Class Actions and Legislative Proposals in the 109th Congress: Class Action Fairness Act of 2005
CRS Report for Congress
Class Actions and Legislative
Proposals in the 109 Congress:
Class Action Fairness
Act of 2005
Updated February 18, 2005
Paul S. Wallace, Jr.
Specialist in American Public Law
American Law Division
Congressional Research Service ˜ The Library of Congress
Class Actions and Legislative Proposals in the 109
Congress: Class Action Fairness Act of 2005
S. 5, the Class Action Fairness Act of 2005 has three main sections: (1) an
amendment to the federal diversity statute; (2) a provision regarding removal; and (3)
a consumer class action “bill of rights.” It would control and restrict class action
lawsuits by shifting some of the suits from state to federal courts. This would be
achieved by creating federal jurisdiction over class action suits when the total amount
in dispute exceeds $5,000,000 and when any plaintiff lives in a state different from
that of any defendant. The bill would treat certain “mass actions” with more than
100 plaintiffs as class actions for purposes of jurisdiction. S. 5 would require judges
to review all settlements based on the issuance of coupons to plaintiffs and limit
attorney’s fees to the value of the coupon settlements actually received by class
members. It would also require careful scrutiny of “net loss” settlements in which
class members ultimately lose money. The legislation would ban settlements that
award some class members a larger recovery because they live closer to the court.
It would allow federal courts to maximize the benefits of class action settlements.
Among other things, S. 5 would also require that a notice of proposed settlements be
provided to the appropriate state and federal officials such as the state attorneys
general. It was reported out of the Senate Judiciary Committee without amendment.
On February 10, 2005, the Senate passed S. 5 (72-26) without amendment. On
February 17, 2005, the House also passed S. 5 without amendment, 279-149 and it
is expected to be signed by the President.
Section 1. Short Title.......................................2
Section 2. Findings and Purposes of the Act....................2
Section 3. Consumer Class Action Bill of Rights and
Improved Procedures for Interstate Class Actions.............3
Section 4. Federal District Court Jurisdiction of Interstate Class
Section 5. Removal of Interstate Class Actions to Federal District
C ourt ...............................................6
Section 6. Report on Class Action Settlements..................6
Section 7. Enactment of Judicial Conference Recommendations....6
Section 8. Rulemaking Authority of Supreme Court and
Section 9. Effective Date...................................7
Class Actions and Legislative Proposals in
the 109 Congress: Class Action Fairness
Act of 2005
Article III, Section 2 of the United States Constitution provides that when a
lawsuit involves citizens from different states or a foreigner, federal courts are given
primary jurisdiction. This provision was added for the purpose of limiting
discrimination against out-of-state litigants. However, under the doctrine of
“complete diversity” current judicial rules provide that as long as at least one
defendant and one plaintiff in a lawsuit are from the same state, they should proceed
in that state’s court system, even if the case involves millions of plaintiffs and is
purely interstate or national in nature. In addition, even when “complete diversity”
exists, the amount in controversy must be a minimum of $75,000 per plaintiff.
Consequently, national class actions with plaintiffs from all 50 states and defendants
from multiple states are rarely eligible for federal court jurisdiction.
It is generally agreed that class action lawsuits can facilitate the fair and efficient
resolution of legitimate claims of numerous parties. For these reasons, the federal
and state courts’ rules of civil procedure are designed to enable the litigants to
proceed on a class basis in appropriate cases.
In recent years, there have been allegations of abuses in class action suits: there
are claims that some class action plaintiffs’ attorneys have abused the class action
procedures; there is distortion of the federalist system by the action of a few state
courts; there is excessive compensation to attorneys at the expense of the injured
plaintiffs; these suits create unprecedented costs to the national economy; and they
(class action suits) have caused an overall decline in public respect for our nation’s1
judicial system. Or so business groups and other supporters contend.
Consumer groups and the plaintiffs bar associations such as the trial lawyers’
groups oppose the legislation. They contend that it would unfairly help corporate
defendants in class action suits by moving cases to federal court where damages
awarded are generally smaller. As a result, they argue that the legislation would be
inconsistent with the principles of federalism and it would create a clog in an already
overburdened federal court system thereby slowing the pace of certifying class action2
1 See Class Action Fairness Act of 2003: Hearing Before the House Comm. on the Judiciary,
the Judiciary, 107 Cong., 2 Sess. (2002).
2 See Id.; CRS Report RL31859, Class Actions and Legislative Proposals in the 108th
The 108th Congress was the fourth consecutive Congress which failed to enact
this type of legislation. The House passed a class action bill (H.R. 1115; Class
Action Fairness Act of 2003); however, due to a last minute attempt to attach non-
germane amendments such as drug reimportation and the minimum wage to the
companion bill (S. 2062) in the Senate, it was withdrawn from further consideration
in the 108th Congress.
Senator Grassley reintroduced last year’s stalled Senate class-action bill (S.
2062) as S. 5 on January 25, 2005, which was referred to the Senate Judiciary
Committee.3 On February 3, 2005, the Senate Judiciary Committee approved the
overall bill on a 13-5 vote, without amendment, and referred it to the Senate.4
On February 10, 2005, S. 5 passed the Senate without amendment by a vote of
72-26.5 On February 15, 2005, S. 5 was referred from the House Rules Committee
to the full House of Representatives by voice vote.6 On February 17, 2005, the
House, as in the Senate, passed S. 5 without amendment, 279-149.7 It is expected to
be signed by the President on February 18, 2005.8
Section 1. Short Title. The act may be cited as the “Class Action Fairness
Act of 2005.” This section also states that it amends title 28 of the United States
Section 2. Findings and Purposes of the Act. The act sets out
Congress’ findings describing in essentially these words the: (1) circumstances in
which class actions are valuable to our legal system; (2) abuses of the class action
process that have harmed class members with legitimate claims and defendants that
have acted responsibly, adversely affected interstate commerce, and undermined
public respect for our judicial system; (3) the manner by which class members have
been harmed by a number of actions taken by plaintiffs’ lawyers, which provide little
or no benefit to class members as a whole, including (i) plaintiffs’ lawyers receiving
large fees, while class members are left with coupons or other awards of little or no
value, (ii) unjustified rewards made to certain plaintiffs at the expense of other class
members, and (iii) confusing published notices that prevent class members from
being able to fully understand and effectively exercise their rights; (4) abuses in class
actions which undermine the national judicial system, the free flow of interstate
Congress: Class Action Fairness Acts of 2003 and 2004, at 9-10.
3 151 Cong. Rec. S450 (daily ed. Jan 25, 2005).
4 151 Cong. Rec. S978 (daily ed. Feb. 3, 2005).
5 151 Cong. Rec. S1259 (daily ed. Feb. 10, 2005).
6 H.Rept. 109-7 Cong. Rec. D93-D94, H603 (daily ed. Feb. 15, 2005).
7 151 Cong. Rec. H723-H755 (daily ed. Feb. 17, 2005).
8 Washington Post, Feb. 18, 2005, at 1, col. 1.
commerce, and the concept of diversity jurisdiction as intended by the framers of the
United States Constitution, in that State and local courts are (i) keeping cases of
national importance out of federal court, (ii) sometimes acting in ways that
demonstrate bias against out-of-state defendants, and (iii) making judgments that
impose their view of the law on other states and bind the rights of the residents of
The act’s stated purposes are to (1) ensure prompt and fair recovery of
legitimate class action claims; (2) reflect the purpose behind the Constitution’s
diversity jurisdiction clause; and (3) to encourage commercial innovation and
Section 3. Consumer Class Action Bill of Rights and Improved
Procedures for Interstate Class Actions. S. 5 would add five new sections
to 28 U.S.C. which are intended to provide greater protections for class members.
In particular, section 3 would add the following:
!Section 1711-Class action definitions
(1) Class Action-The term is defined to include any civil action filed in federal
district court under Rule 23 of the Federal Rules of Civil Procedure, as well as
actions filed under similar rules in state court that have been removed to federal
(2) Class Counsel-The term is defined as “the persons who serve as the attorneys
for the class members in a proposed or certified class action.”
(3) Class Members-The term is defined as “the persons (named or unnamed)
who fall within the definition of the proposed or certified class in a class action.”
(4) Plaintiff Class Action-The term is defined as “a class action in which class
members are plaintiffs.”
(5) Proposed Settlement-The term is defined as “an agreement regarding a class
action that is subject to court approval and that, if approved, would be binding on
some or all class members.”
!Section 1712-Judicial scrutiny of coupon and other noncash
This provision is aimed at certain proposed settlements of class actions, in
which the plaintiffs’ lawyer and the defendant work out a settlement that provides
class members with essentially valueless coupons while rewarding the lawyers with
substantial attorneys’ fees. To address this problem, this section provides that a
judge may approve a proposed settlement under which the class would receive
noncash benefits or would otherwise be required to expend funds in order to obtain
part or all of the proposed benefits only after a hearing to determine whether, and
making a written finding that, the settlement is fair, reasonable, and adequate for
class members. In doing so, the judge on the motion of any party may receive expert
testimony as to the coupons’ value.
It would require that attorneys fees be based either (a) on the value of the
coupons actually redeemed by class members in contingent fee cases; (b) on the
hours reasonably billed in presenting the class action; or (c) on the value of the
coupons redeemed and, to the extent a settlement provides, for equitable relief on a
reasonable hourly rate and total. Attorneys fees coupon calculations could not be
based on unredeemed coupons, although with court approval the value of
unredeemed coupons could be distributed for charitable purposes specified in the
!Section 1713-Protection against loss by class members
This provision provides that a judge may not approve a class action settlement
in which the class member will be required to pay attorney’s fees that would result
in a net loss to a class member unless the court determines in a writing finding that
the benefits to the class member substantially outweigh the monetary loss.
!Section 1714-Protection against discrimination based on
This provision provides that a settlement may not award some class members
a larger recovery than others solely because the favored members of the class are
located closer to the courthouse in which the settlement is filed.
!Section 1715. Notifications to appropriate federal and state
This provision requires defendants to notify the appropriate state and federal
official of the particulars of any class action settlement and delays the effective date
of the settlement until 90 days after they have done so. The appropriate federal
officials include the Attorney General and in the case of financial institutions the
federal regulatory authorities. State officials entitled to notice include the authorities
with regulatory jurisdiction over a defendant in any state in which any member of the
class resides. Should a defendant fail to comply with the notification requirements,
any individual class member would be free to walk away from his obligations under
the settlement agreement.
Section 4. Federal District Court Jurisdiction of Interstate Class
Actions. Article III of the Constitution protects out-of-state litigants against the
prejudice of local courts by allowing for federal diversity jurisdiction when the
plaintiffs and defendants are citizens of different states. However, under current law,
federal diversity jurisdiction for a class action does not exist unless every member of
the class is a citizen of a different state from every defendant, and every member of9
the class is seeking damages in excess of $75,000. This section would change the
law by providing additional protection for out-of-state litigants by creating a minimal
9 28 U.S.C. § 1332. See also Zahn v. International Paper Co.,414 U.S. 291, 301 (1973)(The
Supreme Court decided that in class actions based on diversity of citizenship, every single
class member must satisfy the “matter [amount] in controversy” requirement of section
diversity rule for class actions and by determining satisfaction of the amount-in-
controversy requirement by looking at the total amount of damages at stake.
Under the proposal, federal district courts receive original jurisdiction over any
class action in which the amount in controversy, exclusive of interest and costs,
exceeds $5,000,000 and in which (A) “any member of a class of plaintiffs is a citizen
of a State different from any defendant;” (B)”any member of a class of plaintiffs is
a foreign state or a citizen or subject of a foreign state and any defendant is a citizen
of a State;” or (C) “any member of a class of plaintiffs is a citizen of a State and any
defendant is a foreign state or a citizen or subject of a foreign state.” This rule holds
true if less than one-third of the plaintiffs and the primary defendants come from the
state where the suit is filed; has no application if two-thirds or more of the plaintiffs
and a primary defendant come from the state where the suit is filed; and applies at the
discretion of the federal court if more than one-third but less than two-thirds of the
plaintiffs and the primary defendants come from the state where the suit is filed.10
In the exercise of their discretion, the federal courts must consider:
— “Whether the claims asserted involve matters of national or interstate
— “Whether the claims asserted will be governed by laws of the State in
which the action was originally filed”
— In the case of a class action originally filed in a State court, “whether the
class action has been pleaded in a manner that seeks to avoid Federal
— “Whether the action was brought in a forum with a distinct nexus with the
class members, the alleged harm, or the defendants”
— “Whether the number of citizens of the State in which the action was
originally filed in all proposed plaintiff classes in the aggregate is
substantially larger than the number of citizens from any other State, and
the citizenship of the other members of the proposed class is dispersed
among a substantial number of States”
— “Whether ...1 or more class actions asserting the same or similar claims on
behalf of the same or other persons have been filed.”
This section contains a similar class action definition as section 3, defining a
class action as (A) any civil action filed pursuant to rule 23 of the Federal Rules of
Civil Procedure or a similar state statute or rule. It also deems to be class actions
10 H.R. 1115 in the 108th Congress would have provided for the removal of class actions to
federal court if less than one-third of the plaintiffs are from the same state as the primary
defendant and the suit involves more than $5,000,000.00. S. 2062 substantially broadened
the “two thirds/one-third” analysis to eliminate consideration of a defendant’s state or
residence in determining whether to remove an action to federal district court.
certain other types of civil actions: (1) an action that asserts claims seeking monetary
relief on behalf of 100 or more persons, in which the claims involve common
questions of law or fact and are to be jointly tried; but not (2) an action on behalf of
the general public pursuant to state statute.11
Again, in order that actions lacking national implications remain in state court,
the minimal diversity rule does not apply in any action where “(A) two-thirds or more
of the members of all proposed plaintiff classes in the aggregate and the primary
defendants are citizens of the State in which the action was originally filed; (B) the
primary defendants are States, State officials, or other governmental entities against
whom the district court may be foreclosed from ordering relief; or (C) the number of
members of all proposed plaintiff classes in the aggregate is less than 100.”12
Section 5. Removal of Interstate Class Actions to Federal District
Court. Under existing federal law, civil actions filed in state court, which might
have been filed in federal court, can be removed to federal court under some
circumstances, see 28 U.S.C. 1441 et. seq. Section 5 would permit removal from
state court of minimum diversity cases that section 4 would permit to have been filed
originally in federal court. It would allow class action lawsuits to be removed from
state court to federal court by any defendant without the consent of any of the other13
Section 6. Report on Class Action Settlements. This provision directs
the Judicial Conference of the United States with the assistance of the Director of the
Federal Judicial Center and the Director of the Administrative Officer of the United
States Courts to report to the Judiciary Committees of the Senate and House of
Representatives within 12 months of the enactment with recommendations on the
best practices to further ensure fairness in class action settlements with regard to class
members and attorneys’ fees which should appropriately reflect the extent and
success of the attorneys’ efforts.
Section 7. Enactment of Judicial Conference Recommendations.
This section, which perhaps survives through a scrivener’s error, first appeared in
bills introduced early in 2003 and was designed to accelerate the effective date of
class action reform amendments to Rule 23 of the Federal Rules of Civil Procedure,
see H.Rept. 108-144, at 45 (2003). Those amendments, then scheduled to become
effective on December 1, 2003, did in fact become effective on that date. In its
current form the section appears simply redundant, for it provides that those
amendments to Rule 23 shall become effective on December 1, 2003, or upon
enactment of S. 5, whichever comes first.
11 The House bill in the 108th Congress deviated from the Senate version with regards to two
kinds of lawsuits that are not class actions: (1) “private attorney general” cases brought by
a named plaintiff other than a state attorney general and (2) non-class action cases involving
100 or more plaintiffs, known as “mass tort” cases. 149 Cong. Rec. at H5295. H.R. 1115
would have imposed the new class action rules on both cases.
12 See, S. 5, proposed 28 U.S.C. 1332(d)(4), (5).
13 Under H.R. 1115, any defendant, named plaintiff or unnamed member of a plaintiff class
would have been able to seek removal at any time.
Section 8. Rulemaking Authority of Supreme Court and Judicial
Conference. This section provides that nothing in this act shall restrict the
authority for the Judicial Conference and the Supreme Court to propose and prescribe
the general rules of practice and procedure for the federal courts.
Section 9. Effective Date. This section provides that the legislation applies
to any civil action commenced on or after the date of enactment.
Although balanced by the enhanced class member protection features, the
jurisdictional and removal components of S. 5 are much like its antecedents in the
!Class action process has been manipulated in recent years;14
!U.S. companies have been flooded with labor and employment
litigation, much of which has been entirely without merit;15
!Proposed changes in the law will increase sanctions against lawyers
who bring frivolous claims to court.16
Opponents object that they:
!Would clog an already overburdened federal court system and slow17
the pace of certifying class action cases;
!Are inconsistent with the principles of federalism;18
!Would make consumer and public interest litigation more difficult
to bring, more expensive, and more burdensome.19
14 H.Rept. 108-144, at 8. See also statements on the introduction of S. 5, 151 Cong. Rec.
S450 (daily ed. Jan. 25, 2005) (“Consumers are too often getting the short end of the stick
in class action cases, recovering coupons or pocket change, while their lawyers reap
15 Id. at 13-14.
16 Id. at 8 and 46-47.
17 H.Rept. 107-370, at 125-26 (Dissenting views of Reps. Conyers, Berman, Nadler, Scott,
Watt, Lofgren, Jackson-Lee, Waters, Meehan, Delahunt, and Baldwin).
18 Id. at 126-29.
19 Id. at 129-34. The legislation, they argue, would create numerous barriers to participating
in class actions by permitting defendants to remove most state class action suits to federal
court. The removal from state court to federal court would leave consumers shuttling back
and forth between state and federal court because while a consumers’ class could meet state
law class certification requirements, it could fail to meet the class certification requirements
set forth in federal law. The result, they contend, will be the federal courts’ denial of class
certification and dismissal of the case. See also, S.Rept. 106-420, at 51-60 (2000) (Minority
views of Sens. Leahy, Kennedy, Biden, Feingold and Torricelli).