This article originally appeared in the January 2013 Business Litigation Committee newsletter.
In most any sport, the hometown favorite enjoys an ,edge over the visiting team invited to compete in hostile territory. But, in the bloodsport known as class action litigation, this home turf advantage often assures plaintiffs' attorneys will exploit state procedural rules to land blows against defendants in the form of unreasonable discovery orders, ex parte certification of classes, and massive settlements. The Class Action Fairness Act of 2005 (CAFA) promised to level the playing field in large class actions by broadening federal jurisdiction. But plaintiffs' attorneys have managed to evade CAFA and keep large class actions that affect the national economy in state courts where procedural rules provide fewer protections to defendants than federal courts, (1) thereby enabling plaintiffs to force defendants to settle often meritless claims for millions of dollars. Like a skilled running back on a toss sweep, plaintiffs have successfully run around federal jurisdiction in many class actions by purporting to limit the amount that they will seek on behalf of putative classes to less than the federal jurisdictional minimum. With its recent grant of certiorari in Standard Fire Insurance Co. v. Knowles, (2) the Supreme Court is now poised to end these efforts that undermine CAFA.
I. Hostile Environment: The Playing Field Pre-CAFA
Congress enacted CAFA to correct a jurisdictional anomaly that prevented removal of large class actions from state jurisdictions whose laws offer fewer protections to defendants and unnamed members of putative classes than the federal forum. Congress found that despite their effect on the national economy and the massive sums involved, class actions were generally "adjudicated in state courts, where the governing rules are applied inconsistently (frequently in a manner that contravenes basic fairness and due process considerations)." (3) Plaintiffs' attorneys became infamous for seeking "drive-by" certifications whereby ex parte certification orders were issued on the same day or shortly after the filing of the class action complaint. (4) Often defendants were simultaneously served with the class action complaint and the class certification order. Not surprisingly, class action filings became concentrated in a few plaintiff-friendly venues. For example, over a two-year period, one Alabama state court certified 35 class actions while all federal district courts combined certified only 38 class actions. (5) In Madison County, Illinois, plaintiffs' attorneys filed over 100 class actions in 2003 alone. (6)
Plaintiffs' attorneys ran up the score against defendants. As one example, a small group of plaintiffs' attorneys obtained settlements worth between $3.39 and $3.83 billion, and received over $420 million in fees from those settlements, in nineteen class actions filed in Arkansas state courts soon before the enactment of CAFA. (7) These settlement values say nothing about the strength of the claims asserted; because the exposure in class actions is often sufficient to bankrupt defendants, defendants were faced with an unenviable choice after certification: settle meritless claims for large sums or risk trial. (8) Plaintiffs' attorneys also forced defendants to spend millions of dollars in complying with massive discovery requests. (9) A defendant in an Arkansas class action, for instance, estimated that compliance with a discovery request that it ultimately had to satisfy would cost $45 million. (10) Nor would class members necessarily benefit from large class action settlements, as individual class members were often left with a release of their claims in exchange for a tiny share of a settlement that may have had little value after accounting for attorney fees and costs. (11) Plaintiffs' attorneys kept large class actions out of federal court because complete diversity of citizenship was often lacking or no individual plaintiff had a claim worth more than $75,000. …