Seven years after enactment, the House of Representatives held a hearing featuring vigorous criticism as well as praise of the Class Action Fairness Act from both the plaintiff and the defense perspectives. At a hearing held on June 1, 2012 before the House Subcommittee on the Constitution of the Committee on the Judiciary, Prof. Martin H. Redish, Professor of Law and Public Policy at Northwestern University School of Law, Mr. Thomas M. Sobol, partner at Hagens Berman Sobol Shapiro LLP, and Mr. John H. Beisner, partner at Skadden, Arps, Slate, Meagher & Flom LLP, provided testimony.
Prof. Redish urged the House to revise CAFA to ban the use of cy pres awards in class actions. A cy pres award is normally a means of disposing of unclaimed property. If a court is unable to dispose of property to its intended party, then courts occasionally will invoke the doctrine of cy pres to award the property to the "next best" party. Often, this next best party is a charitable organization. While the concept of cy pres is normally limited to trust and property law, federal judges have increasingly used cy pres in the case of unclaimed class action awards.
Prof. Redish testified that the courts' use of cy pres gives rise the "faux class action." In a "faux class action" the claims of individual class members are so small or class members are difficult to locate. As a result, few awards are actually claimed by class members. According to Prof. Redish, in this type of suit the only real winners are the class action plaintiffs' lawyers. Prof. Redish asserts that cy pres awards allow plaintiffs' lawyers to dress up their opportunistic suits as "socially valuable wealth transfer" by claiming large awards for charities. The problem is that the charities are not a party to the suit, and were not harmed by the defendant's conduct making the cy pres award seems more like a regulatory penalty than a case in controversy.
From the perspective of the class action plaintiff, Mr. Sobol criticized CAFA for its impact on the ability of consumers to bring class action lawsuits. According to Mr. Sobol, CAFA took class actions out of state courts and placed them into the much smaller realm of federal courts. As a result, federal courts are much more likely to deny class action certification to avoid expending scarce time and resources to resolve a dispute involving claims under the law of fifty different states.
Mr. Beisner, speaking on behalf of the U.S. Chamber Institute for Legal Reform, praised CAFA as "a milestone in the crusade for a more just and effective civil justice system." Mr. Beisner credited CAFA with the elimination of "magnet state-court jurisdictions that were once a haven for meritless and abusive class action lawsuits." In the class action magnet jurisdiction of Madison, Illinois, the number of class action lawsuits decreased by 90% after the enactment of CAFA. By shifting class actions from state to federal court, Mr. Beisner credited CAFA with creating an environment of innovation where businesses do not have to fear frivolous class action lawsuits that state courts would certify prior to CAFA. Mr. Beisner testified that these meritless class actions hurt businesses by forcing settlements where the only beneficiary was likely to be the attorney for the class.
Mr. Beisner criticized the failure of some federal courts to employ CAFA's presumption in favor of federal jurisdiction. Under CAFA, the amount placed in controversy must exceed $5,000,000, exclusive of interest and costs. Mr. Beisner pointed out that the Third and Ninth Circuits, in certain circumstances, have required defendants to prove to a "legal certainty" that the amount in controversy has been met. Mr. Beisner contends that this high standard is contrary to Congress' intent that federal courts should err in favor of exercising jurisdiction over class actions. In contrast, other Circuits have applied different evidentiary standards such as the preponderance of the evidence standard and the reasonable probability standard. Mr. Beisner urged Congress to enact legislation formally reaffirming the presumption in favor of federal jurisdiction under CAFA.
While CAFA has succeeded in moving many class actions of national importance to federal court, this hearing highlighted that there is a need to fine-tune the legislation. It remains to be seen whether Congress is inclined to make any modifications to CAFA in the near future. In the mean time, federal courts will continue to struggle to address important deficiencies in CAFA.© 2013 Dinsmore & Shohl LLP. All rights reserved.