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The Employment Law Alert is one of many Orrick publications designed to provide our clients and contacts with information they can use to more effectively manage their businesses and access Orrick's expertise. Please contact Lori Soldinger for information on our other publications. You are receiving this communication because we
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February 2005THE CLASS ACTION FAIRNESS ACT OF 2005: WHAT EFFECT ON EMPLOYMENT LITIGATION?On February 18, 2005, President George Bush signed the Class Action Fairness Act, Senate Bill 5 (S.5) (the "Act"), into law. The Act is a firm step forward in reducing the impact of frivolous class action lawsuits on businesses and employers. In sum, the Act grants federal court jurisdiction for many class actions formerly filed in state court, as long as any diversity of citizenship exists between any plaintiff and any defendant and over $5 million is at stake. It also enacts other reforms intended to curb class actions viewed by Congress as abusive to business interests. Although aimed primarily at so-called "coupon" settlements, consumer class action forum shopping and other practices viewed as abusive by Congress, the bill will unquestionably impact employment class actions as well. In fact, some civil rights proponents argued during floor debate that wage and hour and civil rights class actions should be excluded from the Act, but an amendment specifically aimed at excluding them from the bill's reach was not included within the final text. Thus, the Act does affect employment litigation, but the ultimate impact remains to be seen. With respect to employment discrimination class actions, the impact may be minimal (since relatively few such discrimination class actions tend to be filed in state court), but the Act may have a bigger impact on Fair Labor Standards Act ("FLSA") wage and hour class actions and on other "class-action like" claims filed as collective claims. With respect to FLSA litigation, the Act will immediately impact the practice of filing an "opt-in" collective action under the FLSA together with an "opt-out" class action under state law. In most cases, the Act would require both these suits to now be filed in federal court. Of perhaps even greater interest is some rather ambiguous language in the Act regarding "mass actions" which could conceivably result in federal court jurisdiction over other types of collective actions typically brought under state statutes that permit such actions without the formal requisites attendant to a class action. Here are some specifics on the new law: The Purpose and Intent of the Law: Supporters of the law argued that class actions involving plaintiffs and defendants in several states were frequently filed in state (instead of federal) court in jurisdictions believed likely to award large settlements against out-of-state defendants. The stated purpose of the Act, as passed by Congress and signed by the President, is to curb abusive class actions such as those in which: 1) class counsel receive large fee awards while class members receive little or no benefit, such as coupons or other awards of little or no value; 2) unjustified awards are made to certain plaintiffs at the expense of other class members; or 3) confusing notices are published that prevent class members from being able to fully understand and effectively exercise their rights.Basis For Federal Court Jurisdiction: The
Act grants original and removal federal court jurisdiction to class
actions seeking over $5 million dollars in damages, as long as diversity
of citizenship exists between any member of the plaintiff class - whether
a named plaintiff or not - and any defendant. Previously, removal on diversity
of citizenship grounds was not possible if any member of the purported
class was a resident of the same state as any defendant; the so-called
"complete diversity" requirement.
By elimination of the "complete diversity" requirement, virtually
any class action with simple diversity may now be removed to federal
court, as long as the "amount in controversy" requirement of $5 million
dollars is met. The claims of
each individual class member are aggregated for purposes of determining
whether the requisite $5 million (exclusive of interest and costs) is in
controversy.
Under certain circumstances, the Act permits district courts to decline to exercise jurisdiction over class actions where between one-third and two-thirds of the members of all proposed plaintiffs (and the primary defendants) are all citizens of the state in which the action was originally filed. A district court must decline jurisdiction over such a class action, however, if greater than two-thirds of the members of all proposed plaintiff classes are citizens of the State in which the action was originally filed, together with one defendant from whom significant relief is sought, and if certain other conditions are met. What Is A Covered "Class Action": Class
actions affected by the Act are defined as "any civil action filed in a
district court of the United States under rule 23 of the Federal Rules of
Civil Procedure or any civil action that is removed to a district court of
the United States that was originally filed under a State statute or rule
of judicial procedure authorizing an action to be brought by 1 or more
representatives as a class action."
"Mass Action": The Act also includes within its scope a "mass action," which is defined as a civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs' claims involve common questions of law or fact, except that jurisdiction exists only over those plaintiffs whose claims otherwise meet the jurisdictional amount in controversy requirements. However, the new "mass action" definition excludes civil actions: (1) in which all of the claims in the action arise from an event or occurrence in the state in which the action was filed, that allegedly resulted in injuries in that state or in contiguous states, or; (2) where all of the claims in the action are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to a state statute specifically authorizing such actions, or; (3) where the claims have been consolidated or coordinated solely for pretrial proceedings.These definitions are somewhat ambiguous and are sure to spark litigation over their meaning and intended scope. Although it could be argued that the provisions were intended to cover "mass torts," discussion of the bill on the floor indicated that it was actually intended to address any lawsuit in which a large number of plaintiffs seek to have all their claims adjudicated in one combined trial. "Coupon" Settlements and Attorneys' Fees: Although
this provision will not relate to most employment and wage and hour class
actions, the Act does take a broad swing at these kinds of
settlements. As mentioned
above, class action critics challenged abusive practices in which class
counsel obtained large attorneys' fees awards while obtaining minimal
class relief, such as "coupons" of negligible value, for class
members. In addition to
providing procedures for court approval of such settlements, the Act
provides that, in a coupon settlement, the portion of any attorneys fees
attributable to the coupons must be based on the value of the coupons
redeemed. Otherwise, the
attorneys' fees must be based on hours reasonably expended.
Geographic Discrimination:
The
Act provides that courts may not approve a proposed settlement that
provides for the payment of greater sums to some class members than to
others solely on the basis that the class members to whom the greater sums
are to be paid are located in closer geographic proximity to the court.
Summary: Although
the applicability of the Act to many of the types of collective actions
frequently asserted in employment cases is presently unclear, the Act, at
minimum, provides defendants with another weapon with which to respond to
a state court class action.
By permitting removal of many of these actions to federal courts,
the number of such cases filed or certified will most likely be reduced in
the long run. More
importantly, the incentive for trial lawyers to target businesses with
lawsuits - filed in hand-picked courts - in the hope of a windfall
verdict, will be minimized.
For more information about these new developments in employment law, please contact any of Orrick, Herrington & Sutcliffe LLP's employment law partners listed below. Michael Delikat (New York) 212-506-5230 D. Barclay Edmundson (Los Angeles) 213-612-2397 Lynne C. Hermle (Silicon Valley) 650-614-7422 Mark Howitson (Silicon Valley) 650-614-7643 Timothy J. Long (Sacramento) 916-329-7919 /(Los Angeles) 213.612.2404 Jill L. Rosenberg (New York) 212-506-5215 Ira Rosenstein (New York) 212-506-5228 Robert S. Shwarts (San Francisco) 415-773-5760 Gary R. Siniscalco (San Francisco) 415-773-5833 Julie A. Totten (Sacramento) 916-329-4908 Robert S.
Whitman (New York) 212-506-5257
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