A second, more detailed look at the new class action law

My previous post on the Class Action Fairness Act of 2005 was an initial discussion of the jurisdictional elements of the new law. This post will continue that discussion. If you want to download the entire Act, go to the previous post and follow the instructions therein.

Some basic concepts

For all the non-lawyers and non-Political Science majors, a discussion of some basic concepts is in order. This post discusses jurisdiction. There are many different types of jurisdiction, many of which will not be discussed here. From the legal dictionary at FindLaw.com, here is the general definition of "jurisdiction:" "the power, right, or authority to interpret, apply, and declare the law (as by rendering a decision)." All the types of jurisdiction discussed below share this basic definition.

• Subject matter jurisdiction
  

For purposes of this discussion, the basic type of jurisdiction is "subject matter jurisdiction, the following definition for which can be found at the link above: "the jurisdiction of a court over the subject, type, or cause of action of a case that allows the court to issue a binding judgment." In other words, a court can hear and rule on only those cases which are within its subject matter jurisdiction. The FindLaw.com dictionary goes on to note that "Subject matter jurisdiction is generally established by statute." While this statement suffices for the purposes of this discussion, I would also add that constitutional provisions can also define subject matter jurisdiction.

Stated differently, the types of cases that a court can hear and rule upon are defined by its subject matter jurisdiction, which in turn is defined by statutes.

FindLaw.com also points out that "Diversity jurisdiction, federal question jurisdiction, and jurisdiction over admiralty and bankruptcy cases are examples of the federal courts' subject matter jurisdiction." For reasons that will be explained, the new law effects changes in the law on diversity jurisdiction.

• Federal question jurisdiction

Title 28, Part IV, Chapter 85 of the United States Code (the federal statutes) defines the jurisdiction of the federal District Courts. 28 U.S.C. § 1331 is entitled "Federal question" and says "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." FindLaw.com provides some explanation of this statute:

The federal courts have usually interpreted the statutory phrase "arising under'' rather strictly. U.S. Supreme Court decisions have held that the plaintiff's pleading must establish that the cause of action raises an issue of federal law (as by depending on construction or application of a federal law).

In the Supreme Court case of Gully v. First Nat'l. Bank, 299 U.S. 109 (1936), Justice Benjamin Cardozo said that federal question jurisdiction "requires that a right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action...The right or immunity must be such that it will be supported if the Constitution or laws of the United States are given one construction or effect, and defeated if they receive another."

• Exclusive jurisdiction
  

Jurisdiction is exclusive if it is "granted only to a particular court to the exclusion of others." (from FindLaw.com). In other words, if a statute says a given court has jurisdiction over a certain type of case, no other court can hear such a case. A good example is bankruptcy. Pursuant to 28 U.S.C. § 1334(a) and (b), only federal courts have jurisdiction over bankruptcy cases, meaning that state courts cannot hear bankruptcy cases.

• Diversity jurisdiction

28 U.S.C. § 1332(a) defines the basics of federal diversity jurisdiction:

The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—
(1) citizens of different States;
(2) citizens of a State and citizens or subjects of a foreign state;
(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and
(4) a foreign state, defined in section 1603 (a) of this title, as plaintiff and citizens of a State or of different States.

And now for some translation...In basic terms, the "amount in cotroversy" is the amount of damages being sought. For instance, if a plaintiff is seeking to recover $100,000, the amount in controversy is $100,000. Subsections (1)-(4) define what is known as diversity of citizenship, but the vast majority of diversity cases involve subsection involve subsection (1). What this provision means is that in order for diversity jurisdiction to exist, no plaintiff can be a citizen of the same state as any defendant (known as complete diversity of parties). For instance, if a plaintiff is from Texas, and the defendant is from Oklahoma, there is diversity of citizenship. However, if two plaintiffs from Texas are suing two defendants, one of which is also from Texas, there is no diversity of citizenship. This rule applies regardless of the number of parties to a suit. If there are 100 plaintiffs and 100 defendants, in order for there to be diversity jurisdiction, not one plaintiff can live in the same state as even one defendant--at least up until now. As we will see, the Class Action Fairness Act of 2005 changes that somewhat.

And there is one more basic concept to discuss...

• Removal

28 U.S.C. § 1441(a) allows for cases originally filed in state court to be transferred to federal court through a process known as "removal."

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending...

What this means is that if a case 1) is originally filed in state court, and 2) contains a federal question or has complete diversity of citizenship (or any other basis for federal jurisdiction), a defendant can have the case "removed" (that is, transferred) to federal court.

Once a defendant starts the procedure for removal (see 28 U.S.C. § 1446 for the procedure), there is almost nothing a plaintiff can do to keep the case from going to federal court. Once the case is in federal court, the plaintiff can seek to have the cse sent back to state court through a motion for remand (see 28 U.S.C. § 1447).

The basic changes to federal subject matter jurisdiction pursuant to the Class Action Fairness Act of 2005

Before I read the actual legislation, I was getting my information through media reports. What I heard and read was that the Act would give federal courts exclusive jurisdiction of all class actions except for those where the class members were all in one state. That turned out to be inaccurate, as will be shown. Also, the Act does not make jurisdiction in federal court an absolute, mandatory matter, for there are provisions by which a federal judge can decline jurisdiction over a given class action. There are also provisions which say when a federal must decline jurisdiction.

So, on the one hand, the Class Action Fairness Act of 2005 does not on the surface appear to change jurisdiction over class actions to a great degree. On the other hand, there are the matters mentioned in my previous post.

As I mentioned above, as far as subject matter jurisdiction goes, the Act only expressly changes diversity jurisdiction. Former subsection (d) of 28 U.S.C. § 1441 is now subsection (e), and the Act created a new subsection (d). The basic changes appear in what is now subsection (d)(2):

The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs, and is a class action in which--

(A) any member of a class of plaintiffs is a citizen of a State different from any defendant;

(B) any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or

(C) any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.

Notice that this provision raises the amount in controversy from $75,000 to $5 million. Thus, a multi-state class action does not automatically come withing federal jurisdiction. It has to meet a minimum amout in controversy of $5 million.

Also, notice that for class actions, the requirement of complete diversity does not apply. Under the new law, as long as long as only one member of the plaintiff class is from a different state from only one of the defendants, there is diversity.

This does present a significant change in the law which goes beyond diversity jurisdiction. Before now, any class action in federal court had to have some statutory basis for federal subject matter jurisdiction other than the fact that it was a class action. New § 1332(d)(2) essentially removes that requirement for many class actions.

If the new contained nothing more than new subsection (d)(2), the Class Action Fairness Act of 2005 would be anything but fair. However, there are also some limiting factors in the Act.

Limiting factors

As I said, the impressions left by most of the media coverage were inaccurate. If indeed the Act had given exclusive jurisdiction over most class actions, th Act would have been an abject disaster in my opinion. Such a law would forced federal courts to take on a huge amount of cases and additional work, and the concerns I expressed in my previous post would have manifested to the maximum. However, there are some provisions which--in some ways--will limit the effects of the new law.

• Subsection (d)(3)

This provision allows federal judges to decline to assert jurisdiction over some class actions under a three-part test. The first part is satisfied when the case is first filed is state court. The second part is satisfied when the suit is "a class action in which greater than one-third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed based." For the third part, the federal judge must determine whether "in the interests of justice and looking at the totality of the circumstances," the case should remain in state court. The factors the judge must consider are as follows:

(A) whether the claims asserted involve matters of national or interstate interest;

(B) whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States;

(C) whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction;

(D) whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants;

(E) whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and

(F) whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

Thus, there is a way that federal judges can keep some class action suits out of federal court. Given the concerns over logistics that I discussed in my previous post, I think there is a good chance federal judges will take advantage of this, and that would in turn reduce my concerns about this new law. However, that depends in large part on how the Circuit Courts of Appeal will treat such actions, and that will be covered later in a separate post.

Also, notice that while the factors the judge must consider might seem on the surface to be clear and straightforward, they nonetheless contain ambiguity. Such ambiguity and its potential impact are discussed in connection with Subsection (d)(4).

• Subsection (d)(4)

While (d)(3) is somewhat discretionary, (d)(4) sets out cases over which a federal judge shall decline jurisdiction:

A district court shall decline to exercise jurisdiction under paragraph (2)--

(A)(i) over a class action in which--

(I) greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed;

(II) at least 1 defendant is a defendant--

(aa) from whom significant relief is sought by members of the plaintiff class;
(bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and
(cc) who is a citizen of the State in which the action was originally filed; and

(III) principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed; and

(ii) during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons; or

(B) two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.

(emphasis added). Subsection (d)(4) seems pretty straightforward. It seems like it is a way to keep class actions out of federal courts. However, the italicized sentence indicates something else to me. "Same or similar factual allegations" is vague and can be interpreted to mean many different things. Also "on behalf of the same or other persons" is also vague. If the sentence said on "same factual allegations" and "same persons," there would be no such ambiguity.

Let me explain why the ambiguity is a potential problem. The sentence seems to establish a rule, but the vague language has the potential of creating an exception that could swallow the rule. This would happen over time. Things like this start small and slow, and the process involves many seemingly unrelated steps. See, the vague language could be interpreted to mean one thing one time and something else another time. This is precisely what the Texas Supreme Court has been doing for over 10 years. Decisions are written with broad, vague language, and then the Supremes (and other Texas courts) use that language to justify whatever result they want to reach rather than determining the case by what the law says. To put it in terms that all you wingers can understand, vague language like this enables judges to be "activist judges" rather than judges that apply the law. The chances of this happening in the federal courts is not as great as in state courts. Indeed, right now, I feel that the chances of such conduct in the federal courts is small. However, with Bush having almost four more years to appoint federal judges, the chances could increase. After all, Bush was Governor of Texas when the process really got cranked up in Texas.

Now go back and review the factors the judge must consider under Subsection (d)(3) and see what you think.

Also, how the Circuit Courts of Appeal treat these matters will have a big impact, and, once again, that will be discussed later.

• Subsection (d)(5)

Under this provision, a federal court will not have jurisdiction over a class action if

(A) the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief; or

(B) the number of members of all proposed plaintiff classes in the aggregate is less than 100.

So, if the primary defendants are States or state officials, there will be no jurisdiction. Also, if the total number of plaintiff class members is less than 100, there will be no federal jurisdiction.

As a practical matter, these provisions are not particularly significant. Any suits against States or state officials will be subject to sovereign or official immunity, which means that those parties cannot be sued unless 1) the State gives permission to be sued; 2) there is a statute which specifically allows such a suit; or 3) the state official violates very specific provisions either established by a consitution, statute, or judicial precedent. In Texas, the Texas Supreme Court has seen to it that it is almost impossible to bring any such suit. Also, many States have statutes placing strict limits on how much money can be recovered in such suits, meaning that such suits might not be able to reach the $5 million requirement.

As for the class size being less than 100, most class actions have plaintiff classes far in excess of 100. Indeed, for a group of less than 100, class certification is not generally sought.

• Subsection (d)(9)

Under this provision, there will be no federal jurisdiction for class actions in which the claims solely involve 1) enumerated provisions under the federal securities acts, or 2) "relates to the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized."

• Summary

There are some express limitations to this new form of subject matter jurisdiction, and that is good. The federal courts will have some flexibility and might be able to keep their dockets from being overburdened by class action lawsuits. However, some of those limitations are vague, and others really have no practical effect. The best case scenario is that the federal courts will apply these limitations uniformly and fairly. But even in the best case scenario, federal courts will be required to hear cases that before now they did not, and they will have to devote time and resources to determining whether any of the above limitations exist. Thus, the federal courts will face increased burdens as discussed in my previous post. In other words, the Class Action Fairness Act of 2005 is going to increase--not decrease--litigation in the federal courts for the next few years.

Moreover, the limitations described above will themselves be limited by the Act's new provisions regarding removal and a provision that will automatically convert some cases that were not filed as class actions into class actions which can then be removed to federal court. That will be discussed in a subsequent post.

Ain't law just a barrel of laughs?