Class Actions and Proposed Reform in the 107th Congress: Class Action Fairness Act of 2002

Class Actions and Proposed Reform in the 107th Congress: Class Action Fairness Act of 2002

Order Code RL31506
Report for Congress
Received through the CRS Web
Class Actions and Proposed Reform in the 107th
Congress: Class Action Fairness Act of 2002
July 20, 2002
Paul Starett Wallace, Jr.
Specialist in American Public Law
American Law Division
Congressional Research Service ˜ The Library of Congress

Class Actions and Proposed Reform in the 107th
Congress: Class Action Fairness Act of 2002
Summary
On March 13, 2002, the Class Action Fairness Act of 2002 (H.R. 2341) passed
the House by a vote of 233-190. Similar legislation is pending in the Senate (S.
1712). Both bills allow defendants to move certain class action cases from state to
federal court on diversity grounds (plaintiffs from different states than defendants)
even in the absence of the complete diversity. Proponents contend that existing law
permits unfair forum shopping for friendly state courts. Opponents argue that the
change works to the disadvantage of consumers. Both bills afford consumers and
other class action plaintiffs greater protection which includes: (1) notices to class
members in “Plain English,” (2) judicial scrutiny of settlements in which class
members receive minimal benefits or actually incur losses, (3) elimination of
inequitable discrimination in favor of class agents at the expense of other class
members, (4) prompt consideration of interstate class actions, and (5) application of
the principles of federal diversity jurisdiction to interstate class actions.
H.R. 2341 requires (1) plaintiffs’ attorneys to disclose their fees in any class
action settlement or final judgment favoring plaintiffs; (2) prevents judges from
sealing records in class action settlements except for orders consistent with the public
interest and narrowly drawn; (3) directs the Judicial Conference to study ways to
improve class action attorney’s fee arrangements; and (4) authorizes pre-trial appeals
of district court decisions to grant or deny certification to a class. S. 1712 insists on
none of these things, but unlike H.R. 2341, it does postpone the effective date of any
class action settlement until 90 days after federal and state authorities have been
notified of its provisions.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1. Short Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2. Findings And Purposes Of The Act . . . . . . . . . . . . . . . . . . . 2
Section 3. Consumer Class Action Bill Of Rights And Improved
Procedures For Interstate Class Actions . . . . . . . . . . . . . . . . . . . . 2
Section 4. Federal District Court Jurisdiction Of Interstate Class
Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Removal Of Interstate Class Actions To Federal District
Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Appeals Of Class Action Certification Orders (H.R. 2341
only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 7 (H.R. 2341) [Section 6 in S. 1712]. Report on class action
settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 8 (H.R. 2341) [Section 7 in S. 1712]. Effective date . . . . . . . . 6
Possible Objections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Class Actions and Proposed Reform in the
107th Congress: Class Action Fairness Act
of 2002
Background
In 2001, the House and Senate reintroduced the Class Action Fairness Act after
the previous legislation had withered in the Senate.1 Each bill–H.R. 2341, the House
companion bill to S. 1712–has three main sections: (1) an amendment to the federal
diversity statute, 28 U.S.C. § 1332;2 (2) a provision regarding removal;3 and (3) a
consumer class action “bill of rights.”4
1See CRS Report RS20667, Class Actions and Proposed Reform in 106th Congress: Class
Action Fairness Act of 2000 and CRS Report RS20347, Class Actions: H.R. 1875, 106th
Congress, the “Interstate Class Action Jurisdiction Act of 1999.”
Prior to passage, the House Judiciary Committee conducted hearings on the proposal,
Class Action Fairness Act of 2001: Hearing Before the House Committee on the Judiciary,
107th Cong., 2d Sess. (2002), and reported it out with amendments, H.Rept. 107-370 (2002),
both hearings and report are available at www.house.gov/judiciary. The bill was further
amended during debate on the House floor, 148 Cong. Rec. H859-H882 (daily ed. Mar. 13,
2002). Hereafter, references to H.R. 2341 mean the bill as passed by the House.
2The federal jurisdiction section amends Section 1332 to provide for federal jurisdiction in
class actions where the aggregate amount in controversy of all individual claims exceeds $2
million and any member of the putative plaintiff class is a citizen of a state different from
any defendant. This section excepts actions where (1) a substantial majority of the proposed
plaintiffs and the primary defendants are citizens of the state where the case was filed; (2)
the primary defendants are states or state officials; or (3) the proposed plaintiff class has
fewer than 100 members. H.R. 2341 and S. 1712 also deems so-called private attorney
general actions, and cases involving claims of more than 100 people with common questions
of law or fact, to be class actions for purposes of federal jurisdiction and removal.
3H.R. 2341 and S. 1712 removal provision allows any defendant or absent class member to
remove a class action to federal court if Section 1332 is satisfied, regardless of whether a
defendant is a citizen of the state where the action was filed, and without the consent of
other defendants or class members.
4The ‘bill of rights” portion of the proposed legislation requires a hearing and written
findings before a court may approve any class settlement providing noncash benefits or
requiring expenditure of funds in order to obtain the proposed benefits. Similarly, a court
must make written findings in order to approve a settlement that obligates a class member
to pay class in an amount that would result in a net loss to the class member. Further, the
two bills prohibit approval of a settlement that pays class members higher amounts based
solely on their economic proximity to the court or that pays a bounty to the class
representatives (other than payment for reasonable time and cost). The two bills also
(continued...)

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The Legislation
Section 1. Short Title. The Act may be cited as the “Class Action Fairness
Act of 2002.” This section also states that it amends title 28 of the United States
Code.
Section 2. Findings And Purposes Of The Act. Sets out Congress’
findings describing the: (1) circumstances in which class actions are valuable to our
legal system; (2) abuses of the class action process that injure both plaintiffs and
defendants, i.e., plaintiffs’ lawyers receiving large fees, while class members are left
with coupons or other awards of little or no value, unjustified rewards being made
to certain plaintiffs at the expense of other class members, and the publication of
confusing notices that prevent class members from being able to fully understand and
effectively exercise their rights; (3) the impact of interstate class actions on principles
of federalism through the use of artful pleading thereby permitting the plaintiffs to
avoid litigating class actions in federal court and forcing businesses and other
organizations to defend interstate class action lawsuits in county and state courts
where (i) the lawyer, rather than the claimants, is likely to receive the maximum
benefit, (ii) less scrutiny may be given to the merits of the case, and (iii) defendants
are effectively forced into settlements, in order to avoid the possibility of huge
judgments that could destabilize their companies; and (4) the cost that these suits
impose on the national economy.
Section 3. Consumer Class Action Bill Of Rights And Improved
Procedures For Interstate Class Actions. This section would add seven new
sections to 28 U.S.C. which are intended to provide greater protections for class
members. In particular, section 3 would add the following:
! Section 1711–Judicial scrutiny of coupon and other noncash settlements
This provision is aimed at certain proposed settlements of class actions, in
which the plaintiffs’ lawyer and the defendant work out a settlement that provides
class members with essentially valueless coupons while rewarding the lawyers with
substantial attorneys’ fees. To address this problem, this section provides that a
judge “may approve a proposed settlement under which the class members would
receive noncash benefits or would otherwise be required to expend funds in order to
obtain part or all of the proposed benefits only after a hearing to determine whether,
and making a written finding that, the settlement is fair, reasonable, and adequate for
class members.”
! Section 1712–Protection against loss by class members
This provision provides that a judge may not approve a class action settlement
in which the class members will be required to pay attorney’s fees that would result
4(...continued)
contain “plain English” requirements regarding written notice to class members.
H.R. 2341 and S. 1712 provide that the Act’s provisions apply to any civil action
begun on or after the date of enactment of the Act.

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in a net loss to the class members until after a hearing to determine whether the
nonmonetary benefits to the class outweigh the monetary loss, and if so making a
written finding to that effect.
! Section 1713–Protection against discrimination based on geographic
location
This provision provides that a settlement may not award some class members
a larger recovery than others solely because the favored members of the class are
located closer to the courthouse in which the settlement is filed.
! Section 1714–Prohibition on the payment of bounties
This provision provides that a class action may not be settled on terms that
award special and disproportionate bounties to the named class representatives. A
class representative will, however, be able to be compensated for his reasonable time
or costs that were required to be expended in fulfilling his obligations as a class
representative. The payment of bounties gives the class representatives a share of the
damages award that is disproportionately larger than that provided to absent class
members.
! Section 1715–Clearer and simpler settlement information
This provision provides that class notices should present information in “plain
English.” The notices must be designed to attract the attention of class members by
stating at the outset, in 18-point type, that the recipient is a plaintiff in a class action
lawsuit and has legal rights that are affected by the settlement described in the notice.
In addition, the notice must offer:
(A) the subject matter of the class action;
(B) the members of the class;
(C) the legal consequences of being a member of the class;
(D) detailed information about any proposed settlement, (i) including a
description of the benefits for class members, (ii) the rights that class members will
lose or waive through settlement, (iii) the obligations imposed on the defendant, and
(iv) the amount of attorney’s fee counsel will be seeking or, if not possible, a good
faith estimate of such fee;
(E) any other material matter.
! Section 1716–Disclosure of attorney’s fees (H.R. 2341 only)
This provision requires plaintiffs’ attorneys to inform each member of the class
of the full amount of the attorney’s fees. Notice must be given when the class
members receive their awards or (if there is no award) when notified of final
settlement or judgment.

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! Section 1716-Notifications to appropriate Federal and State officials (S.
1712 only)
This provision requires defendants to notify the appropriate state and federal
officials of the particulars of any class action settlement and delays the effective date
of the settlement until 90 days after they have done so. The appropriate federal
officials include the Attorney General and in the case of financial institutions the
federal regulatory authorities. State officials entitled to notice include the authorities
with regulatory jurisdiction over a defendant in any state in which any member of the
class resides.
! Section 1717–Sunshine in court records (H.R. 2341 only)
This provision precludes courts from sealing the records of class actions or
making them subject to a protective order unless the order is narrowly tailored, in the
public interest, consistent with the protection of public health and safety, and in the
circumstances where the interests of confidentiality clearly outweigh those favoring
disclosure.
! Section 1717–Class action definitions (Section 1718 in H.R. 2341)
(1) Class Action–The term is defined to include any civil action filed in federal
district court under Rule 23 of the Federal Rules of Civil Procedure, as well as
actions filed under similar rules in state court that have been removed to federal
court. The definition also appears to suggest that some suits that are not necessarily
representative actions in the traditional sense, but seek various forms of monetary
relief on behalf of persons who are not parties to the litigation may be treated as class
actions.
(2) Class Counsel–The term is defined as “the persons who serve as the
attorneys for the class members in a proposed or certified class action.”

(3) Class Members–The term is defined as “the persons who fall within the
definition of the proposed or certified class action.”
(4) Plaintiff Class Action–The term is defined as “a class action in which class
members are plaintiffs.”
(5) Proposed Settlement–The term is defined as “an agreement that resolves
claims in a class action, that is subject to court approval and that, if approved, would
be binding on the class members.”
Section 4. Federal District Court Jurisdiction Of Interstate Class
Actions. Article III of the Constitution protects out-of-state litigants against the
prejudice of local courts by allowing for federal diversity jurisdiction when the
plaintiffs and defendants are citizens of different states. However, under current law,
federal diversity jurisdiction for a class action does not exist unless every member of
the class is a citizen of a different state from every defendant, and every member of

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the class is seeking damages in excess of $75,000.5 This section changes the law by
providing additional protection for out-of-state litigants by creating a minimal
diversity rule for class actions and by determining satisfaction of the amount-in-
controversy requirement by looking at the total amount of damages at stake.
Federal district courts receive original jurisdiction over any class action in which
the amount in controversy, exclusive of interest costs, exceeds $2,000,000 and 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.”
This section contains a similar class action definition as section 3, defining a
class action as (A) any civil action filed pursuant to rule 23 of the Federal Rules of
Civil Procedure or a similar state statute or rule; (B) an action seeking monetary relief
on behalf of persons who are not parties to the action (unless the named plaintiff is
the state attorney general); or (C) an action that asserts claims seeking monetary relief
on behalf of 100 or more persons, in which the claims involve common questions of
law or fact and are to be jointly tried.
In order that actions lacking national implications remain in state court, the
minimal diversity rule does not apply in any action where (A) “the substantial
majority of the members of the proposed plaintiff class and the primary defendants
are citizens of the state in which the action was originally filed; and the claims
asserted [in the suit] will be governed primarily by the laws of the state in which the
action was originally filed;” (B) “the primary defendants are states, state officials, or
other governmental entities against whom the district court may be foreclosed from
ordering relief;” or (C) “the number of proposed plaintiff class members is less than
100.”
Section 5. Removal Of Interstate Class Actions To Federal District
Court. This section provides that the legislation applies to any civil action
commenced on or after the date of enactment. H.R. 2341 precludes a class member
who is not a named party or class representative to move for removal prior to
certification of the class.
Section 6. Appeals Of Class Action Certification Orders (H.R. 2341
only). This section provides that orders granting or denying class certification may
be appealed if notice of appeal is filed within 10 days after entry of the order. It also
provides that discovery be stayed during the pendency of the appeal unless the judge
finds that specific discovery is necessary to preserve evidence or to prevent undue
prejudice to a party.
528 U.S.C. § 1332. See also Zahn v. International Paper Co. 414 U.S. 291, 301 (1973) (The
Supreme Court decided that in class actions based on diversity of citizenship, every single
class member must satisfy the “matter [amount] in controversy” requirement of section
1332).

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Section 7 (H.R. 2341) [Section 6 in S. 1712]. Report on class action
settlements. This provision directs the Judicial Conference of the United States
to report to the Judiciary Committee within 12 months of the enactment with
recommendations and action taken to ensure that class action settlements are to the
benefit of and fair to class members and that attorneys’ fees appropriately reflect the
extent and success of the attorneys’ efforts.
Section 8 (H.R. 2341) [Section 7 in S. 1712]. Effective date. This
section provides that the legislation applies to any civil action commenced on or after
the date of enactment.
On March 13, 2002, H.R. 2341 passed the House by a vote of 233-190. During
the floor debate, the House passed three of nine amendments offered to the bill: (1)
an amendment by Rep. Jerrold Nadler which would prevent judges from sealing
records in class action settlements dealing with public health and safety;6 (2) an
amendment by Rep. Ric Keller which would require plaintiffs’ attorneys to disclose
their fees in any class action settlement or final judgment favoring plaintiffs;7 and (3)
an amendment by Rep. Melissa Hart which would require a study by the U.S. Judicial
Conference on ways to improve class action attorneys’ fee arrangements.8 All three
amendments passed by voice vote. A companion bill (1712) awaits Senate action.
Possible Objections
Although balanced by the enhanced class member protection features, the
jurisdictional and removal components of H.R. 2341 are much like their antecedents
in the 106th Congress. Opponents object that they:
! would overburden the federal courts;9
! are inconsistent with the principles of federalism;10
! would make consumer and public interest litigation more difficult to bring,
more expensive, and more burdensome.11
6148 Cong. Rec. H859-H860, H866 (daily ed. March 13, 2002).
7Id. at H863-H866.
8Id. at H879-H882.
9H.Rept. 107-370, at 125-26 (Dissenting views of Reps. Conyers, Berman, Nadler, Scott,
Watt, Lofgren, Jackson-Lee, Waters, Meehan, Delahunt, and Baldwin) (Dissenting views)
10Id. at 126-29.
11Id. at 129-34.

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