On Feb. 18, President Bush signed into law the Class ActionFairness Act, the first step in a wide-reaching tort reform agenda.The legislation, passed by sizable majorities in both the House andSenate, would limit what supporters call law-suit abuse by removingcertain class actions to federal court.

The insurance industry, which long has sought such a measure,responded with enthusiasm and relief. “Class action abuse is amajor contributor to the $246 billion that our legal system costsconsumers each and every year,” said Carl Parks, senior vicepresident, government affairs, for the Property Casualty InsurersAssociation of America.

Others, among them many consumer advocacy groups and somepoliticians and legal scholars, are dismayed by the bill's passage.The Consumer Federation of America asserted that the newlegislation is unfair to consumers and represents “a dangerouschange to our civil justice system.” House Democratic Leader NancyPelosi described the measure as “an injustice to consumers and awindfall for irresponsible corporations.”

Class action suits, as we now know them, were enabled by a 1966amendment to the underlying law, which provides that members of aclass can receive damages even when there is no common legalownership or right. That change opened the door to the expansion ofclass actions and to the categories in which they are mostfrequently brought today, such as anti-trust and security fraud.Although many securities companies operate in an entirely ethicalmanner, “the existence of plaintiffs' class action [law] firms iswhat keeps securities firms more honest than they might otherwisebe,” noted John Moscow, formerly an attorney with the ManhattanDistrict Attorney's office.

There is no dispute that many cases have had legitimate basesand the settlements effectively redressed various wrongs. “A lot ofquestionable business practices have been challenged by classactions,” said Edward Sherman, former dean of the Tulane UniversityLaw School, citing hidden charges imposed by credit card companiesand improper interest charges in banking transactions.

At the same time, Sherman continued, some cases are based onvery small issues, such as the failure of a company to comply witha minor regulation. These, he said, “could be seized upon bylawyers and in the end are very costly.”

Many others point to what they call frivolous suits, brought,they claim, on the slimmest of grounds and, ultimately, only forthe good of plaintiffs' lawyers. The one area of agreement, infact, among all the points of view on class action reform, is thatthe answer to the question cui bono? (who benefits?) is theattorneys who make their livelihoods suing on behalf of aclass.

Analyzing the Act

Although there are provisions regarding the nature ofsettlements and calculation of attorneys' fees relative to couponawards, at the heart of its fine print and legal language, theClass Action Fairness Act primarily provides for the removal fromstate to federal courts of those class actions that meet certaincriteria. The damages involved must total $5 million or more, theremust be 100 or more plaintiffs from multiple states, and any singleplaintiff must be from a state different from that of anydefendant.

This last provision is the crux of the matter, making itpossible for almost every class action suit to be removed tofederal court. Until the new legislation was signed into law, saidRobert Detlefsen, director of public policy for the NationalAssociation of Mutual Insurance Companies, regardless of how manyplaintiffs were involved, “if just one is in the same state as onedefendant, the case can be tried in whatever jurisdiction theplaintiff attorney chooses to file.” That permitted attorneys toseek out the most favorable jurisdictions, ones with judges whoapply the certification rules loosely and with reputations foranti-defendant local jury pools.

“This becomes an instrument by which courts engaged inregulation through litigation,” Detlefsen noted. “A particularcourt can apply its state law to a case involving plaintiffs frommultiple states, with the result that existing law in those otherstates may be nullified.”

Another significant benefit of the new legislation, according toSherman, is its anticipated effect on repetitive class actions:overlapping cases brought by different lawyers who representdifferent members of a class, in cases certified by differentcourts, essentially competing with one another. In some cases,certain defendants are persuaded to make a sweetheart deal with oneattorney and to settle at a low rate. “That amounts to collusion,”Sherman said, “to the disadvantage of the plaintiffs in that case.”

Under the new law, if all those cases were taken to federalcourt, they could be transferred to a single judge who wouldoversee the entire matter, ensuring that the settlement processwould be fair and reasonable. Certainly, the balance of power hasshifted. Whereas the choice of jurisdiction had been theprerogative of the plaintiffs, now the power lies with defendantsto pull cases into federal court. Whether they choose to do so willdepend on a number of factors, including legal strategy.

And the Winners Are

Depending on whose interpretation one accepts, the Class ActionFairness Act is (a) unfair to consumers, (b) a boon to consumers,(c) the redress of major wrongs in the legal system, (d) a rewardfor big business, (e) all of the above, or (f) none of the above.Moscow believes that much of the underlying motive for the act issound. On the other hand, he said, the fact that some jurisdictionsmay be far out of line in their pro-plaintiff rulings “does notmean that we should destroy all state courts to fix a small numberof problems.”

Some of the opposition comes from those who believe thatvirtually all class action cases will now be heard in federalcourt, an outcome, they claim, that will significantly disadvantageplaintiffs. The federal courts, the argument goes, are alreadyseriously over-burdened; new procedural obstacles will create stillgreater backlogs, discouraging the pursuit of legitimateclaims.

“State courts have backlogs, too,” argued Detlefsen, “and, inany event, civil litigation in the country is notoriously slow.”Moreover, he said, the removal of cases to federal courts takesthem out of the hands of elected judges who, he believes, are morelikely to be biased in favor of local plaintiffs and against largeout-of-state companies. “Federal judges are appointed, so they haveno home-town bias.”

Others disagree strongly, pointing out that federal judges arevetted for their pro-business, anti-class-action interpretations ofthe law. Sherman countered that argument by saying that standardsvary from one federal judge to another, and over time as well.“Twenty years ago,” he said, “in some jurisdictions you could filea class action and get the judge to certify it that same day. Nowthat's largely a thing of the past, because of the change inpolitical make-up of state supreme courts.”

As for the plaintiffs' attorneys, many believe that litigationwill become both more complicated and more costly. Firms accustomedto following state legal procedures may be unfamiliar with thecomplexities of the federal courts, whose judges apply differentand, often, stricter rules for evidence.

It is conceivable, Moscow said, that some firms may try tostructure class action suits so as to keep them within the states.Issues of economic feasibility arise, however: the class would haveto specific and small enough to fall within the new guidelines, butlarge enough to make it worthwhile to bring the suit.

The more likely outcome is that, recognizing the futility offiling at the state level, lawyers will resign themselves tobringing cases immediately at the federal level. Then again,Sherman noted, plaintiffs' attorneys are creative; it is morelikely that corporations will find themselves being sued in theirhome states.

Next up on the administration's overall litigation reformprogram are medical malpractice and asbestos injury lawsuits.Although the passage of class action reform has created momentum,Sherman believes that it is not necessarily a prognosticator offurther change. “In political terms, there were some criticalDemocrats in the Senate who were persuaded that [class action] wasimportant reform,” he said. “But, I don't think that you will findthe same coalition for medical malpractice.” Many politicians seethe latter not as an issue of protecting business, but of thelegitimate remedying of wrong.

Erika Rosenfeld is a contributing editor for InsuranceAdvocate. This article originally appeared in the Mar. 14 editionof that publication in a longer form.