U.S. Senate Panel Okays Class Action Reform Bill

"It hits some of the worst problems in the class action system?forum shopping, nuisance suits, class certifications and settlements not in the best interests of plaintiffs," he said.

Melissa Shelk, vice president for federal affairs with the Washington-based American Insurance Association, said the legislation would create a fairer and more balanced system.

"These suits belong in federal court because that's what the founding fathers intended when they set up a system to put suits in federal court if the case crossed state boundaries," she said.

The legislation, S. 274, was approved on a bipartisan basis after a compromise was worked out by Senate Judiciary Committee Chairman Orrin Hatch, R-Utah, and Sens. Dianne Feinstein, D-Calif.; Herb Kohl, D-Wisc.; and Charles Grassley, R-Iowa.

Under the bill approved by the Committee, federal courts would have jurisdiction on most major class actions in which the plaintiffs are asking at least $5 million in damages.

Under an earlier version of the legislation, the threshold was $2 million. H.R. 1115, a class action bill pending in the House, also has a $2 million threshold.

Along with the $5 million threshold, S. 274 establishes a three-tiered system for determining whether a class action is heard in state or federal court.

Under the first tier, if more than two-thirds of the plaintiffs are from the same state, and the primary defendant, the case automatically stays in state court, regardless of the amount in controversy or whether one or both parties ask for federal court adjudication.

Under the second tier, if fewer than one-third of the plaintiffs are from the same state as the primary defendant, the case will be heard in a federal court if either side requests it and the $5 million threshold is reached.

Under the third tier, where between one-third and two-thirds of the plaintiffs are from the same state as the primary defendant and the $5 million threshold is reached, the federal judge would have discretion to hear the case based on several factors, such as whether the case is national in impact.

S. 274 also contains a variety of consumer protections, such as judicial review of non-cash settlements, plain English settlement notification, a ban on settlements that cause plaintiffs to lose money, and various non-discrimination rules.