Putting Preemption into Class Action Mix?: Bill on Notification, Court Jurisdiction Close to Enactment

By Davenport, Todd | American Banker, February 17, 2005 | Go to article overview

Putting Preemption into Class Action Mix?: Bill on Notification, Court Jurisdiction Close to Enactment


Davenport, Todd, American Banker


WASHINGTON -- New limits on class actions, long on the financial services industry's wish list, are just a couple of quick steps away from reality.

A curious provision specific to depository institutions may give them even broader protection.

The legislation would require most corporate defendants to notify the Justice Department and the attorneys general in the states relevant to a class action before settling it. That notification would include a copy of the suit and materials filed with it, the proposed settlement, and a list of class members.

The requirement, advanced by Sen. Herb Kohl, D-Wis., is designed to provide another layer of review for the settlements -- particularly to deter ones in which most of the money would go to the class counsel rather than the class members.

But banking industry lobbyists fought successfully to let depository institutions make the notification to their primary federal regulator instead. Because judges would not be able to approve settlements until 90 days after notification, regulators would have plenty of time to argue against proposals it considered inadvisable for supervised institutions -- or register its own legal objections.

"The government asserts fairly broad preemption defenses, but they have tried to avoid doing this in private litigation," said David Vladeck, a professor at Georgetown University Law Center, who has litigated class actions on behalf of consumers. "One of the reasons the industry would favor an approach like this is that they assume the government may come in some of these cases and say, 'No, this action in its entirety is preempted,' or at least, 'These remedies are preempted.' Preemption, I think, is going to loom large in a lot of these cases."

Regulators said they were not involved in crafting the provision, and they generally expressed little interest in it.

The House is expected to pass a Senate-approved version of the Class Action Fairness Act as early as today. The House vote would clear the way for the bill to be signed by President Bush early next month.

Both sides agree that the legislation would achieve its chief goal: pushing class actions from state to federal courts, which in the past have not been as inclined as state courts to certify classes.

Proponents of the legislation claim it would eliminate spurious claims that are brought in state and municipal courts known for their willingness to certify class actions against corporations. Detractors of the legislation say it would compromise consumers' rights and reduce businesses' accountability for the damage they cause.

"Class actions provide citizen access in a range of circumstances in which the economics of litigation simply don't provide one-on-one citizen access," said Arthur Miller, a professor at Harvard Law School. "Is that outweighed by the burden on the business community? Well, that's just a fistfight -- a philosophical chasm."

The banking industry threw plenty of lobbying muscle into getting a bill passed. A report last year by Public Citizen, a consumer advocacy organization that fought against the bill, claimed that only the insurance industry devoted more lobbyists to pushing the bill than banks.

Andrew Sandler, a lawyer who represents banks at Skadden, Arps, Slate, Meagher & Flom LLP, said, "Because the class-action vehicle is being used so frequently against financial services companies, and the abuses in the state court systems are so heavily focused on litigation against financial services companies, banks and other financial services companies will be a principal beneficiary of this reform."

The legislation would generally grant federal jurisdiction to any class action in which the claims exceed $5 million and the plaintiffs come from more than one state. …

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