When President Bush signed the Class Action Fairness Act (CAFA) into law last February, he said, “The bill will ease the needless burden of litigation on every American.”

However, in CAFA's first year, litigation has surged over numerous ambiguities in the law, and corporations are facing a potential backlash of unintended consequences.

“It will be interesting to see how CAFA affects behavior,” says Michael Lazerwitz, partner with Cleary, Gottlieb, Steen & Hamilton in Washington, D.C. “Some plaintiffs view it as a godsend, because now they can file multi-state class actions directly in federal court instead of filing in several states.” Contrariwise, some of CAFA's provisions actually might make federal courts less attractive to defendants.

To what degree such unintended results will taint CAFA's beneficial reforms remains uncertain. In most cases, CAFA seems likely to bring relief for companies struggling to secure justice in class actions. That relief, however, will come at a price.

Bench Legislation

Congress intended CAFA to address abusive class action litigation by allowing defendants to more easily remove cases from state to federal courts. In this respect the law is working–it makes many class action cases eligible to be heard in federal court, giving defendants a way out of plaintiff-friendly venues.

CAFA's central feature is the new standard it establishes for determining “minimal diversity” in multi-state class actions. CAFA gives federal courts jurisdiction over cases involving at least $5 million in aggregate claims in which any class member lives in a different state from any defendant. This represents a broad net.

“More cases are being removed than perhaps was originally anticipated under CAFA,” says Michael Hartley, a partner with Weston Benshoof Rochefort Rubalcava and MacCuish in Los Angeles. “In California, for example, most large corporate defendants are incorporated in other states–mostly Delaware. As a result, you'll almost always have a good shot at removing a case to federal court.”

However, the law is ambiguous on several points, including such basic questions as whether CAFA applies retroactively and which party bears the evidentiary burden when a defendant seeks to remove a case.

These ambiguities resulted from the legislation's long path to the president's desk. CAFA was first introduced nine years before it became law, and the final bill was vastly watered down from the original.

“If you followed the legislative history, you could see trade-offs between Senators X and Y,” says Anthony Rollo, a partner with McGlinchey Stafford in New Orleans. “Ultimately the only way it made it through Congress was by leaving some things unclear.”

The courts themselves are filling in CAFA's gaps. But although some rulings are now on the books, they don't all agree with each other, and the disagreements will take years to resolve.

“Five years from now the terrain will be much clearer,” Rollo says. “But getting to that point means we have to litigate these issues in every case.”

A great deal of CAFA-related litigation has focused on evidentiary burdens for removing a case or challenging its removal. For example, in Berry v. American Express Publishing Corp., the U.S. District Court for the Central District of California ruled that CAFA's primary intent was to expand federal jurisdiction over class actions, and therefore placed the burden of proof “on the party opposing removal.” But the Eastern District of Pennsylvania ruled in Schwartz v. Comcast Corp. that “notwithstanding its legislative history, CAFA doesn't shift the burden of proof from a removing defendant to a remanding plaintiff.”

Most courts have leaned toward the Berry analysis, but disputes will continue until appellate courts step in. Other conflicts have centered on retroactive application of the law–specifically, determining when an action “commences” for CAFA purposes. In Pritchett v. Office Depot, the 10th Circuit determined that filing a notice of removal in a case originally filed before CAFA's effective date doesn't trigger CAFA's provisions. Meanwhile, the 7th Circuit decided in Knudsen v. Liberty Mutual that adding a new defendant would meet CAFA's threshold for commencing an action.

These questions still are being litigated, and more complex issues lurk over the horizon. For example, the law provides abstention processes for determining when a federal court should “decline to exercise” its jurisdiction over a case that has been removed from state court.

“CAFA is unclear about the nature of this process, when this procedure is supposed to take place, or how it is supposed to work,” Rollo says. “What is clear is this new procedural aspect will be complex and expensive.”

For example CAFA contains two mandatory provisions directing federal courts to abstain from taking cases in which more than two-thirds of the class members are residents of the forum state and either the “primary defendants” or at least one defendant from whom “significant relief is sought” and whose conduct forms a “significant basis” of the claims reside in the forum state.

Other uncertainties involve how to determine whether a class has

100 members, and whether lawsuits in other jurisdictions are based on the

same allegations.

Settlement Impediment

In addition to CAFA's federalization provisions, the law includes legislation known as the Consumers' Class Action Bill of Rights, which imposes limits and conditions on coupon settlements and requires defendants to notify appropriate federal and state officials about

proposed settlements.

Because Congress enacted CAFA just a year ago, class actions haven't proceeded far enough to demonstrate what effect the settlement provisions might have. When they do, however, defendants and plaintiffs alike might reconsider their litigation strategies.

The notification requirements could yield conflicts in some jurisdictions, depending on how state attorneys general and regulators treat the notifications.

“If state agencies become involved, it will make the litigation more protracted and increase the level of complexity,” Hartley says. “Right now we don't know for certain. It may just end up being a notice provision.”

Nevertheless, defendants bear a serious burden to ensure notices are served properly–even if agencies do nothing except file them away. “If you don't do it right, the consequences are harsh,” Hartley says. “Class members could refuse to be bound by the settlement.”

Also, CAFA's restrictions on coupon settlements could have consequences inconsistent with legislators' intent.

“CAFA has made it much more difficult to propose or approve of a settlement in federal court if the class members aren't going to receive significant payments,” says Philip Sellinger, managing shareholder at Greenberg Traurig.

CAFA's settlement provisions might lead toward more fluid-recovery and cy-pres arrangements, such as consumer trust-fund contributions. It also might drive marginal cases toward a full trial, if coupon settlements are the only viable option. And in other situations it might deter some defendants from seeking to remove cases to federal courts altogether.

“Defendants looking to buy out cheap might be inclined to keep cases in state courts,” Sellinger says.

Further, these conditions will lead plaintiffs' counsel to adapt their strategies to the CAFA environment.

“To the extent plaintiffs' lawyers were looking to keep cases in state court, now they will more carefully select defendants and limit the definition of putative classes to make cases more difficult to remove,” Sellinger says.

But despite CAFA's gray areas, the law changes the overall class action landscape in a way that most defendants will find beneficial. However, those benefits will not come free.

“Litigation costs are now 10 to 30 percent higher,” Rollo says. “These higher costs will be in place for years. But on balance, corporations are better off.”

————

When President Bush signed the Class Action Fairness Act (CAFA) into law last February, he said, “The bill will ease the needless burden of litigation on every American.”

However, in CAFA's first year, litigation has surged over numerous ambiguities in the law, and corporations are facing a potential backlash of unintended consequences.

“It will be interesting to see how CAFA affects behavior,” says Michael Lazerwitz, partner with Cleary, Gottlieb, Steen & Hamilton in Washington, D.C. “Some plaintiffs view it as a godsend, because now they can file multi-state class actions directly in federal court instead of filing in several states.” Contrariwise, some of CAFA's provisions actually might make federal courts less attractive to defendants.

To what degree such unintended results will taint CAFA's beneficial reforms remains uncertain. In most cases, CAFA seems likely to bring relief for companies struggling to secure justice in class actions. That relief, however, will come at a price.

Bench Legislation

Congress intended CAFA to address abusive class action litigation by allowing defendants to more easily remove cases from state to federal courts. In this respect the law is working–it makes many class action cases eligible to be heard in federal court, giving defendants a way out of plaintiff-friendly venues.

CAFA's central feature is the new standard it establishes for determining “minimal diversity” in multi-state class actions. CAFA gives federal courts jurisdiction over cases involving at least $5 million in aggregate claims in which any class member lives in a different state from any defendant. This represents a broad net.

“More cases are being removed than perhaps was originally anticipated under CAFA,” says Michael Hartley, a partner with Weston Benshoof Rochefort Rubalcava and MacCuish in Los Angeles. “In California, for example, most large corporate defendants are incorporated in other states–mostly Delaware. As a result, you'll almost always have a good shot at removing a case to federal court.”

However, the law is ambiguous on several points, including such basic questions as whether CAFA applies retroactively and which party bears the evidentiary burden when a defendant seeks to remove a case.

These ambiguities resulted from the legislation's long path to the president's desk. CAFA was first introduced nine years before it became law, and the final bill was vastly watered down from the original.

“If you followed the legislative history, you could see trade-offs between Senators X and Y,” says Anthony Rollo, a partner with McGlinchey Stafford in New Orleans. “Ultimately the only way it made it through Congress was by leaving some things unclear.”

The courts themselves are filling in CAFA's gaps. But although some rulings are now on the books, they don't all agree with each other, and the disagreements will take years to resolve.

“Five years from now the terrain will be much clearer,” Rollo says. “But getting to that point means we have to litigate these issues in every case.”

A great deal of CAFA-related litigation has focused on evidentiary burdens for removing a case or challenging its removal. For example, in Berry v. American Express Publishing Corp., the U.S. District Court for the Central District of California ruled that CAFA's primary intent was to expand federal jurisdiction over class actions, and therefore placed the burden of proof “on the party opposing removal.” But the Eastern District of Pennsylvania ruled in Schwartz v. Comcast Corp. that “notwithstanding its legislative history, CAFA doesn't shift the burden of proof from a removing defendant to a remanding plaintiff.”

Most courts have leaned toward the Berry analysis, but disputes will continue until appellate courts step in. Other conflicts have centered on retroactive application of the law–specifically, determining when an action “commences” for CAFA purposes. In Pritchett v. Office Depot, the 10th Circuit determined that filing a notice of removal in a case originally filed before CAFA's effective date doesn't trigger CAFA's provisions. Meanwhile, the 7th Circuit decided in Knudsen v. Liberty Mutual that adding a new defendant would meet CAFA's threshold for commencing an action.

These questions still are being litigated, and more complex issues lurk over the horizon. For example, the law provides abstention processes for determining when a federal court should “decline to exercise” its jurisdiction over a case that has been removed from state court.

“CAFA is unclear about the nature of this process, when this procedure is supposed to take place, or how it is supposed to work,” Rollo says. “What is clear is this new procedural aspect will be complex and expensive.”

For example CAFA contains two mandatory provisions directing federal courts to abstain from taking cases in which more than two-thirds of the class members are residents of the forum state and either the “primary defendants” or at least one defendant from whom “significant relief is sought” and whose conduct forms a “significant basis” of the claims reside in the forum state.

Other uncertainties involve how to determine whether a class has

100 members, and whether lawsuits in other jurisdictions are based on the

same allegations.

Settlement Impediment

In addition to CAFA's federalization provisions, the law includes legislation known as the Consumers' Class Action Bill of Rights, which imposes limits and conditions on coupon settlements and requires defendants to notify appropriate federal and state officials about

proposed settlements.

Because Congress enacted CAFA just a year ago, class actions haven't proceeded far enough to demonstrate what effect the settlement provisions might have. When they do, however, defendants and plaintiffs alike might reconsider their litigation strategies.

The notification requirements could yield conflicts in some jurisdictions, depending on how state attorneys general and regulators treat the notifications.

“If state agencies become involved, it will make the litigation more protracted and increase the level of complexity,” Hartley says. “Right now we don't know for certain. It may just end up being a notice provision.”

Nevertheless, defendants bear a serious burden to ensure notices are served properly–even if agencies do nothing except file them away. “If you don't do it right, the consequences are harsh,” Hartley says. “Class members could refuse to be bound by the settlement.”

Also, CAFA's restrictions on coupon settlements could have consequences inconsistent with legislators' intent.

“CAFA has made it much more difficult to propose or approve of a settlement in federal court if the class members aren't going to receive significant payments,” says Philip Sellinger, managing shareholder at Greenberg Traurig.

CAFA's settlement provisions might lead toward more fluid-recovery and cy-pres arrangements, such as consumer trust-fund contributions. It also might drive marginal cases toward a full trial, if coupon settlements are the only viable option. And in other situations it might deter some defendants from seeking to remove cases to federal courts altogether.

“Defendants looking to buy out cheap might be inclined to keep cases in state courts,” Sellinger says.

Further, these conditions will lead plaintiffs' counsel to adapt their strategies to the CAFA environment.

“To the extent plaintiffs' lawyers were looking to keep cases in state court, now they will more carefully select defendants and limit the definition of putative classes to make cases more difficult to remove,” Sellinger says.

But despite CAFA's gray areas, the law changes the overall class action landscape in a way that most defendants will find beneficial. However, those benefits will not come free.

“Litigation costs are now 10 to 30 percent higher,” Rollo says. “These higher costs will be in place for years. But on balance, corporations are better off.”

————