Download House committee approves legislation to reform class action and

March 20, 2017
House committee approves legislation to reform
class action and multi-district litigation
By Dale A. Hudson, Mae K. Hau
In February of this year, the House Judiciary Committee approved the Fairness in Class Action
Litigation Act of 2017 (FCALA), which would enact wide-ranging changes to the rules governing
class and multi-district litigation. The sponsors of the bill state that the purpose of FCALA is to
“assure fair, more efficient outcomes for claimants and defendants.” While no one would quarrel
with the stated goal of the legislation, many of the specific provisions of the legislation are
controversial.
FCALA consists of a hodgepodge of new procedural rules. Some of the proposed rule changes
would undoubtedly have significant impact on class litigation. Other provisions, such as the
disclosure requirements, will likely have little if any practical impact.
FCALA would prohibit a court from certifying a class seeking monetary relief unless the plaintiff
demonstrates that each proposed class member suffered the “same type and scope of injury.” The
court would have to make a specific finding after “a rigorous analysis of the evidence presented.” As
a practical matter, it is unclear how this restriction would play out in litigation. For example, it is
unclear what would happen in a scenario where all class members suffered an injury from sideeffects of a prescription drug, but the types or severity of the reactions varied. The courts would be
required to sort this out.
FCALA would prohibit a court from certifying a class seeking monetary relief unless the class can
be defined by “objective criteria” and there is a reliable and administratively feasible mechanism (a)
for the court to determine whether putative class members fall within the class definition and (b)
for distributing the recovery directly to a substantial majority of class members.
One of the more controversial provisions of FCALA would prohibit anyone with a current or past
relationship with class counsel from serving as a class representative. This would include all
relatives of class counsel, all current or former employees of class counsel and all current or former
clients of class counsel. The prohibition on employees and relatives serving as class representatives
is presumably intended to reign in “attorney-driven” litigation. However, the proposed prohibition
on current or former clients of class counsel serving as a class representative is extremely broad. For
example, it could make it difficult for pension funds to find attorneys to bring class action lawsuits
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for securities law violations, since they would effectively be prohibited from using the same law
firm more than once. If this provision is not eliminated or at least watered down in the course of
the legislative process, it will likely face serious constitutional challenges.
FCALA would require that any proposed class representative disclose if he or she has previously
served as a class representative in a prior lawsuit. In addition, class counsel would be required to
disclose if any entity is helping to fund the litigation in exchange for a contingent recovery.
FCALA would limit attorney’s fees awarded to class counsel to “a reasonable percentage of any
payments directly distributed to . . . class members.” This is a change from current law, which
generally calculates fees as a percentage of the gross recovery (including attorney’s fees). This rule
change would discourage so-called “reversionary settlements,” whereby amounts not claimed by
class members revert to the defendant, while class counsel nonetheless seeks fees based on the
amount of the potential maximum payment. In furtherance of this goal, the legislation would also
provide that attorney’s fees could not be determined or paid until payments to the class have been
completed. However, the rule delaying payment of attorney’s fees would apply to all class action
lawsuits, even where no reversionary component is present. The reason for this proposed delay is
unclear.
Where a class lawsuit obtains equitable relief (such as an injunction restricting future conduct),
attorney’s fees would be limited to a “reasonable percentage of the value of the equitable relief.” The
legislation provides no guidance as to how this would be determined. Class counsel might be
required to present expert testimony as to the monetary value of non-monetary relief.
FCALA would also provide that all orders granting or denying class certification are immediately
appealable. This is a departure from current procedure, where an appeal must wait until proceedings
at the trial court have concluded, unless the court of appeal exercises its discretion to allow an
immediate appeal. If this reform is enacted, one would expect that defendants would routinely
appeal any orders granting class certification; this would typically delay proceedings at the trial
court level for a year or more. FCALA would further provide that all proceedings are stayed once a
defendant brings a motion to strike class allegations, a motion to dismiss or a motion to transfer.
Finally, FCALA would require class counsel to prepare an accounting of monies paid incident to any
recovery, with details such as the number of class members who received payments, the average
amount of such payments and the amounts paid to others, such as class counsel. The accounting
would be provided to federal agencies that oversee the federal courts, which in turn would issue an
annual report summarizing how funds paid by defendants in class action lawsuits had been
distributed.
Although the impact of this legislation on class litigation would undoubtedly be significant, it
should be emphasized that the legislation would have no impact on the vast majority of class action
lawsuits, which are filed in state courts. In fact, FCALA might encourage attorneys to file even
more class actions in state court, in order to avoid the restrictive rules of FCALA.
As with changes to rules governing class action litigation, FCALA would also amend certain rules
applicable to cases that become part of multi-district litigation (MDL). The bill would require a
plaintiff in a personal injury action to submit evidence of their injury within 45 days of their case
being transferred to the multi-district proceeding. Such evidentiary support would include medical
records regarding the alleged injury, evidence of exposure to the risk that allegedly caused the
injury and evidence of the alleged cause of the injury. Where the judge finds that such evidentiary
support is insufficient, the action is to be dismissed without prejudice. The plaintiff would then
have 30 days to tender a sufficient submission and, if he or she fails to do so, the action would be
dismissed with prejudice. These changes are intended to ferret out cases where the harm to plaintiff
is minimal or not supported by documentary evidence.
In addition, FCALA would limit MDLs to pretrial proceedings, and would prohibit the use of MDL
procedures for any trial “unless all parties to the civil action consent to trial of the specific case
sought to be tried.” FCALA would also require that plaintiffs in an MDL proceeding receive 80
percent of any recovery, whether obtained by settlement, judgment or otherwise. This would
effectively limit attorneys’ fees to 20 percent of the total recovery. This is a significant departure
from present arrangements for plaintiff’s attorneys, who often charge a contingency fee between
25 percent and 40 percent of the total recovery.
Finally, FCALA would alter the rules regarding diversity of citizenship in personal injury and
wrongful death claims. Under current law, federal courts have jurisdiction over cases in which the
diversity of citizenship among the parties is complete, i.e., only if there is no plaintiff and no
defendant who are citizens of the same state. FCALA would require federal courts to consider each
plaintiff’s claims separately, and to sever those claims that do not satisfy the diversity of citizenship
requirement. To illustrate the effect of this provision, consider a products liability lawsuit involving
ten plaintiffs, one of whom is a citizen of the same state as the defendant. Under current law, a
federal court would be required to remand the case to state court because complete diversity
between the plaintiffs and defendant is lacking. However, the new FCALA provision would require
the court to sever the claim of the plaintiff who is a co-citizen of the defendant, and to retain
jurisdiction over the remaining nine plaintiffs’ claims, as complete diversity would exist after
severance. This is intended to combat the practice of joining at least one non-diverse plaintiff in a
lawsuit to order to avoid removal to federal court.
FCALA was passed without any hearings (although hearings were held on similar legislation that
had been proposed in the last Congress). FCALA now goes to the full House, which is expected to
approve the legislation along a largely party-line vote. The legislation’s fate in the Senate remains
unclear; one unknown is whether Senate Democrats would launch a filibuster in an effort to stop
the legislation. It seems likely, at a minimum, that the Senate will amend some of the more
controversial provisions before passing the bill. President Trump would be expected to sign any bill
that Congress would place on his desk.
For more information on the content of this alert, please contact your Nixon Peabody attorney or:
— Dale A. Hudson at [email protected] or 213-629-6015
— Mae K. Hau at [email protected] or 213-629-6125