The Class Action Fairness Act of 2005

It is now a year since the Class Action Fairness Act of 2005 became law. The Act modified federal court jurisdiction over class actions in two significant respects. First, it expanded "diversity jurisdiction" in class actions. And, second, it permitted greater opportunity to remove class actions from state court to federal court. In the brief period of time since passage, the federal courts have principally been called upon to decide if, and when, class actions may be removed under the Act; few, if any, decisions have been issued on the expanded scope of diversity or the Act’s other substantive provisions.

Expanded 'Diversity Jurisdiction'
There are two basic grounds for federal court jurisdiction: "federal question" or "diversity." Under federal question jurisdiction, federal courts may adjudicate claims arising under federal law. But many class actions – such as consumer fraud or product liability – arise under state law. Traditionally, such claims could only be heard in federal court if there was "diversity" – no plaintiff and no defendant could be from the same state – and if the amount in controversy exceeded $75,000 for each individual claimant (i.e., claims could not be aggregated).

The Act expanded federal court diversity jurisdiction for class actions. First, the Act permits aggregation of claims; if the aggregate value of all claims exceeds $5 million and there are more than 100 total claimants, federal courts may exercise jurisdiction. Second, the Act permits federal jurisdiction even where diversity is absent. Under the Act, if the primary defendant and less than 1/3 of the claimants are from the same state, the federal court must exercise jurisdiction. If the primary defendant and between 1/3 and 2/3 of the claimants are from the same state, the federal court may exercise jurisdiction. But if the primary defendant and more than 2/3 of the claimants are from the same state, the federal court must decline jurisdiction.

Expanded Removal to Federal Court
The Act also expands defendants’ ability to remove class actions to federal court. First, the Act eliminates for class actions the normal one-year bar to removal. Second, the Act eliminates for class actions the requirement that all defendants consent to removal. Third, the Act permits an immediate, but limited, appeal if the federal court to which the class action has been removed declines jurisdiction and remands to state court.

Additional Provisions
The Act does not apply to class actions asserting claims arising under federal securities laws or state corporate-governance laws; claims against states, state officials, or certain other government officials; or claims involving under 100 claimants. The Act also requires greater scrutiny of, and limits attorneys fees recoverable from, so-called "coupon settlements" (where claimants get a coupon to be used for the defendant’s goods or services); specifically, contingent attorneys fees based on the value of coupons are limited only to the value of coupons actually redeemed, rather than the value of the coupons issued. Additionally, the Act requires pre-settlement notification to "appropriate" federal and state officials, such as the US Attorney General and state attorneys general.

Experience in the First Year since Passage
The Act applies to all class actions commenced on or after February 18, 2005, but not to those already pending. By far, the greatest amount of litigation under the Act has been related to the question of when an action is "commenced" under the Act. Not surprisingly, many defendants have attempted to seize upon procedural changes in a state court action – such as the filing of an amended complaint or the substitution of a named plaintiff – to try to remove the matter to federal court under the Act.

In Pfizer v. Lott, 417 F. 3d 725 (7th Cir. 2005), the court rejected Pfizer’s attempted removal to federal court of a state court action that was filed just one day before the Act was signed into law. See also Bush v. Cheaptickets, Inc., 425 F.3d 683 (9th Cir. 2005) (same); Natale v. Pfizer, Inc., 2005 WL 2253622 (1st Cir. 2005) (Act inapplicable to actions filed before February 18, 2005). In Pritchett v. Office Depot, Inc., 420 F.3d 1090 (10th Cir. 2005), Office Depot gamely argued that the matter "commenced" under the Act when Office Depot removed it to federal court. Au contraire, said the Tenth Circuit - the matter "commenced" under the Act when plaintiff filed its initial state court complaint in April 2003 - two years before the Act became law. See also Knudsen v. Liberty Mutual Ins. Co., 411 F.3d 805 (7th Cir. 2005) (affirming remand of matter that had been pending in state court for five years, concurring with Tenth Circuit’s holding in Pritchett, and rejecting Liberty Mutual’s argument that class definition had "substantially changed" so as to "commence" a new action), appeal after remand, __ F.3d __ (7th Cir. Jan. 27, 2006) (determining that plaintiffs’ recently amended class definition, which encompassed not only named defendant but also independent subsidiaries and affiliates, constituted sufficiently substantial change to permit removal and reversing remand order); Schorsch v. Hewlett-Packard Co., 417 F.3d 748 (7th Cir. 2005) (filing of amended complaint after Act’s effective date did not permit removal if amended complaint related back to initial filing; court noted that situations could possibly arise where amended complaint adds novel claims or new parties, which may permit removal, stating, "We can imagine amendments that kick off wholly distinct claims, but the workaday routine changes in class action suits do not"); Plubell v. Merck & Co., ____ F.3d ____, No. 05-4217, 2006 WL 141661 (8th Cir. Jan. 20, 2006) (where action had been pending as of Act’s effective date, substitution of new named plaintiff, after Act’s effective date, did not commence new action where new plaintiff’s claims related back to the claims asserted in initial complaint); cf. Adams v. Federal Materials Company, Inc., 2005 WL 1062378 (W.D. Ky. July 28, 2005) (new defendant added after Act’s effective date permitted to remove matter).

Interestingly, in a couple of cases, plaintiffs who filed their lawsuits on February 18, 2005 - the exact day the Act became law - attempted to argue that the Act did not apply, and their cases could not be removed, because the state court cases were filed several hours before the President signed the Act into law. The courts involved rejected the fraction-of-a-day arguments and refused to remand. See Awaida v. Pfizer, Inc., No. Civ. 05-425 2005 (W.D. OK June 7, 2005); Issacs v. Pfizer, Inc., No. Civ. 05-0426 (W.D. OK. June 21, 2005).

Where a case has been properly removed under the Act, litigation has ensued as to whether the aggregated claims meet or exceed the Act’s $5 million jurisdictional requirement (see Yeroushalmi v. Blockbuster, Inc., No. 05-2550 (C.D. Cal. July 11, 2005); Berry v. American Express Publishing, Corp., et al., No. SA cv 05-302 (C.D.Cal. June 16, 2005)) or whether a claim arises under securities or corporate governance laws, which are exempt from the Act’s removal provisions (see Indiana State District Council of Laborers and HOD Carriers Pension Fund v. Renal Care Group, Inc., No. Civ. 3:05-0451, 2005 WL 2000658 (M.D. Tenn. August 18, 2005)). Additionally, the Act has been held not to apply to certain claims brought by state officials. See Harvey v. Blockbuster, Inc., 2005 WL 186936 (D.N.J. 2005) (remanding on grounds that Act did not permit Blockbuster to remove Attorney General’s parens patriae consumer fraud action).

Courts have yet to address some of the Act’s more substantive provisions, particularly its requirement for greater scrutiny of "coupon" settlements and attorney’s fees awards.

Only time will tell whether the Class Action Fairness Act of 2005 lives up to the expectations of its supporters or its detractors. But the Act represents an important change in the class-action landscape and its impact will be felt across the nation for years to come.