Big Changes Could be coming to Class Action Practice, Courtesy of Congress

Class actions, especially those with nationwide scope and the specter of huge payouts, have long been the stuff of nightmares for in-house counsel and corporate executives. The press regularly report on settlements where plaintiffs’ counsel walked away with millions in attorney fees while the aggregate recovery by the class was much smaller.

The Class Action Fairness Act of 2005 (the 2005 CAFA) significantly changed how class actions were litigated. Advocates of the legislation said it would reduce forum shopping by expanding federal jurisdiction over certain class actions and allowing greater court scrutiny of class action settlement agreements (including settlements with so-called “coupon” components).

But the 2005 CAFA did not solve all the problems that class action critics wanted Congress to address.  In response, the U.S. House of Representatives passed H.R. 985 in March of this year, with the relevant section of the bill titled the “Fairness in Class Action Litigation Act of 2017.”. For simplicity's sake, we will call this bill the 2017 CAFA. The bill has now moved on to the Senate, and in late March was referred to the Senate Judiciary Committee. Given the current political situation in Washington, it's anyone’s guess as to when the bill will be reported out of committee (if at all) much less come to a full vote.

Corporate clients should, nonetheless, be aware of the terms of the bill being considered.  If the Senate ends up passing the bill and the President signs it into law, the 2017 CAFA has the potential to change class action practice in dramatic ways. Here are the 2017 CAFA’s main provisions, each of which will make important changes to the current law for class actions: 

1. Similarity of Injury:  Before a federal judge can certify a class for personal injury or monetary damages, the named plaintiff must “demonstrate that each proposed class member suffered from the same type and scope of injury” as the putative class representative.  In any order certifying such a class, the court “shall” include a determination, based on a “rigorous analysis” of the evidence submitted that this requirement has been met. (Section 1716.) 
2. Conflicts of Interest/Disclosures:  The bill would also require, in any class action complaint, a statement by the putative class counsel whether the proposed class representative is a relative, a former or present employee, a former or present client (with the exception of the class action at issue) or whether the class representative has any contractual relationship with the class counsel.  A court may not certify a class where any such conflicts of interest exist.  Interestingly, the complaint must also “describe the circumstances” in which the named plaintiff in which the named representative agreed to be included in the complaint and any other class actions the named representative has played a “similar role.”  (Section 1717.) 
3. Ascertainability:  Addressing an issue that has garnered the attention of several federal courts of appeal, the bill would mandate that no class could be certified unless the class is defined with “objective criteria” and the class representative “affirmatively demonstrates” that there is a reliable and feasible mechanism for the court to determine if the proposed class members fall within the class definition and “distributing directly to a substantial majority of class members any monetary relief for the class.”  (Section 1718(a)).  Although many courts had read an ascertainability requirement as being implicit in Rule 23 already, some courts, notably recently the Ninth Circuit, see Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017), disagreed.  This would essentially end that debate and, arguably, strengthen the ascertainability requirement many courts had already mandated.  
4. Attorney Fees.  In a significant departure from practice, CAFA 2017 would specifically require that no class attorney fees will be “determined or paid” until the distribution of any funds to the class members “has been completed.”  (Section 1718(b)(1).)  In another significant departure, a federal court could not grant attorney fees to any class counsel beyond a “reasonable percentage” of any amounts “distributed to and received by class members.”  (Section 1717(b)(2).)  This would seem to prohibit so-called “claims-made” settlements, where class counsel would be paid according to what a theoretical upper limit of recovery for the class is no matter how small that recovery ends up being. This practice has been under some criticism, such as from Judge Richard Posner of the Seventh Circuit. “In no event,” the bill continues, “shall the attorney fees award exceed the total amount of money directly distributed to and received by all class members.”  (Section 1717(b)(2).) 
5. Stay of Discovery:  If any motion (such as a motion to dismiss, motion to strike class allegations, or any other motion which would dispose of the class allegations) is filed, “all discovery and other proceedings shall be stayed” unless the motion is brought and the court finds that discovery must continue to preserve evidence or avoid undue prejudice.  (Section 1721.) 
6. Appeal:  The bill would also give an immediate right to appeal from a class certification order. (Section 1723.)  Current law (Federal Rule of Civil Procedure 23(f)) allows for an appeal, but both the trial court and the appeals court must agree to consider the appeal. 
7. Third Party Funding Disclosure:  The bill would also require disclosure of any third party (besides members of the class or class counsel) who would have any contingent right to receive proceeds of the lawsuit. (Section 1722.) 
8. Money Distribution Data:  The bill would also require reporting a detailed list of actual moneys distributed to class members to two federal court administrative bodies, which will then be required to submit an annual report summarizing such information.  (Section 1720.)  
9. Effective Date.  Finally, the version of the bill passed by the House provides that these amendments “shall apply to any civil action pending on the date of enactment… or commenced thereafter.”  (Section 107.) 

This bill has been referred to the Senate Judiciary Committee.   There, it could be adopted in substantially the same form, adopted with major changes (perhaps requiring a conference between the two houses) or outright rejected. We will monitor this important bill’s progress in the coming months.  For complete text of the bill, please click here.