity jurisdiction is essential to our federal constitutional scheme because ''[i]t may happen that a strong prejudice may arise in some state against the citizens of others, who may have claims against them.''(see footnote 33) Or as Justice Frankfurter stated, ''It was believed that, consciously or otherwise, the courts of a state may favor their own citizens. Bias against outsiders may become embedded in a judgment of the state court and yet not be sufficiently apparent to be made a basis of a federal claim.''(see footnote 34)
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This anti-discrimination principle was so important to our constitutional framework that even though there apparently was no concrete evidence of such state court bias in 1787, the framers established diversity jurisdiction as a prophylactic measure to ensure that such bias would never occur.(see footnote 35) They sought to prevent even the perception of bias because they feared that if litigants believed they had suffered discrimination, they would develop prejudices against other states, thereby destroying the federal comity principles upon which our Union is founded.(see footnote 36) Thus, while it was important to the constitutional structure to protect state sovereignty, the framers also recognized that such protections could not be absolute; in cases involving citizens from different states, litigants needed broad access to the federal courts.(see footnote 37)
Prevention Of Bias Against Interstate Commercial Enterprises—Diversity jurisdiction was also intended to ensure that perceived state biases against commercial enterprises did not create a climate that would stymie the expansion of commercial and manufacturing interests throughout the country, thereby undermining the forging of a national union.(see footnote 38) Our founders correctly envisioned the evolution of a Union with large commercial enterprises spanning many states—a future that they believed would be threatened by local courts that might be hostile to such entities. It was thus important to have a fair, uniform, and efficient forum for adjudicating interstate commercial disputes so as to create an environment that would nurture commercial expansion. Federal courts were seen as not only more efficient than state courts (and thus better able to adjudicate complex commercial disputes(see footnote 39)), but also fairer.
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The framers recognized that federal courts had greater institutional competence than state courts to protect individual rights and adjudicate complicated commercial disputes with integrity and fairness,(see footnote 40) in part due to the life tenure and salary protection that shields Article III judges from political pressures.(see footnote 41) Indeed, the framers correctly predicted that in many jurisdictions, state court judges would be elected and therefore subject to a need to satisfy local political interests.(see footnote 42) The framers' fear of state court discrimination against out-of-state business entities was fueled by the general insularity of state courts from the national system and the fact that state legislatures had enacted debtor relief and other measures that generally favored individuals (at the expense of business interests).(see footnote 43) Diversity jurisdiction, the framers believed, was needed to ensure that disputes between individuals and corporations from different states could be litigated in a fair and protective environment—federal court. Thus, diversity jurisdiction was intended to be a levelling device, designed to shield litigants from the insularity of state court systems and to put all litigants on a more equal footing.(see footnote 44)
Enhancement Of Public Confidence In The Judicial System—Diversity jurisdiction was also premised on a belief that predictability of judicial process and safeguards against local court idiosyncracies and biases were key to developing confidence in our justice system. As I noted in an article published almost twelve years ago, diversity jurisdiction ''has heightened [the] confidence of the citizenry in the fairness of the judicial system. We need to feel the umpire is not a 'homer,' and diversity helps.''(see footnote 45)
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For this reason, federal courts were vested with authority over not only federal questions, but also disputes between citizens of different states that were likely to present issues of interstate import. Consistent with this purpose, federal courts have developed broad and deep substantive knowledge—that is, a strong understanding of the laws of the various states—and widely respected procedural protections. In particular, federal courts (unlike their state counterparts) have the ability to consolidate complex litigation arising in multiple jurisdictions in a single district.(see footnote 46)
As has been detailed by other witnesses, state court class action defendants are routinely facing the kind of ''locality discrimination'' (e.g., ex parte class certification orders) that motivated the creation of diversity jurisdiction. Corporate defendants in those cases most assuredly are also being victimized by prejudices against out-of-state business entities and the perceived ability to secure monetary awards without injuring local interests. And there is no question that state court handling of purported class actions—particularly the tendency of many to certify classes regardless of whether applicable prerequisites have been satisfied,(see footnote 47) the willingness of many to approve settlements that benefit only the class attorneys,(see footnote 48) the appetite of many to interpret the laws of other, distant jurisdictions and to resolve the claims of out-of-state residents, and the fervor of many to advance cases that ''compete'' with previously filed actions in federal or other state courts(see footnote 49)—are seriously eroding public confidence in our judicial system.
C. The Present Definitions Of Diversity Jurisdiction Irrationally Excludes Many Interstate Class Actions.
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Everything about state court handling of interstate class actions cries out for ensuring that such cases are heard by federal courts. Yet, we presently have a bizarre regime under which 1, as a New Jersey citizen, could have a $76,000 house remodeling dispute with a New York-based contractor that would be heard in federal court. At the same time, however, a federal court could well be without authority to hear a $2 billion motor vehicle defect dispute between (a) 100,000 vehicle owners with $20,000 claims residing in all 50 states and (b) the California-based manufacturer. Astoundingly, that dispute could be heard only in a state court!
How could our judicial resources be so irrationally allocated? It's all because in enacting 28 U.S.C. §1332, Congress decided to limit federal diversity jurisdiction in a manner that (as interpreted by our federal courts) is producing rather strange results. Section 1332 limits federal diversity jurisdiction to cases in which two requirements are satisfied:
First, there must be ''complete diversity''—that is, federal jurisdiction exists only if no plaintiff shares state citizenship with any defendant. The U.S. Supreme Court has ruled that in purported class actions, satisfaction of this ''complete diversity'' requirement is determined by looking only at the named plaintiffs and defendants; the citizenship of the unnamed members of the putative classes are ignored for purposes of this analysis.(see footnote 50) Nevertheless, in an effort to keep their cases in the more favorable state courts, class action plaintiffs' counsel often name extra parties to ''destroy'' diversity and prevent removal of the purported class action to federal court.(see footnote 51)
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Second, the dispute must be of substantial value. At present, the statute tests this point by requiring that the amount in controversy must be greater than $75,000. And as is discussed further below, the general rule is that in a purported class action, this amount-in-controversy requirement must be satisfied by each and every individual class member or the entire case is outside federal jurisdiction. Again, counsel frequently try to plead around this requirement in order to keep their case in state court. For example, counsel frequently plead that their case is not worth more than $75,000 (even when it arguably may be so for some putative class members) to avoid removal of their state court class action to federal court.(see footnote 52) Ironically, even when some or all of the claims of individual class members are in fact not worth $75,000, the aggregated value of the claims of all members of the class (which often number in the thousands or millions) is enormous.
Congress has full authority to change these restrictions to permit a broader array of class actions to be filed in or removed to federal court. For example, consistent with the Constitution's authorization of federal court diversity jurisdiction, Congress could authorize federal courts to hear purported class actions that satisfy a ''minimal diversity'' requirement—that is, cases in which at least some members of the purported class are citizens of jurisdictions different than some defendants.(see footnote 53) And Congress is entirely free to remove or alter the jurisdictional amount requirement for class actions.
D. At Present, There Is Confusion About Which Purported Class Actions Are Subject To Federal Jurisdiction.
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Regardless of whether Congress ultimately decides to make broad changes in the diversity jurisdiction prerequisites for class actions, there is at least a need for clarification of its intent regarding the existing rules. This is because federal courts are split on an important question: under what circumstances does a purported class action satisfy the requisite amount-in-controversy threshold for removing an action to federal court under a diversity jurisdiction theory?
In two landmark decisions, the Supreme Court held (a) that the question whether a purported class action satisfies the amount-in-controversy requirement should not be determined by aggregating the apparent value of the claims of all of the different class members, see Snyder v. Harris, 394 U.S. 332 (1969), and (b) that the requirement is satisfied as to a purported class action only if each and every member of the purported class is shown to satisfy the jurisdictional amount threshold (currently $75,000) individually. See Zahn v. International Paper Co., 414 U.S. 291 (1973). In recent years, however, federal courts have struggled to apply the Snyder and Zahn holdings, resulting in a number of inconsistent federal court decisions on the increasingly critical question of when purported class actions may be removed.
First, federal courts have disagreed on the precise scope of the Snyder decision. Although the Supreme Court stated in Snyder that each putative class member generally must meet the amount-in-controversy threshold before a purported class action may be removed, the Court also stated that when ''two or more plaintiffs unite to enforce a single title or right in which they have a common and undivided interest,'' the amount in controversy is the total dollar figure in which they have an undivided share. See Snyder, 394 U.S. at 355.
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Of late, federal appellate courts have expressed conflicting views about when plaintiffs' claims should be deemed to represent a ''common and undivided interest'' under Snyder, such that the putative class members' claims may be aggregated. Some circuit courts now hold that in certain circumstances, a defendant's potential liability for punitive damages or injunctive relief may represent a ''common and undivided interest'' that may be considered in the aggregate in determining whether a purported class action meets the amount-in-controversy requirement.
With respect to punitive damages, these courts reason that such damages are intended not to benefit the individual plaintiff but rather to punish the defendant for its behavior toward the class as a whole. Thus, according to these courts, the putative class members have a common interest in the punitive damages, making aggregation appropriate under the reasoning of Snyder.(see footnote 54) Other courts have rejected that conclusion.(see footnote 55)
Similarly, with regard to injunctive relief, some federal courts have recognized that a defendant's cost of complying with an injunction sought by a purported class may not vary depending on how many persons are in the class, suggesting that under Snyder, the purported class has a ''common and undivided interest'' in the injunctive relief. For example, if a purported class sues to force a company to conduct a $1 million campaign publicizing a safety risk posed by a product, the cost will be the same regardless of whether there are 10 or 10 million people in the purported class, strongly suggesting that the relief sought is not separate and distinct for each individual class member. Thus, some courts have held that the cost of the injunctive relief sought may be considered in the aggregate in determining whether the amount-in-controversy requirement is satisfied.(see footnote 56) Other courts have declined to accept such reasoning.(see footnote 57) Indeed, in those circuits that do not allow aggregation of punitive damages or injunctive relief, federal courts often remand purported class actions posing millions of dollars in exposure on the theory that with regard to each individual plaintiff, there is less than $75,000 in controversy.(see footnote 58)
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Second, as the Fifth and Seventh Circuits have recognized, the Zahn ruling was partially overturned by the 1990 enactment of 28 U.S.C. §1367, which on its face allows a class action to be removed to federal court via supplemental jurisdiction if at least one named plaintiff can demonstrate claims in excess of the $75,000 minimum.(see footnote 59) However, several courts have rejected the notion that section 1367 establishes supplemental jurisdiction for class actions, citing legislative history that contradicts the plain meaning of the statutory language. In these courts, defendants must demonstrate that each individual member of the class has claims exceeding $75,000 in order to remove the class action to federal court.(see footnote 60)
In sum, there is significant disagreement about when a high-exposure, interstate class action may be removed to federal court. This disagreement is heightening the stakes for defendants that are forced to defend complicated, nationwide litigation in state courts. It has also led to increased frustration among both judges and litigants who face increasing uncertainties in attempting to interpret the federal jurisdictional statutes applicable to purported class actions.
When discussing the increasingly rampant abuses of the class action device, there is a tendency in some quarters to blame those abuses on the device itself. Without question, there is a need to make some adjustments based on our thirty-two years of experience operating with the current class action model (as established by the current Fed. R. Civ. P. 23 in 1966 and subsequently embraced in some form by most state courts). But a significant cause of abuse is that class actions—lawsuits that are the largest, most complex disputes in our judicial system and that typically have substantial interstate commerce implications—should not be relegated to the jurisdiction of state courts. For the protection of both the unnamed class members on whose behalf such actions are brought and the defendants who must cope with the potentially ruinous, in terrorem effects of the class action device, Congress should develop means to correct this serious problem.
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Mr. COBLE. Mr. Middleton.
STATEMENT OF RICHARD H. MIDDLETON, ESQ., MIDDLETON, MIXSON, ADAMS & TATE
Mr. MIDDLETON. Thank you, Mr. Chairman. I am Richard Middleton, and I am a trial lawyer in Savannah, Georgia. I am also vice president of the Association of Trial Lawyers of America. My practice consists of many types of civil cases, but it also consists of class actions.
And at the outset, I want this committee to understand I don't take part, nor do the members of my firm, in the so-called coupon class actions or in collusive class actions. I abhor those cases as much as any member of this committee.
But I do appear here today on behalf of the largest voluntary trial bar in the world. We have approximately 50,000 members of ATLA, and I am here to address the concerns of our association. We are the only spokesperson for the plaintiff's trial bar. We were not at the hearing on the 1st of May, but we recognize because we represent people, consumers, homeowners, small businessmen and women and small businesses in these types of cases that there is a place for these types of actions.
Furthermore, we understand that individual disputes that by themselves only entail a very small amount of money and might not warrant bringing those actions, as a class can address and uncover schemes and other patterns that perpetrate a wrong upon many individuals.
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ATLA's position is a class action device in both State and Federal courts is an appropriate device to be utilized by the courts so that cases can be heard in a timely manner and without having repetition with many individual cases.
ATLA opposes this bill as it is currently configured because it enlarges and it expands Federal jurisdiction. The argument by the proponents of the bill is that it allows plaintiffs' lawyers to gain the federal system. In fact, because of some things that I am going to point out to the members of this committee, this bill does just the opposite and allows defense counsel and defendants to gain the system.
The purported justification for this legislation is that cases of citizens of different States belong in Federal courts because they are better suited. Mr. Chairman, I have a terrible problem in understanding this one amazing irony. Most of the Federal judges come out of the State court system, and you can be a State court judge, according to this legislation and its proponents, and not be capable of understanding these complex issues, then be confirmed by the Senate without going to school, and in 1 day be available and appropriate to consider these same claims which are primarily based on State law, using state procedural rules and that might have one or more citizens of other States in it. It just to me doesn't make any sense.
The Federal courts have always had narrowly construed diversity jurisdiction. It has been limited. The incongruity of this legislation is that in an era when we want less Federal intrusion, we have come forward with something that creates more Federal jurisdiction, does not recognize the desire of the American public for increased State rights, and in fact allows the mass shifting of certain cases to Federal court.
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I have outlined in my written material certain examples, and I won't go over those now, but State courts for years have been considering class actions. They have done it in a way that they are not overburdened. They are not intellectually overtaxed, they are not unhappy with their responsibility, and the State courts have not come here and asked this committee or asked anyone else to remove the class actions from their purview.
It is just the opposite with the Federal judiciary. We have only 96 districts. We have approximately 10 percent of the judgeships in the Federal system that remain unfilled. We have more than 10,000 judges on the State system. In Federal court, criminal cases take priority because of the speedy trial rules. The Federal courts want less diversity, not greater diversity. They have incredible backlogs as it is now, and I don't know how the budgetary pressures are going to address this if State courts no longer can address these matters of local concern.
With regard to gaining the system, what do I mean? This bill permits defense to gain an unfair advantage in class actions. There are gimmicks that can be readily identified, and I can promise the committee that learned defense counsel will always identify them, and they will resort to these tactics to beat a class action in Federal court.
I list in my written materials one paper we call Hit the Road, Jack, and that is basically because some States, particularly some of the western States, only have one district court. If you brought a case in Durango, Colorado, you would not be able to utilize this right to Federal court unless you could travel to Denver, which is 350 miles away. This does not allow removal by the plaintiffs.
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And finally, I would like to say if this crisis is so important, we should really let the Federal judiciary weigh in on this, list what they want to do and what the problems might be, and we should take a deliberative approach in considering this, rather than trying to do this in a 90-day period.
Thank you, Mr. Chairman.
Mr. COBLE. Thank you, Mr. Middleton.
[The prepared statement of Mr. Middleton follows:]
PREPARED STATEMENT OF RICHARD H. MIDDLETON, ESQ., MIDDLETON, MIXSON, ADAMS & TATE
STATEMENT
My name is Richard H. Middleton, Jr. I am a trial lawyer, practicing in Savannah, Georgia. I appear on behalf of the Association of Trial Lawyers of America, a national voluntary bar association with approximately 50,000 members in all 50 states. I am Vice President of ATLA.
ATLA members primarily represent plaintiffs in civil actions. Their clients are personal injury plaintiffs and plaintiffs in civil rights actions. They are consumers, homeowners, and small businesses involved in disputes. Sometimes the best way to handle these disputes, in the interests of our clients and in the interest of justice, is through a class action in state court. Based on our members' many years of experience litigating these issues in both state and federal court, ATLA opposes H.R. 3789, which enlarges federal court jurisdiction over class actions.
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Congress has in the past considered legislation to curtail or eliminate diversity jurisdiction. On these occasions, ATLA appeared before Congress to defend diversity jurisdiction. Our position then and now is that changes in the delicate balance between the federal and state judicial systems, established by the Constitution and refined by the courts over 200 years, should not be undertaken lightly. Those who drafted the Constitution and their contemporaries who enacted the first Judiciary Act wanted to assure out-of-state parties that a forum free of discrimination was available to them. The changes in diversity jurisdiction that H.R. 3789 are not based on fairness for the litigants. The bill would result in a large number of class action cases moving to federal court where they do not belong. At the same time, the bill, most particularly the removal provisions (which, unlike diversity jurisdiction, are not expressly provided for in the Constitution) would allow defendants to use procedural gimmicks to gain unfair advantages over plaintiffs.
Local Cases Belong in State Court
The justification offered for this legislation is that cases involving citizens of various states ''belong in federal courts that are better situated to deal with these federal controversies.'' That is a fundamental misunderstanding.
I should point out that for all of our history, state courts have been the courts of general plenary jurisdiction. Federal courts have limited jurisdiction. ATLA believes that in this era of greater regard for federalism, legislation that is explicitly based on the notion that state courts are not as competent as federal courts certainly sounds a sour note. If there are specific kinds of actions that Congress truly believes need to be in federal court, the legislation should address those cases directly. It should not shift masses of local cases into federal courts in the hope that the problem cases will be among them. In short, this is a situation that calls for a scalpel, not a chainsaw.
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H.R. 3789 views those class actions where every party and every member of the class has the same citizenship as the only ''truly single state controversies'' which belong in state court. This is a complete misunderstanding of the kinds of cases that state courts handle on a routine basis. State courts handle many class action controversies that are clearly local disputes, despite the fact that the class may include citizens of other states. Here are just a few examples of these kinds of cases. There is nothing unusual or odd about them. Every one could be matched with a long list of similar actions. These are the mainstream kinds of class actions that state courts have been handling for many years with generally good results.
1. Local Commercial Disputes. Many local commercial disputes are resolved through class actions. An example is a case decided by the Ohio Supreme Court just this month. Some 2,700 home buyers who financed their mortgages through the Ohio Savings Bank brought a class action alleging that the bank had cheated them in calculating their interest payments. I don't think anyone would dispute that this is essentially a local matter. But keep in mind that diversity of citizenship is determined as of the time the lawsuit is filed. If this bill were law, if just one of those borrowers had moved to another state by that time, the bank could remove the case to federal court. Hamilton v. Ohio Savings Bank,XXN.E.2dXX, 82 Ohio St.3d 67 (June 10, 1998)
2. Ownership Rights to Real Property. A classic example of a purely local action would be a dispute over the ownership of a piece of real property. A recent case involves the land surrounding a railroad line built by a local railroad in 1872. Penn Central abandoned the line and eventually conveyed the land. A class of landowners bordering the old line argued that the first railroad owned only an easement and that they were the owners of the land. The fact that the railroad's successor in interest is a citizen of another state does not make the controversy a federal one. Ag Farms, Inc. v. American Premier Underwriters, Inc., 1998 WL 248975 (Ill. App. 4 Dist. 1998).
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3. Local Pollution Damage. The rights of homeowners and other owners of real property that might be damages by local polluters are matters that state courts frequently handle. One Michigan case was brought by the residents of an eight- block neighborhood against nearby facilities, including Ford Motor Company, that they claimed were illegally polluting the air. The court of appeals held that the case could go forward as a class action. Ford, of course has its principle place of business in Michigan. But corporations are also deemed to be citizens, for diversity purposes, of the state of incorporation. Ford, like many major corporations, is incorporated in Delaware. H.R. 3789 would allow Ford to take this case into federal court. Oakwood Homeowners Asso. v. Ford Motor Co., 77 Mich. App. 197, 258 N.W.2d 475 (1977).
4. State-regulated Entities. In an interesting case from some years back, a group of 5,500 California doctors sued their malpractice insurance carrier alleging that the carrier had been fraudulently overcharging them on their premiums. An ATLA member, William Shernoff, represented the doctors and obtained a favorable settlement. Doctors are licensed to practice by the state; insurance companies are regulated entirely by the state. The cause of action was based on state law of bad faith, breach of fiduciary duty and unjust enrichment. But if just one of those doctors had retired to Florida or was a citizen of another country, that case could be dragged before a federal court under H.R. 3789. Southern California Physicians Council v. Phoenix Insurance Co., No. C–35076 (Cal. Super. Ct., settled Feb. 4, 1981).
5. Education. Education issues, especially those arising under state statutes, is another example of purely local disputes that state courts may handle on a class action basis. In a case in Illinois, a class representing homeless students in Chicago sued to require the school system to comply with an Illinois law, the Education For All Homeless Children Act of 1994. A settlement was reached that changed the schools' treatment of homeless students. However, if even one member of that class were an alien, the case could be in federal court. With our immigration experience, there are many places where any group of people large enough to be a class is likely to contain citizens of other countries. Class settlement reported in Chicago Tribune, Nov. 25, 1996.
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6. State Tax Cases. There are many state court class actions that involve state or local taxes. Indeed, some states have long taken the position that class action suits by taxpayers should be encouraged to prevent illegal expenditures of public funds. See, e.g., Fox v. Lantrip, 185 S.W.2d 136 (Ky. 1916). Such lawsuits also give taxpayers some leverage against improper collection of taxes. For example, in Cook v. Cohn, 25 Ill. App. 2d 330, 166 N.E.2d 614 (1960), a carpet retailer improperly added an occupational tax on bills for installation. When the retailer refused to refund the amounts, customers brought a class action. Colorado has not only adopted a ''Taxpayer Bill of Rights,'' but has placed it in the state constitution itself. One part of that Bill of Rights states that class actions by taxpayers have priority in the state courts. H.R. 3789 would undermine these state policies by allowing defendants to evade state courts if even one taxpayer is an alien or a citizen of another state at the time the suit is filed. The bill would also put the federal judges in the business of deciding questions of local tax law.
As I said, these are but a few typical examples of the many class action cases that H.R. 3789 would sweep into federal court. They are not cases in which federal judges have superior competency, and they would be a poor use of limited federal judicial resources.
Gaming the System
I also suggested that the bill does the opposite of what the drafters of the Constitution wanted to accomplish by providing diversity jurisdiction. Instead of assuring fairness for the litigants, it would permit defendants to gain an unfair advantage by gaming the system. Here are just a few of the gimmicks that the bill would make available to defendants.
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Hit the Road, Jack. One unfair strategy can be nicknamed after the great Ray Charles song, ''Hit the Road, Jack.'' There are some 4,700 counties and independent cities in the U.S. There are only 96 federal districts. Many large western states have only one, including Arizona, Colorado, and Nevada. H.R. 3789 removes the minimum jurisdictional amount for class actions that may be removed. As a result, consumers or homeowners who have claims for several hundreds of dollars are able to travel the distance to the county seat for their remedy. But it may be a great burden to travel back and forth hundreds of miles to the federal courthouse to testify or attend the proceedings. It certainly increases the expense of pursuing their claims. Defendants are well aware of this. H.R. 3789 would allow them to remove the case to federal court simply to wear down the plaintiffs so they will give up or settle for a nominal amount.
Wait and See. Another gimmick is the ''wait and see'' strategy. Presently, 28 U.S.C. §1446 provides that a defendant shall file for removal within 30 days of receipt of a pleading or paper from which it can be ascertained that the case is removable. But the case cannot be removed more than one year after commencement. In many, if not most class actions, the citizenship of every class members cannot be ascertained from the initial pleadings. In the Ohio case cited above, for example, the plaintiff would not even know the identities of all the members of the class. The bank, however, would be able to determine whether a class member resides in another state. H.R. 3789 eliminates the one-year limit on removals. This situation allows a defendant to simply wait and see how things are going on pretrial motions, or even at trial. If it looks like the defendant is losing, it can demonstrate diversity and remove. Defendant thereby gets has another shot at winning, after getting a good preview of plaintiff's case and strategy.
Bait and Switch. A third way of gaming the system is a ''bait and switch'' gimmick. This is particularly effective where state rules governing class actions differ from Federal Rule 23. Plaintiffs' counsel will have conscientiously researched and complied with the state requirements. The defendant suddenly removes to federal court and then argues that the class action cannot go forward because it does not satisfy the requirements of Rule 23. Essentially, the defendant is allowed to change the rules of the game in mid-play. Moreover, if the court rules that the class does not conform to the federal rule, the case is not remanded back to state court. Rather H.R. 3789 adds 28 U.S.C. §1369, which provides that if the district court determines that the action cannot proceed as a class action under Rule 23, ''the court shall dismiss the action.'' Defense counsel may be expected to make the switch at a time after the state statute of limitations has safely passed.
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I'm just a plaintiffs' trial lawyer. I am confident that defense counsel are capable of devising many other clever devices to take advantage of this legislation.
ATLA has always viewed the diversity jurisdiction of the federal courts as a safeguard provided by the drafters of the Constitution so that plaintiffs would have some measure of assurance of fair treatment in court. H.R. 3789 would turn the system into one that rewards ambush and unfairness. We believe that this legislation should not serve as a vehicle to deny people their day in court. For these reasons, ATLA urges the Committee to oppose this bill.
As a trial lawyer speaking for ATLA, of course, I have a point of view that reflects the interests and concerns of our members and their clients. But we are also participants in the civil justice system, and I believe we have a responsibility to step back, once in a while and take the broader perspective. ATLA believes that the timing of this proposal, in view of the leglislatively augmented workload of the federal judges, could not be worse. To be very blunt, the federal judicial system is in a stew, and this Congress and this Committee have been among the chefs stirring the pot.
Since the early 1990's, this Committee and its Senate counterpart have worked to expand the federal criminal jurisdiction of the courts without devoting commensurate attention to addressing the resulting backlog in the civil docket. On January 1 of this year, Chief Justice Rehnquist warned in his State of the Judiciary address that the continuing judicial vacancy crisis threatens to erode the quality of justice for all parties. At a time when individuals and businesses alike complain of long delays in adjudicating their civil actions in federal courts, this bill would add an additional load of complicated and labor-intensive to the federal dockets. The result will be to push back civil cases even further. Justice delayed is justice denied.
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SUMMARY
ATLA members represent consumers, plaintiffs in civil rights actions, homeowners, and small businesses in civil litigation. At times, the best way to resolve these disputes is through class actions. Based on many years of experience in these areas, ATLA opposes H.R. 3789, which would expand the ability of defendants to remove class actions from state court to federal court.
H.R. 3789 is based on the mistaken notion that class actions in which any class member has different citizenship from any adverse party necessarily belongs in federal court. State courts routinely deal with class actions that are very local in nature. Issues include commercial disputes, ownership of real property, local environmental damage, education, state-regulated entities, and state and local tax matters. The fact that one member of the class is a citizen of a different state or a different country at the time the suit is commenced does not alter the local nature of the dispute. There is no justification for allowing defendants to remove such cases to federal court.
Enlarged diversity jurisdiction combined with expanded removal privileges contained in H.R. 3789 would invite defendants to use procedural gimmicks to gain unfair advantage. Defendants could force plaintiffs and witnesses to travel long distances to attend proceedings, delay removal until it appears that the plaintiffs may prevail on the merits in state court, and change the rules governing the class action long after the case has commenced. Diversity jurisdiction was designed to assure a fair forum for out-of-state parties; H.R. 3789 would reward ambush and unfair practices.
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Finally, ATLA believes it would be unwise to add an unlimited number of complicated and labor-intensive cases to the workload of a federal judiciary that is already laboring to deal with expanded criminal jurisdiction and a vacancy rate approaching crisis proportions. The resulting additional delays for all civil parties would amount to justice denied.
Mr. COBLE. Mr. Wolfman.
STATEMENT OF BRIAN WOLFMAN, ESQ., PUBLIC CITIZEN LITIGATION GROUP
Mr. WOLFMAN. Mr. Chairman and members of the Committee, I appear here today in opposition to H.R. 3789. In short, the bill constitutes a quite radical transformation of judicial authority between the State and Federal systems that is not justified by any alleged crisis in State court class action litigation. I am a staff attorney with Public Citizen, which is a national nonprofit public advocacy organization.
Although we oppose the bill, I want the committee to know that we take a back seat to no one in fighting class action abuse. We are the national leader on that front, opposing unfair collusive class action settlements, for instance, in the Georgine asbestos deal, in the General Motors coupon settlement, and, in fact, we regularly take on the plaintiff's bar challenging excessive attorney's fees requests. I have personally worked on dozens of them.
It is not that we are uninterested in curbing class action abuse, it is that H.R. 3789 does nothing to stop collusive settlements, which will occur anyway unless other reforms are made, and will harm consumers.
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Sections 2 and 3 of the bill allow proposed class actions to be filed in or removed to Federal court if any named plaintiff, any putative class member or purportedly represented party is a citizen of a State different from the State from which any defendant is a citizen, regardless of the amount in controversy.
As a practical matter, these provisions would end virtually all State court involvement in class actions. Given the mobility of our society, and because many metropolitan areas sit on State borders, even the simplest intrastate class action will contain potential class members from out of the State and thus warrant Federal jurisdiction under this bill.
Let me illustrate this with an example. Assume that a State-chartered company in Florida breached life insurance contracts with a hundred thousand senior citizens by charging excessive premiums. The vast majority of the policyholders lived in Florida where the policies were sold, but a small percentage of the cheated seniors lived in neighboring States, and others moved to those States after the policies were sold. The senior citizens filed a class action in Florida State court alleging solely violations of Florida law.
Even though the overwhelming majority of plaintiffs would still reside in Florida, and only Florida law is applicable to that suit, under H.R. 3789 the insurance company would have the choice of removing this class action to Federal court. There is simply no Federal interest in resolving such a dispute.
Others have suggested what the plaintiff's lawyer can do is simply ''game'' the system in that situation and define the class as those only currently residing in Florida, but that is highly inefficient because then you would have a Florida suit, a Georgia suit and an Alabama suit. That makes the system more inefficient rather than more efficient.
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For these reasons the bill is a flagrant affront to federalism. The bill is premised on a deep and misplaced distrust of State courts' ability to uphold the law. Our Constitution properly assumes that the States are fully capable of interpreting their own laws and handing out justice impartially. The bill is not in keeping with that basic constitutional principle.
Moreover, by channelling virtually all class actions to the Federal courts, the bill will make class actions far less efficient and threatens to bring civil cases in the Federal courts to a virtual standstill. I am sure that this committee has heard before that there are numerous districts in this country where civil cases simply are not being set at all because of the backlog. As Chief Justice Rehnquist recently noted in a speech to the American Law Institute, the Federal courts are already overburdened with cases that traditionally are dealt with in State courts, and the Federal courts cannot bear any additional burden.
Moreover, and this is a point yet to be made, it is not simply an increase of cases numerically which would be quite large, but the nature of these cases is complex. They are not easy cases. Even when they are not interstate, they are complex cases, and you are putting them in the Federal courts when there are already a large number of vacancies on the Federal bench.
The bill's proponents claim that it is needed because of a crisis in the State courts, but the proponents rely only on a few anecdotes. I reviewed the submissions made several months back, and that is what they are. They involve settlements where class members got little, and their lawyers got a lot, the very type of cases that we have been fighting.
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But as noted in more detail in my written testimony, abuses do occur in Federal as well as in State court, and those abuses must be fought in the courts, and that is what we are doing. Collusive resolution occurs in Federal and State courts. But as also noted in my written submission, the State courts have been host to many class actions where injured consumers obtained real redress for their injuries. In the end, the anecdotes are just that, anecdotes.
Without much more evidence showing systematic abuse in the State courts, Congress should wait and not consider enacting anything approaching this bill's radical transformation of our State and Federal balance.
I see that I am out of time, and I do want to make one other point if I might. The committee should also be aware that H.R. 3789 poses a serious constitutional question. Article III, section 2 of the Constitution provides that ''the judicial power shall extend to controversies between citizens of different States.''
Assume a situation in which the named plaintiff and all of the named defendants are from State X, although some of the proposed class members are from States Y and Z. When a proposed class action is filed, the class does not yet exist, and there is only a constitutional controversy between the named plaintiff and the defendant, as the Supreme Court noted in its 1975 decision in Sosna v. Iowa. So we don't see how constitutionally jurisdiction can be based on persons who are not yet parties to the suit, but that is what H.R. 3789 does.
In closing, let me reiterate our opposition to this legislation. The enormous shift of power to the Federal courts in this bill tears an enormous hole in the fabric of Federal-State relations and adds a considerable burden on our already overworked Federal court system.
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I will be happy to answer any questions you have later, and thank you very much for allowing me to appear.
Mr. COBLE. Thank you, Mr. Wolfman.
[The prepared statement of Mr. Wolfman follows:]
PREPARED STATEMENT OF BRIAN WOLFMAN, ESQ., PUBLIC CITIZEN LITIGATION GROUP
STATEMENT
Mr. Chairman and members of the Committee. I appear today in opposition to H.R. 3789, the Class Action Jurisdiction Act of 1998. In short, I believe that H.R. 3789 is an unwise and ill-considered broadside incursion by the federal government on the jurisdiction of the state courts. It constitutes a radical transformation of judicial authority between the state and federal judiciaries that is not justified by any alleged ''crisis'' in state court class action litigation.
Before explaining the basis for my conclusion that H.R. 3789 should not be enacted, I want to describe my experience in class action litigation. I am a staff attorney with Public Citizen Litigation Group, a non-profit, national public interest law firm that was founded in 1972, as the litigation arm of Public Citizen, a consumer advocacy organization with over 130,000 members. Like other lawyers who represent consumers, we use class actions in situations where litigation of individual claims would be economically impossible.
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Because we value class actions as an important tool for civil justice, we have for a number of years sought to combat abuses in class actions. We have increasingly devoted resources to opposing what we believe are inappropriate or collusive class action settlements, and have become the nationwide leader in fighting class action abuse. Among the more than 30 nationwide class actions settlements on which we have worked, we have served as lead or co-counsel for objectors in many of the most important cases, including Bowling v. Pfizer (Bjork-Shiley heart valve); Amchem v. Windsor (asbestos case, also known as Georgine); Hanlon v. Chrysler Corp. (Chrysler mini-vans); Duhaime v. John Hancock Mut. Life Ins. Co. (deceptive life insurance sales practices); In re General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig. (GM C/K Pickup Trucks); and In re Ford Motor Co. Bronco II Prod. Liab. Litig. (Ford Broncos). In these cases, we have objected to settlements that we thought grossly undervalued the plaintiffs' claims and we have opposed what we believed were the inflated fees of the plaintiffs' attorneys.
In addition, we have written articles on the problems we have encountered in class action settlements for law reviews and the popular press. See Brian Wolfman & Alan Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 71 N.Y.U. L. Rev. 439 (1996); Brian Wolfman, Forward: The National Association of Consumer Advocates' Standards and Guidelines for Litigating and Settling Class Actions, 176 F.R.D. 370 (1998); David C. Vladeck, Trust the Judicial System to Do Its Job, p. M5, The Los Angeles Times (Apr. 30, 1995); Brian Wolfman, Class actions for the injured classes, p. B–11, The San Diego Union Leader (Nov. 14, 1997).
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The point of these introductory comments is that Public Citizen takes a back seat to no one in fighting class action abuse. We have worked hard to assure that injured consumers will be justly compensated, that class action attorneys' fees are sufficient (but not excessive), and that the class action tool is not weakened. In our judgment, H.R. 3789 will do nothing to aid injured consumers, while working a massive shift of power and caseload to our overburdened federal courts at the expense of the state courts, the traditional forum for hearing disputes involving state law.
I.
Section 2 of H.R. 3789 (''expansion of federal jurisdiction '') allows purported class actions ''or comparable representative action[s]'' to be filed in federal court if ''any named plaintiff, putative class member, or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen'' regardless of the amount in controversy. Building on the language in section 2, section 3 of the bill permits removal from state court to federal court of any class action meeting the expanded criteria for filing class actions in federal court. Thus, as a practical matter, section 2, when combined with section 3's removal provision, would end most, and potentially all, state-court involvement in class actions. Although the bill's proponents have stated that H.R. 3789 would preserve state-court jurisdiction for truly intra-state disputes, that is not correct. To repeat: Proposed section 1332(b) sets up diversity jurisdiction if ''any . . . putative class member or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen . . .'' (emphasis added).
Given the mobility of our society (and the fact that large metropolitan areas are on state borders), even the simplest intra-state class actions will involve putative class members from out of state and thus warrant federal jurisdiction under H.R. 3789. Such a result is not only hostile to federalism, but would substantially increase litigation in federal courts on matters purely of state substantive law.
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In sum, H.R. 3789 allows the filing in, or removal to, federal court of virtually every class action, because all that it requires is that one class member be from a state that is different from any defendant. Therefore, even cases involving plaintiffs almost entirely from one state, and involving only one state's law, would end up in federal court. It is difficult to imagine a more radical restructuring of federal and state court jurisdiction.
An example illustrates our point. Assume that over the past two years a state-chartered insurance company in Florida breached contracts of life insurance with 100,000 senior citizens, charging premiums higher than those promised and not paying certain benefits. The vast majority of the policyholders lived in Florida when the policies were sold, but a small percentage of the cheated seniors lived in neighboring states and others moved to those states after the policies were sold. The senior citizens file a class action in Florida state court alleging solely violations of Florida law. Even though the overwhelming majority of plaintiffs would still reside in Florida and only Florida law is applicable to the suit, under H.R. 3789 the insurance company would have the choice of removing this class action to federal court. There is no federal interest in resolving such a dispute because it does not involve federal law; more important, the Florida courts have a strong interest in resolving the case, making sure the Florida law is properly interpreted and enforced. That interest is usurped by H.R. 3789. Indeed, this example makes clear that H.R. 3789 is little more than a ''Corporate Defendant Choice of Forum Act,'' since it allows the corporate defendants—not the plaintiffs—to select the forum. But there is no valid reason why these Florida seniors should be deprived of the state forum of their choice for this type of single-state litigation, just as there is no valid reason to deprive the State of Florida the opportunity to vindicate its interests in this matter through its judicial system.(see footnote 61)
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Which brings me to my next point. H.R. 3789 dishonors the proper spheres of the states and the federal government in our federalist system. Indeed, the bill is a flagrant affront to federalism and a resounding vote of ''no confidence'' in our state courts. As noted above, under section 3 of the bill, defendants can remove virtually any class action to federal court, even when the case has nothing to do with federal law and the class members live mainly in one state. H.R. 3789 is premised on a deep—and misplaced—distrust in state courts' ability to uphold the law. Our Constitution properly assumes that the states are fully capable of interpreting their own laws and handing out justice impartially. H.R. 3789 is not in keeping with that basic constitutional principle.
Although this radical revision of the allocation of authority between the state and federal courts is enough in itself to warrant the defeat of H.R. 3789, it is the inefficiencies created by the bill that will pose the largest roadblock to justice for ordinary citizens. By channeling virtually all class actions to the federal courts, H.R. 3789 threatens to grind the administration of civil justice in our federal courts to a near standstill. As Chief Justice Rehnquist recently noted in a May 11, 1998 speech to the American Law Institute, the federal courts are already overburdened with cases that traditionally have been dealt with in state courts, and the federal courts cannot bear any additional burden. Not only would H.R. 3789 intolerably increase the caseload of the federal courts, but it would do so with cases that are extremely complex and time consuming. Making matters even worse, by definition these new federal cases involve solely issues of state law, with which state court judges are intimately familiar but federal judges generally are not.
The caseload burden imposed by H.R. 3789 would be reason enough to reject the legislation at any time, but the problem is particularly acute now, because there are a large number of federal judicial vacancies and the civil docket in some districts has already come to a virtual standstill. In short, H.R. 3789 promises that injured consumers will be put on ''hold'' in the overburdened federal courts, without any opportunity to litigate their cases in state courts where they properly belong.
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The proponents of H.R. 3789 try to justify the bill on the ground that there is a class action ''crisis'' peculiar to the state courts. In general, the class action tool is a tremendous benefit to Americans. It is an important and powerful component of our civil justice system that can compensate ordinary citizens who, acting individually, would not have the means to challenge corporate and governmental wrongdoers. As I noted at the outset of this testimony, Public Citizen recognizes that class action abuse threatens to sour the public and harm the people that the class action tool is supposed to help. But it is wrong to think that abuse is limited to, or especially rife in, state courts. Just last week, a federal appeals court approved the Chrysler minivan settlement—where the settlement does little more than repeat Chrysler's prior promise to a federal regulator to fix the class members' defective door latches, with Chrysler agreeing to pay the lawyers five million dollars in fees! The federal and state courts must be vigilant and prevent abuses and, despite the recent Chrysler decision, progress is being made in that regard.
The state courts play a pivotal role in preventing abuse. For example, many of the anecdotes used by the proponents of H.R. 3789 are based on class actions in Alabama where, the argument goes, the state courts have been certifying cases without following the proper procedures. Responding to due process and forum-shopping concerns from corporate defendants, however, the Alabama Supreme Court has recently abolished the practice of certifying class actions before the defendant has an opportunity to answer the suit. See, e.g., Ex Parte State Mutual Ins. Co., Nos. 1960410, et al., 1197 WL 772923 (Ala. Dec. 16, 1997), and Ex Parte American Bankers Life Assur. Co. of Fla., No. 1950705, 1997 WL 773322 (Ala Dec. 16, 1997). The Alabama Supreme Court made clear that classes may not be certified without notice and a full opportunity for defendants to respond and that the class certification criteria must be rigorously applied.
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Meanwhile, state court class actions continue to provide significant relief to consumers who would otherwise have gone without compensation. For instance, state court class actions involving polybutylene pipe illustrate the importance of consumers banding together to fight corporate irresponsibility. Shell, Dupont, and other corporate giants sold leaky plastic pipes, which caused severe damage to the homes of tens of thousands of unsuspecting consumers. This state court litigation resulted in hundreds of millions of dollars in recoveries and replacement of the faulty piping, which would never have occurred if the homeowners had been required to face off against the companies on their own.
Another example is Naef v. Masonite—concerning claims of defects in hardwood siding on homes and commercial property—commenced in 1994 in Mobile County, Alabama. The defendant removed the case to federal court, but the case was later remanded because of a lack of federal jurisdiction. A state-court jury found for the plaintiffs on the question of whether the product was defective, and the matter then settled for hundreds of millions of dollars shortly before trial on the remaining liability and damage issues. Under H.R. 3789, this case could have been removed to federal court, although it appears that the matter was pursued vigorously in the state court setting and brought considerable benefits to injured class members.
Another case (Daar v. Yellow Cab), although it arose in the 1970's, illustrates the expansive reach of H.R. 3789. Taxicab companies in Los Angeles sold ''script books'' that allegedly gave consumers discounts on fares. A class action was filed in state court alleging that the companies in fact systematically overcharged script users. The case was based on state law, and most class members were California residents. The action succeeded in putting substantial amounts of cash back in the hands of the plaintiffs and ended the companies' overcharging practices. Nonetheless, because not every single member of the class was a California resident, under H.R. 3789 this state-law case, overwhelmingly affecting California residents, could be removed to federal court.
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As evidence of the state-court class action ''crisis,'' the supporters of H.R. 3789 rely on a few anecdotes of state class actions that were mishandled by the state courts. As noted, abuses do occur in state and federal court, and we agree that abuse must be fought in all courts, federal and state. But the anecdotes are just that—anecdotes—and much more evidence showing a systematic pattern of abuse in the state (as opposed to federal) courts must be required before Congress considers enacting anything approaching the radical transformation in our state-federal balance contemplated by H.R. 3789.(see footnote 62)
This is not simply our view. In his 1997 Year-End Report on the Federal Judiciary, Chief Justice Rehnquist urged Congress, whenever it ''consider[s] expanding the jurisdiction of the federal Judiciary,'' to ''do so cautiously and only after it has considered all the alternatives and the incremental impact the increase will have on both the need for additional judicial resources and the traditional role of the federal Judiciary.'' Before proceeding with this legislation, Congress thus should determine whether there is truly a problem as the proponents maintain. If so, then Congress must assess, among other things, (a) whether whatever problem exists lend itself to a legislative solution?; (b) whether a solution should be imposed by Congress or state legislatures?; (c) what impact an expansion of federal jurisdiction would have on the backlog in federal courts?; and (d) to what extent would the jurisdiction of state courts be curtailed? These questions remain entirely unanswered, and Congress should stay its hand until it fully comprehends the impact this legislation would have on the administration of justice in federal courts.
In sum, H.R. 3789 should be rejected as unwise and unnecessary. It is an unwarranted attack on the integrity of the state courts and their ability to provide justice to their citizens, and it comes at a time when the federal courts are unable to handle the enormous increase in caseload that H.R. 3789 would entail.
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II.
H.R. 3789 should not be enacted for the policy considerations given above. The Committee should be aware, however, that H.R. 3789 may also be constitutionally flawed. As this Committee well knows, our federal courts are courts of limited jurisdiction. Section 2 of the bill, by requiring only that one plaintiff be diverse from one defendant in order to meet the requirements for diversity jurisdiction, would stretch, perhaps beyond the breaking point, the so-called ''minimal diversity'' approach. This would overrule Strawbridge v. Curtiss, 3 Cranch 267 (1806), where the Supreme Court interpreted the diversity statute to require ''complete diversity'' between all named plaintiffs and defendants. Strawbridge is not a constitutional case, and the Supreme Court has held that only ''minimal'' diversity (i.e., diversity between one plaintiff and one defendant) is required by the Constitution. See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530–31 (1967).
However, in our judgment, the Supreme Court's endorsement of minimal diversity does not ensure the constitutionality of section 2 of H.R. 3789, at least not in all of its applications. The relevant constitutional provision, Article III, section 2, provides that ''[t]he judicial Power shall extend to . . . Controversies . . . between citizens of different States[.]''
To take an extreme example, we doubt that Article III, section 2 authorizes diversity jurisdiction where 9,999 class members and all defendants are in one state and one non-named class member is from another state. But new 28 U.S.C. 1332(b) says that there is diversity jurisdiction if ''any . . . putative class member or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen,'' and thus would permit a federal court to assume jurisdiction under such circumstances.
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More realistically, assume a situation in which the named plaintiff and all the named defendants are from state x, but 25% of the putative class members are from states y and z. When a putative class action is filed, the class does not yet exist and a constitutional ''controversy'' exists only between the named plaintiffs and the defendant. Put another way, there is no controversy between the absent class members—on whom jurisdiction under H.R. 3789 hinges—and the defendant, and thus it is difficult to imagine how diversity jurisdiction can be constitutionally maintained in this circumstance prior to certification of the class. See Sosna v. Iowa, 419 U.S. 393, 399 (1975).(see footnote 63)
III.
Although we believe that H.R. 3789 is unnecessary and should be defeated, it should surely not be enacted in its current form. The following amendments would help ameliorate the damage that will be done to the rights of plaintiff class members by this litigation.
The bill's supporters claim that H.R. 3789 is meant to place cases that are truly nationwide in character in the federal courts and allow cases that are not to remain in state courts. That assertion is incorrect. At present, as shown above, H.R. 3789 allows virtually every class action to be filed in, or removed to, federal court. Thus, at the very least, the bill should be amended to achieve its stated purposes by allowing cases that are mainly intra-state disputes to remain in state court. The statute could provide that diversity jurisdiction does not exist if 50% or more of the putative plaintiff class resides in one state. We recognize that this numerical standard might cause proof problems in close cases, but state and federal courts are accustomed to making those kinds of determinations on a daily basis, and most cases will fall clearly on one side of the line or the other. Alternatively, federal jurisdiction under H.R. 3789 could be limited to cases in which a ''substantial majority'' of the class members reside outside of the forum state.
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Section 4 of H.R. 3789 would enact a new 28 U.S.C. 1369 providing that any action filed under section 1332(b) in which the district court rules that the case may not go forward as a class action will be ''dismissed'' for lack of jurisdiction. This section presents several significant problems and ambiguities.
First, the bill could be a trap for unwary class members because they may face statute of limitations problems because of the bill's procedural requirements. Although the bill virtually ensures that state court class actions will be brought to federal court, there is no provision for a tolling (stop the running) of the plaintiffs' statute of limitations in the event that the federal court declines to exercise jurisdiction over the action. Unless the bill expressly states that the absent class members' statutes of limitations are tolled during the pendency of the federal court class action with respect to any future lawsuit filed by such class members in federal or state court, the bill could result in many class members' claims becoming time-barred. Under American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974); and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), tolling would apply in any future federal action, but it is not certain that all the state courts—where many subsequent individual actions would have to be filed—will necessarily recognize American Pipe under these circumstances. Better yet, H.R. 3789 should simply give the putative class members an additional year to bring any new action if that class member's filing period has run or fallen below one year during the pendency of a putative class action dismissed under section 1369.
Second, the bill is ambiguous and unduly harsh in those cases that the federal courts decide not to certify under Federal Rule of Civil Procedure 23. The new section 1369 applies to cases ''subject to . . . jurisdiction solely under section 1332(b)[,]'' but not expressly to the revised class-action removal provision contained in section 1441(b). Thus, the question arises whether section 1369 applies at all to removed cases. If so, the bill is silent on whether the district court should simply dismiss the class action (as 1369 provides for cases filed under 1332(b)), or remand the named plaintiffs' cases to state court as is typical in a case of failed removal. See 28 U.S.C. 1447(c), (d).
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In our judgment, because outright dismissal of these cases would be grossly unfair, the plaintiffs' cases should be remanded to state court. If the named plaintiffs wish to continue to litigate their claims in the state court from which the case was removed, they should be permitted to do so without having to bear the time and expense incurred in filing a new case. Moreover, those same named plaintiffs should be permitted to litigate the claim as a class action. Although the class action will not have been certified in federal court, the rules for certifying class actions in state courts are not always the same as the federal rule (Federal Rule of Civil Procedure 23). The class members must be given an opportunity to litigate their claims on a class basis if entitled to do so under state law.
It may be that the drafters of H.R. 3789 intend section 4 to foreclose state court class action litigation after a federal court has refused certification. If that is so, then this bill constitutes an even greater assault on federalism than we thought. It is bad enough for Congress to say that all class actions should be channeled in the first instance into federal court; it is even worse to bar state courts from using class actions to promote efficient litigation where a federal court has found certification inappropriate under Federal Rule of Civil Procedure Rule 23. Apart from embodying a massive affront to the sovereignty and independence of the state court system, any such instruction by Congress to a state would raise a series of constitutional problems in its own right, since the historic understanding is that Congress has no right to dictate procedural rules to the states to govern adjudication of state law claims. See Johnson v. Frankell, 117 S. Ct. 1800, 1803–04 (1997) and cases cited therein.(see footnote 64)
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Third, proposed 28 U.S.C. 1369 states that if the court determines that the class action cannot proceed ''in any respect,'' the case should be dismissed. If this provision is taken literally, a class action that is viable with respect to some class members and/or some claims would nonetheless be rendered a nullity and subject to outright termination. We doubt that this is what the drafters intended. For instance, if a class action filed under section 1332(b) is partially certified as to some claims or some issues under Fed. R. Civ. P. 23(c)(4), but certification is denied as to other claims or issues, the case should not be dismissed. But section 1369 seems to require dismissal under those circumstances, and it must be amended to allow the viable portion of the class action to proceed.
The bill establishes federal jurisdiction not only for putative class actions, but what it calls ''comparable representative actions.'' It is unclear what this provision means, and most representative actions—such as next-friend suits or suits brought by fiduciaries—are not ''comparable'' to class actions. This language should be clarified or deleted, lest the courts will be drawn into needless disputes over its meaning.(see footnote 65)
As currently drafted, section 5 of the bill makes H.R. 3789 retroactive to all cases pending on the bill's enactment. This portion of the bill is likely unconstitutional, and, in any event, is fundamentally unfair to plaintiffs whose cases have been pending in state court. Indeed, as we understand the bill, a case certified as a class action and set for trial (or even in the middle of trial) could be removed to federal court. If enacted, the bill should establish an ''effective date'' after it is signed into law and apply only to cases filed after that date.
On a related point, section 3(c) of the bill eliminates any time limitation on removal, thus permitting a state-court defendant to remove a class action to federal court at any time. For much the same reasons stated in the prior paragraph, this provision is wasteful and fundamentally unfair to plaintiffs in pending state court class actions. Removal should be required to be exercised shortly after the case is filed, and there is no reason for Congress to depart from the 30-day period already specified in the general removal statute. See 28 U.S.C. 1446(b).
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Corporate defendants seeking the enactment of H.R. 3789 claim that there is a ''crisis'' in state court class actions for money damages. These are known as (b)(3) class actions, because they are certified in federal court under Federal Rule of Civil Procedure 23(b)(3). As noted above, the evidence for such a ''crisis'' is entirely anecdotal. In any event, no one claims that there is any problem in class actions seeking injunctive relief under state law, such as the abatement of a nuisance or reform of discriminatory hiring practices. Thus, H.R. 3789 should be amended to apply only to class actions in which the plaintiffs' claims are exclusively or predominately for money damages.
On a related topic, H.R. 3789 would even apply to cases brought against state agencies for violations of state law. Assume that the plaintiffs file suit against the state child welfare agency on behalf of all persons who have been, and will in the future, be denied foster care payments in violation of state law. Because some of the class members live out of state (as inevitably would be the case), the proposed class includes some non-residents, and the defendant could remove the case to federal court under H.R. 3789. Of course, such a case—since it involves only matters of interest to the state—certainly is within the competence of the state courts, and removal should not be permitted as a matter of policy. Even more troubling is the application of the Supreme Court's decision in Pennhurst State School and Hospital v. Halderman, 465 U.S. 89 (1984), which holds that the Eleventh Amendment forbids a federal court from enforcing state law against a state or its officers. Thus, in the example given, under H.R. 3789, the action would be removed to federal court, where the case would have to be dismissed, and the plaintiffs would be deprived of any remedy. That is not justice, yet that is precisely the consequence of such broad-brush legislation.
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Finally, it bears mention that this legislation tilts the playing field in favor of corporate defendants at the expense of class members. Not only does the legislation undercut the right of plaintiffs in class cases to select their forum, but it also denies class members the right to select a federal forum while giving exactly that right to every single defendant. In this key respect, H.R. 3789 differs from its Senate counterpart, S. 2083, which at least gives the right to a federal forum to both corporate defendants and class members.
This lack of mutuality is neither an oversight nor defensible policy. It is not an oversight because, as I have made clear throughout, this bill appears to be written to provide corporate defendants the advantage of forum selection in class action litigation. More fundamentally, the lack of mutuality makes it crystal clear what this bill does not address: It does nothing to deter collusive class action settlements. Under H.R. 3789, it is entirely possible for defendants to collude with plaintiffs' counsel to settle class action litigation on terms highly favorable to the defendant corporation and the plaintiffs' lawyers, but decidedly unfavorable to class members. But under H.R. 3789, the only potential objectors—the class members—are denied the right to remove the case to federal court, even when they are facing what appears to be a collusive settlement. At least in this respect the Senate bill is far more intellectually defensible than H.R. 3789, since it empowers both the defendants and the class members to remove class cases to federal court.
In closing, let me reiterate our opposition to this legislation. Since the founding of the Republic and the first Judiciary Act, it has been our shared national understanding that, except in relatively limited circumstances, litigation of state law questions would be the province of state courts. The enormous aggregation of power in federal court proposed by this legislation is unwise because it tears an enormous hole in the fabric of federal-state relations and because it adds a considerable burden to our already overworked federal court system. Congress should reject the heavy-handed approach embodied in H.R. 3789.
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I would be happy to answer any questions you may have. Thank you.
SUMMARY
Since the founding of the Republic, it has been our shared national understanding that, with relatively few exceptions, it is the province of the state court systems to adjudicate disputes involving questions of state law. H.R. 3789 stands this basic understanding on its head. Contrary to the representation of the bill's proponents, H.R. 3789 does not simply permit federal courts to assume jurisdiction over class actions with significant inter-state dimensions, but it in fact authorizes federal court jurisdiction over virtually every state class action, even those involving only truly intra-state disputes. H.R. 3789 accomplishes breathtaking transfer of judicial power from state to federal court by authorizing federal diversity jurisdiction whenever ''any'' named or putative class member is from a different state than ''any'' defendant.
Assume a case in which a Florida insurance company breached its contract with 100,000 senior citizens by charging higher premiums than promised, and that the vast majority of policyholders five in Florida where the policies were sold, but a few of the seniors moved to neighboring states after purchasing the policies. Even though the defendant is a Florida corporation, the vast majority of plaintiffs are Floridians, and the only legal questions arise under Florida law, H.R. 3789 virtually guarantees that this case will be adjudicated in federal court, depriving the plaintiffs of their right to select the forum of their choice, and depriving the State of Florida of the opportunity to vindicate its own interests in this matter through its own judicial system. There is no justification for Congress imposing this massive curtailment of the jurisdiction of state courts, and H.R. 3 789 is a resounding ''no confidence'' vote in the ability of our state courts to dispense justice fairly.
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Although these core federalism concerns are enough to warrant the rejection of H.R. 3789, it is the inefficiencies created by the bill that pose the largest roadblock to justice for ordinary citizens. H.R. 3789 is designed to channel thousands of complex class action cases—all of which, by definition, involve solely issues of state law—into the federal courts. Inevitably, this will grind the administration of civil justice in our federal courts to a near standstill. As Chief Justice Rehnquist has repeatedly warned, our federal court system has already been strained past the breaking point with cases that traditionally have been dealt with by state courts, and the federal courts cannot bear any additional burden.
HR—3789 raises several fundamental constitutional questions, which further counsel against its enactment. For one thing, H.R. 3789 arguably stretches the concept of ''minimal diversity'' beyond the breaking point. To take an extreme example, we doubt whether Art. III authorizes diversity jurisdiction where all defendants and 9,999 class members are from the forum state, but only one non-named class member is from another state. More fundamentally, using non-named class members to create diversity—as H.R. 3789 authorizes—plainly exceeds constitutional bounds. It is established law that when a class action is filed, the class does not yet exist, and a ''controversy'' for Art. III purposes exists only between the named plaintiffs and defendants.
Finally, H.R. 3789 offers consumers nothing. In fact, it tilts the playing field in favor of corporate defendants by giving them the power to select the forum in class action litigation. H.R. 3789 also threatens the implementation of important state laws. Section 4 says that actions brought into federal court under H.R. 3789 are to be ''dismissed'' in the event that the federal district judge declines to certify the case as a class action under the federal rules. This dismissal may well be read by a state court to forbid the named plaintiffs from returning to state court and litigating their claims on a class basis; indeed, it is apparent that this preclusion is intended by H.R. 3789's drafters. The consequence of such preclusion, however, could be devastating on plaintiffs with monetary claims that are not large enough to justify individual litigation, and hence H.R. 3 789 could easily deprive deserving plaintiffs of their right to a day in court. It is bad enough for Congress to require all class actions to be channeled in the first instance into federal court; it is even worse to bar state courts from certifying class actions to promote efficient litigation and justice for consumers where a federal court has denied certification under federal, not state, procedural rules.
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Mr. COBLE. Mr. Grossman, we led off with the proponents to be followed by the opponents, and we are looking for you now to identify the subtle shades of gray in this scenario.
As I read your testimony, your statement, Mr. Grossman, you would probably be neutral, but leaning more toward the opponents' version; am I right on that?
Mr. FRANK. We are one of the few committees these days the way Congress is going that still hears from proponents and opponents. Our colleagues are more and more listening to deponents.
Mr. COBLE. Having said that, Mr. Grossman, if you will proceed.
STATEMENT OF STANLEY M. GROSSMAN, ESQ., POMERANTZ, HAUDEK, BLOCK & GROSSMAN
Mr. GROSSMAN. Thank you for this opportunity to appear. My firm specializes in complex litigation, mostly representing plaintiffs in class actions in both State and Federal courts. I have personally litigated such cases for approximately 30 years now. I appear here today also on behalf of NASCAT, whose members around the country also are involved in such practices.
I would like to say at the outset that NASCAT believes that the recent debate on class actions has placed far too much emphasis on the perceived problems and accorded too little weight to the benefits of such litigation.
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The courts from the Supreme Court down have recognized the important role that class actions often play in providing the only available redress to consumers of price-fixed goods, victims of racial and other forms of discrimination, and those whose individual claims could otherwise not be addressed in the court at all because they are too small to warrant representation.
Now much of the evidence critical of class actions is purely anecdotal and often inconsistent and misleading. The courts themselves have taken steps to address some of these problems. For instance, the Alabama Supreme Court has now directed that the ex parte entry of conditional class certification orders no longer be permitted. This has been a consistent complaint of the proponents of the bill, and presumably this issue has evaporated.
Nonetheless, members of the committee as you recognize, our members have expressed cautious support for some of the goals of H.R. 3789, although we are concerned about the magnitude of some of the changes that this bill would make. We believe that the bill could be substantially improved if the following changes were made.
First, we believe that the legislation should provide for bilateral removal from State court. As drafted, the bill only permits defendants to remove class actions from State and Federal court. Therefore, the bill fails to address one of the primary perceived problems with State class actions that we have heard here today and we have heard before, the risk of the so-called collusive settlement, particularly when actions are pending in both a State and Federal court and defense counsel seek to drive the lowest settlement possible by opening up the matter to bidding.
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Obviously it takes two to tango, and if there is going to be a collusive settlement, that means that the defendant party to the action is involved as well. There is no way under the present bill to remove that action to Federal court to deal with this so-called collusive problem. And, therefore, we suggest that an absent class member or plaintiff in another forum be permitted to remove the action to deal with this problem that we all are very much concerned with.
Secondly, we believe that the bill could be improved substantially by creating a discretionary remand procedure. As drafted, as we have heard, the bill could sweep many class actions into Federal court involving the most local issues in nature. We don't believe that the committee is really concerned with that type of case, but the bill sweeps them in.
Everyone seems to have great confidence in the Federal judiciary, and we think permitting the Federal court to have discretion to remand a case back to the State court in appropriate circumstances would go a long way to resolve that problem.
Third, we believe the bill should be modified to take into account situations where the court denies class certification for a case pending in the Federal forum, but where a State court class action may probably lie. Under the present bill, the action would be dismissed. In the Federal court it is not at all clear what happens thereafter.
We think that the court should have the discretion to remand to the State court if it is a local class action that is appropriate, or to permit in Federal court for appropriate representation if that was the reason for the failure of class certification to begin with.
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Fourth, we believe that the bill should be made prospective. Applying the legislation retroactively would unfairly disrupt many of the pending actions, many of which are well advanced, and would encourage forum shopping, particularly where a defendant has received adverse rulings already in a lengthy litigation.
Five, we are concerned with the language in the bill which applies not only to class actions, but to comparable representative actions. We think that the language is loose and could lead to problems. We have language which we suggested in our proposal to deal with that.
Six, as this committee is well aware, pending litigation elsewhere in Congress dealing with Federal securities laws would preempt from State court various Federal securities laws actions, but would carve out an exception for corporate governance actions. We think that carve-out should be in this legislation as well. If it isn't, it will lead to problems. It was a provision that was drafted not with the input of the plaintiff's bar or our organization, but by Members of Congress, the corporate community and the SEC, and we think that should be respected.
Last, we believe—and I realize my time is up. I will take just a few seconds, if I may.
Last, with respect to the statute of limitations, that is addressed in our submission as well as the issue of State law not being preempted in a case that does come into Federal court under diversity jurisdiction.
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We hope that these comments are helpful. They are contained in my written testimony as well, and we respectfully submit that this proposed bill be changed to reflect these. We think that it would be a great step forward to reconcile these problems.
Mr. COBLE. Thank you, Mr. Grossman.
[The prepared statement of Mr. Grossman follows:]
PREPARED STATEMENT OF STANLEY M. GROSSMAN, ESQ., POMERANTZ, HAUDEK, BLOCK & GROSSMAN
SUMMARY
NASCAT believes that the recent national debate on class actions has placed too much emphasis on the perceived problems and accorded too little weight both to the benefits of such litigation and to the capability of both the federal and state judiciary to correct those problems. Much of the ''evidence'' critical of class actions is purely anecdotal. Other ''evidence'' is inconsistent or misleading. In some instances, courts have themselves taken steps to correct any problems. Nonetheless, NASCAT members have expressed cautious support for some of the goals of H.R. 3789.
At the same time, NASCAT has concerns about the magnitude of some of the changes that H.R. 3789 would make. It is important to recognize that the legislation constitutes a major overhaul of class action practice that would overrule in part at least three Supreme Court decisions regarding diversity jurisdiction. Moreover, our experience indicates that the majority of state court class actions have merit. We are concerned that the transfer of nearly all class actions previously handled by the state judiciary to the federal courts will overload federal judges and result in the rejection of class claims based not on the quality of the cases, but merely on caseload considerations.
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We believe H.R. 3789 could be improved by making the following changes:
(1) Bilateral Removal. H.R. 3789 permits only defendants to remove class actions from state to federal court. The bill therefore fails to address one of the primary perceived problems with state court class actions—the risk of collusive settlements, particularly when actions are pending in both state and federal forums and defendants seek to drive a settlement with the lowest bidder. To prevent collusion, absent class members or plaintiffs in other actions, as well as defendants, should be entitled to seek removal of state court actions, as is permitted by the Senate companion legislation, S. 2083.
(2) Discretionary Remand. H.R. 3789 would potentially sweep almost every class action into federal court. By minimizing diversity jurisdiction requirements, the simplest intrastate class action consumer case could be brought in or removed to federal court if only one class member is a citizen of another state. There has been no demonstration that there is a need to intrude on essentially local matters, which are traditionally handled in the state courts. Federal judges should therefore be given discretion to remand cases to state court if issues of comity or federalism warrant deference to state court handling of the matter. Creating such a ''discretionary remand'' safety valve may in fact be necessary to satisfy Constitutional requirements.
(3) Denial Of Class Certification. H.R. 3789 provides that if a court denies class certification for a case pending in the federal forum it shall be dismissed for lack of subject matter jurisdiction. Courts should be given the discretion to permit intervention of other class members who may be able to cure the defects precluding certification. Further, during consideration of the action in federal court, the statute of limitations should be tolled so that absent class members can later pursue their claims. Finally, even if the federal district court finds that certification of a national class is not warranted, it should be able to remand the case to state court for renewal of the class motion for a narrower state class or for pursuit of the claims on an individual basis.
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(4) Retroactivity. H.R. 3789 would apply to pending lawsuits. This would unfairly disrupt many pending actions and encourage forum shopping, particularly when a defendant has received adverse rulings. The bill should be made prospective.
(5) ''Comparable Representative Action''. H.R. 3789 applies not only to class actions, but to any ''comparable representative action.'' This formulation is too broad and could sweep in many cases the drafters did not contemplate. H.R. 3789 should be limited to class actions.
(6) Mandatory Carve Outs. H.R. 3789 is inconsistent with pending legislation that provides for preemption of securities fraud class actions under state law. The securities bills specifically exempt class actions involving corporate governance claims arising under state law from removal to federal court. H.R. 3789 should be amended to provide for such a state law carve out. In addition, the bill should be amended to exempt class actions filed against state entities or officials on behalf of individuals whose rights or benefits are affected by state regulations. H.R. 3789 might effectively extinguish such claims because the Eleventh Amendment precludes suits in federal courts against state sovereignties.
(7) Impact on State Law. It should be made clear that H.R. 3789 does not preempt the application of substantive state law to federal class actions based upon diversity jurisdiction.
STATEMENT
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June 18, 1998 Mr. Chairman and members of the Subcommittee, I am Stanley Grossman, senior partner at the New York law firm of Pomerantz Haudek Block Grossman & Gross LLP. We specialize in complex commercial litigation, mostly but not exclusively representing plaintiffs in federal and state court class actions. I welcome the opportunity to testify on H.R. 3789, a major piece of legislation that would make fundamental changes in the historic allocation of power between federal and state courts in class action litigation.
I formerly served as President of the National Association of Securities and Commercial Law Attorneys (''NASCAT''), which I am also representing here today. NASCAT is a trade association of law firms across the country committed to a strong system of federal and state legal protections for investors and consumers. Over the years, our members have prosecuted class action cases in federal and state courts in many different areas, including securities, antitrust, consumer, environmental and civil rights. For example, our members have represented investors defrauded by Charles Keating and his cohorts, employees who were victims of racial discrimination at Texaco, fishermen and Native Americans who were injured by the environmental disaster caused by the Exxon Valdez, and Holocaust victims and their families against Swiss banks.
So, our interest in your proceedings is substantial. In general, we believe that the recent national debate on class actions has placed too much emphasis on the perceived problems and accorded too little weight both to the benefits of such litigation and to the capability of both federal and state judicial mechanisms to correct any problems. Much of the ''evidence'' critical of class actions is purely anecdotal. Other ''evidence'' is inconsistent or misleading. In other instances, courts have themselves taken corrective measures.(see footnote 66)
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We recognize, however, that the Subcommittee is proceeding in this area and we wish to be as helpful as possible. Given the globalization of commerce and the mass, interstate character of many transactions, it is easy to understand why some responsible decision makers may well consider ''federalization'' of class claims to be a modernization—provided that a genuine viable federal forum for class claims continues to exist. NASCAT members have expressed cautious support for some of the goals we perceive in H.R. 3789 and, as discussed below, would urge you to enlarge upon those goals in at least one key area.
At the same time, we have concerns about the magnitude of some of the changes that H.R. 3789 would make. We would encourage you to keep in mind that the legislation constitutes a major overhaul of class action practice that would overrule in part at least three Supreme Court decisions regarding diversity. Moreover, our experience indicates that the majority of state court class actions have merit. We are concerned that the transfer of nearly all class actions previously handled by the state judiciary to the federal courts will overload federal judges and result in the rejection of class claims based not on the quality of the cases, but merely on caseload considerations.
Background
Congress has enacted numerous laws to protect the public from securities and other frauds, antitrust violations, overbilling by unscrupulous medical providers and other wrongs motivated by corporate greed. State legislatures have similarly recognized the need for such protections on the local level. With limited resources available to government watchdogs at both levels, the class action procedure—which can provide monetary damages or injunctive relief—often offers the only meaningful enforcement and means of redress for violation of these laws.
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The law of class actions is in flux. The Supreme Court issued a landmark decision on the appropriate perimeter of class litigation last year in the Amchem case(see footnote 67); several circuit courts have issued important opinions in the past several years(see footnote 68); and, as U.S. Circuit Judge Scirica testified before the Subcommittee in March, we can expect further appellate elucidation of class action jurisprudence soon because the Judicial Conference, and now the House of Representatives, have approved interlocutory appeals procedures from class determinations. In addition, the Judicial Conference's Advisory Committee on Civil Rules is conducting a major review of class action procedures, including a working group focusing on mass tort litigation.
The backdrop against which H.R. 3789 should be considered dates from the adoption of the Constitution itself. The Founding Fathers provided for a federal court system of limited jurisdiction in Article III of the Constitution. Article III empowers Congress to establish federal jurisdiction over diversity cases(see footnote 69)—cases involving citizens of different states. Since 1806, with some exceptions, the federal courts have followed the rule of Strawbridge v. Curtiss,(see footnote 70) which requires complete diversity, i.e., federal jurisdiction lies only if all plaintiffs are citizens of states different from all defendants. And, since the early days of our country, Congress has imposed a monetary threshold—now $75,000—for federal diversity claims.
The right of a defendant in a state court proceeding to remove a diversity case promptly to federal court without action by the state court is as old as federal jurisdiction itself. Under current law, a defendant must remove a case from state court within 30 days after receipt of the state court complaint or summons, or 30 days after receipt of an amended pleading that states a removable claim (as by amending the complaint to dismiss a non-diverse defendant), but in no event more than one year after the commencement of the action.(see footnote 71) Under current law, all defendants in a multi-defendant case must join together to remove the case.(see footnote 72)
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In the class context, the Supreme Court has laid out the rules of diversity and removal. Snyder v. Harris(see footnote 73) held that, for diversity purposes, the court should consider only the citizenship of class representatives—those members of the class who initiate the litigation and who seek the necessary judicial certification to represent their fellow class members—and not the citizenship of absent class members. And, four years later, Zahn v. International Paper Co.(see footnote 74) held that each and every class member must meet the jurisdictional amount for the case to proceed.
Policy Considerations
There are numerous competing policy considerations involved in the proposed substantial revision of the long-standing diversity jurisdiction standards.
As we understand it, analogizing to the Interstate Commerce Clause of the Constitution, the basic rationale for the proposed expansion of federal diversity jurisdiction for class actions is that federal courts, not state courts, should adjudicate such interstate claims. Class actions often involve class members from different states and many involve interpretation of the law of different states.(see footnote 75) Proponents of H.R. 3789 believe the federal courts are better suited to handle such cases, presumably in part because federal courts have power to consolidate myriad cases around the country into a single proceeding for discovery and pretrial purposes.(see footnote 76) In addition, proponents argue that federal courts should have jurisdiction over interstate class actions to address perceived abuses of the class action device in a few state courts.
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On the other hand, there are a number of policy considerations that argue against the proposed legislation. First, if a federal forum is denied, plaintiffs may lose all rights to adjudicate their case since the bill provides for dismissal of any action in which class certification is denied, rather than remanding the case to state court. Second, since a basic notion underlying federalism is the positive, creative force of the state as a laboratory of experimentation, this aspect would be lost through federalizing almost all state class actions.
Perhaps most important, the potential impact of the proposed ''minimal diversity'' standard on the workload of the federal judiciary is worthy of serious consideration. On May 11, 1998, Chief Justice William Rehnquist delivered a speech to the American Law Institute in which he stressed his concern regarding the potential ''death'' of federalism and the adverse impact on the quality of the federal courts' work based on the rising number of laws that channel cases into the federal courts:
In my annual report for last year, I criticized the Senate for moving too slowly in the filling of vacancies on the federal bench. This criticism received considerable public attention. I also criticized Congress and the president for their propensity to enact more and more legislation which brings more and more cases into the federal court system.
* * *
Matters that can be adequately handled by states should be left to them, matters that cannot be so handled should be undertaken by the federal government.
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* * *
But there is a much broader question involved: How much of the complex system of legal relationships in this country should be decided in Washington, and how much by state and local governments.(see footnote 77)
In 1995, the Judicial Conference of the United States adopted the ''Long Range Plan for the Federal Courts'' in which the Conference made a strong case for limiting the scope of federal jurisdiction:
Congress should commit itself to conserving the federal courts as a distinctive forum of limited jurisdiction in our system of federalism. Civil and criminal jurisdiction should be assigned to the federal courts only to further clearly defined and justified national interests, leaving to the state courts the responsibility for adjudicating all other matters.(see footnote 78)
According to the Administrative Office of the United States Courts, the caseload and associated workload of federal judges has risen significantly over the last five years. In 1997, the number of civil cases filed in federal district court rose to 272,027. The number of appeals filed in the 12 regional courts of appeal also rose, attaining an all-time high of 52,319.(see footnote 79)
Summary of H.R. 3789
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H.R. 3789 would federalize most class actions by liberalizing the requirements for diversity jurisdiction.
Under section 2 of the bill, federal courts would be granted original jurisdiction in any class action in which any member of the plaintiff class is a citizen of a state different from that of a defendant, i.e., it would substitute a rule of ''minimal diversity'' for the current rule of ''complete diversity.'' In addition, section 2 provides federal jurisdiction if a member of the plaintiff class is a citizen of a foreign state or the defendant is a foreign citizen. The threshold ''amount in controversy'' ($75,000) would be eliminated for class actions. These liberalized diversity requirements would be codified in proposed new 28 U.S.C. §1332(b). The bill covers not only class actions, but other ''comparable representative actions.''
When diversity under proposed section 1332(b) exists, a plaintiff may commence the action in federal court. Moreover, under section 3 of the bill, if the action is commenced in state court but diversity exists, any defendant (but only a defendant) may unilaterally remove the action to federal court. Unlike present practice, a motion by one defendant would be sufficient to trigger removal; other defendants would not have to consent to the removal.
Under current law, the time for removal is governed by 28 U.S.C. §1446(b), which provides that defendants can seek removal of an action within 30 days after receipt of the complaint or other pleading that asserts a removable claim; in any event, the removal must take place within one year of commencement of the action. H.R. 3789 would delete the one year time limitation for removal, apparently to eliminate the possibility that plaintiffs would file an action in state court but not serve the complaint, or a ''removable'' amendment to the complaint, for over one year, thereby precluding any removal.
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Under existing section 1446(b) (and H.R. 3789), if the original pleading asserts a ''removable'' claim and no defendant seeks removal of the case within 30 days of its initial service, the right to seek removal expires. Merely amending the complaint does not renew the defendants' right to seek removal.(see footnote 80) Under no circumstances can absent class members seek removal under the House bill.(see footnote 81)
If a federal court determines that an action pending under proposed section 1332(b) should not be certified as a class action, section 4 of H.R. 3789 requires dismissal of the action ''for lack of subject matter jurisdiction.'' Nothing in the proposed legislation indicates whether the named plaintiff may proceed with the case individually, or whether the statute of limitations is tolled during the pendency of the action for the benefit of absent class members.
Section 5 of the H.R. 3789 makes its provisions retroactive, with the stipulation that any actions that have been pending more than 30 days prior to enactment must be removed within 60 days of such enactment.
Proposed Modifications to H.R. 3789
We believe that the Subcommittee could improve H.R. 3789 immeasurably by making the changes discussed below. Pursuant to the request of the Subcommittee staff and so that the Subcommittee can understand our proposals more easily, we have separately provided the Subcommittee suggested ''concept language'' incorporating the proposed changes.
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1. Bilateral Removal
H.R. 3789 permits only defendants to remove class actions. The bill therefore fails to address one of the primary perceived problems with state court class actions—the risk of collusive settlements, particularly when actions are pending in both state and federal forums and defendants seek to drive a settlement with the lowest bidder. Either a state or federal court can certify and settle a nationwide class action.(see footnote 82) If class action A is pending in state court and class action B (which deals with the same subject) is pending in federal court, current law provides no mechanism for the two cases to be consolidated or coordinated.(see footnote 83) The defendant can seek to create a competition between the plaintiffs in the two actions over who will settle on terms most favorable to the defendant. As Columbia Law School Professor John C. Coffee, Jr. has noted:
[T]he problem with the settlement class action is that it often permits the defendants to pick the plaintiffs' attorneys. In its most extreme form, the defendants shop a proposed settlement among several plaintiffs' attorneys. Sometimes, as illustrated by the now famous Georgine case, the settlement agreement is finalized even before the complaint is filed. The result can be a ''reverse auction'' in which the defendants settle with the lowest bidder among the plaintiffs' attorneys, and all plaintiffs' attorneys are placed in competition with each other under circumstances that can resemble a classic ''prisoner's dilemma.''(see footnote 84)
Collusion cannot occur without the participation of defendants. To prevent collusion, absent class members or plaintiffs in other actions, as well as defendants, should be entitled to seek removal of state court actions. This problem is addressed by S. 2083, which would permit absent class members to seek removal of the case within 30 days of notice of the pendency of the action. In addition, defendants should be obligated to notify plaintiffs in writing that similar claims have been asserted in an action pending in another state forum and that the plaintiff has 30 days thereafter to seek removal.
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2. Discretionary Remand
H.R. 3789 would potentially sweep almost every class action into federal court. By minimizing diversity jurisdiction requirements, the simplest intrastate class action consumer case could be brought or removed to federal court if only one class member is a citizen of another state. For instance, a lawsuit by Florida condominium owners against a Florida developer in which only one of the condominium owners is a ''citizen'' of New York could easily be removed to federal court under proposed section 1332(b)'s diversity requirements. There has been no demonstration that there is an essential need to intrude on such matters, which are traditionally handled in the state courts.
Federal judges should therefore be given discretion to remand cases to state court if issues of comity or federalism warrant deference to state court handling of the matter.(see footnote 85) In other contexts, courts have recognized that disputes that are truly ''local in nature'' should not be handled by the federal courts.(see footnote 86)
Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Creating a ''discretionary remand'' safety valve may also be necessary to satisfy Constitutional requirements. Certainly, it must be questioned whether Article III of the Constitution permits diversity jurisdiction if all defendants and thousands of class members are all citizens of the same state but a single absent class member is a citizen of a different state. Would the framers of the Constitution have considered this to be a controversy ''between citizens of different States?''
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3. Denial of Class Certification
H.R. 3789 provides that if a court denies class certification for a case pending in the federal forum based upon section 1332(b) jurisdiction, the case shall be dismissed for lack of subject matter jurisdiction. We have a number of observations on this point. First, in some cases, class certification is not granted because the plaintiff is not an adequate representative. Courts should be given the discretion to permit intervention of other class members who may be able to cure the defects precluding certification. Further, during consideration of the action in federal court, the statute of limitations should be tolled so that absent class members can later pursue their claims.(see footnote 87) Finally, the federal district court may find that a national class is inappropriate under the circumstances, but a strictly statewide class may properly lie. In such a case, the district court should be able to remand the case to state court (or, when the action originated in federal court, permit a refiling in state court) for renewal of the class motion for a narrower class or for pursuit of the claims on an individual basis only.(see footnote 88)
4. Retroactivity
Section 5 of the proposed legislation would apply its terms to pending lawsuits. This retroactive application would unfairly disrupt many pending actions and encourage forum shopping particularly when a defendant has received adverse rulings. The federal courts could suddenly become deluged with cases that have been pending for many years. Many of them are far along the litigative path and tremendous state court resources have been expended. Changing course in the midst of a litigation would result in a large waste of resources for the parties as well as the courts.
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5. ''Comparable Representative Action''
H.R. 3789 applies not only to class actions, but to any ''comparable representative action.'' Although this formulation is presumably intended only to reach class actions that may be described by other terms under state laws, it runs the risk of being too broad in its application. For instance, it could sweep in shareholder derivative actions. Even an action by the board of a cooperative apartment complex against a contractor could be construed as a ''representative action.'' Similarly, actions by custodians or trustees could be considered ''representative.'' We would urge limiting H.R. 3789 only to class actions.
6. Mandatory Carve Outs
a. As drafted, H.R. 3789 is inconsistent with pending legislation (S. 1260 and H.R. 1689) that provides for preemption of securities fraud class actions under state law and requires that all class actions brought against companies for securities fraud involving stock traded on a national securities exchange be litigated in federal courts. These bills specifically exempt class actions involving corporate governance claims arising under state law from removal to federal court. The Senate approved S. 1260 on May 13, 1998, and the House Commerce Subcommittee on Finance and Hazardous Materials reported H.R. 1689 favorably on June 10, 1998.
The state law carve out in S. 1260 and H.R. 1689 is the product of prolonged negotiations among Members of Congress, the Securities and Exchange Commission and the corporate community. Although NASCAT played no role in these negotiations, we understand that the policy behind the corporate governance exemption is that corporations are creatures of state law and state courts have developed expertise in dealing with these issues. To be consistent with the pending securities bills, H.R. 3789 should be amended to provide for such a state law carve out.
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b. Many class actions are filed against state entities or officials on behalf of individuals whose rights or benefits are affected by state regulations, e.g., beneficiaries of education or welfare grants. By providing for mandatory removal of such actions to federal courts, H.R. 3789 might effectively extinguish such claims because the Eleventh Amendment precludes such suits in federal courts against state sovereignties.(see footnote 89) Such cases are governed by the Pennhurst II doctrine, which holds that ''a suit against state officials is in fact a suit against a State'' and is barred under the Eleventh Amendment ''regardless of whether its seeks damages or injunctive relief.''(see footnote 90) We do not believe that exempting such suits is inconsistent with the purposes of the legislation.
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.
7. Impact on State Law
We do not believe that the drafters of H.R. 3789 intend to preempt the application of substantive state law to federal class actions based upon diversity jurisdiction. Indeed, such a result would be inconsistent with the long standing Erie doctrine,(see footnote 91) which requires federal courts in diversity actions to apply state law. We submit that the bill should make this intent clear.
''Whether the law of the State shall be declared by its legislature in a statute or by its highest court in a decision is not a matter of federal concern . . . Congress has no power to declare substantive rules of common law applicable in a State, whether they be local in their nature or 'general,' be they commercial law or part of the law of torts.''
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Conclusion
H.R. 3789 is major legislation that will have a powerful impact on class action litigation and the rights of those seeking to utilize it. We urge the Subcommittee to consider the policy issues we have raised and to modify the legislation along the lines we have proposed. NASCAT remains available to assist in this process in any manner in which you believe our expertise would be helpful.
Thank you.
STATEMENT OF STANLEY M. GROSSMAN AS TO FEDERAL GRANTS AND CONTRACTS RECEIVED
In the current and preceding two fiscal years, I have not received a federal grant, contract, or subcontract, nor has Pomerantz Haudek Block Grossman & Gross LLP nor the National Association of Securities and Commercial Law Attorneys.
BIOGRAPHY
Stanley M. Grossman, born in Brooklyn, New York, June 23, 1942, admitted to bar 1968, New York; 1969, U.S. District Court Southern District of New York and U.S. District Court, Eastern Districts of New York; 1974, U.S. Supreme Court; 1981, U.S. Courts of Appeal, 1st and 2nd Circuits. Education: New York University and College of the City of New York (B.B.A., 1964); Brooklyn Law School (J.D., 1967).
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Mr. Grossman, the senior partner of Pomerantz Haudek Block Grossman & Gross LLP., has been featured in an article entitled ''Top Litigators in Securities Field—A Who's Who of City's leading Courtroom Combatants,'' New York Law Journal, August 1, 1983. He has been with the Pomerantz firm since February 1969, and has been a member of the firm since 1976. Throughout this period he principally represented plaintiffs in securities and antitrust class actions. He was the lead lawyer for plaintiffs and the class in In re Salomon Brothers Treasury Litigation, 91 Civ. 5471 (RPP) (S.D.N.Y. 1995), where he obtained a $100 million cash recovery for the class. He was also the attorney in charge of the In re First Executive Corporation Securities Litigation, CV–89–7135 DT (Kx) (C.D.Cal. 1994), an action where he obtained $90 million for the class.
Judge Pollack of the Southern District of New York appointed Mr. Grossman to the Executive Committee of counsel charged with allocating to claimants hundreds of millions of dollars obtained in settlements with Drexel Burnham & Co. and Michael Milken.
Many courts have acknowledged on the record the high quality of the legal representation provided by Mr. Grossman to classes of investors. For example, in Gartenberg v. Merrill Lynch Asset Management, Inc., 79 Civ. 3123 (S.D.N.Y.), where Mr. Grossman was lead trial counsel for plaintiff, Judge Pollack noted at the completion of the trial (Tr. 507):
[I] can fairly say, having remained abreast of the law on the factual and legal matters that have been presented, that I know of no case that has been better presented so as to give the Court an opportunity to reach a determination, for which the court thanks you.
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Mr. Grossman has lectured to the profession on various occasions under the auspices of the Southern Federal Securities Institute; ALI–ABA; PLI; the New York State Bar Association; the Association of the Bar of the City of New York and Institute For Law and Economic Policy (''ILEP''). He serves as a director of the Class Action Digest and is the former President of the National Association of Securities and Commercial Law Attorneys (''NASCAT''). Mr. Grossman has also served on various professional committees, including the Association of the Bar of the City of New York's Committee on Professional and Judicial Ethics; State Courts of Superior Jurisdiction; and Trade and Antitrust. He is also a member of the Litigation Section dealing with class actions at the American Bar Association and a Subcommittee of the New York State Bar Association concentrating on class actions.
He is a Trustee and Secretary of The University Settlement Society of New York and a Director of the Jewish Community Center of Harrison.
Mr. COBLE. Let me recognize a proponent and opponent. Mr. Middleton, let me put this question to you and Ms. Birnbaum.
Some opponents have contacted me and perhaps other members of the subcommittee expressing fear if this bill before us is enacted, that it would bar State courts from hearing class actions. What say either of you to that?
Mr. MIDDLETON. If I might address that, Mr. Chairman, because there are class actions which are peculiarly of a State nature. There is an example just last week from Savannah, Georgia. A local cellular power company was sued because they imposed a municipal tax in Savannah.
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We have several—we have many residents from South Carolina across the Savannah River from where I live that work in Savannah. If a resident of South Carolina had a cellular account at his business in Savannah, under this bill that case would be removed to Federal court even though this involves a peculiarly local municipal tax, and it just so happens in this particular instance that on Monday of this week the company admitted wrongdoing, as it was in our newspaper.
This would be different if a defendant decided to gain the federal system as I addressed, and what could happen was you don't have the 1-year limitation on this. If it is a purely State-related action involving State laws, but you have one, and you only need one person of the class who lived across the river in South Carolina, they could let the case proceed, develop, even let negotiations toward an amicable resolution begin, and then they could remove the case when it became most advantageous for their own purposes. There is no 1-year limitation in it. There are many State actions, Mr. Chairman, such as State pollution laws, State real estate and contract actions, which should only be heard, and most appropriately heard, in State court.
Ms. BIRNBAUM. Thank you, Mr. Chairman.
Clearly there are State court types of class actions that this act would not affect at all.
The pollution within the State with a State defendant and State plaintiff is clearly a State action, and that would have no bearing on this, and the State court would apply to that.
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The local bank that has potentially cheated the citizens of its State, those cases would clearly remain in the State court where there is a State nexus, a State nucleus.
The issues that Mr. Middleton talks about, if there were residents of North Carolina as well as Georgia, it may be that a different law would apply to the residents of North Carolina, and they may have an interest in their law applying and not want to be part of a class action.
No one is suggesting that these people are going to lose their right to bring the class action. They will bring it in some instances right next door. They don't have to go very far. It is another courthouse. In those instances, that would be a proper allocation of resources.
But this would not stop in any way State claims in State class actions by members of that State, and, in fact, what many plaintiffs' lawyers are doing even in tort class actions in their States is trying to get State class actions with only residents of those States, because they recognize that the application of different laws would make class actions not possible if courts follow the rules. So this would not change the effect of State cases that have a nucleus in the State.
Mr. COBLE. Thank you.
Mr. Beisner, you were referring to the bill that had a carve-out?
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Mr. GROSSMAN. That is correct.
Mr. COBLE. In the bill before us, it is your belief that it would be incompatible.
Mr. GROSSMAN. That is correct.
Mr. COBLE. Mr. Beisner, would you want to comment on that?
Mr. BEISNER. I would just note that the Securities bill is a separate attempt to address class action abuse in State courts with respect to securities litigation. It is a much more far-reaching bill than H.R. 3789 in the sense that it is substantive in effect.
But I think the bottom line is that since there apparently is a resolution of State court class securities litigation issues in the other bill. Those issues probably should be carved out of H.R. 3789. There is no reason why if those types of abuses in those cases are resolved, in the view of Congress, in the other bill, that H.R. 3789 should override that in any respect.
Mr. MIDDLETON. Mr. Chairman, with regard to this securities bill in what they call the Delaware carve-out, therein lies a clear recognition that there are types of State laws, indeed State corporate laws, because corporations are a fiction of each particular State, that regardless of diversity should remain in State court, and we believe that other types of laws like the State corporate laws should also remain in State court regardless of partial diversity.
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Mr. COBLE. Let me recognize the gentleman from Massachusetts.
Mr. FRANK. I am going to take a minute or two to make an opening statement. I appreciate the testimony to be very helpful, and there has been more focus on this issue. I do want to be honest about some skepticism I have, and I don't know any of you well enough to say that any of this applies to you, but these are things that apply to other people.
Often we get into this people use make weights. I must tell you that I doubt very much that anybody's vote will seriously be influenced by federalism. There are some people who consistently take the position that we can go with the States and some who consistently take the position that we can go with the Federal Government, and then there are the rest of us for whom that becomes an issue once we have made an independent decision.
Secondly, the argument that this is going to overburden the budget of the Federal courts does not persuade me since some of the opponents of this bill, and I am talking about some of my colleagues, not the witnesses, are people who with me are perfectly prepared to burden the Federal courts in a number of other areas. We want to expand jurisdiction to protect individual rights.
I will have to tell you, it will take an extraordinarily persuasive argument to get me to pay any attention to either the federalism or the budget overcrowding arguments, particularly since I do regard the public sector as kind of unique, and whether or not a cost is imposed on a State or the Federal Government I think makes no moral difference. And I don't think that is what motivates people. What motivates people, and I don't think you have to be an inductive genius to figure it out, but my guess is that it is a general assumption that plaintiffs do better in State courts on the whole, and defendants do better in Federal courts, and that affects some of what we have got here. And that is what I would like people to address because I don't think an abstract concern of the concept of diversity has been the major motivation here on either side.
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Mr. Middleton, in much of your conversation you didn't seem to think of much of the concept of diversity at all. Much of what you said seemed to go—and it is interesting because while this bill is supported by my Republican colleagues, some have in the past wanted to get rid of the diversity jurisdiction altogether. Maybe they only want diversity jurisdiction for class actions. Your arguments sounded like some of the arguments that we used to get from them about diversity jurisdiction. You treated diversity jurisdiction as if it were kind of a slur on the capability of State judges. Are you further diminishing diversity jurisdiction?
Mr. MIDDLETON. ATLA has always taken the position that we recognize a very delicate balance between State and Federal courts, and we recognize the need for a narrowly defined diversity jurisdiction.
Mr. FRANK. You said these State judges are just as good as the Federal judges, and there are some State laws that are involved. Why should the accident of someone living in one State rather than another remove it from State court to Federal court?
Mr. MIDDLETON. If it involves a particular instance of State law that is peculiar to that State, I don't think it should. May I give you one example?
Mr. FRANK. No, because I need to get a clarification of this.
My understanding is if I am involved in a suit, and we have just two people, and there is diversity, I pretty much have a right to get that removed, whether or not it is a matter of State law or not?
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Mr. MIDDLETON. If you meet the jurisdictional requirement.
Mr. FRANK. You say if it is a substantive matter of State law, that shouldn't prevail, but it does prevail under State law currently?
Mr. MIDDLETON. With the amount in controversy.
Mr. FRANK. Are you for changing that, because it seems to contradict what you are saying?
Mr. MIDDLETON. No, I am not for changing that.
Mr. FRANK. So the accident of somebody living across the State line would justify an automatic nonappealable removal?
Mr. MIDDLETON. Yes.
Mr. FRANK. That seems to be somewhat contradictory.
Ms. Birnbaum and Mr. Beisner, I don't think that you met the burden in answering the question, wouldn't this get rid of all class actions. It seems to me that it would at the State level. You said, for instance, a local bank, what if the bank had an out-of-state depositor? What if I was a depositor in that bank and I moved out of the State; under this bill wouldn't it automatically get into Federal court?
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Mr. BEISNER. I think what is——
Mr. FRANK. I have this really narrow literal mind. I have a great obsession to have my questions answered. Then I will move into a broader scope of philosophy and the world. But is it not the case that in the bank example that Ms. Birnbaum gave, if someone—there are banks with out-of-state depositors. Would that not under this bill require a removal to Federal court?
Ms. BIRNBAUM. If the class was defined other than those people who reside in the State at the time it is brought, it would.
Mr. FRANK. Isn't that an illogical thing to define that way? Your example was the bank cheated its depositors, so you bring a lawsuit that says only the depositors that always have lived here and never have moved out will get protection? It seems to be more logical if the bill were drafted—and what if someone who lived there then moved away?
And pollution, what if an out-of-state property owner was involved? You said a pollution suit, he or she was one of the claimants for compensation for pollution that damaged his or her property. Wouldn't that under this bill ultimately result in removal?
Mr. BEISNER. Logical or not, that is how classes are defined every day.
Mr. FRANK. Under the bill—let's reconstruct this because——
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Ms. BIRNBAUM. The answer is yes.
Mr. FRANK. Thank you.
That is one of the problems of the bill. That is why Mr. Grossman's argument had some appeal to me. A requirement that there be—there seem to be a couple of extremes here. You are objecting that unless there is perfect unity, you can't go to Federal court. But now one or two plaintiffs can get you to Federal court. Do you really insist on that, Mr. Beisner?
Mr. BEISNER. As it stands, the plaintiff has the full capacity to define what that class is going to be, and plaintiffs don't define classes typically naturally as they lay.
Mr. FRANK. We are writing a law now. I understand that. What should it be? Should we face a situation in which a plaintiff who wanted to define the class logically, and I think all bank depositors would be a logical part of your class——
Ms. BIRNBAUM. Yes.
Mr. FRANK. Why should you be forced by the fear that you would be totally automatically removed; why would you have to try to run them out? I don't know enough about the substantive law, but if I was a judge and people said, here is the class action, the class action is all of the depositors who have always lived in this State, but none of the depositors who used to live in the State and moved out, I would find it peculiar.
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Mr. BEISNER. The practical reason why you would do it that way is you are much less likely to get a class certified if you define it as broadly as you are suggesting.
Mr. FRANK. What is logical about excluding depositors who may have moved away if they are treated the same way as a depositor who has been there?
Mr. BEISNER. In a lot of cases, that will bring in multiple other State laws, and under the current state of the law, that will be a——
Mr. FRANK. Do you believe that the bill has to be that if there is any diversity at all, it is automatically removed? Or would you allow some discretion so in cases where the overwhelming gravamen of the issue—because the bill does seem to be subject to that criticism, what would you say about having the bill amended to allow some discretion with criteria written in as to the appropriate locus?
Mr. BEISNER. We have not seen any criteria that would do that. If you start moving in that direction, a court may have so much discretion you are going to have the same situation as you have now.
Mr. FRANK. Discretion to whom?
Mr. BEISNER. The Federal judge.
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Ms. BIRNBAUM. I think that the one way that you could solve this is to have a discretionary remand procedure, I think, Mr. Grossman described, a procedure which would provide in the mostly localized kind of class action the ability to do that.
If I may answer one question since I gave up a little of my time to Mr. Beisner, this is not a question of where you do better from the defendant's perspective. What we are facing today in mass torts and mass products liability is multiple class actions in multiple States for the same exact thing. The defense costs alone, the waste of money and time that is going on in these cases, that is what——
Mr. FRANK. I appreciate what you are telling me.
This is my last point. If somehow it could be worked out that a class action in one State would be binding, that would be acceptable? You are talking about judicial economy and not the likelihood of doing better in Federal court or State court?
Ms. BIRNBAUM. It is two things. That is the first point, the judicial economy point, which cannot be done in State court and can be done more efficiently in Federal court because of multidistrict litigation. But there also is the issue of bias, perceived and otherwise, between in many places elected State court judges and Federal district court judges that have——
Mr. FRANK. That does get to the idea you will do better in the Federal court with the appointed judge if you are the defendant than you will in the hometown with the elected guy.
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Ms. BIRNBAUM. I think there will be a fairer process.
Mr. FRANK. Do you know what my experience is on how most people define fairer?
Ms. BIRNBAUM. It is in the eyes of the beholder.
Mr. COBLE. I think we will probably have two rounds of questioning. If you can confine your questions to 5 minutes, and we will have a second round.
The gentleman from Florida.
Mr. MCCOLLUM. Thank you, Mr. Chairman.
Mr. Wolfman, I want to ask you particularly about the situation Mr. Beisner gave as his example in the opening testimony. I have been aware that many, many people around the country have pointed to the Alabama situation as a gross situation in the sense that for whatever reason, they have been returning extraordinarily high verdicts, and so if you can forum shop and get into an Alabama court, you are more likely to get a higher jury award in a plaintiff's case.
Isn't it the case where you have stretched limits of jurisdiction, his example had just going out and finding a car dealer locally to make the case, isn't there something about that which says there is a remedy that is needed for that, whether it is needed or not?
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Mr. WOLFMAN. It raises several points.
The jury verdict is a separate problem. I think there was a problem in Alabama, and that was the situation where defendants were going in—plaintiffs were going in and certifying classes ex parte, in other words without the defendant's knowledge of the suit. The Alabama Supreme Court itself has put an end to that business in a series of five cases issued in December.
In addition, I think an important thing that has been missed is that the Alabama Supreme Court says in those cases that it is going to apply the class certification criteria stringently.
Mr. MCCOLLUM. Mr. Wolfman, that illustrates how this could happen in other forums at other times and other places. It has a generic lesson in it.
Isn't there a situation where you really have, as Mr. Beisner described, a limited number of defendants who are brought into a case who just give jurisdiction to that State situation, and where you really have a national class of people, and it really ought to be in a Federal forum or somewhere else? Maybe 90 percent of them are from Illinois, but you have two of them from Alabama. Maybe it ought to be in Illinois if it is a State court.
Mr. WOLFMAN. That may well be. If there is a situation where 90 percent of the plaintiffs are in Illinois, it seems to me that the Illinois State court is perfectly competent to handle that matter.
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Let me answer in another way as well. The principal problem for us is not the additional diversity that is created with the defendants. That could be fixed in a more narrow way by saying that. If you add a diverse defendant, that does not destroy diversity.
The problem that we see is that there is diversity even when one class member—there is only one class member that is diverse. Now, that is an extreme example, but it could be like the bank account example that Ms. Birnbaum raised. What if 10 percent of the people are in other States? That is not appropriate for the Federal courts.
Mr. MCCOLLUM. I can understand that. Maybe the discretionary remand procedure or some kind of formula which involves 25 percent of the value or 25 percent of the plaintiffs or whatever are from some other State, then you get to go into a Federal system. There may be a way that we can craft that. What do you think about that, Mr. Beisner?
Mr. BEISNER. As Ms. Birnbaum said, I think it is worth looking at that possibility, but I think we need to be very careful in this process not to create a loophole that basically leaves all of these cases in State court.
Mr. MCCOLLUM. I still think there may be some truth to what they are arguing, and we need to find some way—whether it is a discretionary issue which may not be satisfactory to you or some formula which allows the ability to go into Federal court if it is a greater number or lesser number.
Ms. BIRNBAUM. Let me just suggest that some sort of a formula would not be able to work because very often you don't know or can't identify where all of the class members are.
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Mr. MCCOLLUM. That brings me to a question that Mr. Wolfman was raising, and you are the perfect one to ask. What about the constitutional issue he raised with respect to the fact that you don't know where all of the class members are when you begin. Is there some way that we can address that problem? A, is it a problem; and, B, is it one where once we identify who the class members are, and if they are from somewhere else, we then have a removal right?
Ms. BIRNBAUM. I don't think that it is a constitutional issue at all.
When you go in and ask for class certification, the plaintiff has to in its complaint usually define what the class is, and you either define it as all of the members of a certain State, or those who reside in a certain State, or as a national class. So you know right from the beginning from the plaintiff's definition as to what kind of people are going to be in the class, and there is no constitutional standing issue here at all.
Mr. MCCOLLUM. Even though they are not named?
Ms. BIRNBAUM. Right.
Mr. MCCOLLUM. By broad generic terms we can——
Ms. BIRNBAUM. We can identify.
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Mr. MCCOLLUM. You don't agree, Mr. Middleton?
Mr. MIDDLETON. I don't agree.
Mr. WOLFMAN. It is true in some cases you know that they live all over the country. The problem is a standing problem. The problem is that there is no controversy with the absent class members because there is no class yet. I cited one case, Supreme Court case, but the Supreme Court has said repeatedly there is no legal interest in the absent class members until the court certifies the case. An absent class cannot litigate a case, only the named parties can, and I think it is a problem if you are basing diversity on individuals who have not yet been found to be members of a class.
Mr. MCCOLLUM. Mr. Middleton, do you want to wrap that up?
Mr. MIDDLETON. Yes. Because this bill does not have the 1-year limitation on removal, defendants are allowed to sit back, get any types of rulings they want. If there is only one diverse defendant or plaintiff, they can remove it to Federal court. They can get their rulings, and then if the judge decides that on one or another issue he is not going to rule in their favor, they then hold the key. The plaintiff's lawyer doesn't know if the class is diverse or if there might be one depositor that has moved out of the State. In my written materials, I talk about the doctors who sued the malpractice carrier for fraudulently increasing their premiums in California. You have State-regulated doctors, State-regulated insurance company, State case. It should have been in State court. But if one retired and moved to Florida, it could be removed.
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One other thing that I would like to mention with regard to this, this needs to have the 1-year limitation put back into it. And with regards to Alabama, the anecdotal problems of one State should not drive Federal jurisdictional changes of the magnitude proposed.
We would never—ATLA would never come here and suggest to this committee that we should fix Virginia and Mississippi law because they don't have class actions that can be brought in their State, and so we don't think that it is up to those States to remedy that situation.
Mr. MCCOLLUM. My time has expired.
Mr. COBLE. Why don't we go ahead and shift to Mr. Conyers, the gentleman from Michigan.
Mr. CONYERS. Thank you, Mr. Chairman. Could I ask the gentlelady from California to go before me?
Mr. COBLE. Sure. The gentlelady from California.
Ms. LOFGREN. Thank you. I have found this to be a very interesting hearing, and I would like to thank the Chairman again for responding so readily to our request for a hearing.
Mr. COBLE. You are indeed welcome.
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Ms. LOFGREN. We have just received a letter from the Department of Justice indicating their concern with the bill, and one of the things that they say is that the bill would essentially federalize class action litigation and would allow removal of class actions to Federal courts essentially at the defendants' option. And I think we have addressed that, and that is true, and it seems to me that we would only do that if there was an overwhelming problem that that fundamental and rather radical change would fix.
I have listened carefully to the discussion, and I am not sure that I agree that this bill is the right answer, but there is an issue of litigation going on on many fronts and the lack of judicial economy therefore. But I was interested in Mr. Middleton's initial comment that you don't pursue coupon settlements, and I am glad to hear that.
When we began the markup that was postponed, I mentioned I had many concerns with some of the remedies that result from class actions that may or may not always provide fair compensation for plaintiffs, and I am wondering if you can comment about—if this bill became law, what the impact would be on coupon settlements or future claim settlements or some of the other remedies that are troublesome to many.
Mr. MIDDLETON. Ma'am, I don't see that this bill addresses remedies at all. This will not solve the problem of collusive class actions. It will not solve the problem of agreements to resolve disputes being taken before a Federal judge, to get a settlement agreement entered into. It will not solve the problem of intangible damages somehow being calculated. It will not help if you have some lawyer trying to take as fees some sort of a percentage of what cash might be in the deal and then adding an intangible benefit to that to up the stake. This doesn't touch the remedies at all.
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Ms. LOFGREN. Let me ask you or Mr. Grossman, who had some interesting comments, the policy issue is whether the Congress should be interested in remedies entered into in State courts. Is there a remedy that could be crafted federally for, say, coupon settlements or some other remedies that are abusive, or arguably abusive, to plaintiffs in class action litigations? What would that be?
Mr. GROSSMAN. First I would like to say that I don't think a coupon settlement by very definition is necessarily wrong. I don't know that I have engaged in any. I can't recall having engaged in any. But there are many instances when you have a lawsuit against a defendant who just can't pay a proper settlement in cash.
Ms. LOFGREN. Rather than get into that, because my time is not unlimited, if we wanted to effect that, jurisdictionally, how would we do that?
Mr. GROSSMAN. I think the best solution to that is to have a strong judiciary both in the Federal courts and the State courts. After all, all of these settlements have to be approved by the court. They look at these things under the microscope. If they think that a coupon settlement is good, we may have some people attacking it, for whatever reason they have, but I have confidence in the judiciary that they will not approve a settlement unless it is good. Of course, there are exceptions from time to time, but I don't think that you can legislate those things.
Ms. LOFGREN. Do you agree with that, Mr. Middleton?
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Mr. MIDDLETON. Yes.
Ms. LOFGREN. Mr. Grossman, I was intrigued by your idea that you would have individuals not even party to a class action play a role in this whole matter, and I was thinking how could that possibly be constitutional, going to the comments that Mr. Wolfman made in his testimony?
Mr. GROSSMAN. I guess if the class members may not be considered parties or quasiparties for any purpose in the litigation, then this bill in effect would be unconstitutional because the class members' citizenship would not appropriately be considered.
If, on the other hand, a bill like this is, in fact, passed and based upon an absentee class member, citizenship diversity would be established, then certainly that absentee class member should have the right to remove the case to Federal court as well as a defendant, particularly in a collusive situation.
Ms. LOFGREN. In a sense, in a backhanded way, you are making the argument that this bill is, in fact, unconstitutional as Mr. Wolfman has suggested.
Mr. GROSSMAN. I think there are serious questions. If you have a class composed of 10,000 people in one particular State, and only one member of the class resides elsewhere, and that is the basis for diversity, I think that may very well pose a constitutional question. I think he is right. That again is why we think the discretionary remand is so important.
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Mr. MIDDLETON. The Congressman earlier used an example of a depositor in an Ohio bank, and then the depositor moves out of town. You have a situation where if you had to define the class that Ms. Birnbaum would recommend, only the in-state people could recover in the action. So as to keep it in State court, you would then have to discuss those individuals who moved out of the State, out of the jurisdiction. Even though they indeed would be harmed, maybe not harmed to the extent that it would warrant bringing an individual case. Those individuals are not protected under this particular scenario. They don't have—for maybe $100 improper or illegal charge on their account, they won't have the ability to come in and practically seek a remedy in a State court for themselves.
Ms. LOFGREN. Thank you.
Mr. COBLE. The gentleman from California, Mr. Rogan.
Mr. ROGAN. Mr. Chairman, thank you. I want to apologize to the members of the panel for my tardiness in coming today. Unfortunately, as is often the case, I have multiple hearings going on at the same time. And as a result of my getting here later rather than earlier, I am somewhat reluctant to get into in-depth conversation on a couple of issues because I suspect that you have already addressed them, and your comments will be available to me at a later time.
One of the things that I would like to find out, Mr. Grossman, there is always a temptation among those of us who are attorneys or not attorneys and end up in a legislative body to——
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Mr. COBLE. If you can pull your mike closer.
Mr. ROGAN. My point was that there is sometimes a temptation for us to legislate by way of anecdote rather than practical application of what is going on in the real world, and in our memoranda that was provided to the committee and some of the statements that we have had a chance to review, there are the horror stories of baseless filings, reverse auction class suits, all forms of collusive conduct between plaintiffs' attorneys and defense attorneys. I am just curious, from each of your individual perspectives, are those the rare exceptions to the rule, or are these increasingly occurring in your practice and in your observation of class lawsuits?
Mr. GROSSMAN. Thank you, Congressman.
I think these are indeed anecdotal and indeed the rare exceptions. First, I would like to say as far as we are concerned, both the Federal and the State judiciary across the country are generally of a high caliber, and we are happy to litigate in Federal as well as State court. It depends what the issue is.
I am not aware of them firsthand, but I have read about the so-called collusive settlements. Undoubtedly, that is a problem; and I guess the question is whether or not a bill as important as this one is necessary to deal with the problem.
Mr. ROGAN. In your firm how many class actions lawsuits have you been involved in?
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Mr. GROSSMAN. I have been in this practice for approximately 30 years now, so I would say literally hundreds of lawsuits both in State court and Federal court all across the country.
Mr. ROGAN. What is the percentage of plaintiff versus defendant work that you have done in that area?
Mr. GROSSMAN. A good 95 percent is on the plaintiff side.
Mr. WOLFMAN. I would say that the problem cases are an exception.
One of our concerns, and the reason that we got in the business of challenging bad settlements, whether you call them collusive or otherwise, is that we are concerned with throwing the baby out with the bath water, that phenomenon. We want to fight against the perception that they are all bad, and we want to support the class action because we think it is an extremely important tool for civil justice.
One thing that you mentioned: the reverse auction is where the defendant bids for the lowest plaintiff's lawyer. That is the concept. We are fighting that as best we can, trying to establish judicial doctrines to deal with that. This bill does not deal with that at all.
In the case Ms. Birnbaum posited earlier, she said the plaintiff's lawyer can limit the class to people who reside in one State. Then you have to have another lawsuit, whether it is Federal court or some other States to deal with the other bank depositors. And of course the defendant will want to settle on a global basis, so you have a potential for a reverse auction. This bill does not solve that problem.
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Mr. ROGAN. Mr. Middleton.
Mr. MIDDLETON. I also think that it is very anecdotal, and you often hear mentioned Alabama and Texas. Those appellate courts have changed in recent elections, and those States now have taken care of the problems in their respective jurisdictions.
I think the Congressman recognizes that you might be being asked to legislate in a vacuum here, but I think the State courts should weigh in on this, and they should be heard on what problems exist, and if it is pervasive amongst all of the State courts, I think the Federal Judiciary——
Mr. ROGAN. I hate to cut you off, but I know my time is going to expire on me. I think that you did the job of getting your opinion, and I want to hear from Mr. Beisner and Ms. Birnbaum.
Mr. BEISNER. I think the problem is more than just anecdotal. You have different attorneys litigating in different places. I think those attorneys who bring those actions in Federal court tend to play the game quite directly.
Mr. COBLE. Mr. Rogan, we have been very liberal on the red light, so go ahead and proceed.
Mr. ROGAN. Thank you, Mr. Chairman. I am going to ask my last two witnesses to be brief, so I can take credit for their brevity.
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Mr. BEISNER. When it comes to State court—and this is not true of all State courts, but in a number, if you are a defense lawyer, the scenario often goes something like this. You get a phone call from an attorney saying, I have just filed a lawsuit against your client. It is a class action lawsuit.
''Oh. Where was this case filed?''
The attorney will tell you where, usually a county court somewhere.
And the attorney will say, ''Oh, by the way, there is a class certification order already entered in this case,'' that being the whole ballgame in the case. Of course, at that point, the defendant doesn't even have the complaint yet.
Or alternatively, the attorney who calls will make a statement like: ''You know the judge that I filed this case before in this instance has never denied class certification in this case.'' And the punch line at that point is that you get a question about——
Mr. ROGAN. Settlement?
Mr. BEISNER. Yes. The attorney will say: ''What will you pay me to settle the case?'' And if you go forward with the conversation with the attorney, you will understand that the attorney is not talking about what will the defendant pay the class.
Mr. ROGAN. Is this a common practice or a rarity?
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Mr. BEISNER. It is a common practice.
Mr. ROGAN. Ms. Birnbaum?
Ms. BIRNBAUM. This is not a situation of one State. The fact that the Alabama Supreme Court may have come down with some opinions doesn't change what happens in the trial court. It is very hard to get appeals of class certifications in State courts. You have to go to the end of the line in order to get your appeal. The blackmail—economic blackmail effect is enormous just as a result of the certification process before you can get a potential mandamus or appeal.
By the way, now in the Federal court there is going to be an appeal process at the end of the year. That makes a very big difference, but this is a situation, we can name six or seven States which are notorious where these things are happening every day.
In the Phen-Fen litigation, there are dozens of putative class actions pending in State courts all over the country, and in Federal courts they have filed the very same class actions. And that is what you get in any mass tort situations. It is an unbelievable waste of money and time.
Mr. ROGAN. I understand where you are coming from.
Mr. Chairman, thank you for your indulgence.
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Mr. COBLE. Mr. Conyers, I moved you ahead of the lady from California by virtue of your Ranking status. I believe the gentleman from Massachusetts preceded you here. Which of you two want to go? I will let you make the decision.
Mr. DELAHUNT. I will. I will probably be briefer.
I think it was Mr. Beisner who said, in reference to your impressions and your observations, and I am not saying that they are valid, but I was just commenting to the gentlelady to my left here, and I have been saying it again and again, what we do here in Congress is legislate by hunch, by guess. I am not suggesting that you are wrong, but has there been a study done?
I just got handed something by staff which says, a Rand study now under way suggests that half of class actions are currently in State courts, half in Federal courts. I mean, I don't know what this particular study is about.
Then I hear, too, that much of the abuses, the perceived abuses in the system are not going to be resolved by this particular bill, the things that really seem to outrage people.
Has there been a study, is there any thoughtful survey that has been completed that indicates that there is a specific problem and that this bill will do something about it?
I mean, I am becoming tired of crafting national policy, significant national policy, that has implications far beyond what we know, and that we are doing this without hard data.
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Mr. Middleton.
Mr. MIDDLETON. There is no study that has considered the impact of this bill. This bill is less than 60 days old as we sit here, and I don't know of any study that has been done or any collaborative effort that has been made by the Council of State courts and the Council of the Federal Judiciary to determine what abuses exist that might be pervasive across all of the various States, not just in one or two or three or four States, that would warrant an overriding, sweeping Federal mandate.
I don't think that exists, and I would suggest that would be an excellent starting point for the deliberative efforts of this particular committee, to request such a study be done and request that those entities come forward with that information before there is a hell-bent rush to judgment on this particular issue and on a vote on this bill.
Mr. DELAHUNT. Ms. Birnbaum, do you wish to comment?
Ms. BIRNBAUM. Yes.
Mr. DELAHUNT. I want to join the chorus that has been applauding Chairman Coble for having this hearing. Whatever comes out of it, it is certainly going to result in a better product, if there is a final product, than there would have been if we had pursued that markup, and I just want for the record to state my appreciation to my friend and my Chairman, Mr. Coble.
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Mr. COBLE. Thank you.
Ms. BIRNBAUM. There is the Institute of Civil Justice preliminary study which was recently done which showed a rush of cases to the State court that previously may have been filed in the Federal court in the last two or 3 years. The Rand Institute, The Institute of Civil Justice, is completing a more in-depth study of these issues, which is not yet completed.
Mr. DELAHUNT. Would you recommend that we wait?
Ms.BIRNBAUM. No, I think you should not wait. I think you also have information from Alabama here.
Mr. DELAHUNT. We are going to craft—you are suggesting that we craft national public policy based on Alabama?
Ms. BIRNBAUM. No, I am suggesting that what goes on in Alabama has gone on in other States as well.
Ms. BIRNBAUM. I know that.
Mr. DELAHUNT. You might know, but do I have any independent, verifiable data or survey that proves what you know, because you obviously have considerable experience? I am listening to Mr. Grossman and Mr. Middleton with a contrary opinion. I have a sense my colleague and friend from Massachusetts may have some good ideas as to where we should be going as far as this particular bill is concerned, and as is his wont, he will probably come up with something that will make such good sense that we can do it without putting at risk a system that ought to be serving the people. But you don't—I am glad you mentioned the Civil Justice Institute and the Rand studies, but I need more than that.
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Mr. BEISNER. I would also recommend to you that there is a four-volume set of materials which came out of very extensive hearings which the Advisory Committee on Civil Rules conducted within the last 2 years in which they brought in a wide array of people; they asked for volunteers. They conducted 3 days of hearings. One of the clear things that came out of that testimony was a number of persons providing concrete evidence indicating that there is a problem with State court class actions.
Now, that committee said, ''Look, we are the Federal Advisory Committee on Civil Rules. You all need to go see Congress on that.'' So that is why you have a number of people here raising that issue. But I would recommend to you that four-volume set which is filled with information.
Mr. DELAHUNT. Let me reclaim my time that I don't have, and I will continue this on my second round.
Mr. COBLE. In view of your generous comments to the Chair, you may proceed.
Mr. DELAHUNT. I know how to butter up.
Mr. COBLE. This may get me in hot water with the gentleman from Michigan for giving you extra time, but I will assume that risk.
Mr. DELAHUNT. As for the economy argument in terms of the Federal courts, Mr. Frank is right when he says we don't necessarily really ascribe to it unless we have more of a policy issue at stake, but I really think we are getting to that point where the issue of judicial economy has to be dealt with.
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The more responsibilities that we place on the Federal Courts, and we are doing that—I mean, I am sure that everyone here is familiar with the Chief Justice's recent essay on the federalization of State laws both criminal and civil and the impact on the Federal judiciary. It is getting to the point—you all practice in the Federal courts—where the Federal courts are—and again, I know, I am quoting you, Ms. Birnbaum, I know when I listen to the clerks, when I listen to magistrates, when I listen to magistrates and Federal court personnel as well as judges, we are running into real serious problems. I am getting to the point where I don't want to support any legislation unless there is a hard commitment from Congress that they are going to fund the necessary resources so that the judiciary can retain its independence and meet the additional responsibilities.
Ms. BIRNBAUM. Let me just respond, Congressman. The advantage of having cases in the Federal court rather than in the State court is that you have multidistrict litigation where normally if there is a mass issue, there is one Federal judge that is handling all of these potential class actions and making a decision that binds everyone. That doesn't indicate—this does not mean that there are going to be more Federal judges working necessarily on more cases, especially in mass torts, mass products liability cases. It will create efficiencies within the Federal system because of the process in the Federal system which is totally unavailable in the State system.
Mr. DELAHUNT. But it will involve an additional burden on the Federal system?
Ms. BIRNBAUM. Not really. If you have multidistrict litigation, you will have one judge deciding a number of these issues instead of multiple judges if there are multiple class actions in various States or in various Federal courts.
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Mr. WOLFMAN. If I might, I think that is wrong. It is true that the multidistrict litigation panel brings some efficiencies. Let's just use a number. There are 400 cases in State courts, which will now be removed to Federal court. That is 400 additional cases.
There are districts in this country where you can't get a civil trial setting. This upsurge reported by Rand is understandable. If I were a lawyer who typically brought a class action in Federal court and had the opportunity to bring it in State court, I would seriously consider it in light of the delays facing my client in the Federal action.
Mr. DELAHUNT. I want to thank you. I will look to the Chairman and the Ranking Member for guidance and counsel.
Mr. COBLE. I thank the gentleman. The gentleman from Indiana.
Mr. PEASE. Thank you. I, too, wish to express my apologies to the panel for my tardiness. We are running to various hearings. And I appreciate the material that you have provided, but since I have not read it, I only want to follow up on the things that I actually heard when I was here, and those focus on the issue of constitutionality.
I am yet to be persuaded that there is a constitutional problem by saying that because 80 percent of the plaintiffs are in one State and only one plaintiff is in X, in a different State, and the different percentages scattered elsewhere, that rises to the point of being a constitutional question. You might disagree from a policy standpoint, or it might be inconvenient or burdensome, but I don't understand the constitutional question here. I would appreciate it if various members of the panel could respond to that.
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Mr. BEISNER. Since we haven't had a chance to respond, let me note that I don't believe that there is a constitutional issue here. I think that I have heard two issues raised. One is the question of whether the notion of using minimal diversity as a basis for Federal jurisdiction is constitutional. The Supreme Court has ruled on that in the State Farm v. Tashire case. In 1967, the Court addressed that. And since then, as noted in the materials that I submitted to the committee, our courts have repeatedly held that minimal diversity is constitutional.
I believe that the second issue that Mr. Wolfman is raising is the question whether under Sosna v. Iowa, another Supreme Court case——
Mr. PEASE. Cited in your materials?
Mr. BEISNER [continuing]. Cited in Mr. Wolfman's materials, that somehow the absent class members are not yet before the court such that they not present a case and controversy. That makes no sense. The federal courts have repeatedly recognized the presence of those unnamed parties before the court.
One of the reasons that we have a problem getting these cases into Federal court is the Supreme Court decision in Zahn in which it says, folks, if you want to bring your class action into Federal court, you have got to demonstrate not only that the named plaintiffs meet the $75,000 jurisdictional requirement, but that all of the class members do. Clearly the Court is recognizing that when you file the lawsuit, those people—those unnamed class members—are there before the court.
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Take another example. Under the American Pipe doctrine, the Supreme Court has ruled that the statute of limitations on unnamed class members' claims is tolled during the pendency of the class action. If those persons are not before the court, if they are invisible, how can that possibly be the case?
There are also a number of cases—the Diaz case out of the Ninth Circuit, the Glidden case out of the Seventh Circuit—looking at the need, if a class action is dismissed under a variety of circumstances, to notify the unnamed class members that the case has been dismissed. If unnamed class members are invisible to the court, why would you have to do that?
I would point out that I don't believe the Sosna case says what Mr. Wolfman says it says. It looks at a narrow issue. It looks only at the impact of class certification going forward, and I believe the case is silent on unnamed class members' pre-class certification status. There is no constitutional issue here.
Mr. PEASE. I would like to hear from one who contends that there is.
Mr. WOLFMAN. It is my testimony that raised that, and let me take a crack at it.
The issue of minimal diversity, 10 percent from out of State is not the principal concern. The principal concern is the one last addressed by Mr. Beisner, which is the notion of the putative class, the uncertified class, having some legal standing.
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Mr. PEASE. You would concede the minimal diversity issue does not create a constitutional problem, but you are contending that something else does?
Mr. WOLFMAN. Yes, but, and let me give you the ''but.'' It is true the Tashire case endorses the concept of minimal diversity, and we say so in our testimony. It is unclear if it is the 1-out-of-10,000 situation that the notion of minimal diversity goes that far because it is so at odds with the policy behind Article III, section 2, which is to deal with genuinely interstate disputes. But by and large we believe that the minimal diversity is constitutional.
But the question of the absent class, and it is not just Sosna v. Iowa, it is the Geraghty case and the Roper case that also say that—make it quite clear that the absent class members only have a legal interest once the case is certified.
Let me tell you what happened in the Sosna case. In Sosna, the named plaintiff's interest mooted out. He no longer had a suit, and the Supreme Court held that the abstentees themselves had a legal interest in pursuing the issues in the case because the class had been certified.
When the class is not certified, it is pretty clear that case could not go forward. That is the case. The Zahn case raised by Mr. Beisner has to do with the amount in controversy, whether each abstentee has the amount in controversy. The answer is quite simple. In Zahn the class had been certified. The question in the Supreme Court was whether all of the abstentees have the requisite amount in controversy, and the Court said each of them have to have it. I think it is a serious question.
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Mr. FRANK. Would the gentleman yield?
Mr. PEASE. Indeed.
Mr. FRANK. As a theoretical question, I can understand it, but as a practical question, is that not resolvable by naming someone out of State? If you just threw in a named plaintiff from out of State, would that resolve that question?
Mr. WOLFMAN. Yes. If in the complaint there was a named plaintiff that was diverse, absolutely.
Mr. FRANK. Anyone who is persuaded by your argument on the other side would just have to find a named plaintiff from out of State and avoid the potential objection that you are raising?
Mr. WOLFMAN. That is correct, and the plaintiffs' lawyers are usually the master of the complaint.
Mr. PEASE. Mr. Chairman, I would like to hear the answer to the question from Ms. Birnbaum.
Mr. COBLE. You may proceed. We have been very liberal on this red light.
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Ms. BIRNBAUM. We do appreciate all of the time.
I couldn't agree more with Mr. Beisner in this instance.
Mr. Frank, just in response, the defendant cannot put in another class representative. It is the plaintiff that is controlling it, and the plaintiff controls it to create a situation to get into whatever court he wants to get into. And so you are right, and that is why this is all a fiction.
The Supreme Court in the Zahn case may have been looking at a class certification, but what it requires the courts to do now is look at this in advance of class certification. One of the big issues is does each class member meet the $75,000 requirement. So clearly, Mr. Wolfman, in that particular case the class had been certified, but today courts look at that issue before class certification. So this can't possibly be a constitutional problem.
Mr. PEASE. Thank you.
Mr. MIDDLETON. May I ask to address another problem of due process?
Mr. COBLE. Can you do it briefly, because we still need to recognize the gentleman from Michigan.
Mr. MIDDLETON. There is another question, gentlemen and lady, that involve the denial of due process. Under this bill as it is crafted right now, what can happen is you can bring a case under a State law. You can comply with your State pleading requirements, particularly in a State that doesn't follow Federal Rule 23 to the letter.
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If you follow it to the letter, and then the defendant apprises you that there is at least one diverse plaintiff in your group, and they wait and do that until after the original statute of limitation expires, then under this bill you are—the Federal judge must dismiss. You do not have the opportunity to amend, and in the State of California there is a recent Supreme Court decision from 1997 which states the statute of limitations is not automatically tolled. So you have a denial of due process in a situation where you have a lawyer doing everything right according to his State law, bringing a State-based claim, and having no remedy to fix it once it is removed by having one diverse party.
Mr. COBLE. I am going to get back to the second round.
Mr. PEASE. My concern is now that we have allowed one side to start a new subject, we don't have any time for the other side to give a response.
Mr. COBLE. We will have a second round, and I will attend to that. I need to recognize the gentleman from Michigan, Mr. Conyers.
Mr. PEASE. As long as I can get a response on the second round.
Mr. CONYERS. Thank you, Mr. Chairman. I want to ask everybody why they think we need this legislation?
Ms. Birnbaum?
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Ms. BIRNBAUM. I would be happy to answer that. What has occurred is in the last 2 or 3 years, there has been a shift in class action pleadings and bringing class actions to the State courts. It is not because people think they are going to get an early trial.
Mr. CONYERS. You will have to be quick.
Ms. BIRNBAUM. There is an enormous number of cases now being filed in the State court for class action certification which were not previously filed in State courts because the rules of the game in some of these State courts, not one or two or three or four, but maybe a dozen, have changed dramatically.
Mr. CONYERS. Thank you.
Mr. Beisner?
Mr. BEISNER. I would just add to that I think there is a real problem with due process consideration in State courts, and I think it is not a problem just for defendants. I think there are serious issues about what law is being applied and about how cases are being processed that affect the unnamed class members in these cases, which often don't have an advocate representing them.
Mr. CONYERS. Mr. Middleton?
Mr. MIDDLETON. We don't believe that this bill as crafted is appropriate. It is flawed because the removal is allowed by defendants only, and that causes exactly the reverse of what Ms. Birnbaum addressed. That is reverse forum shopping, which they are complaining about the plaintiffs having.
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It also is improper regarding retroactivity of application to class actions that are presently in the system and working. For instance, we had a 3 1/2-year class action. The negotiations took 8 months in the State court system in Texas. Had a new CEO come in for that particular insurance company, they could have insisted upon removal. There is no time restraints.
Mr. CONYERS. Okay.
Mr. WOLFMAN. Your question was ''What is the need for this bill,'' and to be brief, we do not believe that there is a need for this bill.
Mr. CONYERS. Mr. Grossman?
Mr. GROSSMAN. Congressman Conyers, if this bill were not before this committee, we would not be here proposing one.
Mr. CONYERS. So I take it from these responses that this isn't a matter of crafting something that we can all live with type situation. There is no way that Mr. Frank and Chairman Coble and I could put together a bill that everybody at the table would say, ''Ah.''; Is that right?
Whatever happens, your positions will probably—are not likely to change in support of any legislation in this direction?
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Mr. MIDDLETON. I think in the vacuum in which this committee is being asked to respond and report out this bill, in the absence of data, without the data from the Conference of State courts and the Federal Judicial Conference, I don't think that the problem has been appropriately identified.
Mr. CONYERS. What would have happened in the tobacco industry litigation if we had had this law, Ms. Birnbaum?
Ms. BIRNBAUM. There were no class actions really in the Federal court. There was one State class action in Florida that was certified in Florida, and it may have been removable to the Federal court. The Federal court may or may not have certified it.
Mr. CONYERS. Mr. Beisner?
Mr. BEISNER. I don't think that there would be a significant difference in outcome of the cases. Some of the tobacco-related cases have been brought in Federal court. Some were not certified, and some were certified, and there were some brought in State court.
Mr. CONYERS. My staff doesn't agree with that response, and they want me to jump on you, but I am not going to.
Mr. MIDDLETON. I would hesitate in light of what has been happening in the halls of Congress to suggest what would go on with the tobacco litigation, but I think these cases, particularly the Minnesota case, and these other cases which dwell on particular and peculiar State laws are best considered by those judges who understand those laws.
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Ms. BIRNBAUM. The State attorney general cases are not class actions.
Mr. CONYERS. One moment, please.
Mr. Wolfman?
Mr. WOLFMAN. Just very briefly, the class actions, and there were some that were brought in State court concerning tobacco, I know of two in Florida involving flight attendants, they would have been removed to Federal court.
Mr. GROSSMAN. I am not very familiar with those actions, but my understanding is the same as Mr. Wolfman's.
Mr. CONYERS. Does anybody here come from a firm that represents any of the tobacco industry?
Ms. BIRNBAUM. Our firm represents U.S. Tobacco.
Mr. CONYERS. Mr. Beisner?
Mr. BEISNER. We do not, no.
Mr. MIDDLETON. No, sir. I have turned down all efforts to get me involved in that litigation.
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Mr. CONYERS. Is there anyone here that are witnesses that are not aware that there has been an intense effort to federalize State law and get it into the Federal court? Is there anybody not aware of that so we don't have to make that argument?
In other words, juvenile crime, we want to Federalize it. Any kind of crime that ticks off a Member, particularly an influential one, can end up having a bill that ends up making it a Federal crime as well as a State crime. That has been going on since the advent of the Gingrich abortion bill—anybody not aware?
So this is in one sense a continuation of this process that we are now going to federalize this diversity in a way that it will be quite easy to get into the Federal courts, and we find the same group of people, with one major exception, pushing this, and brilliantly they got Jack Quinn out of the White House to do the lobbying, and so this is a real kettle of fish here.
In addition, we have the same general legislative group blocking the filling of President Clinton's 75 Federal court vacancies at the same time, 33 of which have been certified as emergency circumstances—Federal district courts are handling maximum activity caseloads of all types.
Can anybody—will anybody want to explain to me how this law, if it is swiftly passed by Republican leadership and it somehow gets into law, would not clog up the Federal courts hopelessly?
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Mr. MIDDLETON. I think the Rand study, which the Congressman from Massachusetts referred to, stated that half of the class actions now are in Federal courts, and half are in State courts. So essentially this legislation would double the amount of cases in the Federal system, which is approximately 10 percent short of its required judges at this point.
Mr. BEISNER. I frankly don't believe that you would have a great clogging of the system coming out of this, because on so many of these issues and claims that are pending now, some cases are in Federal court, some are in State courts. And as Ms. Birnbaum pointed out earlier, under H.R. 378 what you would achieve in the multidistrict litigation process under 28 U.S.C. 1407 is finally a collection of these overlapping, conflicting cases before one Federal judge.
Mr. CONYERS. Mr. Chairman, I think I will stop there.
Mr. COBLE. We will go another round. I am going to get into what the gentleman from Indiana started.
Mr. Wolfman, this is the question that I initially had for you. When the gentleman from Michigan asked you all whether you could come up with a proposal on the bill at hand and all of you would say, ''Ah,'' I don't know of any bill where there is a difference of opinion, it would probably be a case of first impression, where everybody said, ''Ah,'' but maybe you could live with it. Mr. Wolfman, and then I will give Mr. Beisner or Ms. Birnbaum an equal chance, and, Ed, you can follow up when it comes your time if you would like.
I was going to ask you several minutes ago, Mr. Wolfman, to explain how you believe the dismissal provision of the bill would operate both in terms of how it would affect the tolling of other statutes and the ability of plaintiffs to refile in State court?
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Mr. WOLFMAN. The dismissal provision is very problematic, and let me address both of your concerns.
First with the statute of limitations, the current rule in the Federal system under the so-called American Pipe rule is if there is a class action, the statute of limitations is tolled for the purpose of filing another class action. It is completely unclear whether State courts will uniformly adopt American Pipe. Some have, and in some states it is an entirely open question.
Under H.R. 3789, the matter is dismissed and not remanded to the State court, and it could be that all of the plaintiffs' statute limitations, to use the colloquial form, are blown because the matter is dismissed. They go back and try to refile in State court, and they have no case. So at the very least something has to be done to toll the statute of limitations.
Of course, one way around that is to say the case is not dismissed, it is remanded. Then it raises a second question. When it is remanded, it seems to me absolutely to be the case that if the Federal court has said no certification, it should not be the case that these individuals' claims couldn't go forward on a State law class action basis, perhaps just with the residents of that State or whatever. You shouldn't have the Federal class action rule in effect totally preempting State law class action rules.
Mr. COBLE. Ms. Birnbaum or Mr. Beisner.
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Mr. BEISNER. I think the example that Mr. Wolfman gave there is part of the reason why dismissal is appropriate.
When these cases are brought, typically the plaintiff brings the case because they want to bring a class action. If they wanted to file an individual lawsuit, they would bring an individual lawsuit. If the fundamental purpose of the class action has been determined by the Federal court not to work—that it doesn't meet class certification requirements—that should be the end of it.
And to say we are going to remand this case back to State court, to let the plaintiff take a second shot at class certification with a different judge, makes absolutely no sense. These issues ought to be resolved, they ought to be finished. If the plaintiff wants to ask the Federal court to reconsider or whatever, they may do so.
Mr. COBLE. We have a vote.
Mr. Grossman?
Mr. GROSSMAN. I very much disagree with that last comment. The fact that a Federal court does not certify a class does not mean that there isn't any class that could be certified. One of the reasons a Federal court may not certify a class when there is State law involved is that it may find that the laws of 50 different States will apply to this national class action, and that would not be appropriate. That would not satisfy the elements of Federal Rule 23, the class action procedure.
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Well, under those circumstances, there is nothing inconsistent with a plaintiff or class members going back to a State court and saying, we will now limit a class just to California, just to New York, just to Illinois.
So there is no reason in the world necessarily that there is any inconsistency with the propriety of a State class action and the denial of a Federal class action.
Mr. COBLE. We have a vote on now. I am going to recognize the gentleman from Massachusetts. Then we will recess and come back.
Mr. FRANK. First of all, I think Ms. Birnbaum's point, my recollection is that the most successful antitobacco suits were brought by attorneys general, so they were not class actions. In Minnesota and Mississippi, they were brought by the attorney general acting for the State Medicaid/Medicare program, so they would not have been diminished.
A couple of quick questions. On the whole question, Mr. Beisner, I think you are overreaching on the dismissal. People shouldn't be put at risk. Well, I will try to do a class action because that would be better; but if I fail, I would waive my individual right, and I don't think you have a chance of getting a bill like that through. Sometimes people ask for a lot, and you get less, but you can bargain yourself out of the game.
Also the reciprocal removal, should a situation arise where there has been a change so a plaintiff might want to remove because there has been some change in the personnel of the defendants, shouldn't that be possible?
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Ms. BIRNBAUM. The only time you can remove under the Federal rules, and this would——
Mr. FRANK. I am talking about maybe a change in the defendants.
Ms. BIRNBAUM. They couldn't change the defendants unless they changed the question of diversity.
Mr. FRANK. Why don't you give me a straight answer. If circumstances could arise, we could construct them, if somebody replaces somebody, merged, sold, and now there is a right to go into Federal court that didn't exist before, why shouldn't either party be able to make that?
Ms. BIRNBAUM. I don't think that there is a problem. I personally don't have a problem in doing that.
Mr. FRANK. Who else are we talking about? Let me give you some free advice. Don't haggle for every last bit. When they make a perfectly reasonable point, don't fight it to the death. Circumstances could arise where it would be fair, I would believe, for the plaintiff to be able to ask for removal. Would you object to the bill being made reciprocal in that regard?
Ms. BIRNBAUM. I would not, no.
Mr. FRANK. Mr. Wolfman and Mr. Middleton, I agree that the extremism on one side, there is one diversity removed, but are you saying that there are never circumstances where we might want a Federal judge to be able to decide because there is some partial diversity it ought to be set, and you think that the very rigid rules that we now have about when you can get out—particularly, like I say, I am not impressed with the point about—a hypertechnical point that counteracts the meaning that the absent class doesn't exist until this moment, this notion of Brigadoon suddenly coming into play, especially since I assumed that you would insist on complete and full remedy for the absent class. So the notion of them coming in, but not counting before, makes me a little skeptical, but are there circumstances where you think that it might be better litigated in Federal court because there is some diversity, and should we have a mechanism to try to allow for that in some cases?
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Mr. WOLFMAN. I think there are circumstances where there are truly national actions where Federal courts are appropriate and perfectly competent to handle the matter. My point is that I believe the State courts are equally competent. That is my point.
Mr. FRANK. So you would never have a situation—and you never worry about bias in the State courts?
Mr. WOLFMAN. There is sometimes bias, but——
Mr. FRANK. Can you answer?
Mr. WOLFMAN. Yes. The answer is yes.
Mr. FRANK. You are arguing whether there are these peculiar biases, and I think the argument that there never ought to be an ability to move it, I don't understand. I am not persuaded that you are really motivated by a deep concern for federalism. Maybe you are because I don't know you enough, but you would be very unusual if you came here as a true federalist. And I was saying to my friend, sometimes I am for federalizing, and sometimes I am not. I don't have a general principle. The Violence Against Women Act would federalize some things, and I think it would be a good thing.
Mr. WOLFMAN. Is that a question?
Mr. FRANK. You are saying that you don't want any change. You would give no discretion to a Federal judge in some cases of partial diversity to decide whether a particular class action ought to be done in Federal court?
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Mr. WOLFMAN. I don't know if there was a question in terms of taking a crack at the federalism point or not.
Mr. FRANK. Sure.
Mr. WOLFMAN. I am not supporting federalism in the abstract.
Mr. COBLE. We need to recess.
Mr. WOLFMAN. These are cases in which by definition State law is applicable, and it is well known in diversity actions the Federal judges are less likely to take a different view of applicable State law, and diversity cases do have a stultifying effect on the development of state law.
Mr. COBLE. You all rest easy. We will return imminently for Mr. Conyers' second round.
[Recess.]
Mr. COBLE. We apologize, folks, for the delay, but sometimes you can't control when that bell is sounded, and so we respond accordingly.
I recognize now the gentleman from Michigan, Mr. Conyers, for his second round.
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Mr. CONYERS. Thank you, Mr. Chairman.
We are involved in a proposal here that is—it will have a very large effect on the bringing of suits in the United States, H.R. 3789, Class Action Jurisdiction Act of 1998.
Is there anybody that thinks here that it is going to have a very minimal effect as opposed to my fear that it is going to profoundly and negatively alter the practice of bringing suits?
Everybody agrees?
Ms. BIRNBAUM. Congressman Conyers, I don't think that it is going to change the number of suits. It is just going to change where those suits for class action certification are going to be heard, but those are cases that already presently are being brought in the State courts. It just means that the forum will change, not necessarily the number of suits.
Mr. CONYERS. No, that wasn't my question.
Is it going to have a profound effect on the way that lawsuits are brought? I know that it will change the forum, but what else?
Mr. BEISNER. Congressman, it will change the way that class actions are litigated in significant respects because it will result in there being greater uniformity in the way that these cases are resolved, and I think it will increase efficiency in that there will be a greater capacity to draw together before a single judge overlapping, conflicting class actions.
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Mr. CONYERS. Mr. Middleton, do you have a comment?
Mr. MIDDLETON. Yes. I think the argument of greater uniformity if this bill is enacted is indeed a red herring. Many States have adopted at least in part a portion of Federal Rule 23 of the Civil Rules of Procedure. Other States have not done that. Many States follow Rule 23 to the letter, and those States also find persuasive the Federal case law, and so I don't think that you are going to have a great deal of increased uniformity if this bill passes.
What this bill does do is change options, and it provides a reverse forum shopping for the defendants. It gives them an advantage.
One thing that hasn't been mentioned is that if they are in State court, and they have unlimited ability at any time to remove that action, then after the plaintiff lawyer and the plaintiff expend a lot of resources and time in developing the case, they can then go and say, we have this new law. We can remove this case unless you agree to this nominal settlement. So it is reverse leverage, and the economic blackmail that Ms. Birnbaum referred to is, in fact, completely and utterly reversed and much more apparent if this bill passes.
Mr. CONYERS. And what is the effect for we, the people? Will this benefit the system of the practice of law in America for our citizens, or does it carry these negative implications? Is there anything good that we can squeeze out of such a proposal like this, Mr. Wolfman?
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Mr. WOLFMAN. Let me pick up where I left off with Congressman Frank, which is the point that because in our view this brings all of the class actions, or virtually all of them, into Federal court, it will have a stultifying effect on the substantive law to be applied. Take, for instance, a situation where someone is sued under the Consumer Protection Law of the State of Michigan. In that instance it is a well-known fact that the Federal court sitting in diversity is going to take the most narrow already developed approach to the interpretation of that law; not all of the time, but usually.
It is the State courts, because they are interpreting their own laws, that will be willing to look at the matter anew when new situations present themselves.
Under this bill, the State consumer protection laws, because they almost always involve class actions, will now be interpreted almost exclusively by the Federal courts.
Mr. BEISNER. The way that the system works now with these nationwide class actions, it is not going to be the State of Michigan that is interpreting those laws and making them more expansive, as Mr. Wolfman suggests, because those cases are being brought in places other than Michigan. What you are going to have is a State court in Texas or somewhere else deciding what Michigan law ought to be.
Mr. CONYERS. Why is it that the Justice Department is suggesting to us just this morning that this bill would literally federalize all State class actions?
Mr. WOLFMAN. The reason is that it would, and I don't mean to be facetious, but that's what we said in our testimony. The Justice Department says so because it has accurately analyzed the provisions of the bill.
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Ms. BIRNBAUM. I don't know what the rationale behind their thinking is at the Justice Department, but there would be State class actions that affect the citizens of States that are localized against State defendants. This is an attempt to have cases that affect interstate commerce, that affect national issues.
Mr. CONYERS. Do you have a major action in mind that would follow—that would be an example to what you just asserted?
Ms.BIRNBAUM. Well, a product that is sold nationally throughout the country that may be recalled, like in the Phen-Fen litigation, where there are State court class actions pending all over the country as well as in the Federal courts, that is a national issue. A product sold in interstate commerce that has national implications.
Mr. CONYERS. Do you agree with the Justice Department or disagree?
Ms. BIRNBAUM. I haven't seen their rationale. I would like to see it, but I disagree.
Mr. CONYERS. Mr. Grossman?
Mr. GROSSMAN. I would agree with that. The way that this bill is presently drawn, virtually any case no matter how local in nature could indeed be federalized and be brought into the Federal court, not only because we are in such a mobile society where people are moving around, but many times people have dual residences. You may have a case in Florida on behalf of owners of co-ops against management companies strictly local in nature, but there is no doubt that those owners are citizens of a northern State such as New York. Those cases would be federalized. I don't think that probably is the intent of this subcommittee proposing this bill, and we suggest it be dealt with.
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Mr. MIDDLETON. Might I add, Representative Conyers, to the comment of the gentlelady from New York that this has an adverse effect as it currently sits on interstate commerce, I would like to refer for the record to the State of the State address by Governor James of Alabama on January 18, 1998, and Alabama has been seen to be a terrible place to be if you would agree with the proponents of this bill, but Governor James stated, ''The 2-year average for 1995 and 1996 was the highest for industrial investments in State history. The 1997 unemployment rates are the lowest in State history. Alabama is known worldwide as a good place to do business. British Steel, U.S. Gypsum, Boeing, Michelin, and Mercedes and countless other companies, large and small, attest to that fact.''
The class action laws as they currently are handled by those State and Federal courts have no adverse effect on interstate commerce in this country, even as they are currently adjudicated.
Mr. CONYERS. What I am trying to get at is whether this is going to be good for the American system of jurisprudence. Will this help in any way, or will it hurt in any way?
I know that the sides are lined up in the same old way. The industry, the major corporations are pounding at the door again, but what will the net effect be?
Mr. MIDDLETON. If I might address that, Congressman. In the States where——
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Mr. CONYERS. How can you guys come here without thinking that is going to be the number one question?
Mr. MIDDLETON. It is a critical factor, and the reason it is is because if you are in Durango, Colorado, and they know if they remove it to Federal court, the only Federal courthouse is in Denver, Colorado, that representative plaintiff who might be attempting to sustain a class action on the principle and may have less than a thousand dollars in individual damages has literally——
Mr. CONYERS. So what is the benefit to the American people? That's all I am asking you. You are looking at me like, Wow.
Aside from your personal professional interests, which are perfectly legitimate, but we are national, 268 million people. We are looking at not personally how the trial lawyers benefit or how all of the major corporations in America benefit; how about we, the people? What do you say about them? How do they come out in this measure that is before us now?
Mr. BEISNER. Congressman, I think that the example that was just given to us by Mr. Middleton points out the real benefit that this would have.
Mr. CONYERS. To whom? Benefit to whom?
Mr. BEISNER. Benefit to consumers. Here he is talking about being worried about this lawsuit being filed in Durango, Colorado, being moved to Denver because the named plaintiff or the lawyer who lives in Durango might have to travel to Denver. Who is the plaintiff supposed to be representing? He is supposed to be representing class members nationwide. Why is he worried about having to travel to Denver?
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As Professor Koniak said at the hearing on March 5, counsel and the named plaintiff aren't thinking about their representative role. They ought to be trying to put that case at a location that is most accessible to all of the class members nationwide who may wish to protest a settlement or monitor the proceedings.
But I think what Mr. Middleton is saying is indicative of what goes on here. These class actions are viewed by the people who bring them as a chattel—as their own property—not as a mechanism for representing consumers or whatever group that they are trying to represent. I think his example is Exhibit A as to why H.R. 3789 is needed.
Mr. CONYERS. Mr. Wolfman?
Mr. WOLFMAN. As I said earlier, the bill's net effect would harm consumers, not only because they would lose their choice of forum, but because the laws of the States, if it is a regional or in-state matter, that are enacted by the State legislatures to protect consumers would now be exclusively interpreted by the Federal courts. That is not our system. The net effect would be one of harm.
Mr. BEISNER. I would respectfully submit that under the current system those laws are being interpreted by other State court judges. Typically, those laws are not being interpreted by the judges sitting in the States where those laws were made, but by judges sitting in other jurisdictions. It makes no sense.
Mr. CONYERS. Let me point out something here.
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Many of these class actions are consumers versus corporations that are producing dangerous products. Let's get this on the table. Class actions don't just stem from a lot of people in divorce suits banding together.
These are—are they not quite frequently often, most of the time, suits of citizens, consumers, individuals against major corporations?
And that being the case, the corporations, and it is a free country, the business round table, that is their right, can form groups together and come up here and say, let's make it—let's get rid of this State class action stuff. I have 15 cases of national import that I wonder what would have happened in the Federal system?
Ms. BIRNBAUM. May I make one comment, Mr. Conyers?
Your constituents in the State of Michigan under some of these national class actions are being bound by State court judges in other jurisdictions, often to their detriment. Many of these class actions that Mr. Wolfman contests, he believes that they haven't received enough of anything out of these class actions.
Mr. CONYERS. What if they are bound by a Federal court? What is the difference?
Ms. BIRNBAUM. A Federal court has the ability to look at something on a much more—in a national way, a uniform way.
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Mr. CONYERS. In what?
Ms. BIRNBAUM. In a much more uniform, national way.
Do you want your constituents governed by the law—sometimes it is good, and sometimes it is bad for them. It is not always good.
Mr. CONYERS. The answer is, yes.
Ms. BIRNBAUM. I think a lot of people would not like to be bound in other States by what a local judge is doing in some local county in which their case has been brought and they have no rights to say what they want to do or not do.
Mr. CONYERS. Well, you have more populist tendencies than I do.
Ms. BIRNBAUM. I definitely doubt it.
Mr. CONYERS. I am trying to find out what the interests of the American people are, not the corporations that want this, not the plaintiff lawyers that are opposed to it, but what good does it do our society, our system of laws? Don't you have anything to comment about that?
Mr. GROSSMAN. I would like to comment on that.
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Mr. CONYERS. Thank you very much. That is what the hearing is about.
Mr. GROSSMAN. I would like to say that you are absolutely correct with respect to the types of class actions that are being brought. By and large they are on behalf of consumers, people who have been defrauded in purchases or products or securities. They have merit, and they provide a great benefit to the American consumer.
As I said earlier, cases are litigated successfully both in State and Federal courts. The level of the judiciary reaches high, and we have had great justice and great result in both Federal and State courts.
Our concern with the bill as drafted is that everything goes into Federal court, and we lose the right as plaintiffs' lawyers to choose the forum in which we wish to litigate. If the case is local in nature, and State courts are appropriate, that is where the case belongs. This bill would take them out of State courts regardless, and that's why we suggest——
Mr. CONYERS. Ms. Birnbaum, what would happen bad if we just left the law as it is?
Ms. BIRNBAUM. I think a lot of class actions in some jurisdictions, national classes, would be certified by State courts judges to the detriment to both the litigants, the absent class members in many instances and also corporations who are out-of-state corporations who have to face the bias in local communities where they are dealing with national issues and national concerns. And those cases on a national basis should be more in——
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Mr. CONYERS. So you want to bring in reverse forum shopping to correct that?
Mr. BEISNER. Congressman, I would like to address that.
Mr. CONYERS. What about you, Mr. Beisner?
Mr. BEISNER. I would like to address the reverse forum shopping that you just referenced. In Mr. Middleton's testimony there is a grave misunderstanding what the law says. He says if a case is brought, the defendant may remove that case at any time. That's the forum shopping that he is talking about.
The bill does not change 28 U.S.C. 1446(B) with respect to a 30-day requirement. When a case is filed, the defendant has 30 days to remove that case to Federal court. If it doesn't do it then, it is out of luck. It is going to stay in State court. It can change that later primarily only if the—and the testimony Mr. Middleton filed has that wrong. It doesn't recognize that 30-day requirement is still there.
Mr. GROSSMAN. May I respond?
Mr. CONYERS. Yes.
Mr. GROSSMAN. One of the benefits to the American consumer if legislation is promulgated here is if there is bilateral removal, which is not present in the current bill which we suggest, because one of the biggest problems that we hear from the other side is about collusive settlements.
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Well, the other side is part of that collusiveness. The present bill does nothing to deal with it. Therefore, we suggest if there be a bill, that there be bilateral removal that an absentee class member, or a plaintiff in another forum, Federal or otherwise, can remove that case to prevent a collusive settlement. That would benefit the American consumer.
Ms. BIRNBAUM. I think we have both said previously as long as it can't be done at any time, the same rules would apply both ways.
Right now you have forum shopping at its worst because people are added to lawsuits that are going to be dropped, that are not going to ever be there for any purpose, and after one year they are dropped, the plaintiffs can then go in and amend their pleadings and create jurisdiction alleging the controversy is in excess of $75,000. There are enormous abuses of the rules for forum shopping.
Mr. COBLE. Folks, I don't want to cut anybody off, but we have been here since 10:00, and I have another meeting to go to before too long. If you can sort of wrap up, John.
Mr. WOLFMAN. I will be very brief. I think there is an underlying assumption here which I want to counter. Two points. The first is that most class actions do good. I made the point earlier. We don't want the baby thrown out with the bath water. That is why we oppose bad deals, collusive settlements.
But the second point is that there appears to be an underlying assumption that all deals in Federal court are good, and all deals in State court are bad, or many deals, and in our experience has not been the case. There are bad deals in Federal court as well, and we oppose them.
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The granddaddy coupon settlement of them all is a Federal court case from Georgia. A class settlement in San Francisco was recently approved at the Federal appellate level, and in our view it is a disgrace. Most of them are good, but I want to counter the assumption that State court is bad and Federal court is good.
Mr. MIDDLETON. I would just like to address very briefly this idea that there is this rampant and unwarranted misjoinder, improper joinder, of defendants in order to effectuate jurisdiction in the State court system. That is not true.
On both the State and the Federal levels, the courts have perfect controls in place for the improper misjoinder of parties. Motions to dismiss can address this situation long before the time expires to remove under the current system, and that is also a red herring that they are relying upon.
Mr. CONYERS. Thank you very much, gentlemen and lady. Mr. Chairman, I appreciate your generosity.
Mr. COBLE. This has generated much interest and much controversy. Let me ask you a final question, and I will let all of you answer, or if one can answer for the group.
Has there been a trend about State court judges who are elected not being accountable to out-of-state defendants, and I realize that depends on each judge's personality and demeanor, but has that been a problem for any of you? Let us go from my left, your right.
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Mr. GROSSMAN. That has not been for us.
Mr. WOLFMAN. We find nothing systematic in that regard.
Mr. COBLE. There are exceptions to every rule, but generally.
Mr. WOLFMAN. We would like to see general data on that point, and there isn't any.
Mr. MIDDLETON. There are no studies done that show it to date. Unfortunately, we know even as this is rushed out of committee and to the floor of the House, the Rand Institute and the Federal judges conference are all studying the very issue that is addressed in this bill without. There is no empirical data, and believe me, if there was empirical data, I believe the proponents of this legislation would have brought it forward, you can count on that. If there was empirical data which suggested such——
Mr. COBLE. Okay, you know of none.
Mr. BEISNER. There is significant empirical data in the record, which I think people are just ignoring.
To your immediate question about elected State court judges, there is not a problem in all instances, but I think there is a greater likelihood of such a problem dealing with out-of-state defendants, as was predicted in the Federalist Papers which indicate the justification for diversity jurisdiction in the first place.
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Ms. BIRNBAUM. I thank you for letting me have the final word. I think in some cases there is a real problem where there are campaign contributions made by local plaintiffs' attorneys who are very active in campaigns of local judges who are reelected every 4 or 5 years. This becomes an important issue. It becomes an issue whether they intentionally want to do it or otherwise, there is bias, and that is again why the framers of the Constitution recognized diversity jurisdiction, recognized the inherent biases to out-of-state defendants and out-of-state companies, and passed diversity in the first place. Thank you very much.
Mr. CONYERS. I think a very important issue has been raised about these studies, Mr. Chairman, and nobody talking about this has said it has to come through before the end of the 105th Congress or the system goes down.
Wouldn't it—and you've helped the trial lawyers whenever you thought that they were right. You have been very fair about this. Would there be any harm done if we could get our mitts on some of these studies that have now all of a sudden sprung up? I don't know who has seen them on the subcommittee. I haven't seen them.
Mr. MIDDLETON. They are not complete yet. They are being formed right now.
Mr. CONYERS. I mean, this is really shooting from the hip on some pretty big stuff here, and all I am suggesting, Chairman Coble, is that—how far away is the Rand study? Could we find out? Not that it would change anything, but we could at least have the benefit of something other than these anecdotes about Alabama and some case, the coupon case and this and that, and that this is going to be the basis—we are right at the recess. We are at the end of the whole 105th Congress.
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This might be something—I hate to say this—that we could study. There is a Federal judiciary report due. So the only thing that I am saying is that why do we have to move so fast? There is a markup scheduled for next week. What in God's name—I can think of 20 subjects offhand that could be put in terms of national urgency before this measure.
Mr. COBLE. If the gentleman would yield, the judicial conference has been studying this between 6 and 7 years with no resolution.
Mr. CONYERS. So we are just going to forget everything and just decide it ourselves with two hearings?
Ms. BIRNBAUM. I think there is the hearings that Mr. Beisner asked this committee to look at.
Mr. CONYERS. Yes, but we don't have them.
Ms. BIRNBAUM. We could provide them to you. There are four volumes. They are from the Judiciary and the Rules Committee.
Mr. CONYERS. When is the markup?
Mr. COBLE. Next Thursday.
Ms. BIRNBAUM. There is certainly a summary of the testimony.
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Mr. COBLE. I hope nobody will accuse me of being inpatient with anyone since we have been here since almost the cock crowed, but I have to go to another hearing.
Mr. CONYERS. If we start looking at campaign contributions from the trial lawyers, which I am for, we would have to look at the U.S. Chamber of Commerce, the Business Round Table, the PACs of all of the corporations and industries in America which are fueling this measure, and you would be surprised at what you would find out.
Ms. BIRNBAUM. I have not suggested that.
Mr. CONYERS. I am glad that you didn't.
Ms. BIRNBAUM. Because I think that is part of the American way as well, lobbying.
Mr. CONYERS. You raised campaign contributions.
Ms. BIRNBAUM. No, I was talking about State court judges.
Mr. CONYERS. My dear, you see that stenographer over there?
Ms. BIRNBAUM. I was talking about State court judges, not the legislature.
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Mr. CONYERS. Oh, then we will just reread the transcript.
Ms. BIRNBAUM. You can read it at any time.
Mr. CONYERS. Thank you. I think I will.
Mr. COBLE. This concludes the legislative hearing of H.R. 3789, The Class Action Jurisdiction Act of 1998. The record—before you all leave, the record will remain open for 1 week if you have additional information or the subcommittee has questions to put to you. We thank you for your cooperation, and we stand adjourned.
[Whereupon, at 12:53 p.m., the subcommittee was adjourned.]
(Footnote 1 return)
Stateside Associates, Class Actions in State Courts: A Report on Alabama (February 26, 1998) (''Stateside Report'').
(Footnote 2 return)
Dr. John B. Hendricks, Statement on Mass Torts and Class Actions Before the Subcommittee on Courts and Intellectual Property of the House Judiciary Committee on Behalf of the U.S. Chamber of Commerce 9 (March 5, 1998).
(Footnote 3 return)
See Henry J. Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv. L. Rev. 483 (1928).
(Footnote 4 return)
To ensure its inclusion in the H.R. 3789 record, I am attaching a copy of Mr. Martin's prepared statement for the March 5 hearing.
(Footnote 5 return)
So that the study proffered by Dr. Hendricks will be part of the H.R. 3789 record, a copy of his prepared statement at the March 5 hearing is attached.
(Footnote 6 return)
So that Mr. McGoldrick's prepared statement will be part of the H.R. 3789 record, I am attaching it. I recommend its detailed assessment of (a) how interstate class actions are exactly the kind of dispute for which diversity jurisdiction was designed and (b) how our federal courts are presently divided over which purported class actions should be subject to federal diversity jurisdiction.
(Footnote 7 return)
The oral statement quotes included below are taken from an unofficial transcript.
(Footnote 8 return)
This concept has been included in H.R. 1252, the ''Judicial Reform Act of 1998,'' which was reported by this Subcommittee and was recently passed by the full House.
(Footnote 9 return)
See 28 U.S.C. §1407 (statute providing for transfer and consolidation of actions through multidistrict litigation mechanism).
(Footnote 10 return)
At present, class actions not presenting federal questions often may not be brought in or removed to federal courts under diversity jurisdiction theories because of two U.S. Supreme Court decisions interpreting section 1332. First, in Snyder v. Harris, 394 U.S. 332, 340 (1969), the Court ruled that in determining whether the parties satisfied the diversity prerequisite, a court should look only to the named parties (ignoring the unnamed class members). That ruling allows class proponents to avoid federal diversity jurisdiction by naming as plaintiffs parties who are non-diverse with a defendant, even though a significant number of the unnamed class members (if not the vast majority of class members) do not share the defendant's citizenship. Second, in Zahn v. International Paper Co., 414 U.S. 291 (1973), the Court held that the ''amount in controversy'' requirement in section 1332 is satisfied in a purported class action only if each and every member of the purported class is shown separately to satisfy the jurisdictional amount threshold (presently $75,000). That ruling means that even though class actions invariably are huge controversies, involving millions (or billions) of dollars of claimed damages, they cannot be heard in federal court. For example, an action involving 100,000 class members may put millions of dollars at stake, but it would not be subject to federal jurisdiction unless each class member had $75,000 at issue or a total of $7.5 billion for the purported class!
(Footnote 11 return)
In State Farm, the Court noted that the concept of ''minimal diversity'' providing the basis for diversity jurisdiction in the class action context had already been discussed in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). On several subsequent occasions, the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction where there is less than complete diversity among the parties is wholly consistent with Article III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 199–200 (O'Connor, J., dissenting) (''Complete diversity . . . is not constitutionally mandated.''); Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826 (1989) (''The complete diversity requirement is based on the diversity statute, not Article III of the Constitution.''); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978) (''It is settled that complete diversity is not a constitutional requirement.''); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity).
(Footnote 12 return)
Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol. 1, at ix-x (''Working Papers 1'') (memorandum to members of the Standing Committee on Rules and Procedure and the Advisory Committee on Civil Rules from Judge Paul V. Niemeyer).
(Footnote 13 return)
Deborah Hensler et. al., Preliminary Results of the RAND Study of Class Action Litigation 15 (May 1, 1997) (''RAND Report'').
(Footnote 14 return)
See, e.g., RAND Report,
(Footnote 15 return)
At the same time, federal courts have laid down clearer, firmer rules governing when a matter may be afforded class treatment. The recent decisions of the U.S. Supreme Court in Amchem Products v. Windsor 117 S. Ct. 2231 (1997), the Fifth Circuit in Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), the Sixth Circuit in In re American Medical Sys., Inc., 75 F.3d 1069 (6th Cir. 1996), the Seventh Circuit in In Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir.) (Posner, J.), cert. denied, 116 S.Ct. 184 (1995), the Ninth Circuit in Valentino v. Carter-Wallace, Inc., 97 F.3d 1227 (9th Cir. 1996), the Eleventh Circuit in Andrews v. American Tel. & Tel. Co., 95 F.3d 1014 (11th Cir. 1996), all have been a much-needed breath of fresh air. In different ways and to varying degrees, they have reminded district courts of the importance of taking the requirements of Rule 23 seriously; that is, matters may be certified for class treatment only if they clearly meet the certification prerequisites set forth in Fed. R. Civ. P. 23.
(Footnote 16 return)
RAND Report, supra note 2, at 22.
(Footnote 17 return)
See Faden-Bayes Corp. v. Ford Motor Co., Index No. 97–601076 (N.Y. Sup. Ct. County of New York) (filed Feb. 28. 1997). Ford's efforts to remove this case to federal court failed.
(Footnote 18 return)
For example, a lead named plaintiff in Lewis v. Volvo of North America, No. 96–19724 (Civil Dist. Ct, Parish of Orleans, Louisiana), an air bag-related class action originally filed in state court, was the attorney who filed the lawsuit. The only named plaintiff in Merrick v. Ford Motor Co., Case No. 9708–06079 (Ore. Cir. Ct. Multnomah County), a Citibank credit card-related class action originally filed in state court, was one of the attorneys who filed the lawsuit. A lead named plaintiff in Gordon v. Ford Motor Company, Index No. 104365/94 (N.Y. Sup. Ct. N.Y. County), was the spouse of the lead plaintiffs' counsel in the case. And the lead named plaintiff in Landry v. Ford Motor Company, No. 33255 (40th Jud. Dist., Parish of St. John the Baptist, Louisiana), a paint-related class action originally filed in state court, was the law partner of the lead plaintiffs' counsel in the action.
(Footnote 19 return)
Sweet v. Ford Motor Company, Civil Action No. L–10463 (Cir. Ct. for Blount County, Tenn.) (filed Jul. 10, 1996).
(Footnote 20 return)
See Order Granting Nationwide Class Certification, Sweet v. Ford Motor Company, Civil Action No. L–10463 (Cir. Ct. for Blount County, Tenn.) (filed Jul. 10, 1996).
(Footnote 21 return)
Robinson v. EMI Music Distribution, Inc., Civil Action No. L–10462 (Cir. Ct. of Blount County, Tenn.) (filed July 8, 1996).
(Footnote 22 return)
In re Ford Motor Co. Bronco II Prod. Liab. Litig., MDL No. 991, 1997 WL 86337 (E.D. La. Feb. 27, 1997).
(Footnote 23 return)
Civ. A. No. CV 93–065 (Cir. Ct. Greene County, Ala.) (filed Aug. 26, 1993).
(Footnote 24 return)
See, e.g., Snider v. State Farm Mut. Auto. Ins. Co., No. 97–C–114 (III. Cir., Williamson Co.) (order certifying nationwide class of state-law based claims).
(Footnote 25 return)
414 U.S. 291 (1973).
(Footnote 26 return)
See Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1359 (11th Cir. 1996).
(Footnote 27 return)
See, e.g., Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir. 1997); Ex parte Russell Corp., 1997 WL 641325 (Ala. Oct. 17, 1997).
(Footnote 28 return)
This figure is based on decisions identified through computerized legal research data bases. Cases against the government and discrimination class actions are excluded from the count.
(Footnote 29 return)
In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1295 (7th Cir. 1995).
(Footnote 30 return)
Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol. 1, at ix-x (May 1, 1997) (''Advisory Committee Working Papers'') (memorandum of Judge Paul V. Niemeyer to members of the Advisory Committee on Civil Rules).
(Footnote 31 return)
Deborah Hensler, et al. (Institute for Civil Justice), Preliminary Results of the RAND Study of Class Action Litigation, at 15 (May 1, 1997) (''ICJ Report'') (observing that the ''doubling or tripling of the number of putative class actions'' has been ''concentrated in the state courts'').
(Footnote 32 return)
See Henry J. Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv. L. Rev. 483 (1928).
(Footnote 33 return)
Id. at 492–93.
(Footnote 34 return)
Burford v. Sun Oil Co., 319 U.S. 315, 316 (1943) (Frankfurter, J., dissenting on unrelated grounds).
(Footnote 35 return)
James William Moore & Donald T. Weckstein, Diversity Jurisdiction: Past, Present and Future, 43 Texas L. Rev. 1 (1964).
(Footnote 36 return)
See, e.g., Adrienne J. Marsh, Diversity Jurisdiction: Scapegoat of Overcrowded Federal Courts, 48 Brooklyn L. Rev. 197, 201 (1982).
(Footnote 37 return)
''However true the fact may be, that tribunals of the states will administer justice as impartially as those of the nation, to the parties of every description, it is not less true, that the constitution itself either entertains apprehensions of this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between . . . citizens of different states.'' Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87 (1809) (Marshall, C.J.).
(Footnote 38 return)
Moore & Weckstein, 46 Texas L. Rev. at 16.
(Footnote 39 return)
See John P. Frank, Historical Bases of the Federal Judicial System, 13 Law and Contemp. Probs. 3, 27 (1948); see also John J. Parker, The Federal Jurisdiction and Recent Attacks Upon It, 18 A.B.A. J. 433, 437 (1932) (''No power exercised under the Constitution . . . had greater influence in welding these United States into a single nation [than diversity jurisdiction]; nothing has done more to foster interstate commerce and communication and the uninterrupted flow of capital for investment into various parts of the Union, and nothing has been so potent in sustaining the public credit and the sanctity of private contracts.'').
(Footnote 40 return)
See, e.g., Burt Neuborne, The Myth of Parity, 90 Harv. L. Rev. 1105, 1121–29 (1977).
(Footnote 41 return)
See Moore & Weckstein, 43 Texas L. Rev. at 22. In this regard, one constitutional scholar—Martin Redish—has drawn an analogy between judges and baseball umpires. He argues that if baseball umpires were subject to the same kinds of political pressures as elected state court judges, nobody would trust them to call balls and strikes. See Martin H. Redish, Judicial Parity, Litigant Choice, and Democratic Theory: A Comment on Federal Jurisdiction and Constitutional Rights, 36 UCLA L. Rev. 329, 333–34 (1988); see also Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Rule 23, Vol. 4 (May 1, 1997) (comments of consumer advocate Stephen Gardner) (highlighting ''the inconvenience'' and the uncertainty of dealing with local practice in a variety of state courts, where the Good Old Boy system frequently prevails'').
(Footnote 42 return)
In 38 states, judges are subject to some form of election, a process that increases the risk of political pressure and favoritism. See Erwin Chemerinsky, Federal Jurisdiction §1.5, at 34 (2d ed. 1994).
(Footnote 43 return)
See Friendly, 41 Harv. L. Rev. at 495–97.
(Footnote 44 return)
See Frank, 13 Law and Contemp. Probs. at 27–28.
(Footnote 45 return)
John L. McGoldrick, The Federal Experiment at 200: On Diversity Jurisdiction, the Constitution and Federalism, New Jersey Lawyer, Summer 1987, at 39, 40.
(Footnote 46 return)
See, e.g., 28 U.S.C. §1407. Not only do state courts lack the authority to consolidate cases, but they have demonstrated little self-restraint in addressing claims that have already been asserted in a different forum. See, e.g., Marcel Kahan and Linda Silberman, Matsushita and Beyond: The Role of State Courts in Class Actions Involving Exclusive Federal Claims, Advisory Committee Working Papers, Vol. 2, at 412.
(Footnote 47 return)
See Advisory Committee Working Papers, Vol. 3, at 39 (testimony of Lewis Goldfarb, Chrysler Corporation) (noting the ''huge shift'' of class actions into state courts ''where the judges . . . almost see it as their civic duty to certify classes'').
(Footnote 48 return)
See Lawrence W. Schonbrun, The Class Action Con Game, Regulation, Fall 1997, at 50.
(Footnote 49 return)
See Advisory Committee Working Papers, Vol. 3, at 32 (statement of Prof. Samuel Issacharoff, University of Texas School of Law) (noting that ''rival state court proceedings in class actions are ''emerging as real problem spots''); id., Vol. 4, at 88 (comments of consumer advocate Stephen Gardner) (describing the duplication of rival state class action proceedings in state and federal courts).
(Footnote 50 return)
See Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity).
(Footnote 51 return)
For example, counsel sometimes name in-state defendants that are only tangentially related (if at all) to the controversy and that are certainly not necessary for the fair adjudication of the case. In other instances, counsel seek out and name a plaintiff who shares citizenship with the defendant (even though the case involves a purportedly nationwide class and a resident of any other jurisdiction could have been named as a plaintiff).
(Footnote 52 return)
On this point, it is important to note that the current removal statute contains a major loophole that is a source of substantial abuse. Under 28 U.S.C. §1446(b), a defendant may remove a state court class action to federal court only during the first year after the action is commenced. In my experience, it is a common practice for class action plaintiffs to limit their relief demands in the initial complaint to avoid federal jurisdiction. Once the one-year removal period has expired, however, these limitations are removed; by amendment, counsel demand relief in excess of the diversity jurisdictional amount threshold. Through this tactic, a defendant is denied the opportunity to remove a case to federal court, even though it fully satisfies the diversity jurisdiction prerequisites.
(Footnote 53 return)
Article III requires only that the controversy be ''between citizens of different states.'' The Supreme Court has observed that ''in a variety of contexts, [federal courts] have concluded that Article III poses no obstacle to the legislative extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are not co-citizens.'' State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530–31 (1967) (citations omitted). On several subsequent occasions, the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction where there is less than complete diversity among the parties is wholly consistent with Article III. See, e.g., Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826, 829 n.1 (1989) (''The complete diversity requirement is based on the diversity statute, not Article III of the Constitution.''); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 373 n.13 (1978) (''It is settled that complete diversity is not a constitutional requirement.''). See also Carden v. Arkoma Associates, 494 U.S. 185, 199–200 (1990) (O'Connor, J., dissenting) (''Complete diversity . . . is not constitutionally mandated.'')
(Footnote 54 return)
See Allen v. R & H Oil & Gas Co., 63 F.3d 1326, 1335 (5th Cir. 1995) (punitive damages are ''fundamentally collective'' under Mississippi law and can thus be aggregated for purposes of removal because each plaintiff has ''an integrated right to the full amount''); Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1359 (11th Cir. 1996) (punitive damages claims under Alabama law should be aggregated for purposes of removal because the purpose of such damages is deterrence—not compensation—making them ''a single collective right in which the putative class has a common and undivided interest'').
(Footnote 55 return)
See, e.g., In re Brand Name Prescription Drugs Antitrust Litig., 1997 U.S. App. LEXIS 22267, *26 (7th Cir. 1997) (''the right to punitive damages is a right of the individual plaintiff, rather than a collective entitlement of the victims of the defendant's misconduct''); Gilman v. BHC Securities, Inc., 104 F.3d 1418, 1430 (2d Cir. 1997) (punitive damages must not be aggregated for purposes of removal unless the underlying claim asserts a single title or right); Haisch v. Allstate Ins. Co., 942 F. Supp. 1245, 1250 (D. Ariz. 1996) (refusing to aggregate punitive damages in insurance case because the right to punitive damages is held individually by each member of the class).
(Footnote 56 return)
See, e.g., Loizon v. SMH Societe de Microelectronics, 950 F. Supp. 250, 254 (N.D. Ill. 1996) (allowing removal of class action in which plaintiffs sought injunction requiring defendants to inform all watch owners of possible radiation, because cost to defendants of complying with injunction would exceed amount-in-controversy threshold); Earnest v. General Motors Corp., 923 F. Supp. 1469 (W.D. Ala. 1996) (denying motion to remand products liability case to state court even though plaintiffs explicitly limited compensatory and punitive damages claims to less than $50,000; compliance with plaintiffs' request for injunction that would include vehicle recall and advertising campaign would clearly exceed the amount-in-controversy requirement).
(Footnote 57 return)
See Packard v. Provident Nat'l Bank, 994 F.2d 1039, 1050 (3rd Cir. 1993) (''allowing the amount in controversy to be measured by the defendant's costs would eviscerate Snyder's holding that the claims of class members may not be aggregated in order to meet the jurisdictional threshold'').
(Footnote 58 return)
See, e.g., Prescription Drugs Antitrust Litig., 1997 U.S. App. LEXIS 22267.
(Footnote 59 return)
See In re Abbott Labs., 51 F.3d 524, 529 (5th Cir. 1995) (under plain language of 28 U.S.C. §1367, a district court can exercise supplemental jurisdiction over members of a class even though they did not meet the amount-in-controversy requirements, as long as the class representatives did meet that requirement); Stromberg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928, 930–31 (7th Cir. 1996) (same).
(Footnote 60 return)
See, e.g, Crosby v. America Online, Inc, 967 F. Supp. 257, 263 (N.D. Ohio 1997) (supplemental jurisdiction is not appropriate in class actions because ''the Zahn rule has continued vitality, even after the passage of the amendments to 28 U.S.C. §1367); Mayo v. Key Fin. Servs., Inc., 812 F. Supp. 277, 278 (D. Mass. 1993) (same). Even those courts that recognize the import of 28 U.S.C. §1367 on class actions disagree about applying that provision in particular cases. For example, at least one court has held that the potential liability for attorneys' fees can be attributed to one plaintiff for purposes of meeting the amount-in-controversy threshold, and that the rest of the class can then be brought into federal court under §1367's supplemental jurisdiction. See In re Abbott Labs, 51 F.3d 524 (5th Cir. 1995). But that view has not been adopted by other federal courts. See, e.g., In re High Fructose Corn Syrup Antitrust Litig., 936 F. Supp. 530 (C.D. Ill. 1996) (remanding antitrust case to state court after refusing to apply the reasoning of Abbott Labs to request for attorneys' fees).
(Footnote 61 return)
It might be suggested that the plaintiffs' lawyer could avoid federal jurisdiction by defining the class to include Florida residents only. However, leaving injured people out of the class would probably run afoul of the lawyer's duty to be an adequate representative for the class as a whole. More fundamentally, there is no reason that attorneys should have to engage in that kind of ''artful pleading'' where the matter is one traditionally handled by state courts and there is no federal interest. Nor would such a bizarre division of the class conserve judicial resources, since the likely result would be two class action cases: 1) a Florida-plaintiffs-only class filed in state court; and (2) a class action involving all non-Floridians filed in federal court.
(Footnote 62 return)
The bill's proponents also point to an alleged upsurge in state-court class action filings. But the mere filing of cases in state court does not show a pattern of abuse. More likely, state court filings have increased simply because the delays in federal court—due to unfilled judicial vacancies and increasing caseloads—have caused counsel seeking a prompt resolution of their clients' claims to file more frequently in state court.
(Footnote 63 return)
Even if H.R. 3789 could pass constitutional muster in all of its applications, it is surely not consistent with the underlying purpose of Article III, section 2, which is to allow truly interstate controversies to be litigated in federal court. Further, to the extent that Art. III, section 2 diversity jurisdiction was believed necessary to avoid bias against out-of-state defendants, that need is not present in the examples given in the text because they address controversies that mainly involve plaintiffs and defendants from the same state.
(Footnote 64 return)
To the extent that the federal and state class action rules are identical, the judgment of the federal court denying class certification might be controlling on the state court action under normal principles of issue preclusion. But that very point shows the massive intrusion on state prerogatives worked by H.R. 3789. In effect, under H.R. 3789, the state courts would no longer play a role in interpreting and applying their own class action principles, thus federalizing the class action.
(Footnote 65 return)
Section 4 of the bill (proposed section 1369) replays the notion of a ''comparable representative action,'' but this time the statute uses the phrase ''class action or comparable representative action under Rule 23 of the Federal Rules of Civil Procedure.'' This too is confusing because Rule 23 deals only with class actions and so there is no such thing as a ''comparable action under Rule 23.''
(Footnote 66 return)
Recently, for example, the Alabama Supreme Court reversed the trial court practice of some judges entering early conditional class certification orders before defendants had an adequate opportunity to be heard. Ex parte First National Bank of Jasper, 1997 WL 773364, (Ala. Dec. 16, 1997).
(Footnote 67 return)
Amchem Products, Inc. v. Windsor, 117 S.Ct. 2231 (1997).
(Footnote 68 return)
E.g., Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996).
(Footnote 69 return)
Article III, Section 2, Clause 1. (''The judicial Power shall extend to all Cases . . . between Citizens of different States. . . .'').
(Footnote 70 return)
7 U.S. (3 Cranch) 267 (1806).
(Footnote 71 return)
28 U.S.C. §1446(b). The one-year limitation applies to diversity cases only, not federal question cases.
(Footnote 72 return)
Hewitt v. City of Stanton, 798 F. 2d 1230, 1232–33 (9th Cir. 1986); Moore's Federal Practice 3d §107.11[1][c] (1998).
(Footnote 73 return)
394 U.S. 332 (1969).
(Footnote 74 return)
414 U.S. 291 (1973).
(Footnote 75 return)
The Castano court held that variances among state laws were a reason to defeat class certification. Castano, supra note 3, at 737.
(Footnote 76 return)
The federal courts, unlike the state courts, have the ability to consolidate and coordinate civil actions involving common questions of fact throughout the country, even if those actions are pending in different districts. In such a case, the Judicial Panel on Multi-district Litigation transfers all proceedings into one court. 28 U.S.C. §1407.
(Footnote 77 return)
''Rehnquist: Is Federalism Dead?'' Legal Times, May 18, 1998, p. 12.
(Footnote 78 return)
Judicial Conference of the United States, ''Long Range Plan for the Federal Courts'' (December 1995).
(Footnote 79 return)
Administrative Office of the United States Courts, ''Judicial Business of the United States Courts'' (1997).
(Footnote 80 return)
Samura v. Kaiser Foundation Health Plan, Inc., 715 F. Supp. 970 (N.D. Cal. 1985); Moore's Federal Practice 3d §107.30[3][a][iv][A] (1998).
(Footnote 81 return)
Section 4 of S. 2083 (the Senate counterpart to H.R. 3789) takes the opposite—and we believe better—approach. It would allow for absent class members to seek removal of actions, and extend the time for seeking removal of an action by a plaintiff class member to 30 days after receipt of ''the initial written notice of the class action.''
(Footnote 82 return)
Phillips Petroleum Company v. Shutts, 472 U.S. 797 (1985).
(Footnote 83 return)
Cf. 28 U.S.C. §1407 (consolidation and coordination of separate federal court actions).
(Footnote 84 return)
John C. Coffee, Jr., ''Class Action Reform: Advisory Committee Bombshell,'' New York Law Journal, May 21, 1996. See also John C. Coffee, Jr., ''Class Actions: Interjurisdictional Warfare,'' New York Law Journal, September 25, 1997.
(Footnote 85 return)
See 28 U.S.C. §1334(c)(1), which provides a general comity basis for deference to state courts in some bankruptcy situations:
(Footnote 86 return)
United States v. Lopez, 514 U.S. 549 (1995); NLRB v. Jones & Laughlin Steel Corp., 331 U.S. 416 (1947).
(Footnote 87 return)
See American Pipe Construction Co. v. Utah, 414 U.S. 538 (1974); United Airlines, Inc. v. McDonald, 432 U.S. 385 (1977); Crown & Cook Seal Co. v. Parker, 462 U.S. 345 (1964).
(Footnote 88 return)
The failure to provide for a federal district court to remand to the state court may create a ''Catch-22'' anomaly in which a state court could certify a statewide class but a federal court would not certify the same class solely because it has been consolidated with actions from other states. Cf. Castano, supra note 3, at 737.
(Footnote 89 return)
The Eleventh Amendment reads as follows:
(Footnote 90 return)
Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89, 102 (1984); see Annotation, ''Supreme Court's Construction of Eleventh Amendment, Restricting Federal Judicial Power Over Suits Against States,'' 106 L.Ed.2d 660 (1991).
(Footnote 91 return)
In Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), the U.S. Supreme Court held that a federal court exercising jurisdiction over a case on the ground of diversity must apply the law of the forum state. The Court stated: