Class action law raises jurisdictional issues

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Many Wisconsin legal observers familiar with the federal Class Action Fairness Act of 2005 seem to agree that it is likely to divert some class actions from state courts into federal courts.

But recent interviews reveal a divide in their assessments of whether that would be a generally positive development, and if so, for whom.

Bernard T. McCartan, who is associate general counsel for American Family Mutual Insurance Company in Madison and manages its Wisconsin regional legal department, said that the new law should help address variances in the application of state laws and in state judges’ approaches to class action suits.

"My sense of it is that the act is going to bring more consistency to that area of litigation, which I think is a good thing," he said.

Possible Effects on Substantive Law

Others believe that by sending more class actions to federal court, the act could retard progress in areas of state law and ultimately deprive some plaintiffs of redress for wrongs.

Because the act expands federal diversity jurisdiction over class actions, federal courts are likely to see more class cases that concern questions of state law, whether the cases are filed in federal court originally or removed there by defendants.

According to Scott Moss, an assistant professor at Marquette University Law School who teaches a seminar on class actions, federal courts are often more timid in applying state law because when they do, federal judges view themselves as interpreting somebody else’s law.

"So federal courts are often much less likely to want to go out on a limb and allow a claim that is a close call under state law," he said. "If it’s a close call on an unsettled question of state law — that is, if there isn’t much precedent under the state law — then the federal court may decline to hear the case on the premise that federal courts shouldn’t be issuing cutting-edge state law decisions."

Yet, in some areas of law, such as consumer fraud, class actions are virtually the only cases that produce reported decisions, Moss said.

If all of the decisions in an area of state law are issued by federal courts, that could stunt the development of that field of law, he said.

Procedural Requirements Differ

Although more class actions may go to federal court, fewer may survive there, according to Steve Meili, a clinical associate professor at the University of Wisconsin Law School and the director of its Consumer Law Litigation Clinic.

"Because of the heightened procedural requirements in federal court generally, it’s likely that more class actions will be dismissed for various reasons in federal court than is currently the case in state court," he said. "So it may be more difficult for consumers or other plaintiffs in class actions to obtain relief."

William P. Dixon, who represents class action plaintiffs in his practice as a partner at Miner, Barnhill & Galland PC, said that while the act will in most cases have little effect on class action practice in Wisconsin, it poses a danger to plaintiffs in consumer class action lawsuits.

Federal courts may refuse to hear removed consumer class action cases in which many different states’ laws must be applied, citing manageability problems, he said.

Under the act, such cases apparently wouldn’t be able to be returned to state courts, Dixon said.

Individual plaintiffs may not have any effective recourse in that situation, he said, because their claims could be too small to justify the costs of independent litigation.

"Consumers are at risk under this until it gets figured out by the courts," Dixon said, "because the courts know this isn’t going to work, and they’re going to have to be creative in how to deal with it."

Jurisdictional Jockeying Foreseen

But Josh Johanningmeier, a member of the litigation team at LaFollette Godfrey & Kahn, who primarily represents manufacturers, distributors and retailers and who, along with his firm, represents several class action defendants in cases pending in Wisconsin, said that while the act may result in fewer classes certified under the more rigorous federal rules, it is possible that plaintiffs’ attorneys will try to plead cases so that they cannot be removed to federal court.

The act contains provisions that either require or permit a court to decline jurisdiction under certain conditions, depending on what fraction of the members of all of the proposed plaintiff classes are citizens of the state in which the action was originally filed and various other factors.

Individual plaintiffs’ claims are unlikely to fall through the cracks under the terms of the act, Johanningmeier said.

"There will either be a class action in federal court under the new jurisdiction or there will be single-state class actions available to them," he said.

Meili said that the act is likely to significantly increase litigation about jurisdictional issues in class actions.

"One can easily foresee many battles about exactly what percentage of the putative class members are from the forum state," he said.

Forum Shopping a Concern

The act could help ensure that large numbers of claims are not as frequently litigated in state jurisdictions known as havens for class actions, Johanningmeier said.

"That type of forum shopping is going to be much tougher now, because you won’t b
e able to bring in 50,000 class members nationwide," he said.

There is a sense that certain "hot spots" are out of control, said Moss, who represented employees in individual and class litigation in practice prior to joining the faculty at Marquette.

"But I can name hot spots in the federal judiciary that are, in my view, absurdly anti-plaintiff," he said. "So it’s pick your poison."

Meili said that he believes that the new law will deter some meritorious class actions that otherwise might have been brought. As a result, he said, the act may impair one of the traditional strengths of state class actions: the deterrent effect that exists when companies know that if a class action is certified and it succeeds, they may have substantial exposure.

"If that deterrent is no longer present or is significantly weakened, I think it will certainly have an impact on their practices and how they deal with consumers and others who may be affected by their conduct," he said.

Speed at Issue

Class actions may proceed more slowly in federal courts because of clogged federal dockets, Dixon said.

"It takes much longer to get a lawsuit litigated usually in federal court, with the exception of [the Western District of Wisconsin], where they move things right along," he said.

Battles of attrition in litigation generally favor defendants, Moss said.

"The more litigation costs, and the longer it takes, the more plaintiffs will settle on the cheap," he said. "And defendants know that."

But Johanningmeier said that he believes that litigants in Wisconsin will see their cases handled very efficiently.

"I really think that federal courts around the country, and in particular here in Wisconsin, will handle this quite well," he said.

Settlements Scrutinized

Other provisions in the act, such as those that require notice of proposed class action settlements to certain government officials and which concern plaintiffs’ attorneys’ fees in cases involving coupon settlements, address problems that have not surfaced in Wisconsin courts, according to Dixon.

"Judges are honest in Wisconsin," he said. "Judges keep these cases under control.

"All settlements, even coupon settlements, have to be approved by a judge. That was the law before this bill, and it’s the law after this bill."

Likewise, a provision that governs approval of proposed settlements under which class members would sustain net monetary losses after paying attorneys’ fees mirrors existing law, Moss said, because judges already have to scrutinize any class settlement to make sure that it is fair to class members.

"On the one hand, this only requires courts to scrutinize settlements they already had to scrutinize," he said. "On the other hand, I imagine judges scrutinizing settlements will keep in mind that this is an expression of Congress’ intent that they apply a more searching scrutiny to certain kinds of settlements, like ones that cost the class members money or that involve coupons."