Congress recently passed the Class Action Fairness Act of 2005 (CAFA), intending to lower the costs and risks class-action litigation imposes on businesses. CAFA works primarily by moving certain large class actions out of state courts and into federal courts.
This seemingly elegant solution assumes that litigating in federal court will be quicker, cheaper and yield a better result than litigating in state court. However CAFA's complexity, combined with the good job most state courts are already doing, undermines that assumption.
Viewed most charitably, CAFA is a reaction to the well-documented rise of forum-shopping-plaintiffs' lawyers seeking friendly judges and juries for high-stakes litigation against businesses. Class actions undeniably have been abused in some courts, primarily in Texas, Mississippi, Alabama and Illinois.
Advocates for change have somewhat exaggerated, however, the dimensions of the problem. First, the "friendly court" problem is largely confined to a few counties in a handful of states-and Indiana is not among them. Even though Indiana sports a series of pro-class-action appellate decisions stretching back 30 years, there has been little abuse of the class-action device in Indiana state courts. For example, during the past two years,
an Indiana trial court declined to certify a class in a large product-liability case against an out-of-state pharmaceutical company,
the Indiana Court of Appeals reversed certification of a class of Indiana employees asserting wage and hour claims against a large retailer,
the Indiana Supreme Court vacated the certification of a large class against a health insurer accused of shortchanging doctors.
Second, problem states already are moving to mitigate the problem. For example, in the late 1990s, the Texas Supreme Court issued the "Texas trilogy," three opinions tightening review of class certifications to ensure that trial judges were following state law.
To greatly oversimplify, CAFA requires a federal court to accept jurisdiction of a class action (at a defendant's request) when fewer than one-third of the class members reside in the state, and when defendants can satisfy other tests requiring singling out the most important defendants and identifying their states of citizenship.
An alternative allows a federal court, in its discretion and after balancing six separate statutory factors, to accept cases in which between one-third and two-thirds of proposed class members are from the forum state.
CAFA also covers certain "mass actions," lawsuits brought by 100 or more plaintiffs.
Finally, CAFA imposes some limits on attorney-fee awards and requires notice of proposed settlements be given to "appropriate," but undefined, state and federal officials.
Defendants invoking CAFA may buy months or years of litigation over the jurisdictional tests, over which officials need to be notified of settlements and what they should do when notified, and over other nuances of the statutory scheme. That litigation of course itself creates cost and risk, and will likely divert management time and attention as well. Such an investment might well be justified in a large case in dreaded Madison County, Illinois, where reform to curb plaintiffs' lawyers' ability to bring cases in favorable forums regardless of the subject of the suit is overdue. And there certainly is nothing unfair in requiring plaintiffs to prove their cases in federal court.
But in Indiana cases, the cure-requiring months of federal court litigation over CAFA's many threshold tests-may be more expensive than the disease.
Yeager is a litigation partner in Baker & Daniels' Indianapolis office.