by Jackson Lewis
Employers throughout the United States may soon begin to fight back in federal
court against forum-shopping plaintiff lawyers through the Class Action Fairness
Act of 2005 (the "Act"). The Act recently became effective when it
was signed into law on February 18, 2005.
The stated purpose of the Act is 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."
While the Act is aimed primarily at products liability and mass tort cases, it also
may significantly impact employment-related class actions such as discrimination
and wage and hour cases.
Expanded Federal Jurisdiction
The Act dramatically modifies federal law by permitting all class actions to be filed
in federal court if the aggregate value of the claims exceeds $5 million and any
class member is a citizen of a different state from any defendant. Under prior
law, the claims of individual class members could not be aggregated to meet the jurisdictional
amount.
Removal of cases from state court to federal court also is made easier by the Act.
For example, cases filed in state court involving at least 100 potential class members
may now be removed to federal court. The Act also permits any defendant to
remove the case to federal court without the consent of other defendants. The
Act also eliminated the prior rule that removal had to occur within one year of filing
in state court.
In the past, plaintiffs generally have been more successful with class actions in
state court than in federal court because state class action rules tend to be easier
to satisfy than the federal rules. Opponents thus claim the Act severely affects
class members' ability to pursue class actions because of the more rigorous rules
in federal court. Opponents also claim class members' rights will be reduced
because federal courts tend to interpret state substantive laws narrowly.
While the Act makes removal of state court class actions to federal court easier,
federal courts also are granted more discretion to deny employers' removal requests.
Under the Act, federal courts may decline jurisdiction if more than one-third, but
less than two-thirds, of the class members are citizens of the state in which the
action is filed. Federal jurisdiction must be declined if two-thirds or more
of the potential class members and at least one primary defendant are citizens of
the state where the action is originally filed.
No Retroactivity
The Act applies only to civil actions "commenced" on or after February
18, 2005. In a recent overtime class action, Office Depot removed a pending
state case to federal court prior to trial. On April 11, 2005, the Tenth Circuit
Court of Appeals held the Act did not apply because the case "commenced"
when it was originally filed during 2003 - not when it was removed to federal court.
The case was ordered back to state court.
Class Action Settlements
The Act also aims to ensure fair settlements for class members.
Under the Act, federal courts may not approve class action settlements that provide
class members with coupons requiring purchases, while class counsel receive large
attorney fees awards, unless the settlement is fair, reasonable and adequate.
Class action settlements also may not be approved if the payments to class counsel
result in a monetary loss to the class members, unless the court finds the loss is
substantially outweighed by non-monetary benefits.
Federal courts also may not approve class action settlements providing greater recovery
to some class members than others solely because those class members are located
geographically closer to the court.
Wage and Hour Class Actions
Although it is much too early to predict how the Act may affect employment-related
class actions in general, the Act is expected to impact certain types of wage and
hour cases.
In overtime cases, plaintiff attorneys often pursue state and federal actions concurrently
or consecutively to increase the number of potential class members, to take advantage
of state laws, and to seek lucrative attorneys' fee awards. The procedural
rules, however, are different under state and federal law.
In federal court, class members in a collective action under the FLSA must "opt-in"
to be included in the case. In state court, class members are automatically
included in the action if the case is certified by the court as a class action, unless
they affirmatively "opt-out" of the class. The different federal
and state procedures greatly affect the size of the class, which has caused most
plaintiff attorneys to pursue class actions in state court.
Under the Act, state overtime class actions may now be removed to federal court provided
the cases meet the expanded federal jurisdiction. In such cases, employers
may begin to benefit from the more stringent federal class action rules.
Practical Application for Employers
Employers are cautiously optimistic the Act will permit removal of a significant
number of future cases from state court to federal court. The removal of cases
to federal court also may assist employers in the transfer of cases to locations
more convenient for corporate defendants.
To illustrate, if a class action is filed in state court with more than $5 million
in controversy, and the employer is not incorporated in the state and does not have
its principal place of business in the state, the action may be removed to federal
court if the employer is the sole defendant. If other defendants in the case
are citizens of the state where the suit is filed, the case could still be removed
if the plaintiffs are not seeking significant relief from those defendants, if the
alleged conduct of those defendants does not form a significant basis for the claims
asserted, or if fewer than two-thirds of the individuals making up the proposed class
are citizens of the state in which the action was originally filed.
After removing the case, the employer could then request the federal court to transfer
the case under transfer of venue rules to any district in which the action could
have been filed. By so doing, the case could be transferred to a location more
convenient to the employer, i.e., geographically closer and perhaps more favorable.
Ultimately, employers hope the Act accomplishes one of its intended purposes, namely
benefits society by encouraging innovation and lowering consumer prices, or in other
words drastically reduces the number of class actions targeting employers.
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