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The Class Action Fairness Act

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The Class Action Fairness Act of 2005,Reed R. Kathrein, Esq. …

The Class Action Fairness Act of 2005,Reed R. Kathrein, Esq.
San Francisco, California
Reed.Kathrein@gmail.com
Reedkathrein.com
CLE International – 3rd Class Actions Annual Conference
January 25-26, 2007 Los Angeles, California


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  • 1. The Class Action Fairness Act of 2005 Reed R. Kathrein, Esq. San Francisco, California [email_address] Reedkathrein.com CLE International – 3 rd Class Actions Annual Conference January 25-26, 2007 Los Angeles, California
  • 2. Reed R. Kathrein
    • REED R. KATHREIN is an attorney practicing law in San Francisco, California.
    • Until recently he was a partner of the San Francisco office of the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP (formerly Milberg Weiss Bershad Hynes & Lerach LLP), which he opened in 1994.
    • For the past 16 years, he has focused his practice on representing investors and consumers in class actions. He has been lead counsel in numerous state and federal court actions around the country.
    • He can be reached at [email_address] or 415-699-6355. His website url is www.reedk.com and www.reedkathrein.com .
  • 3. CAFA
    • In February 2005, Congress enacted the Class Action Fairness Act of 2005 (CAFA):
      • The purposes of this Act are to—
      • (1) assure fair and prompt recoveries for class members with legitimate claims;
      • (2) restore the intent of the framers of the United States Constitution by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction; and
      • (3) benefit society by encouraging innovation and lowering consumer prices .
  • 4. CAFA
    • Applies to any civil action commenced on or after February 18,2005 . It does not apply to actions that were pending on that date.
    • Covers class actions and mass actions where number of plaintiffs is more than 100 and amount in controversy is more than $5 million.
  • 5. CAFA – Core Components
    • Grant of federal jurisdiction over mass and class actions
    • Removal provisions
    • Consumer Bill of Rights addressing coupon settlements and attorneys fees
    • Notice provisions to Government
  • 6. Law Prior to CAFA
    • Class actions raising federal claims could be freely brought in or removed to federal court by virtue of the broad grant of federal question jurisdiction in 28 U.S.C. § 1331.
    • Class actions raising only state-law claims could reach federal court only if they satisfied the requirements for diversity jurisdiction under 28 U.S.C. § 1332.
      • “ complete diversity” requirement was that all named class representatives and all defendants had to be citizens of different states.
      • at least one, maybe all, class members had to have a claim for more than $75,000 under the Supreme Court’s decision in Zahn v. Int’l Paper Co., 414 U.S.291 (1973).
  • 7. Law After CAFA
    • Generally amends both the diversity statute (28 U.S.C. § 1332) and the removal laws (28 U.S.C. §§ 1441 et seq.) to provide for federal jurisdiction
      • over any action in which any one member of the class (named or not) has diverse citizenship from any one defendant ,
      • where the aggregate amount in controversy exceeds $5 million . 28 U.S.C. § 1332(d)(2).
  • 8. Federal Jurisdiction Summary Total damages must exceed $5 million exclusive of costs One named plaintiff must have $75k in damages Amount in Controversy * Charts suggested and modified from Professor William B. Rubenstien, UCLA, Understanding Class Action Fairness Act of 2005, 2005. Any plaintiff can be diverse from any defendant All class representatives and defendants must be completely diverse. Citizenship 100 of more class members or plaintiffs Not required Minimal Number CAFA Regular Federal Diversity Jurisdiction*
  • 9. CAFA Exceptions - General Description
      • Class or mass actions that involve both class members and defendants who mostly (1/3rd or more) are citizens of the forum state;
      • Class actions against state government defendants;
      • Class or mass actions with fewer than 100 class members;
      • Class or mass actions with less than $5 million in damages; and
      • shareholder class actions or derivative suits based on state corporation law.
  • 10. Discretionary Exception (1/3 rd -2/3 rds )
    • Discretionary “Interests of Justice” Exception . 1/3rd to 2/3rds . A federal court is permitted to decline jurisdiction where all of the primary defendants and between one-third and two-thirds of the class members are citizens of the forum state. 28 U.S.C. § 1332(d)(3).
      • In deciding whether to exercise its power to decline jurisdiction, the court must consider the “interests of justice” and “the totality of the circumstances,” including whether involved are
          • matters of national interest ,
          • the application of the law of states other than the forum state,
          • pleading in an effort to avoid federal jurisdiction,
          • a “distinct nexus” between the case and the forum state,
          • class members who are citizens of the forum state substantially predominate over citizens of other states, and
          • similar class actions have been brought within the past three years.
  • 11. Non-Discretionary Exceptions( > 2/3 rds )
    • Non-Discretionary Exceptions. Above 2/3rds. Class actions to proceed in state court where the great majority of the class and one or more significant defendants are citizens of the forum state.
      • A federal court may not exercise diversity jurisdiction over a class action (or accept removal jurisdiction) if
        • Two-thirds of all class members are citizens of the forum state, and --------  -------- 
  • 12. Home State Exception
      • A federal court may not exercise diversity jurisdiction over a class action (or accept removal jurisdiction) if :
      • Two-thirds of all class members are citizens of the forum state, and
      • A ll “the primary defendants” are citizens of the same state. (primary defendant not defined but Senate report refers to them as “ real targets ” who will incur the “ most loss ” if liability found.)
      • 28 U.S.C. §1332(d)(3)
  • 13. Local Controversy Exception
      • A federal court may not exercise diversity jurisdiction over a class action (or accept removal jurisdiction) if
      • Two-thirds of all class members are citizens of the forum state, and
      • either all “the primary defendants” are citizens of the same state; OR
      • At least one defendant from whom “significant relief” is sought and whose conduct is a “significant basis” of the claims asserted is a citizen of the forum state, and
        • the “principal injuries” from the conduct of “each defendant” were suffered in the forum state, and
        • no other “similar” class actions have been filed within the past three years.
      • 28 U.S.C. §1332(d)(4)
  • 14. The Delaware Carve-Out
    • CAFA reserves Delaware’s jurisdiction over most corporate cases by stating that it (CAFA) will not apply to class actions solely involving claims:
      • that concern a covered security as defined by certain federal securities laws, 28 U.S.C. §1332(d)(9)(A);
      • that relate to “the internal affairs or governance of a corporation . . . that arise under or by virtue of the laws of the State in which such corporation . . . is incorporated or organized,” 28 U.S.C. §1332(d)(9)(B); or
      • that concern fiduciary duties created by securities laws,
    • 28 U.S.C. §1332(d)(9)(C).
  • 15. Securities Fraud Carve-Out
    • 28 U.S.C. §1332(d)(9) appears to carve out of CAFA those securities class actions already addressed by Congress’ promulgation of
      • the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. §§ 77z-1 - 78j-1; and the
      • Securities Litigation Uniform Standards Act of 1998 (SLUSA), Pub. L. No. 105- 353, 112 Stat. 3227 (1998).
  • 16. Civil Rights Exception
    • In enacting CAFA, Congress demonstrated no intention to create federal jurisdiction that would strip states of existing sovereign immunity defenses.
    • CAFA rejects jurisdiction in cases against states, state officials, or other governmental entities over whom “the district court may be foreclosed from ordering relief.”
    • The impact of this exception is largely to carve many civil rights class actions out of CAFA.
  • 17. Removal – by whom and when
    • Any Defendant May Remove : any defendant may remove without the consent of other defendants. (1453(b))
    • Removal Within 30 Days :
      • a removal petition may be filed within 30 days of the first pleading or paper filed in any state-court class action from which a defendant can ascertain that the actions falls within the scope of federal jurisdiction under the new 28 U.S.C. §1332(d). (1446(b))
      • one-year limitations on removal no longer applies (1453(b))
  • 18. Removal - Discretionary Appeals
    • Existing law (1447(d) provides that when district court determines that removal is not proper and remands to state court, the remand order cannot be reviewed on appeal
    • CAFA (1453(c) provides, however, that a court of appeals MAY accept an appeal of the granting or denying a motion to remand, if an application for permission to appeal is filed WITHIN SEVEN days of the order
    • If court of appeals accepts such an appeal, it must decide within 60 days , unless all parties agree to an extension (which can be of any length) or the court grants an extension of no more than 10 days for good cause
    • If the court of appeals does not decide the case within the time limit, the appeal is denied
  • 19. Removal Summary CAFA Conventional Discretionary with strict time limits None Appellate Review Same but not limited to 1 year 30 days from pleading but no longer than 1 year Deadline Not required Required Consent of Defendants Any defendant can remove Only out-of-state defendants can remove Citizenship Removal of Diversity Actions
  • 20. CONSUMER CLASS ACTION BILL OF RIGHTS
    • 1712. Coupon settlements.
    • 1713. Protection against loss by class members.
    • 1714. Protection against discrimination based on geographic location.
    • 1715. Notifications to appropriate Federal and State officials.
  • 21. Coupon Settlement Restrictions
    • 1712(e)court may approve a coupon settlement “only after a hearing to determine whether, and making a written finding that, the settlement is fair, reasonable and adequate for class members.” and
    • Court has the discretion to require that in a coupon settlement, some portion of the value of unclaimed coupons be distributed to charity
    • 1712(a) any portion of attorney’s fee attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed
    • 1712(b) court may use the lodestar with multiplier method to determine attorneys fees regardless
    • 1712(c) any portion of fees based on injunctive relief shall be based on time (or lodestar and multiplier).
  • 22. Protection Against Loss and In-State Discrimination
    • Settlements cannot constitute a net financial loss to individual plaintiffs, unless the court makes a “written finding that non-monetary benefits to the class member substantially outweigh the monetary loss.” 28 U.S.C.§1713.
    • CAFA bans settlements that accord extra monies to in-state, or local, plaintiffs as opposed to out of state plaintiffs. 28 U.S.C. §1714.
  • 23. Notifications to appropriate Federal and State officials (1715(a)&(c))
    • Notice of any settlement of a class action be provided to “appropriate” federal and state officials, including
      • US Attorney General
      • State officials with regulatory authority or the attorney general of any state in which any class member lives
      • In cases involving regulated financial institutions, the federal officials who must be notified include whoever has primary regulatory authority over the institutions at issue (e.g., the FDIC)
  • 24. Notifications to appropriate Federal and State officials (1715(b))
    • The notice must be provided no more than 10 days after proposed settlement is filed in federal court, and must include: the complaint; notice of any scheduled hearing; copies of notices to class members; copies of settlement and any side agreements; copies of (proposed) final orders or judgments; and copies of related judicial opinions
    • Notice must also, to the extent possible, inform the appropriate state officials of the identities and/or numbers of class members residing in their states
    • Responsibility for providing notice falls on “each defendant”
  • 25. Notifications to appropriate Federal and State officials (1715(d)&(e))
    • Final approval of a settlement may not be issued earlier than 90 days after the later of the dates on which the appropriate Federal and State officials are served with the notice.
    • failure to provide the required notice means class members may choose not to be bound by the settlement.
  • 26. Significant Cases
    • Amount in Controversy
      • Moda v. Priceline.com , Inc., No. 06-56301, 2006 WL 3327871 (November 16, 2006). (“Priceline admitted that it sold 2,092,145 rooms to California consumers during the relevant time period, which amounted to $310,070,978 in revenue.... At a 50 percent reimbursement rate, Priceline demonstrated, the class stood to recover $155,035,489.... We do not predict what Moda will recover, only what he could recover.... From Priceline’s revenue numbers and the text of the complaint, we conclude that the amount in controversy exceeds $5 million.
      • Brill v. Countrywide Home Loans, Inc ., 427 F. 3d 446, No. 05-8024, 2005 WL 2665602 (7th Cir. Oct. 20, 2005) (where complaint under Telephone Consumer Protection Act did not set cap on recovery and held open possibility of treble damages, “Countrywide did all that was necessary by admitting that one of its employees sent at least 3,800 faxes.” Countrywide “did not have to confess liability in order to show that the controversy exceeds the threshold”; at $500 in statutory penalties per fax, damages could equal $5.7 million).
  • 27. Burden of Proof and Scope of Appeal
    • Brill v. Countrywide Home Loans, Inc ., 427 F. 3d 446, No. 05-8024, 2005 WL 2665602 (7th Cir. Oct. 20, 2005).
      • In an opinion authored by Justice Easterbrook, the Court rejected Defendant’s argument that CAFA shifts the burden of proof in a removal dispute to the plaintiff opposing jurisdiction.
      • Going beyond CAFA jurisdictional grounds, the Court also rejected plaintiff’s argument that removal was improper on the grounds that state courts have exclusive jurisdiction over suits brought under the Telephone Consumer Protection Act. (Thus entirety of a courts dismissal can be reviewed.)
  • 28. Burden of Proof (2)
    • Blockbuster, Inc. v. Galeno , No. 05-8019-cv (2d Cir. 12/26/06).
    • Found burden on defendant.
    • Slammed the defendant's reliance on the Senate Report “...the Senate report was issued ten days after the enactment of the CAFA statute, which suggests that its probative value for divining legislative intent is minimal." 
  • 29. Time Limit for Appeal
    • Morgan v. Gay , Case No. 06-8045 (3d Cir. October 16, 2006).
    • Defendants filed a appeal petition exactly seven days after the District Court’s remand Order.
    •   28 U.S.C. § 1453(c) states that a court of appeals “may accept an appeal from an order of a district court granting or denying a motion to remand a class action to the State court from which it was removed if application is made to the court of appeals not less than 7 days after entry of the order.”
    • Court concluded that because the uncontested legislative intent behind § 1453(c) was to impose a seven-day deadline for appeals, the statute as written contains a typographical error and should be read to mean “not more than 7 days.” 
    • Cited United States v. Ron Pair Enterprises , 489 U.S. 235, 242 (1989) for the proposition that “The plain meaning of legislation should be conclusive, except in [ ] rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters. In such cases, the intention of the drafters, rather than the strict language, controls.”
  • 30. Time Limit for Appeal
    • DiTolla v. Doral Dental , No. 06-2324 (2d. Cir. Nov. 17, 2006)
      • 60-day period begins to run from the day the court of appeals agrees to hear the appeal, not the day that the application to appeal is filed. 
      • Also...burden of proving CAFA's jurisdictional prerequisites ($5 million in controversy, minimal diversity, etc.) rests on the party seeking the federal forum.
  • 31. Coupon Settlements- Heightened Scrutiny?
    • Synfuel Technologies, Inc. v. DHL Express (USA), Inc. , 463 F.3d 646 (7th Cir. 2006)
    • Seventh Circuit cited what it considered to be CAFA's policy of " heightened scrutiny " of coupon settlements in support of a decision striking down a non -CAFA settlement because the district court did not adequately evaluate its fairness. 
      • Claim forms had been submitted under the settlement by "a paltry three percent " of the class
      • Would require class members to do business with DHL.
      • Most of these benefits would be reaped by "future customers who are not plaintiffs in this suit ," and that benefits to such non-class members counted for little or nothing in balancing the fairness of the settlement: "The fairness of the settlement must be evaluated primarily based on how it compensates class members for ... past injuries."
  • 32. Coupon Settlements- Heightened Scrutiny? (Page 2)
    • Judge Wood's asserts that CAFA calls for " heightened scrutiny " of coupon settlements
    • But CAFA's provision regarding scrutiny of coupon settlements actually provides only that such settlements may be approved if they are " fair, reasonable, and adequate " -- exactly the same standard applied pre-CAFA settlements under Rule 23(e)(1)(C).
  • 33. Trends – FDC Report
    • Second Interim Report to the JudicialConference Advisory Committeeon Civil Rules – Federal Judicial Center, September 2006.
    • Shows trends for the first 134 days.
    • Overall, data from 85 federal district courts show a substantial increase in class action activity during the period from January 1, 2001, through June 30, 2005. More to the point, we found a substantial increase in class action activity during the months following CAFA’s effective date.
    • Class actions were filed at a rate of 10.48 cases per filing day before CAFA (July 1, 2001, through February 17, 2005) and 11.96 cases per filing day after CAFA went into effect.
  • 34. Trends – FDC Report (Page 2)
      • Removals in traditional federal question cases such as labor, civil rights, and securities, were not affected by CAFA, just as one would anticipate.
      • Increases in class action activity during the post-CAFA period occurred primarily in the nature-of-suit categories likely to include state-law claims:
        • Contracts, torts (almost entirely in property damage and not in personal injury cases), and
        • “ Other fraud” cases (about half of which were based on diversity jurisdiction; many were filed originally in state courts). Increases in the contracts and fraud cases were statistically significant; the increase in property damage cases was not statistically significant.
  • 35. Trends – FDC Report (Page 3)
      • After CAFA, cases based on diversity of citizenship jurisdiction increased from 13% of all class action filings and removals to 19% of such cases.
      • After CAFA, cases removed from state courts increased from 18% of all class action activity to 23% of such activity. The percentage of original proceedings filed in federal court declined correspondingly.
  • 36. Discussion and Conclusions Thank You Reed R. Kathrein

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