The Class Action Fairness Act of 2005
In February 2005, the Class Action Fairness Act became law. The Class Action Fairness Act, or CAFA, sought to significant changes to the way in which class action lawsuits are litigated in the United States. Primarily, CAFA expanded federal jurisdiction and created new settlement requirements for class action suits.
Expansion of Federal Jurisdiction
Before CAFA was passed, federal courts had jurisdiction over class action cases if:
· The case was a matter of federal law and would have been decided in federal court even if it had not been a class action;
· The class representatives and the defendants were citizens of different countries; or
· Every single class member met the minimum amount in controversy amount.
Pursuant to CAFA, federal courts now also have jurisdiction over class actions if:
· A case has more than 100 class members, if at least one class member has a citizenship different than at least one defendant; or
· The amount in controversy totals $5 million or more.
CAFA is meant to make it easier to get to federal court, where it is believed there will be greater uniformity among decisions – a move that was well favored by big companies and common defendants in class action lawsuits.
CAFA, therefore, expands federal jurisdiction to include the cases which were under federal jurisdiction prior to 2005, and the expanded jurisdiction established in CAFA. Furthermore, CAFA makes it easier for a defendant to remove a case to federal court by ending some of the limitations on removal that used to exist.
Exceptions to Expanded Federal Jurisdiction
While generally, CAFA expands federal jurisdiction, the law recognizes that there are some situations where state courts are the more appropriate venue for class action cases. Specific exceptions to federal jurisdiction include:
· Cases where more than two thirds of the class members are from one state and a significant defendant is from that state, the injuries happened in that state, or there has been no class action suit filed on the issue within the previous 3 years;
· When a federal court decides that a state court is more appropriate and 1/3 -2/3 of the class members are from one state and the primary defendants are from the same state; and
· Corporate cases that primarily deal with securities issues, governance of a corporation or fiduciary duties.
New Settlement Rules
When class action lawsuits eventually settle, class members are often left with a coupon to cash in for future goods or services from the defendant. Lawmakers were concerned about how a coupon to the company that caused the class members’ harm actually compensated class members for their injuries. CAFA now requires that judges who accept “coupon settlements” issue written findings explaining that the settlement is fair, adequate and reasonable. Additionally, CAFA bases attorney’s fees on the amount of coupons that are actually redeemed which is often much lower than the coupons available.
Other new settlement rules include that:
- Settlement agreements can’t result in a net financial loss to a class member unless the court makes a written finding that the nonfinancial compensation outweighed the loss; and
- Settlements cannot give extra money to in state or local class members.
In order to promote fair settlements, CAFA now requires that government officials be notified of pending class action settlements and be provided time to comment on such settlements.
CAFA was designed to make class action lawsuits fairer for both class members and defendants. Although it has been more than five years since the law was adopted, class action lawsuits are still beginning to work their way through the system pursuant to the new guidelines and it is still too early to determine whether the changes significantly benefit either side of class action lawsuits.
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