House committee approves legislation to reform class action and multi-district litigation

March 19, 2017

Class Action Alert

Author(s): Dale A. Hudson, Mae Hau

The House Judiciary Committee has approved the Fairness in Class Action Litigation Act of 2017 which would enact wide-ranging changes to the rules governing class and multi-district litigation.

In February of this year, the House Judiciary Committee approved the Fairness in Class Action Litigation Act of 2017 (FCALA), which would enact wide-ranging changes to the rules governing class and multi-district litigation. The sponsors of the bill state that the purpose of FCALA is to “assure fair, more efficient outcomes for claimants and defendants.” While no one would quarrel with the stated goal of the legislation, many of the specific provisions of the legislation are controversial.

FCALA consists of a hodgepodge of new procedural rules. Some of the proposed rule changes would undoubtedly have significant impact on class litigation. Other provisions, such as the disclosure requirements, will likely have little if any practical impact.

FCALA would prohibit a court from certifying a class seeking monetary relief unless the plaintiff demonstrates that each proposed class member suffered the “same type and scope of injury.” The court would have to make a specific finding after “a rigorous analysis of the evidence presented.” As a practical matter, it is unclear how this restriction would play out in litigation. For example, it is unclear what would happen in a scenario where all class members suffered an injury from side-effects of a prescription drug, but the types or severity of the reactions varied. The courts would be required to sort this out.

FCALA would prohibit a court from certifying a class seeking monetary relief unless the class can be defined by “objective criteria” and there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within the class definition and (b) for distributing the recovery directly to a substantial majority of class members.

One of the more controversial provisions of FCALA would prohibit anyone with a current or past relationship with class counsel from serving as a class representative. This would include all relatives of class counsel, all current or former employees of class counsel and all current or former clients of class counsel. The prohibition on employees and relatives serving as class representatives is presumably intended to reign in “attorney-driven” litigation. However, the proposed prohibition on current or former clients of class counsel serving as a class representative is extremely broad. For example, it could make it difficult for pension funds to find attorneys to bring class action lawsuits for securities law violations, since they would effectively be prohibited from using the same law firm more than once. If this provision is not eliminated or at least watered down in the course of the legislative process, it will likely face serious constitutional challenges.

FCALA would require that any proposed class representative disclose if he or she has previously served as a class representative in a prior lawsuit. In addition, class counsel would be required to disclose if any entity is helping to fund the litigation in exchange for a contingent recovery.

FCALA would limit attorney’s fees awarded to class counsel to “a reasonable percentage of any payments directly distributed to . . . class members.” This is a change from current law, which generally calculates fees as a percentage of the gross recovery (including attorney’s fees). This rule change would discourage so-called “reversionary settlements,” whereby amounts not claimed by class members revert to the defendant, while class counsel nonetheless seeks fees based on the amount of the potential maximum payment. In furtherance of this goal, the legislation would also provide that attorney’s fees could not be determined or paid until payments to the class have been completed. However, the rule delaying payment of attorney’s fees would apply to all class action lawsuits, even where no reversionary component is present. The reason for this proposed delay is unclear.

Where a class lawsuit obtains equitable relief (such as an injunction restricting future conduct), attorney’s fees would be limited to a “reasonable percentage of the value of the equitable relief.” The legislation provides no guidance as to how this would be determined. Class counsel might be required to present expert testimony as to the monetary value of non-monetary relief.

FCALA would also provide that all orders granting or denying class certification are immediately appealable. This is a departure from current procedure, where an appeal must wait until proceedings at the trial court have concluded, unless the court of appeal exercises its discretion to allow an immediate appeal. If this reform is enacted, one would expect that defendants would routinely appeal any orders granting class certification; this would typically delay proceedings at the trial court level for a year or more. FCALA would further provide that all proceedings are stayed once a defendant brings a motion to strike class allegations, a motion to dismiss or a motion to transfer.

Finally, FCALA would require class counsel to prepare an accounting of monies paid incident to any recovery, with details such as the number of class members who received payments, the average amount of such payments and the amounts paid to others, such as class counsel. The accounting would be provided to federal agencies that oversee the federal courts, which in turn would issue an annual report summarizing how funds paid by defendants in class action lawsuits had been distributed.

Although the impact of this legislation on class litigation would undoubtedly be significant, it should be emphasized that the legislation would have no impact on the vast majority of class action lawsuits, which are filed in state courts. In fact, FCALA might encourage attorneys to file even more class actions in state court, in order to avoid the restrictive rules of FCALA.

As with changes to rules governing class action litigation, FCALA would also amend certain rules applicable to cases that become part of multi-district litigation (MDL). The bill would require a plaintiff in a personal injury action to submit evidence of their injury within 45 days of their case being transferred to the multi-district proceeding. Such evidentiary support would include medical records regarding the alleged injury, evidence of exposure to the risk that allegedly caused the injury and evidence of the alleged cause of the injury. Where the judge finds that such evidentiary support is insufficient, the action is to be dismissed without prejudice. The plaintiff would then have 30 days to tender a sufficient submission and, if he or she fails to do so, the action would be dismissed with prejudice. These changes are intended to ferret out cases where the harm to plaintiff is minimal or not supported by documentary evidence.

In addition, FCALA would limit MDLs to pretrial proceedings, and would prohibit the use of MDL procedures for any trial “unless all parties to the civil action consent to trial of the specific case sought to be tried.” FCALA would also require that plaintiffs in an MDL proceeding receive 80 percent of any recovery, whether obtained by settlement, judgment or otherwise. This would effectively limit attorneys’ fees to 20 percent of the total recovery. This is a significant departure from present arrangements for plaintiff’s attorneys, who often charge a contingency fee between 25 percent and 40 percent of the total recovery.

Finally, FCALA would alter the rules regarding diversity of citizenship in personal injury and wrongful death claims. Under current law, federal courts have jurisdiction over cases in which the diversity of citizenship among the parties is complete, i.e., only if there is no plaintiff and no defendant who are citizens of the same state. FCALA would require federal courts to consider each plaintiff’s claims separately, and to sever those claims that do not satisfy the diversity of citizenship requirement. To illustrate the effect of this provision, consider a products liability lawsuit involving ten plaintiffs, one of whom is a citizen of the same state as the defendant. Under current law, a federal court would be required to remand the case to state court because complete diversity between the plaintiffs and defendant is lacking. However, the new FCALA provision would require the court to sever the claim of the plaintiff who is a co-citizen of the defendant, and to retain jurisdiction over the remaining nine plaintiffs’ claims, as complete diversity would exist after severance. This is intended to combat the practice of joining at least one non-diverse plaintiff in a lawsuit to order to avoid removal to federal court.

FCALA was passed without any hearings (although hearings were held on similar legislation that had been proposed in the last Congress). FCALA now goes to the full House, which is expected to approve the legislation along a largely party-line vote. The legislation’s fate in the Senate remains unclear; one unknown is whether Senate Democrats would launch a filibuster in an effort to stop the legislation. It seems likely, at a minimum, that the Senate will amend some of the more controversial provisions before passing the bill. President Trump would be expected to sign any bill that Congress would place on his desk.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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