Today we are publishing a guest post contributed by Sandy Atwood, on behalf of Lawyers.com. Sandy studies corporate law and in her spare time, she takes an interest in and writes about the various acts that are passed by Congress.
The floor is yours, Sandy.
The Class Action Fairness Act was passed by Congress in 2005; it allowed federal courts to begin hearing large class-action lawsuits and mass torts that were usually heard in state courts. Tort reform supporters, corporations and business organizations argued for the bill, stating that the law was needed to prevent the class action lawsuit abuse that was becoming commonplace in the state courts. Prior to the bill being passed, class action lawsuits in which lawyers received huge sums of money and plaintiffs were left with coupons became almost typical. Towns like Madison County, Illinois were gaining a reputation for being plaintiff friendly, and were taking cases with jurisdictional issues and awarding large sums of money.
The notorious coupon settlements in abusive class action cases were a major impetus for the passage of CAFA. In such settlements, plaintiffs receive only coupons for products sold by the defendant, while plaintiffs’ attorneys get paid massive fees. CAFA, however, does not prohibit these questionable settlements, perhaps because they are popular with corporations. Instead, CAFA simply affirms the federal courts and the duty of federal district courts to scrutinize the fairness of coupon settlements. The Act does, however, limit attorneys’ fees for counsel in coupon settlements.
CAFA allows federal court jurisdiction in certain class action cases where the amount of damages demanded exceeds $5 million, and in which any of the members of the class of plaintiffs is a citizen of a state different from that of any one defendant. The Act also orders the federal courts to pay more attention to details relating to settlements, especially those involving coupons for plaintiffs.
However, many feel that CAFA’s downsides outweigh its upsides. Critics of the Act have argued that the federal jurisdiction over these cases comes at the expense of states’ rights and imposed federalism. By moving lawsuits from the state to the federal court level, they say, local community concerns have been taken out of the hands of the people.
Additionally, the settlement portion of the Act has created some confusion, as it appeared that Congress did not have a good understanding of the issues that were created in state courts. Thus, the new law was not clear regarding settlements, leaving many of the problems regarding class action settlements unresolved. Congress attempted to rectify this by passing additional provisions, but they did little to clarify the situation.
Although much had been made in the press about how the Class Action Fairness Act changed substantive law, in truth it did not. It only changed procedural law for class action lawsuits. What remained was the substantive law that actually led to the early abuses in state courts. For example, CAFA did not change federal securities laws, and the results were extortion-like settlements in the billions of dollars demanded by "innocent bystander" banks in the Enron cases. In this situation, the defendants settled rather than spend untold amounts fighting individual plaintiffs.
The Class Action Fairness Act and its impact has been scrutinized and debated almost endlessly since it was first proposed. Nonetheless, it still remains in place nearly seven years after its passing.