June 18, 1998
Testimony of Brian Wolfman, Esq.
Staff Attorney, Public Citizen Litigation Group
Before the House Committee on the Judiciary Subcommitte on the Courts and Intelectual Property Regarding H.R. 3789
Mr. Chairman and members of the Committee. I appear today in opposition to H.R. 3789, the Class Action Jurisdiction Act of 1998. In short, I believe that H.R. 3789 is an unwise and ill-considered broadside incursion by the federal government on the jurisdiction of the state courts. It constitutes a radical transformation of judicial authority between the state and federal judiciaries that is not justified by any alleged "crisis" in state court class action litigation.
Before explaining the basis for my conclusion that H.R. 3789 should not be enacted, I want to describe my experience in class action litigation. I am a staff attorney with Public Citizen Litigation Group, a non-profit, national public interest law firm that was founded in 1971, as the litigation arm of Public Citizen, a consumer advocacy organization with over 100,000 members. Like other lawyers who represent consumers, we use class actions in situations where litigation of individual claims would be economically impossible.
Because we value class actions as an important tool for civil justice, we have for a number of years combatted abuses in the class action system. We have increasingly devoted resources to opposing what we believe are inappropriate or collusive class action settlements, and have become the nationwide leader in fighting class action abuse. Among the more than 30 nationwide class actions settlements on which we have worked, we have served as lead or co-counsel for objectors in many of the most important cases, including Bowling v. Pfizer (Bjork-Shiley heart valve); Amchem v. Windsor (asbestos case, also known as Georgine); Hanlon v. Chrysler Corp. (Chrysler mini-vans); Duhaime v. John Hancock Mut. Life Ins. Co. (deceptive life insurance sales practices); In re General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig. (GM C/K Pickup Trucks); and In re Ford Motor Co. Bronco II Prod. Liab. Litig. (Ford Broncos). In these cases, we have objected to settlements that we thought grossly undervalued the plaintiffs' claims and we have opposed what we believed were the inflated fees of the plaintiffs' attorneys.
In addition, we have written articles on the problems we have encountered in class action settlements for law reviews and the popular press. See Brian Wolfman & Alan Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 71 N.Y.U. L. Rev. 439 (1996); Brian Wolfman, Forward: The National Association of Consumer Advocates' Standards and Guidelines for Litigating and Settling Class Actions, 176 F.R.D. 370 (1998); David C. Vladeck, Trust the Judicial System to Do Its Job, p. M5, The Los Angeles Times (Apr. 30, 1995); Brian Wolfman, Class actions for the injured classes, p. B-11, The San Diego Union Leader (Nov. 14, 1997).
The point of these introductory comments is that Public Citizen takes a back seat to no one in fighting class action abuse, to assure that injured consumers will be justly compensated, that class action attorneys' fees are sufficient (but not excessive), and the class action tool is not weakened. In our judgment, H.R. 3789 will do nothing to aid injured consumers or combat collusion, while working a massive shift of power and caseload to our overburdened federal courts at the expense of the state courts, the traditional forum for hearing disputes involving state law.
Section 2 of H.R. 3789 ("expansion of federal jurisdiction") allows purported class actions "or comparable representative action[s]" to be filed in federal court if "any named plaintiff, putative class member, or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen" regardless of the amount in controversy. Building on the language in section 2, section 3 of the bill permits removal from state court to federal court of any class action meeting the expanded criteria for filing class actions in federal court. Thus, as a practical matter, section 2, when combined with section 3's removal provision, would end most, and potentially all, state-court involvement in consumer class actions. Although the bill's proponents have stated that H.R. 3789 would preserve state-court jurisdiction for truly intra-state disputes, that is not correct. To repeat: Proposed section 1332(b) sets up diversity jurisdiction if "any ... putative class member or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen..." (emphasis added).
Given the mobility of our society (and the fact that large metropolitan areas are on state borders), even the simplest intra-state consumer class actions will involve putative class members from out of state and thus warrant federal jurisdiction under H.R. 3789. Such a result is not only hostile to federalism, but would work a substantial increase in the federal complex litigation caseload on matters purely of state substantive law.
In sum, H.R. 3789 allows the filing in, or removal to, federal court of virtually every class action, because all that it requires is that one class member be from a state that is different from any defendant. So even cases involving plaintiffs almost entirely from one state, and involving only one state's law, would end up in federal court. It is difficult to imagine a more radical restructuring of federal and state court jurisdiction.
An example illustrates our point. Assume that over the past two years a state-chartered insurance company in Florida breached contracts of life insurance with 100,000 senior citizens, charging premiums higher than those promised and not paying certain benefits. The vast majority of the policyholder lived in Florida when the policies were sold, but a small percentage of the cheated seniors lived in neighboring states and others moved to those states after the policies were sold. The senior citizens file a class action in Florida state court alleging solely violations of Florida law. Even though the overwhelming majority of plaintiffs would still reside in Florida and only Florida law is applicable to the suit, under H.R. 3789 the insurance company would have the choice of removing this class action to federal court. There is no federal interest in resolving such a dispute because it does not involve federal law; more important, the Florida courts have a strong interest in resolving the case, making sure the Florida law is properly interpreted and enforced. That interest is usurped by H.R. 3789. Indeed, this example makes clear that H.R. 3789 is little more than a "Corporate Defendant Choice of Venue Act," since it allows the corporate defendants -- not the plaintiffs -- to select the forum. But there is no valid reason why these Florida seniors should be deprived of the state forum of their choice for this type of single-state litigation.(1)
Which bring me to my next point. H.R. 3789 dishonors the proper spheres of the states and the federal government in our federalist system. Indeed, the bill is a flagrant affront to federalism and a resounding vote of "no confidence" in our state courts. As noted above, under section 3 of the bill, defendants can remove virtually any class action to federal court, even when the case has nothing to do with federal law and the class members live mainly in one state. H.R. 3789 is premised on a deep -- and misplaced -- distrust in state courts' ability to uphold the law. Our Constitution properly assumes that the states are fully capable of interpreting their own laws and handing out justice impartially. H.R. 3789 is not in keeping with that basic constitutional principle.
Although this radical revision of the allocation of authority between the state and federal courts is enough in itself to warrant the defeat of H.R. 3789, it is the inefficiencies created by the bill that will pose the largest roadblock to justice for ordinary citizens. By channeling virtually all class actions to the federal courts, H.R. 3789 threatens to grind the administration of civil justice in our federal courts to a near standstill. As Chief Justice Rehnquist recently noted in a speech to the American Law Institute, the federal courts are already overburdened with cases that traditionally are dealt with in state courts, and the federal courts cannot bear any additional burden. Not only would H.R. 3789 intolerably increase the caseload of the federal courts, but it would do so with cases that are extremely complex and time consuming. Making matters even worse, by definition these new federal cases involve solely issues of state law, with which state court judges are intimately familiar but federal judges generally are not.
The caseload burden imposed by H.R. 3789 would be reason enough to reject the legislation at any time, but the problem is particularly acute now, because there are a large number of federal judicial vacancies and the civil docket in some districts has already come to a virtual standstill. In short, H.R. 3789 promises that injured consumers will be put on "hold" in the overburdened federal courts, without any opportunity to litigate their cases in state courts where they properly belong.
The proponents of H.R. 3789 try to justify the bill on the ground that there is a class action "crisis" peculiar to the state courts. In general, the class action tool is a tremendous benefit to Americans. It is an important and powerful component of our civil justice system that can compensate ordinary citizens who, acting individually, would not have the means to challenge corporate and governmental wrongdoers. As I noted at the outset of this testimony, Public Citizen recognizes that class action abuse threatens to sour the public and harm the people that the class action tool is supposed to help. But it is wrong to think that abuse is limited to state courts. Recently, a federal appeals court approved the Chrysler minivan settlement--where the settlement provided little more than Chrysler's prior promise to a federal regulator to fix the class members' defective door latches, with Chrysler agreeing to pay the lawyers five million dollars in fees! The federal and state courts must be vigilant and prevent abuses and progress is being made in that regard.
The state courts can play a role in preventing abuse. For example, many of the anecdotes used by the proponents of H.R. 3789 are based on class actions in Alabama where, the argument goes, the state courts there have been certifying cases without following the proper procedures. Responding to due process and forum-shopping concerns from corporate defendants, however, the Alabama Supreme Court has just abolished the practice of certifying class actions before the defendant has an opportunity to answer the suit. See, e.g., Ex Parte State Mutual Ins. Co., Nos. 1960410, et al., 1197 WL 772923 (Ala. Dec. 16, 1997), and Ex Parte American Bankers Life Assur. Co. of Fla., No. 1950705, 1997 WL 773322 (Ala Dec. 16, 1997). The Court made clear that classes may not be certified without notice and a full opportunity for defendants to respond and that the class certification criteria must be rigorously applied.
Meanwhile, state court class actions continue to provide significant relief to consumers who would otherwise have gone without compensation. For instance, state-court class actions involving polybutylene pipe illustrate the importance of consumers banding together to fight corporate irresponsibility. Shell, Dupont and other corporate giants sold leaky plastic pipes, which caused severe damage to the homes of tens of thousands of unsuspecting consumers. This state-court litigation resulted in hundreds of millions of dollars in recoveries and replacement of the faulty piping, which would never have occurred if the homeowners were required to face off against the companies on their own.
Another example is Naef v. Masonite -- concerning claims of defects in hardwood siding on homes and commercial property -- commenced in 1994 in Mobile County, Alabama. The defendant removed the case to federal court, but the case was later remanded because of a lack of federal jurisdiction. A state-court jury found for the plaintiffs on the question of whether the product was defective, and the matter than settled for hundreds of millions of dollars shortly before trial on liability and damages. Under H.R. 3789, this case could have been removed to federal court, although it appears that the matter was pursued vigorously in the state court setting and brought very considerably benefit to injured class members.
Another case (Daar v. Yellow Cab), although it arose in the 1970's, illustrates the expansive reach of H.R. 3789. Taxicab companies in Los Angeles sold "script books" that allegedly gave consumers discounts on fares. A class action was filed in state court alleging that the companies in fact systematically overcharged script users. The case was based on state law, and most class members were California residents. The action succeeded in putting substantial amounts of cash back in the hands of the plaintiffs and ended the companies' overcharging practices. Nonetheless, because not every single member of the class was a California resident, under H.R. 3789 this state law case overwhelmingly affecting California residents could be removed to federal court.
As evidence of the state-court class action "crisis," the supporters of H.R. 3789 rely on a few anecdotes of settlements in which the class members were cheated at the expense of their lawyers. As noted, abuses do occur in state and federal court, and that abuse must be fought in the courts. But the anecdotes are just that -- anecdotes -- and much more evidence showing a systematic pattern of abuse in the state (as opposed to federal) courts must be required before Congress should consider enacting anything approaching the radical transformation in our state-federal balance contemplated by H.R. 3789.(2)
In sum, H.R. 3789 should be rejected as unwise and unnecessary. It is an unwarranted attack on the integrity of the state courts and their ability to provide justice to its citizens, and it comes at a time when the federal courts are unable to handle the enormous increase in caseload that H.R. 3789 would entail.
H.R. 3789 should not be enacted for the policy considerations given above. The Committee should be aware, however, that H.R. 3789 may also be constitutionally flawed. As this Committee is aware, our federal courts are courts of limited jurisdiction. Section 2 of the bill would stretch, perhaps beyond the breaking point, the so-called "minimal diversity" approach, requiring only that one plaintiff be diverse from one defendant, in order to meet the requirements for diversity jurisdiction. This would overrule Strawbridge v. Curtiss, 3 Cranch 267 (1806), where the Supreme Court interpreted the diversity statute to require "complete diversity" between all named plaintiffs and defendants. Strawbridge is not a constitutional case and the Supreme Court has held that only "minimal" diversity (i.e., diversity between one plaintiff and one defendant) is required by the constitution. See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967).
However, in our judgment, the Supreme Court's endorsement of minimal diversity does not ensure of the constitutionality of section 2 of H.R. 3789, at least not in all of its applications. The relevant constitutional provision, Article III, section 2, provides that "[t]he judicial Power shall extend to ... Controversies...between citizens of different States[.]"
To take an extreme example, we do not believe that Article III, section 2 authorizes diversity jurisdiction where 9,999 class members and all defendants are in one state and one non-named class member is from another state. But new 28 U.S.C. 1332(b) says that there is diversity jurisdiction if "any ... putative class member or purportedly represented party is a citizen of a State different from the State of which any defendant is a citizen," and thus would permit a federal court to assume jurisdiction under such circumstances.
More realistically, assume a situation in which the named plaintiff and all the named defendants are from state "x," but 25% of the putative class members are from states y and z. When a putative class action is filed, the class does not yet exist and a constitutional "controversy" exists only between the named plaintiffs and the defendant. Put another way, there is no controversy between the absent class members -- on whom jurisdiction under H.R. 3789 hinges -- and the defendant, and thus it is difficult to imagine how diversity jurisdiction can be constitutionally maintained in this circumstance prior to certification of the class and some reasonable assurance that there are, in fact, diverse class members. See Sosna v. Iowa, 419 U.S. 393, 399 (1975).(3)
Although we believe that H.R. 3789 is unnecessary and should be defeated, it should surely not be enacted in its current form. The following amendments would improve the bill.
The bill's supporters claim that H.R. 3789 is meant to place cases that are truly nationwide in character in the federal courts and allow cases that are not to remain in state courts. That assertion is incorrect. At present, as shown above, H.R. 3789 allows virtually every class action to be filed in, or removed to, federal court. Thus, at the very least, the bill should be amended to achieve its stated purposes by allowing cases that are mainly intra-state disputes to remain in state court. The statute could provide that diversity jurisdiction does not exist if 50% or more of the putative plaintiff class resides in one state. We recognize that this numerical standard might cause proof problems in close cases, but state and federal courts are accustomed to making those kinds of determinations on a daily basis, and most cases will fall clearly on one side of the line or the other. Alternatively, federal jurisdiction under H.R. 3789 could be limited to cases in which a "substantial majority" of the class members reside outside of the forum state.
Section 4 of H.R. 3789 would enact a new 28 U.S.C. 1369 providing that any action filed under section 1332(b) in which the district court rules that the case may not go forward as a class action will be "dismissed" for lack of jurisdiction. This section presents several significant problems and ambiguities.
First, the bill could be a trap for unwary class members by running out the time within which they have to file their claims. Unless the bill expressly states that the absent class members' statutes of limitations are tolled (stop running) during the pendency of the federal court class action with respect to any future lawsuit filed by such class members in federal or state court, the bill could result in many class members' claims becoming time-barred. Under American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974); see also Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), tolling would apply in any future federal action, but it is not certain that all the state courts -- where many subsequent individual actions would have to be filed -- will necessarily recognize American Pipe under these circumstances. Better yet, H.R. 3789 should simply give the putative class members an additional year to bring any new action if that class member's filing period has run or fallen below one year during the pendency of a putative class action dismissed under section 1369.
Second, the bill is ambiguous and unduly harsh in those cases that the federal courts decide not to certify under Federal Rule of Civil Procedure 23. The new section 1369 applies to cases "subject to ... jurisdiction solely under section 1332(b)[,]" but not expressly to the revised class-action removal provision contained in section 1441(b). Thus, the question arises whether section 1369 applies at all to removed cases. If so, the bill is silent on whether the district court should simply dismiss the class action (as 1369 provides for cases filed under 1332(b)), or remand the named plaintiffs' cases to state court as is typical in a case of failed removal. See 28 U.S.C. 1447(c), (d).
In our judgment, dismissal of these cases would be grossly unfair and the plaintiffs' cases should be remanded to state court. If the named plaintiffs wish to continue to litigate their claims in the state court from which the case was removed, they should be permitted to do so without having to bear the time and expense incurred in filing a new case. Moreover, those same named plaintiffs should be permitted to litigate the claim as a class action. Although the class action will not have been certified in federal court, the rules for certifying class actions in state courts are not always the same as the federal rule (Federal Rule of Civil Procedure 23). The class members must be given an opportunity to litigate their claims on a class basis if entitled to do so under state law.
It may be that the drafters of H.R. 3789 intend this provision to foreclose state court class action litigation after a federal court has refused certification. If that is so, then this bill constitutes an even a greater assault on federalism than we thought. It is one thing for Congress to say that all class actions should be channeled in the first instance into federal court; it is quite another to say that state courts are forbidden from using class actions to promote efficient litigation where a federal court has found certification inappropriate under Federal Rule of Civil Procedure Rule 23. Apart from embodying a massive affront to the sovereignty and independence of the state court system, any such instruction by Congress to a state would raise a series of constitutional problems in its own right, since the historic understanding is that Congress has no right to dictate procedural rules to the states. [cites; I'll get them.](4)
Third, proposed 28 U.S.C. 1369 states that if the court determines that the class action cannot proceed "in any respect," the case should be dismissed. If this provision is taken literally, a class action that is viable with respect to some class members and/or some claims would nonetheless be rendered a nullity and subject to outright termination. We doubt that this is what the drafters intended. For instance, if a class action filed under section 1332(b) is partially certified as to some claims or some issues under Fed. R. Civ. P. 23(c)(4), but certification is denied as to other claims or issues, the case should not be dismissed. But section 1369 seems to require dismissal under those circumstances, and it must be amended to allow the viable portion of the class action to proceed.
The bill establishes federal jurisdiction not only for putative class actions, but what it calls "comparable representative actions." It is unclear what this provision means, and most representative actions -- such as next-friend suits or suits brought by fiduciaries -- are not "comparable" to class actions. This language should be clarified or deleted, lest the courts will be drawn into needless disputes over its meaning.(5)
As currently drafted, section 5 of the bill makes H.R. 3789 retroactive to all cases pending on the bill's enactment. This portion of the bill is likely unconstitutional, [cites], and, in any event, is fundamentally unfair to plaintiffs whose cases have been pending in state court. Indeed, as we understand the bill, a case certified as a class action and set for trial (or even in the middle of trial) could be removed to federal court. If enacted, the bill should establish an "effective date" after it is signed into law and apply only to cases filed after that date.
On a related point, section 3(c) of the bill eliminates any time limitation on removal, thus permitting a state-court defendant to remove a class action to federal court at any time. For much the same reasons stated in the prior paragraph, this provision is wasteful and fundamentally unfair to plaintiffs in pending state court class actions. Removal should be required to be exercise shortly after the case is filed, and there is no reason for Congress to depart from the 30-day period already specified in the general removal statute. See 28 U.S.C. 1446(b).
Corporate defendants seeking the enactment of H.R. 3789 claim that there is a "crisis" in state court consumer class actions for money damages. These are known as (b)(3) class actions, because they are certified in federal court under Federal Rule of Civil Procedure 23(b)(3). As noted above, the evidence for such a "crisis" is entirely anecdotal. In any event, no one claims that there is any problem in class actions seeking injunctive relief under state law, such as the abatement of a nuisance or reform of discriminatory hiring practices. Thus, H.R. 3789 should be amended to apply only to class actions in which the plaintiffs' claims are exclusively or predominately for money damages.
On a related topic, H.R. 3789 would even apply to cases brought against state agencies for violations of state law. Assume that the plaintiffs file suit against the state child welfare agency on behalf of all persons who have been, and will in the future, be denied foster care payments in violation of state law. Because some of the class members live out of state (as inevitably would be the case), the proposed class includes some non-residents and the defendant removes the case to federal court under H.R. 3789. Of course, such a case -- as it involves only matters of interest to the state -- certainly is within the competence of the state courts, and removal should not be permitted as a matter of policy. Even more troubling is the application of the Supreme Court's decision in Pennhurst State School and Hospital v. Halderman, 465 U.S. 89 (1984), which holds that the Eleventh Amendment forbids a federal court from enforcing state law against a state or its officers. Thus, under H.R. 3789, removal to federal court would, in the example given, deprive plaintiffs of any remedy. That is not justice, yet that is precisely the consequence of such broad-brush legislation.
Finally, it bears mention that this legislation tilts the playing field in favor of corporate defendants at the expense of class members. Not only does the legislation deprive plaintiffs in class cases the right to select their forum -- a right any other plaintiff has -- but it also denies class members the right to select a federal forum while giving exactly that right to defendants. In this key respect, H.R. 3789 differs from its Senate counterpart, S. 2083, which at least gives the right to a federal forum to both corporate defendants and class members.
This lack of mutuality is neither an oversight nor defensible policy. It is not an oversight because, as I have made clear throughout, this bill appears to be written to provide corporate defendants the advantage of forum selection in class action litigation, and for no other reason. More fundamentally, the lack of mutuality makes it crystal clear that this bill does address: It does nothing to deter collusive class action settlements. Under H.R. 3789, it is entirely possible for defendants to collude with plaintiffs' counsel to settle class action litigation -- in state or federal court -- on terms highly favorable to the corporation and the lawyers, but decidedly unfavorable to class members. The only potential objectors -- the class members -- are given no rights under H.R. 3789. At least in this respect the Senate bill is far more intellectually defensible than H.R. 3789, since it empowers both the defendants and the class members to remove class cases to federal court.
* * *
In closing, let me reiterate our opposition to this legislation. Since the founding of the Republic and the first Judiciary Act, it has been our shared national understanding that, except in relatively rare instances, litigation of state law questions would be the province of state courts. The enormous aggregation of power in federal court proposed by this legislation is unwise because it tears a enormous hole in the fabric of federal-state relations and because places adds a considerable burden on our already overworked federal court system. If there are genuine problems with state court class actions, then Congress should work hand-in-hand with state courts and legislatures, with scalpel-like precision, to resolve them, mindful of the vital state interests that are implicated when Congress proposes curtailing state court jurisdiction. But Congress should reject the heavy-handed approach embodied in H.R. 3789. I would be happy to answer any questions you may have.
1. It might be suggested that the plaintiffs' lawyer could avoid federal jurisdiction by defining the class to include Florida residents only. However, leaving injured people out of the class would probably run afoul of the lawyers' duty to be an adequate representative for the class as a whole. More fundamentally, there is no reason that attorneys should have to engage in that kind of "artful pleading" where the matter is one traditionally handled by state courts and there is no federal interest. Nor would such a bizarre division of the class benefit defendants, since the likely result would be two class action cases: 1) a Florida-plaintiffs-only class filed in state court; and (2) a class action involving all non-Floridians filed in federal court. This result makes little sense, yet that will be the inevitable by-product of H.R. 3789.
2. The bills' proponents also point to an alleged upsurge in state-court class action filings. But the mere filing of cases in state court does not show a pattern of abuse. It is likely that there is an increase in state court filings simply because the delays in federal court -- because of judicial vacancies and increasing caseloads -- have caused counsel seeking a prompt resolution of their clients' claims to file more frequently in state court.
3. Even if H.R. 3789 could pass constitutional muster in all of its applications, it is surely not consistent with the underlying purpose of Article III, section 2, which was to allow truly interstate controversies to be litigated in federal court. Further, to the extent that Art. III, section 2 diversity was believed necessary to avoid bias against out-of-state defendants, that need is not present in the examples given in the text because they involve controversies that mainly involve plaintiffs and defendants from the same state.
4. To the extent that the federal and state class action rules are identical, the judgment of the federal court denying class certification would be controlling on the state court action under normal principles of issue preclusion. But that very point shows the massive intrusion on state prerogatives worked by H.R. 3789. In effect, under H.R. 3789, the state courts would no longer play a role in interpreting and applying their own class action principles, thus federalizing the class action.
5. Section 4 of the bill (proposed section 1369) replays the notion of a "comparable representative action," but this time the statute uses the phrase "class action or comparable representative action under Rule 23 of the Federal Rules of Civil Procedure." This is very confusing because Rule 23 deals only with class actions and so there is no such thing as a "comparable action under Rule 23."