Now Is Time for Class Action Reform

Posted February 4, 2005 at 2:54pm

When a so-called remedy hurts the very people it is supposed to help, you know it is time for reform. That is the situation we face with the class-action system today. Fortunately, we have a solution in S. 5, the Class Action Fairness Act, a modest, carefully balanced measure that addresses the despicable abuses of class actions in state courts.

We’re all familiar with the problems now. Throughout the past several Congresses, we heard powerful evidence about the extraordinary concentration of large interstate class-action lawsuits in a handful of our state courts — certain counties in particular.

We learned that these courts operate in a manner that deprives the rights of truly injured plaintiffs and defendants who have fallen prey to the manipulation of settled rules by a small number of personal injury attorneys. Rules intended to ensure fundamental fairness during the resolution of major interstate class-action disputes are instead being perverted to the detriment of consumers and small businesses.

The abuses in this broken system hurt everyday consumers who are being used, usually unknowingly, as a means for a relative few personal injury lawyers to extract large attorney fees for themselves. Irene Taylor of Tyler, Texas, is just one example. She was cheated out of approximately $20,000 in a telemarketing scam that defrauded senior citizens out of more than $200 million. But in the class action brought in Madison County, Ill., the attorneys “representing” Taylor negotiated a proposed settlement which excluded her from any recovery whatsoever.

In another case, Martha Preston of Baraboo, Wis., actually lost money in a settlement. Preston had seemingly won $4 in a matter involving a bank’s alleged failure to post promptly interest to a mortgage escrow account. But the settlement actually required her to pay $95 in attorney fees, leaving her with a net loss of $91. To add insult to injury, her attorneys were paid $8.5 million for their services.

It is not only consumers who get taken — small businesses are devastated as well. Hilda Bankston’s small business has been dragged into hundreds of lawsuits by personal injury attorneys in the class-action haven of Jefferson County, Miss. Her small business became a prime target for forum-shopping lawyers in pharmaceutical cases not because of wrongdoing, or even because of deep pockets. No, her business has been sued over and over again for the sole reason that she owns the only drugstore in the county. “No small business should have to endure the nightmares I have experienced,” Bankston testified at a July 31, 2002, Senate Judiciary Committee hearing. “I have spent many sleepless nights wondering if my business would survive the tidal wave of lawsuits cresting over it.”

Bankston’s case demonstrates that a small minority of creative but unscrupulous lawyers can evade federal court jurisdiction to keep cases in state courts, where the judges are not insulated by lifetime appointments and remain part of the political process of elections.

Our class-action system is obviously broken.

The Class Action Fairness Act represents a modest and balanced solution to this crisis, and its chief beneficiaries will be injured consumers. There are two core features to the legislation. First, the bill implements consumer protections against abusive settlements by: (1) providing a standard for judicial approval of settlements that would result in a net monetary loss to plaintiffs; (2) valuing attorney fees in coupon settlements to those coupons that are actually redeemed; and (3) prohibiting settlements that favor class members based upon geographic proximity to the court house.

Second, the bill corrects a flaw in the current federal diversity jurisdiction statute so that class actions with a truly interstate impact are adjudicated where they truly belong — in our federal courts. Specifically, S. 5 amends the federal diversity of citizenship jurisdiction statue to allow larger interstate class actions to go to federal court where there is “minimal diversity” and the aggregate amount in controversy among all class members exceeds $5 million. The bill also balances the states’ interest in adjudicating local disputes by providing that class actions filed in the home state of primary defendants remain in state court subject to a triple-tiered formula that looks at the composition of the plaintiffs’ class membership.

That is the substance of this modest measure. This bill does not eliminate all state court class-action litigation, as some opponents claim; and it does not diminish the rights of victims to band together to pursue their claims, as some opponents unfairly charge. To the contrary — this bill includes consumer protection provisions which will dramatically increase the prospects of achieving a fair result in a class-action settlement.

Congress has examined the class-action issue for many years now, and a clear pattern of abuse has emerged. The legislation that the 109th Congress will shortly consider would fix many of these problems, and it would be a shame if we do not finally accept this much-needed reform of the abuses in the current system.

Our civil justice system too frequently hurts the very consumers it is supposed to help. It is past time to correct these glaring inequities.

Sen. Orrin Hatch (R-Utah) was chairman of the Judiciary Committee in the 108th Congress and is now the second-ranking Republican on the committee.