Epstein on Class Action Fairness Act

A Further Fix Is Needed to Class Action Fairness Act
Richard A. Epstein
New Jersey Law Journal
November 28, 2005

In the law of class actions, Feb. 18, 2005, marks the great divide.

Actions commenced before that date remained governed by pre-existing law whose most notable feature sharply restricted the removal of any lawsuit based exclusively on state law from state to federal court.

The usual obstacles included requirements that (at the very least) the cause of action of the named plaintiff be worth at least $75,000. More important, ordinary state lawsuits could not be taken to federal court on removal unless the requirement of complete diversity was met. So long as a single defendant and a single plaintiff were from the same state, the out-of-state defendant with deep pockets had to face the wrath of hostile state juries in state forums where established plaintiffs' lawyers did repeat business.

One year after the suit was filed, the in-state defendants who destroyed diversity could be conveniently dismissed, because the statutory period of removal had passed.

It seems almost ironic that the removal provisions in the federal code should loom so large in modern complex litigation. But it is a sad commentary that the choice of forum turns out in too many cases to be the most important determinant. The restrictive rules of removal therefore were the major target of the Class Action Fairness Act, passed in response to heated business pressure for a federal forum.

One fix was relatively easy. On jurisdictional amount, CAFA provides that any class mass action can reach federal court if it is worth more than $5 million. But not all such actions can make it into federal court. CAFA's basic intuition is that class actions whose center of gravity lies in a given state ought to remain there, while those whose center of gravity lies elsewhere should go to federal court at the request of the federal defendant.

The tripartite scheme that implements this vision, however, necessarily injects a heavy dose of uncertainty into a troubled area. If the initial class has one-third or fewer in-state claimants, it may be whisked off to federal court. If it has more than two-thirds in-state claimants, it stays put. If it has between one- and two-thirds in-state claimants, the federal court that gets the case has to weigh the strength of state and federal interests.

This scheme has two disadvantages. The first is that the generic descriptions used in class actions (all people who bought product X in period Y) do not lend themselves to easy counting, and the percentages could easily be revised on the strength of evidence that is only obtained after the initial determination on forum is made. Second, there is little excuse to create a litigation limbo for anyone caught in the middle category. Two categories, with only one boundary line, are surely preferable to a statutory no-man's land in the middle.

However awkward CAFA's basic structure, no one should deny that it has had profound effects on the litigation structure. Plaintiffs' lawyers will often cap their damages below $5 million to avoid being shipped off to federal court.

In addition, it now seems that neither side has any appetite to litigate the thorny questions in the middle category. Many plaintiffs' lawyers, anticipating removal, just file their suits in federal court to begin with. A voluntary sorting takes place that avoids litigating the beastly complexities of the act.

CAFA then has a positive impact. But it does not go far enough. The risk of marooning a large out-of-state corporation in state court is of importance not only in class actions but also in individual cases. The most beneficial aspect of CAFA is not found in the litigated cases, but in the dubious lawsuits that die stillborn. But it does not go far enough.

There is a simpler and more sensible plan: Start by scrapping the statutory rule of complete diversity. Whenever an out-of-state defendant is sued in state court, the defendant can remove the case to federal court as of right. The risk the foreign defendant faces is the same whether it is sued alone or joined with some local merchant or pharmacist. Once the defendant goes into federal court, the plaintiff can choose to bring the other in-state defendants along with the out-of-state defendant into federal court, or keep the remaining defendants in state court.

Often, the only reason the local defendants are sued is to block removal to federal court. The plaintiff who knows that the deep-pocket defendant gets to federal court as of right will not sue in state court. At this point, state courts might just clean up their acts to keep their business.

But until that day comes, these expanded removal provisions loom large in federal jurisdiction. Without them, the plaintiff gets to choose the forum. With them, that option goes to the defendant. Let's hope that a thorough housecleaning at the state level means no one will much care about the difference.

Epstein is a professor at the University of Chicago Law School and a senior fellow at the Hoover Institution.

Copyright 2005 ALM Properties, Inc.

Richard A. Epstein