[Senate Hearing 106-465] [From the U.S. Government Publishing Office] S. Hrg. 106-465 THE CLASS ACTION FAIRNESS ACT OF 1999 ======================================================================= HEARING before the SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED SIXTH CONGRESS FIRST SESSION on S. 353 A BILL TO PROVIDE FOR CLASS ACTION REFORM, AND FOR OTHER PURPOSES __________ MAY 4, 1999 __________ Serial No. J-106-22 __________ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 63-965 WASHINGTON : 2000 COMMITTEE ON THE JUDICIARY ORRIN G. HATCH, Utah, Chairman STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware JON KYL, Arizona HERBERT KOHL, Wisconsin MIKE DeWINE, Ohio DIANNE FEINSTEIN, California JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York BOB SMITH, New Hampshire Manus Cooney, Chief Counsel and Staff Director Bruce Cohen, Minority Chief Counsel ______ Subcommittee on Administrative Oversight and the Courts CHARLES E. GRASSLEY, Iowa, Chairman JEFF SESSIONS, Alabama ROBERT G. TORRICELLI, New Jersey STROM THURMOND, South Carolina RUSSELL D. FEINGOLD, Wisconsin SPENCER ABRAHAM, Michigan CHARLES E. SCHUMER, New York Kolan Davis, Chief Counsel Matt Tanielian, Minority Chief Counsel (ii) C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page Grassley, Hon. Charles E., U.S. Senator from the State of Iowa... 1 Kyl, Hon. Jon, U.S. Senator from the State of Arizona............ 33 Thurmond, Hon. Strom, U.S. Senator from the State of South Carolina....................................................... 33 Sessions, Hon. Jeff, U.S. Senator from the State of Alabama...... 34 Torricelli, Hon. Robert G., U.S. Senator from the State of New Jersey......................................................... 35 Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin.....37, 38 CHRONOLOGICAL LIST OF WITNESSES Statement of Eleanor D. Acheson, Assistant Attorney General, Office of Policy Development, U.S. Department of Justice, Washington, DC................................................. 40 Panel consisting of John P. Frank, Lewis and Roca, Phoenix, AZ; and E. Donald Elliott, Prof. of Law, Yale Law School, New Haven, CT...................................................... 52 Panel consisting of Stephen G. Morrison, general counsel, Policy Management Systems Corp., Columbia, SC; Richard A. Daynard, Prof. of Law, Northeastern University School of Law, Boston, MA; and John H. Beisner, O'Melveny and Myers, LLP, Washington, DC............................................................. 107 ALPHABETICAL LIST AND MATERIAL SUBMITTED Acheson, Eleanor D.: Testimony.................................................... 40 Prepared statement........................................... 47 Beisner, John H.: Testimony.................................................... 123 Prepared statement........................................... 125 Daynard, Richard A.: Testimony.................................................... 116 Prepared statement........................................... 118 Elliott, E. Donald: Testimony.................................................... 95 Prepared statement........................................... 96 Frank, John P.: Testimony.................................................... 52 Prepared statement........................................... 55 Grassley, Hon. Charles: Article: ``Federalist Society's Study On Class Actions: Part I,'' Vol. 1 No. 1, Spring 1999............................. 5 Article: ``Federalist Society's Study On Class Actions: Part II,'' Vol. 1 No. 2, Spring 1999............................ 21 Morrison, Stephen G.: Testimony.................................................... 107 Prepared statement........................................... 109 APPENDIX Proposed Legislation S. 353 A bill to provide class action reform, and for other purposes....................................................... 141 Questions and Answers Responses of Eleanor Acheson to Questions from Senators: Grassley..................................................... 154Thurmond..................................................... 160 Torricelli................................................... 162 Kohl......................................................... 163 Responses of John P. Frank to Questions from Senators: Thurmond..................................................... 167 Kohl......................................................... 168 Responses of Prof. E. Donald Elliott to Questions from Senators: Grassley..................................................... 171 Thurmond..................................................... 171 Kohl......................................................... 172 Responses of Stephen Morrison to Questions from Senators: Grassley..................................................... 180 Kohl......................................................... 186 Responses of Richard A. Daynard to Questions from Senators: Torricelli................................................... 191 Kohl......................................................... 193 Responses of John H. Beisner to Questions from Senators: Grassley..................................................... 246 Kohl......................................................... 256 THE CLASS ACTION FAIRNESS ACT OF 1999 ---------- TUESDAY, MAY 4, 1999 U.S. Senate, Subcommittee on Administrative Oversight and the Courts, Committee on the Judiciary, Washington, DC. The subcommittee met, pursuant to notice, at 2:05 p.m., in room SD-226, Dirksen Senate Office Building, Hon. Charles E. Grassley (chairman of the subcommittee) presiding. Also present: Senators Thurmond, Sessions, and Kyl [ex officio]. OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE STATE OF IOWA Senator Grassley. I want to say good afternoon to everybody, and I would like to thank everybody for coming to this hearing about class action abuse and S. 353, the Class Action Fairness Act of 1999. We have party caucuses that go on usually until 2:15 p.m. or a little bit past that on Tuesdays. So since we have such a full schedule of people to hear this afternoon, I want to start on time and I will stop wherever we are for people, particularly Mr. Torricelli or Mr. Kohl, who will represent and speak for the Democrats. I will let them speak when they get here, regardless of where we are in the process because it is only fair for them to have an opening statement as well. Although we had a joint hearing with the House earlier this year on bankruptcy reform, this is the first Senate only subcommittee hearing with Senator Torricelli as the ranking member. So I welcome his participation and hope to work closely with him during this Congress and beyond what is on the agenda of this subcommittee. Although the subcommittee did not take up the bankruptcy reform bill, I have had a very close working relationship with Senator Torricelli on that major piece of legislation. The topic of our hearing today is an important subject that lately has received considerable attention. More and more people recognize that the class action system is being abused and that the people who are supposed to be helped by this process are instead getting used. Ultimately, the current system is benefiting lawyers and not your average class member. This subcommittee held a hearing about a year ago to examine the problems occurring with class actions and how the process is being abused at the expense of the plaintiff class and defendants. We heard about scenarios where plaintiffs are misled into accepting settlements which either offer them little of value or even cost them money, while the class lawyers get rich. We heard about settlements where plaintiffs receive coupons of little value or with redemption restrictions making them practically useless. Yet, their lawyers receive millions of dollars in attorneys' fees. We heard about attorneys searching the newspapers and the Federal Register for possible cases, determining which ones they can reap the most from, then recruiting potential plaintiffs so that they can bring their lawsuits. Those things are already on the record. We also heard about the increased concentration of class actions in State courts, particularly in courts which are more susceptible to approving class certifications without adequately considering whether a class action would be fair to all class members. We heard about plaintiff lawyers gaming the system to avoid removal to Federal court by manipulating the pleadings and by finding a token plaintiff or defendant to defeat procedural requirements. We heard about lawyers using the State court system to get the lowest settlement amount possible for defendants and the highest amount in attorneys' fees for the plaintiff class lawyers. The abuse list goes on, and I am sure that we are going to hear more about this today. That is why Senator Kohl and I introduced the Class Action Fairness Act. Our bill takes the first step at curbing class action lawsuit abuses. It requires that settlement notices be written in plain English and include the amount and sources of attorneys' fees. It requires notification of State attorneys general of any proposed class settlement that affects their residents so that they can object if the settlement terms are unfair. It penalizes frivolous class action filings by requiring to impose rule 11 sanctions, although the nature and extent of such actions remain discretionary. Our bill discourages settlements that give attorneys exorbitant fees based upon hypothetical over-valuation of coupon settlements by providing that class action attorneys' fees be based on a reasonable percentage of damages actually paid to class members. It allows attorneys' fees to be based on an hourly rate so that reasonable fees are available in all kinds of cases, including those involving injunctive relief. Our bill also allows more class action lawsuits to be removed from State court to Federal court either by a defendant or an unnamed class member. Currently, class lawyers can avoid removal if the individual claims are for just less than $75,000 or if just one class member is from the same State as a defendant. Consequently, plaintiff class lawyers gravitate toward those State courts which permit class actions to proceed with little or no scrutiny, and lawyers play games with the procedural requirements to stay in those State courts. On the other hand, Federal courts consistently give closer scrutiny to class settlements and to whether it is fair for a case to proceed as a class action. They are better equipped to deal with multi-State issues. With their ability to consolidate related cases, the Federal courts can bring about more efficiencies and prevent a race to settlement between competing cases. Not only do I believe that the changes in our bill better protect the due process rights of unnamed plaintiffs and defendants, I believe that the fact that we are dealing with multi-State plaintiffs makes the Federal courts an appropriate forum for these kinds of cases. This is especially true because I don't believe State courts should be dictating national policy or imposing their State's laws on other State citizens in these multi-State cases. In fact, I believe that to the extent there is some federalization of class standards, it is reasonable to do with uniformity rather than having individual State courts setting different standards, which only breeds gaming of the judicial system and forum-shopping. Today, we will hear from witnesses that there is a clear constitutional basis to having these multi-State class actions proceed in Federal court. But our bill also takes into account federalism concerns by making sure that the purely State cases remain in State court, thus allowing State courts to retain their ability to adjudicate class actions that involve their citizens. I want to make it clear, our bill does not prevent any claim from being heard, nor does it close the courthouse door to any plaintiff. Now, I have heard from lawyers who say that the plaintiff class is obtaining the best value for their case by winning in settlement a bunch of coupons. How can that be? How can a lawyer tell me that the plaintiff class got a great deal where the attorneys negotiated a settlement valued by the court at millions of dollars, of which the class got only coupons, the terms of which are so restrictive they are basically useless, and the lawyers got all the cash? Witnesses have testified to Congress that these coupons allow the class lawyers to claim that a settlement is worth much more than it really is worth, and therefore they can claim more in attorneys' fees. Again I ask, if coupons are better for the clients, why aren't the lawyers paid in coupons? These coupon deals are so pervasive that even one of my staffers got a notice telling him that as a member of a plaintiff class in a lawsuit against a mortgage company, he had won in settlement a coupon for $100 off the next financing or refinancing of his mortgage with this company. But he doesn't want to refinance his mortgage at this time, and certainly not with the company that ripped him off in the first place. So you tell me what use to this staff person is this coupon worth $100. And I am sure that those attorneys are not going to be paid with coupons to refinance their mortgages. What I see happening is lawyers negotiating for something of little to no value for their clients, but keeping what does have value--in other words, cash--for themselves. The way I see it, the class plaintiffs receive no benefit whatsoever and, in fact, plaintiffs forfeit their right to sue. And the reason the plaintiffs' bar is so opposed to any regulation is because we are talking about taking away their gravy train. Moreover, I find it remarkable that some still maintain that the class action problems we are seeing--State court abuse, attorney misconduct, and consumer exploitation--just happen to be anecdotal. That is not the case. The RAND study, a study by Stateside Associates, and statistics recently compiled by the Federalist Society confirm that more and more class action lawsuits are being filed, that they are increasingly concentrated in State courts, and that abuses are occurring with class actions. For example the RAND study found that the problems are intrinsically inherent in the class action system, stating that, ``It is generally agreed that fees drive plaintiffs' attorneys' filing behavior, that defendants' risk aversion in the face of large aggregate exposures drives their settlement behavior * * * In other words, the problems with class actions flow from incentives that are embedded in the process itself.'' The House and Senate committee hearing records are replete with examples of class action abuses. The Judicial Conference has recognized that the process is being misemployed. They have been studying how to fix the class action system for quite some time now. Something has to be done, and our bill is one good first step. Today, the subcommittee will continue in its examination of class action abuse. We will look at how the Grassley-Kohl bill can address some of these problems, and listen to suggestions on how to make our bill better and how to further address the class action phenomenon. I am looking forward to hearing from all of our distinguished witnesses. Without objection, I would like to place in the record the Federalist Society's study on class actions already referred to. 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Because he has to go very quickly, I want to call on the Senator from Arizona for purposes of an introduction. STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM THE STATE OF ARIZONA Senator Kyl. Well, thank you very much, Mr. Chairman, and thank you for the legislation you have sponsored and for holding this hearing. I appreciate my colleagues allowing me to proceed out of turn. As a member of the full committee but not this subcommittee, I appreciate your courtesy. I simply wanted to preliminarily introduce a member of your third panel, John P. Frank, from my State of Arizona, a distinguished member of the bar, a partner in the firm of Lewis and Roca there, and a member of the firm's special litigation group. In fact, Mr. Chairman, he has been involved in more than 500 appeals in the Arizona Supreme Court, the Ninth Circuit and the U.S. Supreme Court. That is about as many appeals as I have made to the chairman of our full committee here, so I know that is a lot of appeals. John Frank was a law clerk to Justice Hugo Black. He was an Assistant Professor of Law at Indiana University, and then a Professor of Law at Yale University. He has been named to the National Law Journal's list of the 100 Most Influential Lawyers in the country, not once, not twice, but three times. In all of the good things I can say about him, of course, there is one thing that is a black mark on his record, but I will not fail to mention it. He has for many years, and currently serves as General Counsel to the Arizona Democratic Party. With that one exception, his record, however, is outstanding. [Laughter]. In fact, I had the opportunity for a time to serve as General Counsel to the Republican State Party at the same time that John served for the Democrats, and we worked together on a number of matters. But to conclude, Mr. Chairman, John Frank is Chairman of the Senior Advisory Board to the Ninth Circuit Court of Appeals. And in addition to writing 11 books on legal history and constitutional law, he served on the Civil Procedure Committee of the Judicial Conference from 1960 to 1970, which, of course, meant that he was a member of that committee in 1966 when it promulgated the present rule 23 on class actions. He is eminently qualified to speak to the subject of your bill. His conclusions and his testimony here are eminently balanced and sensible. I commend them to you, and again preliminarily introduce to you John P. Frank, of Phoenix. Thank you for the opportunity to do that at this point. Senator Grassley. We thank Mr. Frank for coming, and thank you, Senator Kyl. Senator Thurmond. STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR FROM THE STATE OF SOUTH CAROLINA Senator Thurmond. Thank you, Mr. Chairman. I am pleased that the subcommittee is holding this hearing today on S. 353, the Class Action Fairness Act. I think this is important legislation that is needed to help reform our class action system. I appreciate your work, Mr. Chairman, on this issue. Class action lawsuits are an extremely important aspect of our court system. We generally think of lawsuits as involving a few named persons. However, in class actions, hundreds or thousands of people are often involved. A major reason for class actions is to allow aggrieved people to combine together to bring a lawsuit that would not be worth bringing on their own. By combining together, the case can generate enough money to compensate attorneys, and the results sometimes can be quite beneficial for plaintiffs. Unfortunately, however, there are sometimes abuses, and the abuses appear to be increasing. There is a great incentive on the part of lawyers representing the defendants to settle because of the huge potential liability of their company from all of the combined claims. These settlements are often quite good for the attorneys for the plaintiffs, but not necessarily for the plaintiffs themselves. Indeed, the plaintiffs are often secondary to the attorneys. In a hearing here by Senator Grassley in this subcommittee in the last Congress on this issue, we heard from witnesses who received essentially worthless coupons, while their attorneys made millions. A key reform of this bill would combat this problem by linking attorneys' fees to the plaintiffs' actual recovery. This issue is especially important because a number of class action lawsuits arise in State courts, especially courts that have proven to be very receptive to class action lawsuits. Class action lawsuits are important for many litigants, but they should not be used as social tools to effect social change. This hearing is important to discuss the bill's efforts for reform in this area, and I am pleased to have the witnesses with us here today. Thank you, Mr. Chairman. Senator Grassley. Thank you, Senator Thurmond. The Senator from Alabama. STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE OF ALABAMA Senator Sessions. Thank you, Mr. Chairman. I want to say that I believe that class actions can be extraordinarily effective tools in helping us deal with legal problems confronting America. Sometimes, the error, or negligence, committed by the defendant is applicable to thousands, or even hundreds of thousands of different individuals. Therefore, 100,000 lawsuits would not be appropriate, when one case could settle for all the parties involved in those issues. The concept of class action has been around a long time, and I think it is a good concept. What has happened, however is that over the years good advocates have figured out ways to file those actions in circuits and in methods that maximize the benefit to their client. And I respect them for that, but it is up to us in Congress to make sure that we create laws that guarantee fairness across the board. I would like to note one case, for example, from my State of Alabama, Hoffman v. Bank of Boston Mortgage Corporation, a class action filed by a Chicago attorney in the circuit court of Mobile, AL. The case alleged that the bank did not promptly post interest to real estate escrow accounts. A settlement was agreed to that limited the maximum recovery for class members to $9 each. After the State approved the settlement, the bank disbursed more than $8 million to the class action attorneys in legal fees and credited most of the accounts of the victims with paltry sums. The legal fees, equal to 5.3 percent of the balance in each account, were debited to the accounts. So they debited everybody's account, these class action victims, with the legal fees. For many accounts, the debit to the account exceeded the credit they obtained. For example, Dexter J. Kamowitz, of Maine, did not initiate the class action against Bank of Boston. However, he received a credit of $2.19 under the class action settlement. At the same time, the class action attorneys debited his account for $91.33 for legal fees, producing a net loss of $89.14. Such results often produced outrage from class members in other States affected by the action. Judge Frank Easterbrook, of the Seventh Circuit, has asked, ``What right does Alabama have to instruct financial institutions in Florida to debit the accounts of citizens in Maine and other States?'' So this bill would eliminate some of those abuses and help us deal with them. I know there are six rural counties in Alabama which are seen as good counties to file lawsuits in. There have been 91 class actions filed in these six counties in the last number of years, I believe, from 1995 to 1997. And you ask why would a New York attorney or someone from Chicago do that. Well, a good attorney is out to find the best forum, if he can, to file his case in, and many of them have found these forums to be most advantageous. But you are setting a legal principle and establishing penalties nationwide, and I think in interstate matters that the class action really would be better done in Federal court, where you have less possibility of home cooking, a fairer system, a uniform system of law. And although I certainly think we need to be careful about expanding Federal jurisdiction--we have Federal jurisdiction in cases with de minimis interstate commerce nexus, but when a national corporation is dealing with clients in every State in America, that is quintessentially an interstate operation and it is the kind of thing that I think is appropriate in Federal court. Thank you for your leadership, Mr. Chairman. I am pleased to join with you in support of this and I look forward to the testimony, and if we can improve this piece of legislation, I look forward to that. Thank you, sir. Senator Grassley. We have a statement from Senator Torricelli which we will insert into the record at this point. [The prepared statement of Senator Torricelli follows:] Prepared Statement of Senator Robert Torricelli Thank you Senator Grassley. I want to say first that I have great respect for my colleagues Senator Grassley and Senator Kohl, and I don't doubt their commitment to finding a solution to the problem of collusive class action settlements where the attorneys receive more than the plaintiffs. However, I'm not sure how the bill before us addresses that problem. In fact, there are a few provisions in this bill that could greatly hinder the ability of plaintiffs to obtain class action relief at all. Class actions are an essential part of our legal system. They are necessary for administering many of the complex cases that move through our courts. And they are often the most economical and efficient method for managing the claims of a group of similarly injured people. Many times they are the only hope for the injured because they allow people to pool resources against big defendants. Class actions have been an important tool to accomplish policy changes in a variety of areas including civil rights, antitrust, consumer fraud and tort law. The 1997 Texaco employment discrimination case was one of the more notable cases in which this was true in recent years. As you may recall, Texaco was found liable for discriminating against its African-American employees. Indeed, we all heard the tapes documenting the racial epithets used by Texaco's management. The Texaco plaintiffs could never have afforded to pursue this case as individuals, but were able to use a class action to obtain just compensation for the discrimination against them. And perhaps more importantly, they were successful in altering Texaco's systemic discriminatory practices. This is a perfect example of why we need to tread carefully in reforming the class action system. I am concerned that this bill sweeps too broadly and, in so doing, would result in more harm than good. My concerns center on two areas. First, the bill drastically lowers the threshold for removing a case to federal court. The proponents claim there are problems with the current requirement of complete diversity, but I disagree that the solution is to change the law to the complete opposite end of the spectrum, which is minimal diversity. Minimal diversity would allow for removal of cases to federal court if any class member is a citizen of a different from any defendant. Let me give you an example of the kind of cases that will be affected by this bill. tobacco cases Class action lawsuits have been an indispensable tool in recent efforts to hold the tobacco industry accountable. Most tobacco class action litigation occurs in state courts. This arrangement makes sense because the cases typically involve purely state law claims. But this bill will allow tobacco companies to routinely remove or at least attempt to remove cases to federal court where it is more difficult for class certification to occur. In general, the tobacco industry prefers to litigate in federal court and this bill corresponds perfectly with their strategy. gun violence Another example of class actions that will be affected is in the area of gun violence. Litigation is the primary way to ensure that the gun industry takes responsibility for the safety of its products. It would be a disservice to the more than 100 thousand individuals injured by firearms each year to hinder the progress of these suits by giving gun manufacturers the option of removing the case to federal court where the result will be increases in costs and significant delay. My second concern is that in transferring so many class actions-- among the most resource-intensive of all litigation--to federal court, we will place a tremendous burden on federal courts. Federal judges have already seen their caseloads rise substantially over the last five years. The number of civil and criminal filings per district judgeship climbed 16 percent to 484. The number of appeals filed grew 11 percent. Despite these increases, no new judgeships have been created in 8 years and there are currently 65 vacancies in the Federal Judiciary. These discouraging statistics prompted Chief Justice Rehnquist to call the federal judiciary ``a victim of its own success.'' In short, people like federal courts so much that they want to pursue their cases there. In the past few years, Congress has continued to expand federal jurisdiction to areas that were typically the exclusive province of state courts. Yet, Congress has failed to provide the courts with the resources they need to handle them. I will conclude my remarks by quoting again from Justice Rehnquist. He made these remarks in response to legislative proposals to increase the jurisdiction of the federal court: If the ill effects from these bills were confined to the increase of the workload of the federal judiciary, they would still be of concern to judges and to the legal profession. But there is a much broader question involved. How much of the complex system of legal relationships in this country should be decided in Washington, and how much by state and local governments? That is a fundamental question of which we must not lose sight. Thank you. Senator Grassley. It is my privilege now to call on our first witness, and that is Senator Kohl. Senator Kohl has worked very closely and hard with me on this subject and I appreciate his cooperation, and I would like to hear your testimony at this point. STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF WISCONSIN Senator Kohl. Thank you, Mr. Chairman. Mr. Chairman and members of this subcommittee, let me thank you for convening this hearing today on class action abuses. Mr. Chairman, it has been a pleasure working with you on legislation to help ensure that victims stop being shortchanged, while their lawyers line their pockets with exorbitant fees. Let me just give you one disturbing example offered by one of my constituents, Martha Preston, of Baraboo, WI, who testified before this subcommittee less than 2 years ago and whose case I believe Senator Sessions referred to just a few minutes ago. Ms. Preston was an unnamed member of a class action lawsuit against her mortgage company. While she did not initiate the suit, the class action lawyers were supposed to represent her. Instead, they negotiated a settlement that was, at best, a bad joke. Initially, she ``won'' 4 dollars and change. A few months later, however, her lawyers went into her escrow account and secretly took $80--20 times the compensation that she has received. In total, her lawyers managed to pocket over $8 million in fees, but never explained to the court or to their own clients that the class, not the defendant, were paid the attorneys' fees. Naturally outraged, she and others sued the class lawyers, but her suit was turned away on a technicality by a divided Federal court, even though Judge Easterbrook and other dissenting judges blamed the class action lawyers for, ``pulling the wool over the State judge's eyes,'' and complained that unfair class action settlements are too easily, ``crammed down the throats'' of overmatched victims. Adding insult to injury, the lawyers turned around and sued her in Alabama, a State she had never visited, and demanded an unbelievable $25 million. So not only did she lose $75, she was forced to defend herself from a $25 million lawsuit. Mr. Chairman, in the words of Woody Allen, ``this is a travesty of a mockery of a sham of justice.'' Even class action lawyers admit there is a problem. The National Association of Consumer Advocates complains that, ``some * * * newcomers have brought with them a relatively new brand of consumer advocacy, one in which the lawyers stand first, if not alone, in the benefits line at the time of settlement. Simply put, many consumer class actions are now being settled on the basis of what the lawyers get and not what the consumers in the class get.'' And Public Citizen agrees that, ``all too often, class action settlements are approved with little or no judicial scrutiny,'' citing a study finding that 90 percent of all class settlements are approved without amendment. Fortunately, there are a few steps that we can take to weed out the worst abuses, while still protecting what is basically an effective process for vindicating rights. We don't want to close the courthouse doors to important class action claims, and we don't have to. Mr. Chairman, that is why you and I have introduced the Class Action Fairness Act of 1999. This measure, which you described so eloquently, protects victims from being dragged into lawsuits, unaware of their rights and unarmed on the legal battle field. By promoting more disclosure and closer scrutiny, it gives regular people back their rights and their representation. Mr. Chairman, I hope my own balanced record on these types of issues adds credibility to our measure. Just today, I reintroduced the ``Sunshine in Litigation Act,'' which addresses the growing use of secrecy orders by Federal courts that too often allow vital public health and safety information that is discovered in litigation to be covered up, to be shielded from mothers, fathers and children whose lives potentially are at stake. Unlike our class action reform, this is a proposal that trial lawyers support and some business groups resist. Whether it be secrecy in courts or class action reform, doing what is right is what counts. And regardless of where the special interests line up, our Class Action Fairness Act is a terrific place to start. Of course, this is not a final product; we continue to remain open to further negotiations. But, Mr. Chairman, this is a balanced approach that corrects the worst abuses while still preserving the benefits of class actions. So I look forward to working together with you and others to move this forward. Thank you, Mr. Chairman. Senator Grassley. And I accept your offer, obviously, as we do continue our partnership on this bill. Senator Thurmond or Senator Sessions, any questions from either one of you? Senator Sessions. No, Mr. Chairman. Thank you, Senator Kohl, for your comments. Senator Grassley. Thank you very much, Senator Kohl. [The prepared statement of Senator Kohl follows:] Prepared Statement Senator Herbert Kohl Mr. Chairman and members of the Subcommittee, let me thank you for convening this hearing today on class action abuses. Mr. Chairman, it has been a pleasure working with you on legislation to help ensure that victims stop being shortchanged, while their lawyers line their pockets with exorbitant fees. Let me give you just one truly disturbing example, offered by one of my constituents--Martha Preston of Baraboo, WI--who testified before this Subcommittee less than two years ago. She was an unnamed member of a class action lawsuit against her mortgage company. While she did not initiate the suit, the class action lawyers were supposed to represent her. Instead, they negotiated a settlement that was, at best, a bad joke. Initially, she ``won'' four dollars and change. A few months later, however, her lawyers went into her escrow account and secretly took $80--20 times the compensation she received. In total, her lawyers managed to pocket over $8 million in fees, but never explained to the court or to their own clients that the class--not the defendant--would pay the attorneys' fees. Naturally outraged, she and others sued the class lawyers. But her suit was turned away on a technicality by a divided Federal court, even though Judge Easterbrook and other dissenting judges blamed the class lawyers for ``pulling the wool over the state judge's eyes'' and complained that unfair class action settlements are too easily ``crammed down the throats'' of overmatched victims. Adding insult to injury, the lawyers turned around and sued her in Alabama--a state she had never visited--and demanded an unbelievable $25 million. So not only did she lose $75, she was forced to defend herself from a $25 million lawsuit. Mr. Chairman, in the words of Woody Allen, ``this is a travesty of a mockery of a sham of justice.'' In too many cases, victims are dragged into lawsuits unaware of their rights and unarmed on the legal battlefield. In the end, they get little or nothing, while their lawyers cash in. Some of these suits may be frivolous. Even when the claims are real, defendants often collude with class lawyers--leaving defendants with protection from future lawsuits under unreasonably favorable terms, class lawyers with padded wallets, and class members out of luck. And courts, who never hear from anyone looking out for the victims' best interests, often don't give class actions the close scrutiny they deserve. Even class action lawyers admit there's a problem. The National Association of Consumer Advocates complains that ``some * * * newcomers have brought with them a relatively--new brand of consumer advocacy-- one in which the lawyers stand first, if not alone, in the benefits line at the time of settlement. Simply put, many consumer class actions are now being settled on the basis of what the lawyers get and not what the consumers in the class get.'' And Public Citizen agrees that ``all too often class action settlements are approved with little or no judicial scrutiny,'' citing a study finding that 90 percent of all class settlements are approved without amendment. Fortunately, there are a few steps we can take to weed out the worst abuses, while still protecting what is basically an effective process for vindicating rights. We don't want to close the courthouse doors to important class action claims. And we don't have to. Mr. Chairman, that's why you and I have introduced the Class Action Fairness Act of 1999. This measure promotes more disclosure and closer scrutiny. And it gives regular people back their rights and their representation. First, it invites third parties--namely, state Attorneys General-- to look out for consumers by requiring they be notified about proposed class settlements that would affect residents of their states. This provision has been endorsed by Wisconsin's Attorney General Jim Doyle, who also is President of the National Association of Attorneys General. Second, it promotes better disclosure to class members, by requiring notice in plain English--not legal jargon--of the terms of a proposed settlement, including the source of attorneys' fees. Third, it makes class lawyers think twice about ``scam'' settlements by limiting attorneys' fees to a reasonable percentage of the actual damages received by class members, rather than letting them reap big fees based on inflated ``estimates'' of the value of unlikely-to-be-used $5 coupons. Finally, it permits unnamed plaintiffs or defendants to remove multi-state class actions to Federal court, where judges are likely to give closer scrutiny and have the ability to consolidate related cases, in order to prevent a ``race to settlement'' between competing cases and competing class lawyers. Let me emphasize the limited scope of this legislation. Unlike some proposals out there to move from ``opt-out'' to ``opt-in'' procedures, we do not close the courthouse door to any class action. And we do not require that state attorneys general do anything with the notice they receive. We do not deny reasonable fees for class lawyers. Nor do we mandate that every class action be brought in Federal court. These proposals have earned a broad range of support. Even Judge Paul Niemeyer, the Chair of the Judicial Conference's Advisory Committee on Civil Rules, who has testified before Congress on this issue, expressed his support, calling this a ``modest'' measure, noting in particular that increasing federal jurisdiction over class actions will be a positive ``meaningful step.'' Mr. Chairman, I hope my own balanced record on these types of issues adds credibility to our measure. Just today, I've reintroduced the ``Sunshine in Litigation Act,'' which addresses the growing use of secrecy orders by Federal courts that too often allow vital public health and safety information that is discovered in litigation to be covered up, to be shielded from mothers, fathers and children whose lives are potentially at stake. Unlike our class action reform, this is a proposal the trial lawyers support and some business groups resist. Whether it be secrecy in courts or class action reform, doing what is right is what counts. And, regardless of where the ``special interests'' line up, our Class Action Fairness Act is a terrific place to start. Of course, this is not a final product. We continue to be open to further limitation of the removal provision, and you have indicated that you may be able to live without the mandatory Rule 11 penalties, which inexplicably raise loud concerns. But Mr. Chairman, this is a balanced approach that corrects the worst abuses, while still preserving the benefits of class actions. I look forward to working together to move it forward. Thank you. Senator Grassley. Three or four administrative matters before we call the next three panels, and I will obviously call the next three panels separately. Everybody's full written testimony will be put in the record as submitted to us, so your entire statement will become part of the printed record. Therefore, we ask you to summarize your oral testimony in 5 minutes. That is when the red light goes on, and then obviously if you are in the middle of a sentence or in the middle of a paragraph, finish it, but we would like to keep everybody to the limit so we get through because there will be a lot of questions to be asked and we want Members to be able to participate. One other administrative thing, and that is that for Members who are here or for Members who aren't here, you can expect that we won't be able to ask all of our questions orally, so some will be submitted for answers in writing. We would like to have those answers provided to us in writing within 2 weeks from today. If that is an inconvenience for somebody, tell us what would be a good time for you and we will try to accommodate you, but normally we would like to do that in 2 weeks. On our second panel now, I introduce Assistant Attorney General Eleanor Acheson, who will be testifying about the Justice Department's views. I welcome you and thank you for your cooperation in providing testimony for your Department and for your participation in the hearing. I would ask you to proceed. STATEMENT OF ELEANOR D. ACHESON, ASSISTANT ATTORNEY GENERAL, OFFICE OF POLICY DEVELOPMENT, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC Ms. Acheson. Thank you, Senator Grassley. Good afternoon. I appreciate the opportunity to appear before the Subcommittee on Administrative Oversight and the Courts to lay out the Department of Justice's views regarding the proposed Class Action Fairness of 1999, S. 353. I have submitted a more extensive written statement for the record. That statement describes the Department's concerns with each of the sections of the bill. To keep my oral statement short, I will focus on those provisions of S. 353 that would effectively federalize class actions, and then address whatever questions you have, Senator Grassley, or any of the other Members. By so limiting my opening statement, however, I don't mean to minimize our other concerns that are described in the written statement. Sections 3 and 4 of S. 353 would effectively federalize most State class actions by providing Federal jurisdictions for class actions in which any plaintiff is diverse from any defendant in the action. S. 353 further provides that if a State class action is removed to Federal court and then is not certified as a class action under Federal rules, the Federal court is to remand the case to the State court, stripped of its class allegations. In other words, even if the case could have proceeded as a class action under the law of the State, S. 353 would effectively require the State to try each individual claim separately. The ability to consolidate large numbers of claims in court is tremendously important. When there are large numbers of individuals, each of whom has been significantly harmed, but the potential recovery is insufficient to support an individual lawsuit, a class action is virtually the only way these individuals can seek redress through the legal system. Plaintiffs, defendants, and the system of justice all benefit from the efficiencies resulting from consolidated consideration of multiple claims with common questions of fact and law. Because the class action mechanism is so important, we should be cautious in curtailing access to it, do so only on indications of clear and undisputed failures or abuse, and make sure that any limitations or changes to this procedure are closely tailored to the specific problems identified. S. 353 is apparently intended to address a perception that State courts are too ready to certify class actions. Of course, State courts are subject to the constraints of due process, as are Federal courts. We do not believe that a difference between State and Federal class certification standards justifies Federal action. To the extent that there have been concerns about ex parte certifications in State courts, the States themselves appear to be remedying that situation. S. 353 also apparently is intended to address concerns that certification of nationwide class actions by State courts permits individual States to impose their own law on the Nation as a whole and leads to extorted settlements and other abuses by class action attorneys. If this is indeed an endemic problem, legislation addressing State certification of nationwide classes may be in order, but S. 353 does not take this approach. Instead of focusing on what the appropriate limits on State authority to bind out-of-state plaintiffs ought to be, S. 353 would permit removal to a Federal court of nearly all State law cases that otherwise would be heard in State court. Implicit in this provision is the belief that class certification is more difficult to obtain in Federal court, since otherwise removal to Federal court would not reduce the possibility of extorted settlements. Again, we do not believe that Federal policy concerning class actions is sacrosanct. States, within the constraints of due process, should be free to establish their own policies. Moreover, the instances generally cited as evidence of abusive or collusive class action settlements can and have occurred in Federal as well as State courts. If the Congress believes that courts are approving unjustifiable class action settlements, Congress certainly has the authority to address that issue in Federal class actions, and provide models for States to follow, if appropriate. There are certainly examples of class actions in which settlements appear to provide benefits primarily to lawyers and defendants rather than to the injured plaintiffs. There are class actions in which the purported nationwide reach of the State court seems problematic. Perhaps there are particular classes of cases--the Judicial Conference has been considering whether mass torts constitute such a class--that appropriately should be tried in Federal court, even absent the traditional grounds for Federal jurisdiction. We would be pleased to work with the members of this subcommittee and with the Congress to determine whether there are specific, systemic problems with class actions that warrant a Federal response and to help craft such a response. Thank you. Senator Grassley. Thank you very much. I will start out with questioning and we will have 5-minute rounds of questioning, and I thank you for your timeliness as well. Your testimony makes reference to perceived abuses in class actions. Yet, both the House and Senate have received abundant testimony regarding these abuses. Moreover, as I referred to in my opening statement, there have been several studies documenting that class action filings are dramatically on the rise. Many academics and judges acknowledge that the class action rule has gone beyond what was originally intended. So my question to you--really, two questions and then a question that kind of summarizes--Are you saying that there is no systemic problem with the class action system? Are you saying that there are no real issues of consumer exploitation and attorney misconduct in regard to class actions? And does the Justice Department have any data indicating that the information that we have about the tidal wave of State court actions is just plain wrong? Ms. Acheson. I am certainly not saying that the studies that you refer to don't indicate that there are some problems. I think my answer, Senator, is no to your first two questions. And with respect to your third question about there being a tidal wave of class actions in State courts, I think I would say that, first of all, a tidal wave of any kind of litigation in any particular forum doesn't necessarily in and of itself indicate that there are any problems. Getting back to your first question, it is clear, I believe, that there are certainly excesses, abuses and failures of courts and court systems, it would appear, to in some cases, both respect to procedural aspects--we have talked about the ex parte certification--and some substantive aspects, effectively police class actions. Nobody is disputing that there are those cases. They occur both in State and Federal courts, however, and one of our points about this bill and the problems that it intends to target, which I think we would all agree should appropriately be addressed, is that this bill doesn't, in federalizing class actions, in taking State class action cases into the Federal court, necessarily address those problems. And so I think that is what we are saying. We are not saying that there aren't problems. I think we are saying, and I think the RAND study---- Senator Grassley. Maybe you could help us by suggesting, since there are some problems, what you might suggest to fix as to what you consider to be a problem. Ms. Acheson. Well, first of all, I don't purport to be an expert in this area, but it looks as if the studies that have been done--I have not read the Federalist Society study, but we will certainly look at that immediately--indicate a couple of problems that do exist. One of them, which has been the procedural problems that sometimes occur, it appears, at least, in certain State court systems are beginning to be addressed by State courts themselves. Senator Sessions didn't refer to this, but one of the problems procedurally has been a practice--I don't know whether it was just in some counties in Alabama, but of ex parte certification of class actions. Perhaps that occurs in other State systems, but now the Supreme Court of Alabama has fixed that problem and it is no longer appropriate as a procedural way to go forward. On the more substantive side, it seems to me that another of the problems that have been identified, and I think people rightly are concerned about, is the extent to which a State court that has jurisdiction of a nationwide class action can effectively apply its State law to out-of-state plaintiffs. And while there are some Supreme Court cases which indicate the limits that due process allows in such circumstances, I would think that Congress could appropriately legislate within those limits and cut back to some extent there. So it would seem to me that might be one approach to get to the business that is much commented on, which is how appropriate is it for a State court somewhere to be binding an out-of-state plaintiff. Senator Grassley. Could I ask you one more question while I still have time? Ms. Acheson. Absolutely, Senator. Senator Grassley. You raise concerns about federalizing class actions. Aren't multi-State plaintiff class actions exactly the kind of cases that should be in Federal court? Wouldn't you agree, as Professor Elliott will testify, that the Constitution's only limitation on diversity jurisdiction is Article III's requirement that controversies be between citizens of different States, but rules governing complete diversity, minimum amount in controversy, and removal are really political decisions not mandated by the Constitution? Those latter words are his. Because we are dealing with interstate class actions involving plaintiffs and defendants from many different States, shouldn't the Federal courts be at the very least an option for these litigants? Don't you think that due process dictates that? Ms. Acheson. Well, I guess, Senator, I would say that I don't believe due process dictates that. I would agree with Professor Elliott that I think the Constitution allows it, but I certainly don't think due process dictates it. I think that there are federalism interests that are implicated here that we need to be concerned about because there certainly are both sets of circumstances and absolutely fully competent State court systems and groups of judges who can handle class action cases. And somewhere between what the Constitution would allow and some of the excesses that I know occur and have been vividly described here today, I think we can craft some lines and some sets of rules that would get at some of the abuses that have been described, but perhaps not have the effect of pushing so many cases into the Federal system. Senator Grassley. Senator Thurmond. Senator Thurmond. Thank you very much, Mr. Chairman. Mr. Chairman, I have another engagement and have to leave. I understand Mr. Steve Morrison, a distinguished attorney from South Carolina, is one of the witnesses here today, and I wish to welcome him. I would like to ask unanimous consent that I may submit some questions for the record. Senator Grassley. Yes. Senator Thurmond is an example that I just spoke about that there will be some questions submitted for answer in writing. [The questions of Senator Thurmond are located in the appendix.] Senator Grassley. The Senator from Alabama. Senator Sessions. Thank you. Ms. Acheson, I am disappointed, I guess, that your statement is so strongly adverse to this. It strikes me that we have a magnificent legal system in America, but it is appropriate to reform it and change it as we have evidence to suggest that there are problems. I think this administration is basically resisting all attempts to reform tort law in America, and I think we need to reach an accord where we can communicate on how to make it better. That is just an observation. You probably disagree with that, but I think we are not giving serious thought to it and we need to work together to get some changes. Let's take a typical class action, maybe a credit card interest error, maybe a product defect, a medical defect that is sent to 50 different States in America. Just as a matter of public policy, wouldn't it be better that that case be settled and handled in a Federal court, where the U.S. Supreme Court may ultimately decide an issue, as opposed to the plaintiffs being able to search 50 States and then finding the most favorable law and then find the county or circuit within that State that would be most favorable to their lawsuit and filing it there? Just conceptually, isn't this the kind of case that would be more appropriate in Federal court? Ms. Acheson. Well, I think it is hard, on a relatively bare-bones hypothetical, Senator, to really get into all the competing interests. But the way that you have presented the matter, it would seem to me that probably in a case where you do have victims/plaintiffs in all 50 States, it might well be the type of a case that would be most effectively and appropriately handled in a Federal court. But it sort of depends on what law would be applied because it may well be that that Federal court is applying, unless there is some basis for Federal jurisdiction, simply the law of one of the 50 States where the occurrence, whatever it was, the accident, the fraud, the negligence, the whatever, took place. So I think that one thing that really needs to be examined is what is really the culprit here. Is the culprit people searching out the best substantive law, or is the culprit people searching out the weakest sort of procedural structures that they can manipulate? Senator Sessions. Well, good lawyers are going to seek the most favorable forum in the whole world, if you allow them to. They are not good lawyers if they don't, and I think it is our job to make sure we have got a system that creates a favorable forum for both parties, not just one party. We have certainly had complaints and evidence to suggest that plaintiff lawyers and defendants have gotten together in pre-trial negotiations and agreed to settlements that provide little for the victims, but allow large attorneys' fees for the attorneys. And then they find a favorable State court somewhere and go in and present a settlement, and little has been done by the judge to go behind that settlement to make sure it is just. Are you familiar with that problem? Ms. Acheson. That is certainly one of the problems that has been written about. I can't say I am personally familiar, but you are absolutely right. It is one of the specific problems that many people identify. Senator Sessions. Well, I believe we have a situation in which we have a class of cases that would be appropriate in Federal court because not only some specific act of interstate commerce is involved, but the entire matter is usually deeply involved in interstate commerce. You have a Federal court system that therefore can provide a universal system of law that private industries and businesses can know what the law is and protect themselves better, and would avoid aberrational results. I mean, why would you say these lawyers from Chicago want to file a lawsuit like this in a rural county in Alabama? The six counties in Alabama--I don't believe any of them have over 20,000 people in them. Why would they pick those counties to file lawsuits if they didn't think there was some specific advantage? Ms. Acheson. I assume you are right in that. I assume you are right, and I would only say this just to underscore the main theme of our comment. One is we are absolutely not opposed to class action reform. Two, we are simply concerned that particularly with regard to the two or three major problems that have been articulated that this legislation does not get at it. And, three, Senator, we are more than ready to sit down and address specifically your concerns of how to get at some of these problems. What we are concerned about is that federalizing is not the answer because there really isn't any whole system of law that a Federal court or any State court can apply in some of these cases. I think the question is what can we do substantively, but also what can we do to have appropriate cases be in the Federal system and to shore up the State systems with respect to the kind of policing that may need to happen in some of these areas. But we, I want to underscore again, are more than ready to work with you and with the chairman of this subcommittee on this issue. Thank you very much. Senator Sessions. Well, we have criminal laws and other laws that are very tenuously connected, lawsuits over employment that have tenuous interstate commerce connections. But often the class actions are just intrinsically interstate commerce and I think they are most appropriate for this handling. Thank you. Senator Grassley. Right now, there are State courts that, in dealing with large class actions, are dictating the laws of other jurisdictions. Does it make sense to you that a court in Illinois is dictating to a resident of Massachusetts what their law means? Ms. Acheson. Well, I am not sure whether or not it makes sense to me. I guess, Senator Grassley, what I believe our concern is is that this bill does not necessarily address that problem. If that case were brought in the Federal court in Illinois and was determined to be appropriate for class handling, the Federal court might well be applying the substantive law of Illinois or Oklahoma or---- Senator Grassley. That gets to my point. Isn't the Federal court in these instances better suited to do this? Ms. Acheson. I am not sure why that is intrinsically so. Senator Grassley. Well, I mean isn't that what Federal courts are supposed to do when they preside over Federal diversity cases? Ms. Acheson. Well, there are class actions and other kinds of group actions brought in the Federal court on Federal bases, and then when there is diversity, obviously, they deal with the State law. But State courts have for 200-plus years dealt with the laws of their sister States. I mean, I think that just on that sort of precept alone, there is nothing that is magical about the Federal courts. Senator Grassley. Well, I am in a situation, not a real situation but a hypothetical situation, of my constituents-- explaining to them that their rights were adjudicated in a suit that they never knew about, never consented to participate in. It was heard by a State court judge who is elected by people in another State and has no accountability to the citizens of my State of Iowa, and there is nothing an Iowa citizen or court can do about it if the case is settled. To me, that is a problem. You don't see that as a problem? Ms. Acheson. No. I do see that--first of all, I certainly see it as a multi-layered problem that people might well have objections to. What I think I am trying to say, Senator, is that whether it is in Federal court or State court I don't think is the answer to that problem. I think the answer to that problem is some of the notification provisions and the whole idea of clearer notice to parties, the opportunity to opt out. If somebody does get notice, they know what the benefit of staying in might be and what the consequences of getting out and seeking to bring their action might be. I think there are some other ways to get at that very problem. But simply changing the forum doesn't change--the Federal court may be stuck with exactly some of the same procedural shortcomings that you are talking about. There is no guarantee, because a matter is in Federal court, that the non-in-state plaintiff is going to know any more, is going to be any further informed or better protected just based on which court it is in. Senator Grassley. Well, thank you very much. Do you have another question? Senator Sessions. I would just like to say that Texas is also a favorite spot, and they have had a 338-percent increase in these filings. Alabama is not the only one. I didn't want to suggest that, but we do have a problem and I have been made aware of it. I had the Attorney General from New Hampshire come down 3 years ago when I was Attorney General of Alabama and wanted my assistance to help intervene in one of these class actions that involved his constituents in New Hampshire. What you say about this, in theory, is correct, but our Founding Fathers were practical people. They created separation of powers and they understood home cooking. That is really why we have diversity jurisdiction, so out-of-state defendants can get a less home-flavored court and jury. Isn't that what we have really got here in these class actions, a classic diversity case, but because of its unusual nature can be pled in such a way that it doesn't implicate the diversity rules? Isn't that why we ought to make some reform? Ms. Acheson. Well, I certainly think that based on some of the examples that have been given here, it would seem to me to be certainly, if not right over the edge, casting a shadow on abuse of the law, if not the spirit. In those cases, we should come up with some reforms. Senator Sessions. Thank you, Mr. Chairman. Senator Grassley. Thank you, Ms. Acheson. We appreciate your cooperation. Ms. Acheson. Thank you, Senator. [The prepared statement of Ms. Acheson follows:] Prepared Statement of Eleanor D. Acheson Good afternoon. I appreciate the opportunity to appear before this Subcommittee on Administrative Oversight and the Courts to express the Justice Department's views regarding the proposed Class Action Fairness Act of 1999 (S. 353). introduction The Class Action Fairness Act of 1999 (S. 353) proposes to deal with perceived abuses in state class actions by effectively federalizing class actions. Sections 3 and 4 of S. 353 are substantively identical to H.R. 3789, a bill considered by the House in the last Congress. Last October, the Administration issued a Statement of Administration Policy that stated that the Attorney General would recommend that the President veto H.R. 3789 if it were presented to him. See Statement of Administrative Policy (issued Oct. 5, 1998). S. 353 raises the same concerns as H.R. 3789. Moreover, it includes a number of additional provisions that raise additional concerns on policy and its constitutional grounds. Accordingly, the Department strongly opposes S. 353. Before addressing the specific provisions of S. 353, I would like to review the importance of class action procedures and the significance of the provisions of S. 353 that would federalize most class actions. When there are large numbers of individuals, each of whom has been significantly harmed, but the potential recovery is insufficient to support an individual lawsuit, a class action is virtually the only way these individuals can seek redress through the legal system. Even when the harm to some or all of the individual victims might justify individual lawsuits, class actions are by far the most efficient means of resolving large numbers of claims that have common questions of fact and law. Indeed, court systems can be overwhelmed by large numbers of similar claims, delaying and even denying justice to plaintiffs. Class actions provide efficiency benefits to defendants as well, permitting resolution of multiple claims in one proceeding. Plaintiffs, defendants, and the system of justice all also benefit from the reduction in or elimination of inconsistent verdicts. Because the class action mechanism is so important, we should be cautious in curtailing access to it, do so only on indications of clear and undisputed failures or abuse, and make sure that any limitations or changes to this procedure are closely tailored to the specific problems identified. S. 353 would address perceived abuses in class actions by federalizing them--providing federal jurisdiction and removal authority for almost all non-securities class actions. We do not believe that the case has been made that there are abuses intrinsic to state court class actions that justify the wholesale removal of these cases from state courts. There have been cases raising concerns from state courts, but also from federal courts, and the anecdotes about state cases seem to reflect problems with individual judges or particular locales rather than systemic problems in states' handling of class actions. Unless the claimed abuses of class actions are peculiarly a state court or state law problem, federalization would not address the problems. A related, and, we believe, crucial aspect of our consideration of S. 353 is that we live in a federal system. states should be able to create the remedies in their courts that the states conclude best serve the interests of their citizens. S. 353 would federalize class actions involving only state law claims--claims based on federal law already can be brought in federal court under federal question jurisdiction. We should await evidence of clear necessity before the federal government interferes with the authority of states to set their own law and procedures in their courts, and that evidence should demonstrate that the states have broadly overreached or are unable to address the problems themselves. Finally, we are all aware that federal class actions standards have been narrowed considerably by court interpretation in the past decade or so. There is much debate over whether this is a good or bad thing, but the very existence of the debate makes clear that there are public policy choices to be made. There is nothing sacrosanct about federal choices. When assertions are made that states certify class actions that ``should not'' be certified, or approve settlements that ``should not'' be approved, we need to be sure that such statements are not simply expressions of policy differences. In a system of federalism, state public policy choices should not be overridden without a showing of compelling national need. There must be evidence of harm to interests of national scope that require a federal response, and even with such evidence, federal preemption should be limited to remedying specific problems with tailored solutions, something that S. 353 does not do. There are certainly examples of class actions in which settlements appear to provide benefits primarily to lawyers and defendants rather than to the injured plaintiffs. There are class actions in which the purported nationwide reach of a state court seems problematic. Perhaps there are particular classes of cases--the Judicial Conference has been considering whether mass torts are such a class--that appropriately should be tried in federal court even absent the traditional grounds for federal jurisdiction. We would be pleased to work with the Members of this subcommittee and with the Congress to determine whether there are specific systemic problems with class actions that warrant a federal response and to attempt to craft such a response. I would now like to turn to the specific provisions of S. 353. section 2--notification requirements Section 2 of the bill requires notification of the Attorney General and state attorneys general of proposed settlements in class actions, requires that hearings on proposed settlements be delayed for 120 days after notification, imposes plain language requirements on class notices, and limits attorneys' fees in class actions. We have the following concerns about the provisions in this section. 1. Notification of the Attorney General Requiring notice to the Attorney General of all class certifications and settlements is unnecessary and burdensome, both to the litigants and the Attorney General. Under this provision, the Department is likely to be inundated with notices in cases in which the Federal government has no interest. We note that the statute does not indicate what the Attorney General is supposed to do with the notices or the information contained in them. In addition, despite the provision in the bill that these notice requirements impose no legal obligations on the Attorney General, the Attorney General's silence in response to notices may in some cases be interpreted as acquiescence, if not approval. 2. Instructing State-court judges as to the timing of hearings on proposed class action settlements Section 2's requirements concerning notice of proposed settlements in state court class actions and hearings on those proposals implicate constitutional principles of federalism. Section 2 would require, for example, that judges in state as well as Federal courts to wait at least 120 days after service of settlement documents on state and Federal attorneys general before convening any hearing to evaluate the fairness of a proposed class-action settlement. Such procedural directions to state judges, although constitutional in our view, could be subject to significant constitutional challenge as an impermissible infringement on the states' sovereign authority to determine the manner in which state courts adjudicate state law claims.\1\ --------------------------------------------------------------------------- \1\ See Johnson v. Frankell, 117 S. Ct. 1800, 1805 (1997) (recognizing a ``general rule, bottomed deeply in belief in the importance of state control of state judicial procedure, * * * that federal law takes the state courts as it finds them'') (internal quotations omitted). But see also Printz v. United States, 117 S. Ct. 2365, 2371 (1997) (noting that at least some types of Federal instructions to state courts are exempt from the general proscription against the commandeering of State governmental institutions). --------------------------------------------------------------------------- 3. Notice and attorneys fees provisions The notification provisions of section 2 would create a number of difficulties in class actions. First, it is often difficult to determine the current residence of all members of a plaintiff class. This would necessitate providing notice to the attorneys general of all fifty States in order to ensure that agreements are enforceable against class members who generally could not otherwise opt out. The 120-day advance notice requirement follows general practice in most cases, but would not permit an expedited settlement even if the court and parties agreed in a particular case that it was necessary. Finally, the proposed limitation on attorneys' fees could create a number of problems. It is not clear why class actions brought under particular substantive rules of law should have different attorneys' fees rules than other cases involving the same rules of law. For example, it is not clear why Title VII class actions involving classes of current and former federal employees, which the Department defends on behalf of the United States, should have different attorneys' fees rules than all other Title VII cases. Title VII, like other employment discrimination statutes, has its own fees provision and there is a well-established body of law concerning what is and is not permitted. One of the principles established by that body of law is rejection of the kind of proportionality set forth in proposed section 1714(a). Courts recognize that civil rights cases often concern equitable rather than monetary relief, and that attorneys may be unwilling to pursue these cases (or Title VII cases subject to caps on recovery) if they will not be paid for their efforts. Proposed subsection 1714(b), which permits courts to base attorneys' fees on a reasonable lodestar calculation, provides some, but not enough, correction. A reasonable lodestar is often the beginning rather than the end of fee calculations in Title VII cases. Multipliers are available for particularly complicated cases or for experienced plaintiffs' counsel. The interests of both plaintiffs, the courts, and even defendants are best served by not discouraging experienced and knowledgeable counsel from taking on these cases. sections 3 and 4--class action jurisdiction and removal from state to federal court Under current law, Federal district courts have jurisdiction in diversity cases only when all plaintiffs are diverse from all defendants. That is, no plaintiff can be a citizen of any State of which any defendant is a citizen. Section 3 of S. 353 would change that rule for class actions alleging State law claims. Under S. 353, Federal district courts would have jurisdiction in such cases as long as any class member was a citizen of a State different from any defendant. Section 4 of S. 353 would permit any defendant (without the concurrence of the other defendants) to remove such a case from State to Federal court. Once removed to Federal court, the case would be governed by Federal law concerning class actions. In the event that the Federal district court did not certify the proposed class, S. 353 provides that the case would be remanded to State court stripped of its class allegations. S. 353 provides exceptions for corporate governance and securities class litigation. The legislation also permits Federal courts to abstain from hearing class actions against State government entities or officials against whom Federal courts may not be able to order relief.\2\ S. 353 also permits Federal courts to abstain from hearing class actions in which the ``primary defendants'' and a ``substantial majority'' of the members of the plaintiff class are from the same State and that State's law governs the action. This exception is not likely to produce a significant reduction in the number of State class actions subject to removal. Defendants in class actions are likely to be corporate entities whose citizenship has no necessary relationship to where claims against them arise, so the exception for cases in which plaintiffs and defendants are predominately citizens of the same State is likely to apply to few cases. --------------------------------------------------------------------------- \2\ This latter exception appears to be superfluous in light of Pennhurst State School & Hospital v. Halderman, 465 U.S. 89 (1984). In that case, the Supreme Court held that the Eleventh Amendment forbids Federal courts from ordering States and State officials to conform to State law. --------------------------------------------------------------------------- Because the exceptions in S. 353 are likely to be insignificant, the effect of this statute would be to grant defendants the option of State or Federal court in almost all State class actions. In addition, since cases not certified in Federal court would be remanded to State court stripped of their class allegations, the bill would effectively federalize class action standards. This latter result would not be affected by the provision in the legislation that permits plaintiffs to file amended class actions upon remand, since S. 353 appears to permit defendants to remove the amended action to Federal court once again. The bill apparently is intended to address a perception that State courts are too ready to certify class actions. Of course, State courts are as subject to the requirements of due process as Federal courts.\3\ If there are class action procedures in State courts that protect the due process rights of the parties but are objectionable on policy grounds, these policy issues should be addressed in the State courts and legislatures. We do not believe that a mere difference between Federal and State class certification standards justifies Federal action. We live in a federal system and the States should be free to provide the remedies they consider appropriate in their courts. To the extent that S. 353 is directed at concerns about ex parte class certifications in certain states, state legislatures and courts are the appropriate bodies to address these concerns.\4\ --------------------------------------------------------------------------- \3\ In Phillips Petroleum Co. v. Shutts (472 US 797, 821-22 (1985), the court held that for a forum state to apply its law to non-residents in a nationwide class action, the state ``must have a significant contact or significant aggregation of contacts to the claims asserted by each member of the plaintiff class, contacts `creating state interest,' in order to ensure that the choice of law is not arbitrary and unfair.'' The court held that if this test was not satisfied, violations of the Due Process Clause of the Fourteenth Amendment and the Full Faith and Credit Clause of Article IV would result. \4\ Indeed, the complaints about ex parte class certification have focused on one county in a particular state, and the Alabama Supreme Court has dealt with that problem. See Ex parte Equity Nat'l Life Ins. Co., 715 So.2d 192 (Ala. 1997); Ex parte Citicorp Acceptance Co., 715 So.2d 199 (Ala. 1997); Ex parte First Nat'l Bank, 717 So.2d 342 (Ala. 1997). --------------------------------------------------------------------------- S. 353 also apparently is intended to address concerns that certification of nationwide class actions by State courts permits individual States to impose their own law on the nation as a whole and leads to extorted settlements and other abuses by class action attorneys. If this indeed is an endemic problem, legislation addressing State certification of nationwide classes may be in order, but S. 353 does not take this approach. Instead of focusing on what the appropriate limits on state authority to bind out-of-state plaintiffs ought to be, S. 353 simply would permit removal to Federal court of nearly all State law class actions that otherwise would be heard in State court. Implicit in this provision is the belief that class certification is more difficult to obtain in Federal court, since otherwise, removal to Federal court would not reduce the possibility of ``extorted'' settlements. Again, we do not believe that Federal policy concerning class actions is sacrosanct and that the States, within the constraints of due process, should be precluded from establishing their own policies. Moreover, the instances generally cited as evidenced of abusive or collusive class action settlements have occurred in federal as well as state courts. If the Congress believes that courts are approving unjustifiable class action settlements, Congress certainly has the authority to address the issue in federal class actions and provide models for states to follow if appropriate. Finally, a recent study by the Federal Judicial Center found that ``there were not objective indications that settlement was coerced by class certification.'' See Thomas E. Willging, et al., Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules (Federal Judicial Center 1996), at 60, 90 (1996). We note that S. 353 would permit the removal to Federal court of cases concerned solely with State law that are most appropriately tried in State court. For example, a class action brought under State law concerning a corporation's operations within the State would be removable to Federal court solely because a primary defendant happened not to be a citizen of the State, even if the defendant had substantial operations in the State. This bill would undermine the efforts of State courts to address State and local matters by allowing litigants to circumvent and render irrelevant the State court system. In our view, this provides further demonstration of why federalization of class actions is not an appropriate remedy for perceived class action abuse. We also are concerned about the potential impact of this legislation on the Federal judiciary at a time when the Chief Justice of the United States has expressed serious concern about the marked expansion of caseloads of Federal courts. See Chief Justice Rehnquist, The 1997 Year-End Report on the Federal Judiciary at (I)(A). Preliminary data from RAND's ongoing study of class actions suggest that more than half of such litigation is in State courts. Class actions are among the most resource-intensive litigation before the judiciary. A study of class actions in Federal court by the Federal Judicial Center showed that class actions took two to three times the median time of a civil case from filing to disposition and consumed almost five times more judicial time than other civil cases. FJC, Empirical Study of Class Actions in Four District Courts at 7. By expanding Federal court jurisdiction for class actions and permitting removal from State courts, this bill could move most of this litigation into the Federal judicial system, potentially requiring substantial new Federal resources. Responsibility in this area should continue to be shared among both the Federal and State judicial systems. In addition to these policy concerns, we believe that the bill's displacement of State-law class certification procedures could be subject to constitutional challenge on federalism grounds. As a general matter, Congress has the power to prescribe the manner in which Federal courts, in the exercise of their diversity jurisdiction, handle issues such as class action certification, ``which, though falling within the uncertain area between substance and procedure, are rationally capable of classification as either.'' Hanna v. Plumer, 380 U.S. 460, 472 (1965). However, sections 3 and 4 of S. 353 would expand the Federal courts' diversity jurisdiction in a highly selective fashion. Putative class actions that failed to meet the federal standard for class certification would be returned to state court in disaggregated form for individualized adjudications. The resulting displacement of States' decisions as to the proper role of class action procedures in the adjudication of State-law claims could be attacked as an impermissible form of federal interference in States' decisions as to how to structure the operations of the their own courts. Although we believe that these provisions are constitutional and that such a challenge should not succeed under current doctrine, there is a strong likelihood of constitutional litigation on this point. section 5--rule 11 Section 5 of S. 353 would amend Rule 11 of the Federal Rules of Civil Procedure to require judges to impose sanctions upon finding a violation of Rule 11, instead of leaving the issue to the judge's discretion as is the case now. This provision would apply to all civil litigation, not simply class actions. We strongly oppose this provision for a number of reasons. First, we believe that, barring an emergency requiring prompt legislation, amendment of the rules of procedure should proceed through the processes of the Rules Enabling Act, 28 U.S.C. Sec. Sec. 2071, et seq. That act was created by Congress for the precise purpose of affording fair and thorough consideration, with an opportunity for comment by the public at large, to proposals for rules amendments. The Department strongly supports the Rules Enabling Act process. To the extent that any amendment to Rule 11 is necessary, it would be appropriate for the Advisory Committee on Civil Rules to make a proposal to the Judicial Conference Standing Committee on Rules of Practice and Procedure for consideration. Accordingly, we urge that the change proposed in S. 353 be submitted to the Judicial Conference or an appropriate committee of the Conference for review in the first instance, rather than being pursued directly through legislation. Our second reason for objecting to the proposed modification of Rule 11 is that the modification is not directed at the problem S. 353 is intended to address. The modification appears intended to deter frivolous class actions, but Rule 11 applies to civil litigation generally. The impact on class actions of the proposed change is likely to be minuscule compared to its impact on other aspects of civil litigation. While we do not necessarily agree that class actions are a greater source of frivolous lawsuits than other kinds of civil actions, if any measures are to be taken to deter frivolous class action claims, the measures should be directed specifically at that issue. We also object to the proposed modification of Rule 11 on substantive grounds. In 1983, sanctions under Rule 11 were made mandatory, as S. 353 would make them again. In 1993, sanctions once again were made discretionary in response to the ``increased disruption'' caused by the mandatory sanctions provision enacted in 1983. See Proposed Amendments to the Federal Rules of Civil Procedure: Hearing Before the Subcomm. On Courts and Admin. Practice of the Senate Comm. on the Judiciary, 103d Cong. 9-10 (1993) (statement of Sam C. Pointer, Jr., Chief District Judge for the Northern District of Alabama and Chairman, Advisory Committee on Civil Rules). Judge Pointer observed that the empirical studies of the Federal Judicial Center ``amply support [the Advisory Committee's] conclusion that there has been an excessive and unproductive amount of Rule 11 activity'' under the 1983 version of the rule. Judge Pointer further noted that the Judicial Conference accepted the view that ``explicit discretion to decline imposition of sanctions is needed in order to deal with the problem of Rule 11 motions that raise technical, insignificant violations.'' Judge Pointer also recognized the concerns of the civil rights bar that ``the 1983 version of Rule 11 had been used by defense counsel and some courts to `chill' the development of potentially meritorious, yet untested and novel, claims.'' Thus, ample deliberation and research supported the change from mandatory to discretionary sanctions in 1993. No such research demonstrates the need for the revision to Rule 11. S. 353 would accomplish, particularly outside of the Rules Enabling Act process. For these reasons, the proposed revision to Rule 11 is unwarranted. conclusion As discussed in my testimony, there may be discrete problems with class actions that need to be addressed. We would be happy to work with Members of this subcommittee and with the Congress to address any such problems. Nevertheless, we do not believe that federalization of class actions and imposition by the federal government of numerous requirements in state court class actions litigation is appropriate for the reasons we have set forth, and accordingly the Department of Justice strongly opposes enactment of S. 353. Senator Grassley. Our next panel is Mr. John Frank and Professor Don Elliott. Mr. Frank is a partner with the Phoenix law firm of Lewis and Roca. He is the witness that was introduced by Senator Kyl, and he is the last living member of the committee which created the class action rules in the period of time of 1963 to 1966. Mr. Frank will be able to provide us with a unique insight into the class action rules. Mr. Elliott is a partner at the Washington, DC, office of Paul, Hastings, Janofsky and Walker, and is currently an adjunct professor at Yale Law School. Previously, Mr. Elliott was at the Yale Law School as a professor, 1981 to 1994, specializing in a number of subjects, including complex litigation, class action, and constitutional law. Welcome to both of you. I think we will start with you, Mr. Frank. PANEL CONSISTING OF JOHN P. FRANK, LEWIS AND ROCA, PHOENIX, AZ; AND E. DONALD ELLIOTT, PROFESSOR OF LAW, YALE LAW SCHOOL, NEW HAVEN, CT STATEMENT OF JOHN P. FRANK Mr. Frank. Thank you, Mr. Chairman. I appreciate the opportunity to be here very much. This has been a subject of deepest interest to me. You are right; in the 1960's, I was on the committee. I dissented at that time because I thought it would lead to fraud, and I must say the results seem to indicate that. In more recent years, there has been 7 years of work by subsequent committees, headed by Judge Patrick Higginbotham, Judge Paul Niemeyer and Judge Scirica. All of them have invited me to participate as an emeritus member, so I have participated in all of the meetings and the hearings on this subject in the last several years. I have the report of the Federal Judicial Center, and the RAND report was sent to me for comment before it became final. So it is a matter of deepest interest. I strongly support this bill. Senator Sessions, you may be perhaps amused to know that you are not the only Alabamian nor the first to have doubts on this subject. I cannot give you orally, because the time is too short, the history of this matter, except to say that originally when we created this rule, we assumed that the largest class would be 100 people. And we were looking at airplane crashes and the Ringling Brothers fire at Hartford, CT. The growth of this to involve thousands and thousands of people was totally beyond the anticipation of the rule. But I return to Senator Sessions. Senator, at page 8--if you have my statement, at page 8a, when Justice Black, whose clerk I was and whose very close friend I was, so that we corresponded for all the years of his life, made his decision in Snyder v. Harris requiring that each party have the jurisdictional amount, and thus frankly cutting down on class actions, I wrote him an applauding note and sent him a copy of my dissent to the rule. And he responded, ``Thanks for sending me your dissent to Rule 23(b)(3) concerning which I wrote in my opinion in Snyder v. Harris. I certainly agree with you that the rule is a very poor one, and I am glad to know that you agreed with me at the time it was passed.'' To add to your collection of oddities, Senator Grassley, I have inserted at page 15 of my statement an illustration of a check that some victorious member of a class who, for his joy in being in a class, got a check, a copy of which I enclose, for $.08, with counsel receiving a very large sum. Let me use the balance of my time to speak briefly to the bill itself because there simply isn't time to make a comprehensive statement here for you. But let me turn to the bill. First, I have made some technical suggestions to the staff where I think, Senator Grassley, you can do even more to tighten down on that fee subject. There are some details there that I would not use in this precious time, but they are there. I do think one thing you ought to give real thought to is you have unleashed the injunction thing without putting an effective control on the fees there, and all that is going to do is shift the cases from damage cases to injunction cases, which is already happening. And I submit that a little tightening there would be an improvement and carry out your wish, which I strongly applaud. On the fee subject, as I say, I have covered it. Coupons ought to be abolished. You are absolutely right. This business of giving people a coupon for what would amount for the discount they would get on the merchandise anyway and then paying a large fee is simply scandalous. Also, I think, Senator, and members of the committee, you ought to take up the subject of fluid recovery. I would like to make one or two other points. May I do so? I am not sure if the light tells me that I am done. Senator Grassley. Yes. Mr. Frank. Fluid recovery is what is being done--the sort of thing Senator Thurmond objected to, I think, where there is nothing to give the class, so you take the amount of money and give it to some charity and then pay a large fee to the client. That is wrong. That is the kind of social policy that ought to be made by the Congress or by the administrative agencies and should not be the subject of the whimsical jurisdiction of some class action judge. I have one very gray point to take up, Senator Grassley-- two, if I may, briefly. One, the problem with the Department of Justice. Clearly, if the Department is going to veto the bill, it is a waste of time; you probably will have trouble getting two-thirds. Those problems can be solved. Ms. Acheson was very clear that they are ready to talk. I submit that if you think it wise, you might arrange informally to have Judge Higginbotham of the Fifth Circuit and Judge Pointer of your circuit, who are the two most experienced judges in America on the Federal-State relation problem in class actions, and who have administered a great number of the cases with both Federal and State participating, together with the Department of Justice and some technical member of your group--let me nominate Senator Kyl--to see if you can't work out a compromise with Justice. I suspect you could, and if I can personally be of any assistance, I would like to. The only other subject I can take up, with the indulgence of your time, Senator Grassley, goes to you, but it is major. I respectfully submit that it is probably not a good idea to have this rule 11 thing tacked on here because what you are doing-- you have got plenty of opposition from the class action bar as it is. I am responsible more than any other bar member in the country for the 1993 revision of rule 11, and it is working rather well and was supported by the Litigation Section of the ABA and countless other groups all over America. You don't need two wars. What is more important is it is not a good solution to the problem that is troubling you, and I ask leave to state briefly what I submit would be a better solution. In the committees of the last 7 years, we have repeatedly taken up the subject of the small case--I gave you the example of the $.08, the $.38; you gave the $10 case--whatever they may be, the trivial case which ought not be in the Federal courts at all. The slang expression for these cases in the committee dialogue was the ``t'ain't worth it cases.'' They are just not worth putting in the Federal system. They are not worth putting in any system. They are just fee engenderers and there is nothing else to them. It is the biggest complaint you have and it is a good one. I submit that this bill should provide, as earlier drafts of the pending rule has provided--and it should have stayed there--that it would be very constructive to put a ``t'ain't worth it'' provision into your statute and provide that the court, before certifying a class, should ensure that the prospect of financial reward to members of the class is large enough to be worth undertaking it in the first place, so that the $.02, $.08, $15 trivial cases would be barred from being in this category at all. I submit that that will get to, Senator Grassley, what you wisely want. You will get rid of the frivolous cases that way and still keep it within the orbit of class actions without taking on a side war that I greatly fear would result in defeating the whole bill. And it is a good bill and you ought to do it, and I thank you for letting me say so. Senator Grassley. We will consider your recommendation as well on that point. 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Professor Elliott. STATEMENT OF E. DONALD ELLIOTT Mr. Elliott. Thank you very much, Mr. Chairman. If I could begin with a very brief personal note, in 1989 I was confirmed as general counsel of EPA by the Senate, and I remember, Mr. Chairman, in our courtesy calls you said to me, why would anyone leave a professorship at Yale to go be a general counsel at EPA? And I must say, Senator, I wanted to tell you that in some of the dark hours at EPA I remembered that comment. But I am here today as a longtime teacher of complex litigation and class actions at Yale Law School, where I have been a successor of John Frank's since 1981. I am a qualified supporter of class actions, although I think there are some abuses under the Federal rules, as well. But I am here primarily because I am very concerned that some recent decisions have restricted the rights of litigants in the large multi-party cases that I agree with Senator Sessions really ought to be in the Federal courts, to remove those kinds of cases into the Federal courts where they belong. And I do disagree with the Department of Justice's position. I was very disappointed with it. I do not think this legislation effectively federalizes. I think that is a little bit too simplistic. My view as both a litigating lawyer and a professor of civil procedure is that we have struck a really brilliant balance in cases. We give the plaintiff the first choice of where they file the case, but that is not an unlimited choice. It is balanced by the defendant's right to remove. And that is true in all kinds of cases and it is one of the core reasons we have diversity jurisdiction. Unfortunately, for a variety of reasons that we could get into if you are interested, that right to removal has become more apparent than real in complex class action cases. It is pretty easy for a good lawyer to join some parties that will defeat complete diversity, and thereby make a complex case, including a class action case, one that can't be removed to Federal court. So I think what we are really talking about in the removal provisions here is not effectively federalizing litigation, but restoring the balance between the plaintiff's right to pick and the defendant's right to remove the case to Federal court if there is too much home cooking or too much of what we sometimes call the home court advantage. I don't think there is any real serious question about the constitutional authority of the Congress to do something like that. And I think it is important to realize that removal is, I think, a really brilliant part of our jurisprudence. It not only guarantees reality and the appearance of fairness to the litigants directly involved, but I think sometimes it is not fully recognized that it creates a kind of incentive that gently discourages the State courts from going too far through the device of competition. Senator Grassley, you will be glad to know that we in academia are again rediscovering some of the virtues of the market, and I think increasingly market approaches to a variety of areas are coming back into fashion. And in a sense, that is what removal does. It doesn't override the States' decision to have any kind of class action rule they want. It simply says if there is a little competition and an alternative to go to Federal court, then States are not able to go too far. In a sense, it is like the school choice plans. You know, you try to improve the public schools by giving somebody an opportunity to go elsewhere if the State is not using its monopoly in the right way. And I think the removal provisions of this bill are definitely a step in the right direction. I also disagree with the Justice Department interpretation that if cases are remanded from Federal court that they are necessarily stripped of the class action allegations. It is true that those allegations are stricken, but once the case goes back to State court, if it is appropriate for State certification, I don't see why those class action allegations couldn't come back in. So I think that is a provision that needs to be clarified in terms of its intent. Since time is short, let me just wind up. You mentioned that there might be some areas for further thought as the process goes forward, and let me mention two or three. First of all, part of the problem we have in terms of removal in class action cases is created by--and these are not in my written statement. I apologize, but just in thinking about it last night, part of the problem is created by the 1996 amendments to 28 U.S.C. 1446(b), the removal statute that provides an absolute 1-year limitation on the right to remove to Federal court in diversity cases. In these complex class action cases, you are not going to get to the question of who the proper parties are within that year. Another provision that is a problem is 28 U.S.C. 1359, which is the collusive joinder provision. It provides that you can't add fictive parties for purposes of establishing Federal jurisdiction. But it does not provide you can't add parties collusively for the purpose of defeating Federal jurisdiction. So when you take those two together, the reality of what happens is you can avoid joinder by sticking some parties in there as named plaintiffs who are going to be non-diverse. And there are several different ways to fix that problem. One way which I would support is to abolish the complete diversity requirement. I agree with Senator Sessions. These are the kinds of cases, particularly when they are multi-party cases, that fundamentally belong in the Federal courts and really respond to the core purposes for which we have Federal diversity jurisdiction. I will just finish up by saying I also think that the limitations on the extraterritorial of State courts in class action cases, which I heard the Justice Department saying they might support--I think that is also an area that would be helpful. Thank you, Mr. Chairman. [The prepared statement of Mr. Elliott follows:] Prepared Statement of E. Donald Elliott As a long-time teacher of complex civil litigation and class actions at Yale Law School, as well as a practicing attorney specializing in complex litigation, I am greatly concerned that recent decisions by some federal courts have restricted the rights of litigants in large, multi-party class actions to remove these cases to a neutral federal forum on grounds of diversity of citizenship. The main purposes for which diversity jurisdiction was created--preserving the appearance as well as the reality of no bias in favor of local litigants--are particularly relevant in large class-action litigation against out-of-state corporations. However, overly rigid interpretations of the judge-made requirement for ``complete diversity'' of citizenship among all parties in class actions have made it virtually impossible to remove class actions to federal court. I believe that removal is a brilliant innovation in our federal jurisprudence, and I strongly support the provisions of S. 353 that would make removal to federal court in class actions cases a reality again by revising the complete diversity requirement. The removal option not only guarantees the reality and the appearance of fairness to the litigants directly involved, but--even more importantly--the removal option gently discourages abuses in the state courts by offering litigants a competitive choice to take their business elsewhere. Like other governmental programs that improve systems by giving users the option to go elsewhere if they are dissatisfied, removal does not override state court autonomy to choose whatever law or class action rule the state may like; keeping a removal option alive merely provides potential competition from an alternative forum. Finally, I believe that removal may be important for an additional reason: in many instances overall efficiency in terms of speed and reduced transaction costs can be enhanced by concentrating complex cases in a single federal forum for resolution. Thank you very much for the opportunity to discuss the important issues presented by the proposed legislation being considered by this Subcommittee today--S. 353, the Class Action Fairness Act of 1999. I am particularly interested in the provisions of the bill concerning the expansion of our diversity jurisdiction statutes to allow removal so that more interstate class actions to be heard by our federal courts. I approach this subject from two different but related perspectives. First, I have taught complex civil litigation and class actions at Yale Law School since 1981--first, as a tenured professor ultimately holding the Julien and Virginia Cornell Chair in Environmental Law and Litigation, and since 1994, part-time as an adjunct professor at Yale while also practicing. I have spent a great deal of academic energy thinking and writing about how particular jurisdictional and procedural rules affect the resolution of complex disputes (particularly in environmental, toxic tort and medical and consumer product injury cases), and have served as an adviser to the Federal Courts Study Committee. Second, as a partner focusing on complex environmental litigation at Paul, Hastings, Janofsky & Walker LLP, I have had some experience confronting the practical effects of the current jurisdictional regime. I. The Rising Tide of State Class Actions Is A Product Of The Federal Courts' Reluctance To Take Jurisdiction Over Interstate Class Actions a. there is a class action crisis in the state courts The flood of class-action litigation in our state courts across the United States is too well documented to warrant significant discussion, much less debate.\1\ Many out-of-state defense lawyers have had the experience of arriving at a state courthouse, only to see their opponent drive up in a car bearing a campaign sticker from the judge's last election. Why should we consider the state-court class-action explosion a crisis? For one simple reason: because the class action device has the (often realized) potential to put its heavy thumb on the scales of justice, affecting not only procedure but also in many instances the outcome of lawsuits. As I once observed in an article in the University of Chicago Law Review, judges often are inclined to certify cases for class-action treatment not because they believe a class trial to be more efficient than an individual trial, but because they believe class certification will simply induce the defendant to settle the case without trial.\2\ Chief Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit has made the same point more recently and more bluntly: in his words, the mere act of certifying a class ``often, perhaps typically, inflict[s] irreparable injury on the defendants.'' \3\ When a class is certified in state court, where an out-of-state defendant has little confidence in the prospect of a fair and impartial trial on the merits, the coercive power of class certification is all the greater. Plainly, the judicial system is supposed to provide procedures and a forum for dispute resolution; it is not supposed to coerce particular outcomes. --------------------------------------------------------------------------- \1\ Among other places, the ever-increasing rate at which state- court class actions are being filed against out-of-state corporate defendants has been documented in Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol. 1, at ix-x (May 1, 1997) (``Advisory Committee Working Papers'') (memorandum of Judge Paul V. Niemeyer to members of the Advisory Committee on Civil Rules); and Deborah Hensler, et al. (Institute for Civil Justice), Preliminary Reports of the RAND Study of Class Action Litigation, at 15 (May 1, 1997) (``ICJ Report'') (stating that the ``doubling or tripling of the number of putative class actions'' has been heavily ``concentrated in the state courts''). \2\ See E. Donald Elliott, Managerial Judging and the Evolution of Procedure, 53 U. Chi. L. Rev. 306, 323-24 (1986). \3\ In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1295 (7th Cir. 1995). --------------------------------------------------------------------------- b. the federal courts have played a significant role in precipitating the class action crisis in the state courts Notwithstanding Chief Justice Marshall's admonition that the federal courts must assume jurisdiction over cases that come within the federal jurisdictional confines of the Constitution and applicable statutes,\4\ the clear trend in the federal courts over the past several years has been to decline jurisdiction over interstate class actions in any and every way possible. For example, federal courts have given a very strong reading to the judge-made rule requiring ``complete diversity''--the principle of federal diversity jurisdiction stating that no plaintiff in a lawsuit can be a citizen of the same state as any defendant. This rule may be quite sensible in other contexts, but in class actions, it virtually assures that large class actions will be kept out of federal court. The result has been that class-action plaintiffs' attorneys can evade the federal court system simply by naming (in addition to the real parties) a defendant with no connection to the class action other than shared citizenship with the named plaintiff. Blessing this practice, the U.S. Court of Appeals for the Eleventh Circuit recently considered a class action in which an Alabama citizen filed a class-action complaint against a Florida auto leasing company alleging the existence of a fraudulent pricing scheme. The Alabama plaintiff also named an Alabama auto dealership, which had no involvement in the development of the alleged pricing scheme, and which had virtually no connection whatever with any putative class member other than the single named plaintiff. Despite the conceded fact that 98 percent of the 17,000 ``plaintiffs'' involved in the case were unconnected to the non-diverse Alabama defendant, and therefore that the focus of virtually all--but not technically all--of the trial court's efforts would be on parties that were completely diverse, the Eleventh Circuit sent the case back to state court.\5\ --------------------------------------------------------------------------- \4\ See Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 403 (1821) (``It is most true that this Court will not take jurisdiction if it should not; but it is equally true, that it must take jurisdiction if it should. The judiciary cannot, as the legislature may, avoid a measure because it approaches the confines of the constitution. We cannot pass it by because it is doubtful. With whatever doubts, with whatever difficulties, a case may be attended, we must decide it, if it be brought before us. We have no more right to decline the exercise of jurisdiction which is given, than to usurp that which is not given.''). \5\ See Triggs v. John Crump Toyota, Inc., 154 F.3d 1284 (11th Cir. 1998). --------------------------------------------------------------------------- The federal courts have also relied on the present diversity- jurisdiction statute's amount-in-controversy requirement--under which only cases that put more than $75,000 in issue may be heard in federal court--to keep interstate class actions out of federal court. Interpreting a previous (but fundamentally identical) version of the diversity-jurisdiction statute, the Supreme Court held in 1973 that the amount-in-controversy requirement must be met by each and every class member in a class action.\6\ The Supreme Court did not address the issue of how certain categories of relief (such as attorney's fees, punitive damages, and injunctive relief) should be calculated for jurisdictional purposes, however. Unfortunately, many (though not all) lower courts have addressed this issue quite restrictively from a jurisdictional standpoint. For example, in cases where defendants have attempted to remove cases to federal court on the ground that a class- action complaint requests attorney's fees in excess of the required jurisdictional amount, a number of courts have held that the amount of fees requested cannot be attributed to all the class members, and therefore that such cases cannot be heard in federal court.\7\ Similarly, in cases where defendants have attempted to remove cases to federal court on the ground that a complaint seeks punitive damages well above $75,000, courts have held that the amount of alleged punitive damages cannot be applied to the claims of all class members, and therefore have remanded such cases to state court.\8\ And in cases where defendants have attempted to remove cases to federal court on the ground that a defendant's cost of complying with the injunctive relief requested by the plaintiff exceeds the jurisdictional amount, at least one federal appeals court has held that the amount-in-controversy requirement is not met and that the case therefore cannot proceed in federal court.\9\ --------------------------------------------------------------------------- \6\ See Zahn v. International Paper Co., 414 U.S. 291 (1973). \7\ See Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214 (3d Cir. 1999) (citing cases); but see In re Abbott Laboratories, Inc., 51 F.3d 524 (5th Cir. 1995). \8\ See, e.g., In re Brand Name Prescription Drugs Antitrust Litig., 1997 U.S. App. LEXIS 22267, at *26 (7th Cir. 1997) (``the right to punitive damages is a right of the individual plaintiff, rather than a collective entitlement of the victims of the defendant's misconduct''); Gilman v. BHC Securities, Inc., 104 F.3d 1418, 1430 (2d Cir. 1997) (to same effect); but see Allen v. R & H Oil & Gas Co., 63 F.3d 1326, 1335 (5th Cir. 1995) (permitting aggregation of punitive damages for purposes of satisfying jurisdictional amount requirement); Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1359 (11th Cir. 1996) (same holding). \9\ See Packard v. Provident Nat'l Bank, 994 F.2d 1039, 1050 (3d Cir. 1993) (``allowing the amount in controversy to be measured by the defendant's costs would eviscerate Snyder's holding that the claims of class members may not be aggregated in order to meet the jurisdictional threshold''). --------------------------------------------------------------------------- The federal courts' contribution to the class action crisis is not limited to an increasingly narrow reading of the two statutory requirements for federal diversity jurisdiction. Federal courts also have demonstrated an increasing willingness, in the absence of congressional direction to the contrary, to seek out procedural technicalities on the basis of which to decline jurisdiction even when the two statutory requirements of diversity jurisdiction are satisfied. One very recent example of this phenomenon is an unpublished remand order issued by the U.S. District Court for the District of Arizona.\10\ In that case, the plaintiff filed a class-action lawsuit in Arizona state court attacking a marketing practice of an auto manufacturer. To dissuade the manufacturer from removing the case to state court, the plaintiff named an Arizona auto dealer as a defendant and declined to state the amount of damages she sought. The manufacturer removed the case, arguing that the diversity-of- citizenship requirement was satisfied because the Arizona auto dealer had no connection with putative class members other than the named plaintiff herself, and that the plaintiff's request for attorney's fees, punitive damages, and injunctive relief were all sufficient to satisfy the amount-in-controversy requirement. The district court rejected these arguments and remanded the case to state court. --------------------------------------------------------------------------- \10\ Dixon v. Ford Motor Co., Civ. A. 99-456 (D. Ariz.). --------------------------------------------------------------------------- Within weeks of the remand order, the plaintiff filed a sworn disclosure statement disclosing that, in fact, she would not seek any relief from or make service upon the Arizona dealer defendant. Intrigued, counsel for the manufacturer asked the plaintiff's attorney to stipulate that the plaintiff sought damages of $75,000 or less. The attorney refused to stipulate. The manufacturer therefore removed the case to federal court again, relying on the federal statute permitting re-removal of cases upon the discovery of ``other paper'' showing that the requirements of federal jurisdiction are met. The manufacturer pointed out that the plaintiff had expressly disclaimed any right to relief against the only non-diverse defendant, and that the plaintiff's refusal to stipulate to damages less than the jurisdictional amount gave rise to an inference that she sought damages in excess of the jurisdictional amount. The district court agreed with the manufacturer both that there now was complete diversity of citizenship, and that the plaintiff's refusal to stipulate created an inference that her claimed damages exceeded $75,000. Nonetheless, the district court remanded the case to state court, all for the exceedingly technical reason that the attorney's refusal to stipulate did not constitute ``other paper'' upon which removal could occur under the relevant provision of our removal statutes (28 U.S.C. Sec. 1446(b)). In short, because there is no clear congressional mandate permitting interstate class actions to proceed in federal court, some federal courts are straining to avoid them. II. The Constitutional Purposes Of Diversity Jurisdiction Support The Extension Of Federal Jurisdiction To Cover Interstate Class Actions a. interstate class actions implicate all three concerns identified by the framers as justifications for diversity jurisdiction Let me make clear at the outset that the decision whether or not to extend diversity jurisdiction to cover interstate class actions is a political decision, and not a constitutional one. The Constitution's only limitation on diversity jurisdiction is Article III's requirement that controversies be ``between citizens of different states.'' The Supreme Court has regularly recognized that the decision to require complete diversity, and the decision to set a minimum amount in controversy, are political decisions not mandated by the Constitution.\11\ It therefore is the prerogative of Congress to broaden the scope of diversity jurisdiction to any extent it sees fit, as long as any two adverse parties to a law suit are citizens of different states.\12\ --------------------------------------------------------------------------- \11\ See, e.g., Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826, 829 n.1 (1989) (``The complete diversity requirement is based on the diversity statute, not Article III of the Constitution''); Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 373 n.13 (1978) (to same effect). \12\ See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530- 31 (1967). --------------------------------------------------------------------------- In my view, extending diversity jurisdiction to cover interstate class actions is not only permissible, but desirable in light of the purposes that animated the framers of the Constitution in adopting the constitutional diversity jurisdiction principle. Diversity jurisdiction generally is thought to be premised on three considerations, each of which I discuss in turn. The impermissibility of locality discrimination Perhaps the most important reason why the framers in 1787 thought it important to replace the Articles of Confederation with a new Constitution was the conviction that a loose confederation of states was a weaker form of government, and less protective of basic liberties, than a single, unified nation. As Judge Henry Friendly explained, diversity jurisdiction was an important component in the framers' plan to create a stronger union out of the old confederation; its central purpose was (and is) to protect citizens in one state from the injustice that might arise if they were forced to litigate in the courts of another state.\13\ Quoting James Madison, Judge Friendly believed diversity jurisdiction to be essential to a strong union because it ``may happen that a strong prejudice may arise in some state against the citizens of others, who may have claims against them.'' \14\ A century and a half after Madison, Justice Frankfurter put a more practical face on Madison's understanding: ``It was believed that, consciously or otherwise, the courts of a state may favor their own citizens. Bias against outsiders may become embedded in a judgment of the state court and yet not be sufficiently apparent to be made the basis of a federal claim.'' \15\ --------------------------------------------------------------------------- \13\ See Henry J. Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv. L. Rev. 483 (1928). \14\ Id. at 492-93. \15\ Burford v. Sun Oil Co., 319 U.S. 315, 316 (1943) (Frankfurter, J., dissenting on grounds unrelated to diversity jurisdiction). --------------------------------------------------------------------------- A number of scholars have argued, persuasively in my view, that the problem with local bias is based not only on the existence of such bias, but also on the possibility of a perception of such bias. Chief Justice Marshall himself recognized the constitutional significance of even the perception of bias: However true the fact may be, that tribunals of the states will administer justice as impartially as those of the nation, to the parties of every description, it is not less true, that the constitution itself either entertains apprehensions of this subject, or views with such indulgence the possible fears and apprehension of suitors, that it has established national tribunals for the decision of controversies between * * * citizens of different states.\16\ --------------------------------------------------------------------------- \16\ Bank of United States v. Devaux, 9 U.S. (5 Cranch) 61, 87 (Marshall, C.J.). Thus, diversity jurisdiction not only was designed to protect against bias, but to shore up confidence in the judicial system by preventing even the appearance of discrimination in favor of local residents.\17\ Given this function, diversity jurisdiction should not be construed as parsimoniously as the recent federal decisions described above have done; instead, as others have recognized, the ``prophylactic'' function of diversity jurisdiction demands that it be extended liberally to cases in which legitimate concerns about locality discrimination might arise.\18\ --------------------------------------------------------------------------- \17\ See, e.g., Adrienne J. Marsh, Diversity Jurisdiction: Scapegoat of Overcrowded Federal Courts, 48 Brooklyn L. Rev. 197, 201 (1982). \18\ See James W. Moore & Donald T. Weckstein, Diversity Jurisdiction: Past, Present and Future, 43 Tex. L. Rev. 1 (1964). --------------------------------------------------------------------------- In my view, these concerns are particularly weighty in the context of class actions against large, out-of-state corporations. Whatever one's view of the value of diversity jurisdiction generally (and I served as an adviser to the Federal Courts Study Committee, which expressed some doubt about the value of diversity jurisdiction in the modem era in the context of suits between individual citizens), there is no doubt in my mind that a federal forum which is perceived as neutral and unbiased will enhance the quality of justice in the context of large class actions against multiple parties, many of which are out- of-state corporations. The undesirability of discrimination against interstate businesses Part and parcel of the political failure of the Articles of Confederation was the economic failure of that regime. It had become clear by 1787 that, if individual states were permitted to enter into separate economic treaties with one another, and to impose tariffs and other restrictions on the free flow of goods across state lines, the economic health of the United States would falter. Discrimination against out-of-state business entities by means of state judicial processes was regarded as an equally great threat to the growth and economic health of the nation. As one commentator put it: No power exercised under the Constitution * * * had greater influence in welding these United States into a single nation [than diversity jurisdiction]; nothing has done more to foster interstate commerce and communication and the uninterrupted flow of capital for investment into various parts of the Union, and nothing has been so potent in sustaining the public credit and the sanctity of private contracts.''\19\ \19\ John J. Parker, The Federal Jurisdiction and Recent Attacks Upon It, 18 A.B.A. J. 433, 437 (1932); see also John P. Frank, Historical Bases of the Federal Judicial System, 13 Law & Contemp. Probs. 3, 27 (1948). --------------------------------------------------------------------------- The importance of fostering confidence in the judicial system Last, but certainly not least, the availability of a federal forum enhances the perception (among litigants and others) that justice is not meted out according to what one commentator has called ``the Good Old Boy System.''\20\ Northwestern University law professor Martin Redish has compared the judicial system to a baseball game, and pointed out that in the same way sports fans would not trust an umpire to call balls and strikes fairly if he were affiliated with the home team, the public cannot be expected to have confidence in a judicial system without the life tenure and other protections of the federal judiciary--a system, like that in effect in 38 states,\21\ where judges are beholden to their constituents and campaign contributors. Litigating lawyers typically refer to this as the ``home court'' advantage. --------------------------------------------------------------------------- \20\ Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol. 4 (May 1, 1997) (comments of consumer advocate Stephen Gardner). \21\ See Erwin Chemerinsky, Federal Jurisdiction Sec. 1.5m at 34 (2d ed. 1994). --------------------------------------------------------------------------- One important way in which the federal courts preserve public confidence in the judicial system is by maintaining procedures designed to minimize inconsistent results. Unlike state courts, the federal judiciary has the ability to consolidate numerous complex lawsuits involving similar allegations in a single district before a single judge.\22\ By contrast, related state court cases that are not susceptible to consolidation often reach differing (and seemingly random) results, permitting class-action plaintiffs' attorneys to take multiple bites at the apple in the hope that, despite a number of losses on a particular issue, they will rack up a handful of lucrative wins. One recent example of this phenomenon involved a series of cases filed in state court against Ford Motor Company concerning the quality of paint on Ford cars and trucks. All of these cases were removed to federal court, where they stayed--except for one case, which a federal district judge in Texas remanded twice to state court. The removed cases were consolidated before a single federal judge in New Orleans, where all pretrial matters were conducted in a coordinated fashion. The Texas case proceeded on its own, in state court. After the completion of years of discovery, the federal judge issued what has already become a leading opinion, denying class certification in the consolidated federal cases.\23\ Reviewing an identical record, an elected state judge in Texas reached the opposite conclusion and certified a class.\24\ What can litigants and the public take from such a result, other than a sense of randomness and inconsistency? --------------------------------------------------------------------------- \22\ See 28 U.S.C. Sec. 1407 (providing for consolidation by the Judicial Panel on Multidistrict Litigation). \23\ See In re Ford Motor Co. Vehicle Paint Litig., 182 F.R.D. 214 (E.D. La. 1998). \24\ See Ford Motor Co. v. Sheldon, 965 S.W.2d 65 (Tex. App.-- Austin 1998), writ granted. --------------------------------------------------------------------------- Other witnesses today and at other hearings have noted the practice followed by many state judges of simply certifying classes as a matter of course,\25\ the apparent willingness of state judges to approve class settlements that seem to benefit no one other than the plaintiff's attorneys,\26\ and the fervor--demonstrated perhaps most recently in the breast-implant class litigation in federal court in Alabama and in Louisiana state court--with which state judges often advance cases that compete with previously filed (and possibly even certified) class actions in federal courts. All of these developments can have no other consequence than a serious erosion of public confidence and trust in the judicial process. --------------------------------------------------------------------------- \25\ See Advisory Committee Working Papers, Vol. 3, at 39 (testimony of Lewis Goldfarb, Chrysler Corporation) (noting that many state judges ``almost see it as their civic duty to certify classes''). \26\ See Lawrence W. Schonbrun, The Class Action Con Game, Regulation, Fall 1997, at 50. --------------------------------------------------------------------------- But in my view, the issue transcends whether individual state courts cases certifying classes are right or wrong, or what standards particular states adopt for certifying class actions. At the structural level, it is important to have the option--as we do in other areas of law--to remove cases to federal court. Removal is a brilliant innovation in our federal jurisprudence. It maintains the autonomy of state to develop their own law and their own procedures (without federal preemption) while at the same time creating a gentler incentive to keep them from going too far. The existence of a removal provision creates what economists call ``potential competition.'' Removal is like the use of economic incentives, rather than command-and-control regulation, in environmental regulation, or like a school choice voucher program that improves the public schools by giving students an option to go elsewhere. Removal does not override the states' freedom of action. It merely breaks a monopoly and creates a kind of competitive market discipline. If a state goes too far, and its decisions are perceived by litigants as unfair for whatever reason, the litigants may go to another forum that they perceive as more neutral. Unfortunately, in the field of class actions, the option to remove to federal court has been more apparent than real, because of the decisions regarding diversity jurisdiction discussed above. In my view, the most important provisions of S. 353 are those that would make removal to federal court--which is available as a matter of course in other major litigation--available in class actions as well. As I stated above, this is important not only to insure fairness to the litigants themselves in the cases that are removed, but will, in the long run, I believe, exercise a salutary effect on improving the quality of justice in the state courts. b. the current statute is too blunt an instrument to achieve its purpose of ensuring that ``important'' cases have an available federal forum As I have already explained, the current diversity-jurisdiction statute contains two requirements, neither of which is constitutionally required: ``complete'' diversity of citizenship, and a minimum amount in controversy. Intuitively, these two requirements serve a single purpose: to ensure that ``important'' cases qualify for a federal forum, while protecting the federal docket from cases too trivial to merit the attention of overburdened federal judges. As the class-action explosion demonstrates, however, the current two statutory requirements are not up to their task. Perversely, under the present system, any legally insignificant dispute that happens to involve citizens of different states and a minimum amount in controversy--say, a slip-and- fall case involving a Virginia citizen and a Maryland grocery store owner, or a contract dispute between a businessman in Kansas City, Missouri, and his supplier in Kansas City, Kansas--qualifies for federal jurisdiction. But the Texas lawsuit against, Ford Motor Company--a lawsuit that, according to the plaintiffs' attorneys, involved hundreds of thousands of class members, each with tens of thousands of dollars in alleged damages--somehow is not ``important'' enough to warrant the federal courts' time. Clearly, this result is indefensible. It is time we realized--in academia, in the profession, and in Congress--that the two current requirements of diversity jurisdiction are simply proxies for ``importance.'' It is true that these proxies, because they have been in force for many years, have come to be embedded in the legal culture. But there is nothing sacred--and certainly nothing constitutional-- about them. They are merely proxies, and highly imperfect ones at that. More important than fealty to these proxies is that we remember the underlying purpose they are intended to serve: to provide a federal forum for cases that are sufficiently large and important, judged against the three constitutional purposes I have described above. Interstate class actions clearly are important on any measure. Accordingly, I strongly support the proposed amendments. III. Conclusion I appreciate the opportunity to testify today before this Subcommittee. Please allow me to summarize. Interstate class actions are filed at a rate that increases every year. More and more, they are filed in state court in an effort to capitalize on the political goodwill that many local class-action plaintiff's attorneys have with their local elected judges. And federal courts, lacking any clear guidance from Congress, are bending over backwards to decline jurisdiction over these cases. This has created strong pressure on out- of-state defendants to settle cases, regardless of the merits of the claims involved. This situation is a real and tangible threat to due process in this country, and I urge Congress to take immediate steps to address the threat by restoring the right to remove these cases to a neutral, federal forum. Senator Grassley. Thanks to both of you, and we will have 5-minute rounds of questions as well for this panel. I will start with you, Mr. Frank. I would like to have you comment on the Justice Department's concerns regarding diversity removal provisions in the bill. Do you think that the Justice Department's criticisms are justified? Mr. Frank. I think not, and I must acknowledge to you, sir, that I have been the principal defender of diversity through many Congresses for many years. That is one of the reasons you are keeping it. So I am very strongly in support of the diversity jurisdiction generally. At the same time, I have some sympathy with the feeling of the Department, evidently, that they don't want to inundate the system with cases. I also have a sense, as you gentlemen with more experience have, with the practical politics of the situation, because the plain gut fact of the matter is that you are either going to work this out with Justice or you won't get the bill through, I would fear. And I listened to Ms. Acheson with very great interest. She and I had spoken before the meeting, and I heard her repeatedly encouraging discussions to see if some compromise can't be worked out. And I think that that is just, as I earlier suggested, essential. I noted Senator Sessions nodding to me when I mentioned Judge Pointer of his State, who has done more than any other single judge in America to make the systems work well together, and by having joint hearings. And I am also a member of the Council of the American Law Institute. There is a bill to work out integration of State and Federal systems. Charlie Wright could be a useful guy for this discourse. So I take the liberty of suggesting that while I personally believe strongly in the bill as it stands, I suggest that tactically it shouldn't be difficult to work out with Justice some way which would get away from perfectly outrageous situations. I have included an essay in my own statement on that Bank of Boston case that you spoke about. Of course, that is appalling, and we have just got to put a stop to that. And if there is no way to do it but running a steam roller through it, then please run a steam roller. But I think you could work something out. Senator Grassley. Thank you. Professor Elliott, you heard the critics of our proposal argue that it would federalize class action procedures, so that if a Federal court denies certification, a State court can't turn around and certify the same class. Do you believe that most State courts already look to the Federal law as a class action procedural issue? Mr. Elliott. Overwhelmingly, they do. I think that is part of the problem. In many, many, many States, as a litigating lawyer, I think my clients and I would not particularly care whether we are in the Federal court or the State court because there are very similar rules. We do have some situations--and it is kind of a race to the bottom--where certain jurisdictions have developed rules that are extremely favorable to the plaintiff, and cases that have very little connection with that forum tend to get filed in those few areas. But I think in the overwhelming majority of jurisdictions, the rule is pretty similar to the Federal rule, or even more restrictive than the Federal class action rule. But, again, I think that is why the approach of removal which is used in this bill is really such a good one because you are not going to remove a case to Federal court solely because of a difference in class action standards. You are going to make a decision based on the overall mix of whether or not the State court and the State judge and the State jury and the State procedural system as a whole is perceived as reasonably fair. And if not, I think it is important, particularly in multi- State cases with out-of-state corporate defendants, that there be an opportunity to remove that case to a more neutral forum. I don't think that is federalizing the rule. I think it is really just the core purposes of diversity jurisdiction. And let me note I have not been as strong a supporter of diversity jurisdiction as John Frank. I was one of the advisers to the Federal Court Study Committee that recommended some contracting of diversity jurisdiction. But if we have diversity jurisdiction at all, in my opinion, these kinds of cases where you have out-of-state, multi-State corporate defendants are really the core purposes for which diversity jurisdiction is created. And I think it is ultimately very ironic that the simple slip-and-fall case between two citizens of different States can be in Federal court, and the kind of case that involves many, many people throughout the country and many corporations can't be effectively brought in the Federal court because of these problems with the removal provisions. Senator Grassley. Professor Elliott, would you please comment on the Justice Department's testimony of how far--well, this isn't just the Justice Department's testimony. How far will this legislation go toward addressing problems associated with class actions? I would also ask Mr. Frank that as well. Mr. Elliott. I think it is a useful first step, but I don't believe it goes far enough. I think there is plenty more work to be done in this area. As I indicated, I think there are abuses even under the Federal rule, but as a very moderate, balanced first step, restoring the right to remove cases back into the Federal court I think is a good first step. Senator Grassley. Would you like to comment, Mr. Frank? Mr. Frank. I simply feel that it is a very long and a very good first step, and I take the liberty of complimenting you on it, especially on that portion that you mentioned earlier. You are keeping the true State cases in State courts. In my State, for example, there is a pending class action about water rights. Now, that belongs in the State court. It involves our water. The plaintiffs are people involved in the State. It is a very legitimate State class action. You have protected that very, very thoroughly. I have made my technical suggestions, which I respectfully submit would perhaps strengthen the bill and go squarely to where you want to go, Senator Grassley, and I hope you can consider them. Senator Grassley. The Senator from Alabama. Senator Sessions. Thank you, Mr. Chairman. I agree with you, Professor Elliott, that really this is the heart and soul of what diversity is about. It is precisely the kind of case that is in harmony with the philosophy, I believe, of diversity, and it is appropriate. I recall an individual who got elected chief justice of the Alabama Supreme Court and was narrowly defeated by a few votes this last time for reelection, but when he was in private practice, he made a closing argument that was presented in the Alabama Lawyer in which he said, looking at his jury, he wanted them to return a verdict, a big verdict, a verdict so big that it would have to be written by the president of that New York corporation personally. And he wanted it so big, that the executive would cry when he wrote it. There is a sense sometimes that juries can be inflamed against foreign defendants, and sometimes you end up with bizarre verdicts that are not always helpful. That is why we had some diversity to begin with, and I think we are moving away from that. Mr. Frank, I would also note for you Judge Higginbotham is a University of Alabama graduate. So your three people there-- Justice Black, and Higginbotham, and Judge Pointer--are all University of Alabama graduates. Mr. Frank. It is clear that Judge Higginbotham is very enthusiastic about that, and one of the meetings of the committee under his chairmanship was at the University of Alabama and I was allowed to give a lecture in the Black Room that is now in the building there. I hope you have seen it. It is really very nice. Senator Sessions. It is very nice. Thank you for your continual interest in this. Like any piece of legislation, obviously, you had concerns that interested me. Some of the concerns you had at that time, you now believe have proven to have been correct, is that right? Mr. Frank. Yes. Senator Sessions. So you would say to the legislative body, based on your personal experience and the experience we have had over these years, that it is time for us to improve the law so we can minimize those concerns? Mr. Frank. Yes, though I don't want to claim I have a crystal ball. Let me say nobody in America in the 1960's ever anticipated that we were going to get this massive growth. I repeat, what we thought we were dealing with was small matters. May I add one other word? I am keenly aware that the Committee on Civil Procedure and the special committee headed by Judge Scirica has recently recommended that there be further study of the mass tort problem. I have read it. They have sent it to me. I strongly endorse that proposal of Judge Scirica, and at the same time that is no reason why you have to paralyze action on this particular difficulty. This is a subset of the problem; it is a severe abuse. And you are very wise in doing just what you are doing. Thank you. Senator Sessions. I thank you for that, and I agree 100 percent. We had hearings on the asbestos litigation. I believe 200,000 asbestos cases have been concluded; 200,000 are pending, and another 200,000 expected. Seventy percent of asbestos companies, 25 companies, are in bankruptcy, and only 40 percent of the money paid out by the asbestos companies has gotten to the victims. In mass tort, we have got to do better. For those who love the law, we need some professors to be outraged about that. This money should have gone to victims and not the bureaucrats and lawyers in between, in my view. But that is to some degree another subject. With regard to the Department of Justice, I hope your optimism is not too great, Mr. Frank, because I am not sure they want legislation. But I certainly would be prepared to work with you or the chairman, if he chose. I have spent some time personally with Judge Pointer, who I think is one of the country's finest district judges, and he believes that this is not an undue burden on the Federal courts; a necessary burden, I assume he would call it. And he thinks your suggestions are on the right track. Mr. Elliott, with regard to the attorneys' fees, aren't there circumstances in which there is a conflict of interest between the attorney and the clients, the thousands they may represent? Would you explain why we can't always rely on a fee agreement to be a fair setting of attorneys' fees? Mr. Elliott. I would be glad to, and I certainly agree with you that there is an inherent conflict between the attorney and the clients in class action cases. That is one of the reasons that we have the provisions that are unique in rule 23(e) in the Federal system requiring that the settlement agreements and the fee agreements have to be approved by the court because in a class action case, although you have some representative parties that are in some of the academic literature referred to as decorative figureheads, you can't really count on them to negotiate an agreement. So these fee agreements are not really negotiated with class action members in the way that they would be in a normal situation. And along those lines, Senator Sessions, let me just make one remark. You mentioned the asbestos cases, and as you continue to draft this legislation, I think we have to be careful that we cover what are sometimes called quasi-class actions. I was involved in defending the--and the closing argument you mentioned reminded me of the times I had heard that. I was involved in defending the 8,800-plaintiff Baltimore asbestos cases, at the time one of the largest asbestos cases ever. That was not filed as a class action. Senator Sessions. 8,800 individual lawsuits? Mr. Elliott. 8,800. They just named 8,800 consolidated cases. And if you were to have a situation where your legislation granted removal, but it was limited to those cases that are class actions, you might create incentives for people to file these cases in the State courts under liberal joinder provisions, but simply to name 8,800 people. So I think you need to think as the process goes forward about how this gets drafted so that we are really dealing with the multi-party cases, not just those that are formally class actions. I mean, we had a situation where people were using consolidation as an alternative to class actions, and you can get to pretty much the same result that way in many cases. Senator Sessions. Thank you. Senator Grassley. The last question was something I was going to ask Mr. Frank, so I just wondered if you want to comment on the last question that he asked just to have a confirmation of everything we have talked about here today. Mr. Frank. I think Mr. Elliott has done this so well, and John Beisner is coming before you and he speaks for me very well. I do reiterate what I took the liberty of saying before. I really believe that if the right people expert in this field spent an afternoon together, they would solve this problem and come back to you with a proposal that could be unanimously accepted. It just isn't that difficult. Some of the cases should stay in State courts, some of them shouldn't. You have made a brave step. Perhaps something further can be done, and it so needs to be done. Please don't let this valuable bill die because of a quarrel over that very important question. It just has got to be compromised somehow. Thank you. Senator Grassley. Thank you, and I say thank you to the entire panel. Your contribution is very worthwhile for this project that we are going forth on. Now, on our fourth and final panel, I would call Mr. Steve Morrison, Professor Richard Daynard, and Mr. John Beisner. Mr. Morrison is a partner with the Columbia, SC, law firm of Nelson, Mullins, Riley and Scarborough, as well as general counsel for Policy Management Systems Corporation. He is the witness that Senator Thurmond has referred to as being a constituent of his, and Senator Thurmond is glad to have Mr. Morrison here. He also serves as board chairman of the Lawyers for Civil Justice. Professor Daynard is a professor at Northeastern University School of Law and is active in tobacco-related studies and litigation. He has published numerous articles dealing with tobacco liability. Mr. Beisner is a partner in the Washington, DC, office of O'Melveny and Myers, and he has defended over 250 class action lawsuits in both Federal and State court. I would ask Mr. Morrison to start. PANEL CONSISTING OF STEPHEN G. MORRISON, GENERAL COUNSEL, POLICY MANAGEMENT SYSTEMS CORP., COLUMBIA, SC; RICHARD A. DAYNARD, PROFESSOR OF LAW, NORTHEASTERN UNIVERSITY SCHOOL OF LAW, BOSTON, MA; AND JOHN H. BEISNER, O'MELVENY AND MYERS, LLP, WASHINGTON, DC STATEMENT OF STEPHEN G. MORRISON Mr. Morrison. Thank you, Mr. Chairman. Mr. Chairman, I am an old trial lawyer. I have had the privilege of trying over 200 cases to jury verdict in over 20 States in the United States, and I have seen home cooking in various places and I have seen some excellent judges and fundamental fairness. Your bill restrikes the appropriate balance of fundamental fairness in class actions by allowing for the use of diversity jurisdiction to remove the case to Federal court. It is what the Framers intended and it is what we need as practicing lawyers. Nicholas Negroponte, who is head of the media lab at the Massachusetts Institute of Technology, a fellow who foresaw the digital world that we are in now, wrote a book called Being Digital in 1996. He says if you are going to look to the future, looking straight ahead with your head down, you don't always see things. To see the future appropriately, you need to see it from peripheral vision because some of the things that come at you really come out of left field. I think out of left field, we have had a situation where class actions have increased so dramatically from 1988 to 1998--up 1,000 percent in some areas, 300 percent in other areas. The RAND study says most of them are in State courts. The focus has been on State court litigation. So, Mr. Chairman, what I say is what is happening out there? Has corporate conduct really changed? Is the business world significantly more evil in more multiples across the country, in the United States? No, absolutely not. What has changed is an attitude toward entrepreneurial litigation which is going to the lowest common denominator, that is the jurisdiction where they can get the best possible judge with the least possible rigor in the class certification process. Entrepreneurial litigators are bringing these cases in hometown jurisdictions. Now, why are they doing that? They are bringing them in hometown jurisdictions because the whole ball game in class action is about class certification. When I am litigating a class, if I can prevent it from being certified, or at least get enough rigor in the class process by which you have a rational certification of people that are really injured, really in like situation, whose cases can be tried together rationally, then you can come up with a rational settlement or, better yet, a rational trial process by which you can go to a verdict. There is a case down in Tennessee that is commented upon in several of the articles that are before you where a class action involving 23 million people nationwide was certified on the same day it was filed. What do you think the defendant has to do under those circumstances? The defendant is forced to settle with a 23-million-person multiplier in that situation. That is legal blackmail in a State court. You know those 23 million people didn't all live in Tennessee, nor were all the defendants in Tennessee. But there were enough defendants and enough plaintiffs in Tennessee to allow that to go forward. That was wrong. And, you know, when we looked further into it, we found that within 10 days before that, the same lawyer in the same court in the same State of Tennessee had filed a case against the music industry for a class action. That is abusive, and that is what is going on. So we have a huge increase in monetary demands, no change in corporate behavior, and an entrepreneurial litigation going on. Why? It is because the States are less rigorous. It is because the States are less able to manage this litigation. They have not been set up for it, they have not had the training in it, they do not have the clerks in it. Mr. Chairman, when I go to a State court in a small county, I am frequently confronted with a judge in a mass tort situation, class action or other mass tort, where the judge the next day will be hearing a divorce case, and the case right before mine was a juvenile crime case and the case right after mine is a slip-and-fall in a grocery store. Now, the State courts have to deal with that. There are wonderful, brilliant State court judges in all of our States and they have to deal with justice on an individual level in that State, in that locality. That makes sense. But does it make sense for them to be handling a nationwide class action? No, it does not. That is what diversity jurisdiction is all about. Now, when we take a look at what is happening, we get this certification, we get the blackmail multiplier in there. And then what we really have to do is look at who runs the case once that is done. Well, Mr. Chairman, the person who runs the case is the self-appointed chief executive officer of the case; it is a lawyer. There are no clients. In fact, in the Federalist documents there is a quote from William Lerache, who is probably one of the major class action plaintiff lawyers in the country, saying it is wonderful not to have a client. If your client is going to get $.08 at the end of the case, there is no client, there is no accountability. Now, that person has not been elected by a board of directors, not been elected by the shareholders, not been elected by the voters. That entrepreneurial litigator is then negotiating a class settlement that is really about that person's fee. If I might just conclude, so who is getting tromped on here? The people that are really getting tromped on are the consumers. The consumer then ends up paying a huge fee for an $.08 settlement. The disclosure didn't come out on the fee. The disclosure didn't come out in plain English. The notification didn't come out in plain English. And what is the solution to all of this? Interstate class actions should be in the Federal courts. Why? Mr. Chairman, the Federal courts are particularly able to handle these. They were designed for multi-State issues, to deal with them. They have a sensitivity toward the substantive law of each State. Moreover, if you look at what is happening in the peripheral vision, the aggregation of large numbers of claims, as Senator Thurmond said in his opening statement, is creating social policy. In essence, the courts are being used by aggregating large numbers of claims to make public policy, absent an elected representative, absent a legislator. Why is that significant? The Federal courts are extraordinarily sensitive to separation of powers, and so they are sensitive to the law of each State. They have a mechanism by which we are not going to duplicate these class action lawsuits, so there is a mechanism to manage them. Most of the Federal judges have two or three law clerks. Most of the Federal judges have a docket that is more manageable. They work extraordinarily hard, but the variety and size of cases is in a narrower band. They are in a situation where, if they can have this appropriate jurisdiction, eliminating the sham defendant or the false joinder, as you have done here, and the amount in controversy claim-shaving abuse, all you do is take appropriate Federal actions in the U.S. district courts where they belong. I strongly endorse this bill as a very powerful first step and, as Professor Frank said, a long first step toward class action reform. Thank you. Senator Grassley. Thank you, Mr. Morrison. [The prepared statement of Mr. Morrison follows:] Prepared Statement of Stephen G. Morrison Thank you for this opportunity to speak to you today about the merits of S. 353, the Class Action Fairness Act of 1999. This important legislation at least partially addresses one of the most serious problems raised by class action litigation in our nation's legal system, and I therefore urge the members of this Subcommittee to give their careful consideration and support to this legislation. Before spelling out the reasons for my support of this legislation, let me tell you about the multiple perspectives that I bring to this subject. Indeed, I have seen the subject matter of this legislation-- class actions--``up close and personal'' from four very distinct vantage points. First, I am a partner and practitioner trial attorney with the law firm of Nelson, Mullins, Riley & Scarborough in Columbia, South Carolina. In that role, I have had considerable involvement with the adjudication of class action litigation. Second, I am the General Counsel of Policy Management Systems Corporation, a publicly traded (NYSE) technology computer systems and technology services company. Third, I currently serve as Board Chairman of the Lawyers for Civil Justice (LCJ), a national coalition of the leading corporate counsel and defense bar organizations. Finally, I recently served as President of the Defense Research Institute, an organization of 21,000 lawyers defending civil cases in America's civil courts every day. My firm which has over 200 lawyers in North Carolina, South Carolina, and Georgia has been involved in defending dozens of state and federal class actions. My own personal experience in handling state and federal class actions involving both national and ``local'' issues and classes in managing multidistrict litigation forms the primary basis for my testimony. I. The Number Of Class Actions Has Increased Exponentially When it comes to class actions, there may be room for legitimate debate on a lot of issues. But there is no room for dispute on a key point--over the past several years, the number of putative class action lawsuits filed has skyrocketed. I have seen that phenomenon in my own legal practice. I have seen that phenomenon as a general counsel, both in dealing with the legal docket of my company and in corresponding with fellow general counsels of other companies. And I have seen that phenomenon in my work with Lawyers for Civil Justice, whose members have spent many hours discussing and analyzing the burgeoning ``class action problem.'' Personally, I have experienced the explosive increase in class action suits through the over fifty class action cases recently or currently handled by my firm; multiple state court class action cases filed against Policy Management Systems Corporation over the cost of photocopying hospital and other medical records; and the alarming increase in state court class actions filed against corporate members of Lawyers for Civil Justice. There's a lot more than just anecdotal evidence of this trend. Both this Subcommittee and its House counterpart held hearings last year in which ample evidence of the class action tidal wave was supplied. For example, the record of those hearings reflect statements from the Federal Judicial Conference's Advisory Committee on Civil Rules observing that over the past few years, U.S. companies have experienced 300-1,000 percent increases in the number of purported class actions filed against them.\1\ And a study by the highly regarded RAND Corporation confirms this trend.\2\ --------------------------------------------------------------------------- \1\ Working Papers of the Advisory Committee on Civil Rules on Proposed Amendments to Civil Rule 23, Vol. 1, at ix-x (``Working Papers 1'') (memo to members of the Standing Committee on Rules and Procedure and the Advisory Committee on Civil Rules from Judge Paul V. Niemeyer). \2\ Deborah Hensler et al., Preliminary Results of the RAND Study of Class Action Litigation 15 (May 1, 1997) (``RAND Report''). --------------------------------------------------------------------------- Let me also observe that it is not only the number of these cases that has grown--the size of those cases has also grown. It is not unusual for the proposed classes in these cases now to encompass millions of Americans. And not surprisingly, with the number of class members growing in the average case, the monetary demands are growing as well. Thus, it is not unusual for a company to be served with a class action lawsuit seeking damages of a billion dollars or more. This dramatic increase in the number of state court class actions and the size of the awards being sought is puzzling to say the least. Obviously, it is not attributable to any radical change in corporate behavior. I see no evidence that our nation's business leaders suddenly lost their moral compass, such that it is rampant corporate wrongdoing that is prompting these lawsuits. Instead, I think it is clear that the explosion of class action filings can only be attributed to the fact that certain members of the plaintiffs' bar have discovered that some of our state courts can be a fertile playing field for class litigation. b. the class action device is being abused Given the immense stakes involved in nearly all class actions, one might think that these class actions would generally be filed and litigated in the federal district courts. After all, a core function of the federal courts is to adjudicate claims between the citizens of different states that involve substantial amounts of money. But there is compelling evidence that the recent growth in the number of class actions is primarily a state court phenomenon. The RAND Report notes that the ``doubling or tripling of the number of putative class actions'' has been ``concentrated in the state courts.'' \3\ --------------------------------------------------------------------------- \3\ See, e.g. RAND Report, supra note 2, at 15. --------------------------------------------------------------------------- The reason for this explosion of state court class actions is simple. State courts in a number of jurisdictions have exhibited a relatively lax attitude toward class action lawsuits--that is, many local courts are willing to certify for class treatment cases that do not meet the basic, generally accepted class action requirements.\4\ Not surprisingly, some members of the class action plaintiffs' bar have seized this obvious opportunity. They have taken their lawsuits to state courts that are less likely to exercise the rigorous case management necessary to ensure that all parties (including unnamed class members) receive due process. Having discovered an open door in state courts, plaintiffs' counsel are filing class action lawsuits that they would never have seriously considered bringing a few years ago. --------------------------------------------------------------------------- \4\ At the same time, federal courts have laid down clearer, firmer rules, governing when a matter may be afforded class treatment. The recent decisions of the U.S. Supreme Court in Amchem Products v. Windsor, 117 S.Ct. 2231 (1997), the Fifth Circuit in Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), the Sixth Circuit in In re American Medical Sys., Inc., 75 F.3d 1069 (6th Cir. 1996), the Seventh Circuit in In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir.) (Posner, J.), cert. denied, 116 S.Ct. 184 (1995), the Ninth Circuit in Valentino v. Carter-Wallace, Inc., 97 F.3d 1227 (9th Cir. 1996), the Eleventh Circuit in Andrews v. American Tel. & Tel. Co., 95 F.3d 1014 (11th Cir. 1996), have reminded federal district courts of the importance of taking the requirements of Rule 23 seriously; that is, matters may be certified for class treatment only if they clearly meet the certification prerequisites set forth in Fed. R. Civ. P. 23. --------------------------------------------------------------------------- In interviews for the RAND Report, many attorneys (including some plaintiffs' counsel), observed that ``too many non-meritorious [class action lawsuits] are [being] filed and certified'' for class treatment.\5\ As a result, U.S. corporations (both large and small) are being forced to expend substantial resources defending an onslaught of cases, most of which do not come close to satisfying the class action prerequisites. By readily obtaining certification of huge classes in state courts, plaintiffs' attorneys are able to create enormous financial exposure and to thereby force settlements of cases that otherwise would not be taken seriously. --------------------------------------------------------------------------- \5\ RAND Report, supra note 2, at 22. --------------------------------------------------------------------------- But corporations are not the only victims here. Class actions are supposed to be brought on behalf of class members--usually consumers. But in the class actions we are seeing today, class members are the forgotten participants. No one checks to see if the putative class members really want to have their claims asserted in a class action. No one asks the class members how or where they wish their claims to be asserted. No one confers with class members to find out if they wish to have their claims litigated. And most importantly, no one obtains input from class members about how they wish to have their claims settled (if at all). In short, consumers' claims are being used by attorneys as business ventures. Consumers have little or no control over how their claims are being used. Thus, not surprisingly, they exercise little or no control over what happens to their claims. 1. Defendants' due process rights are being ignored The record shows that many state courts do not give a fair shake to either class action defendants or the members of the putative classes-- only class counsel are benefited. The state court abuses of the class action device have become open and notorious. As defendants in state court class actions, U.S. companies are being denied fundamental due process rights. Let me describe a few types of problems defendants commonly incur in these courts. Some state courts ignore the due process rights of out-of-state corporate defendants. In these jurisdictions, the defendant is not afforded a fair opportunity to contest the claims brought against it. The most outrageous example of this is the ``drive-by class certification'' in which a state court judge grants plaintiffs' motion to certify his claims for class treatment before the defendant even has a chance to respond to the motion (or, indeed, in some instances has even been served with the complaint). For example, I noted in the record of the House hearings last year discussion of a lawsuit filed against a major car manufacturer in a Tennessee state court.\6\ Plaintiffs filed several inches of documents with their complaint. Astoundingly, by the time the court closed on the very day that the action was filed, the judge had entered a nine-page order granting certification of a nationwide class of 23 million vehicle owners--one of the largest class actions ever certified by any court.\7\ In the order, the court stated that it had conducted ``a probing, rigorous review'' of the matter. I am not sure how you could possibly do that in a few hours on the day a case is filed. And I am quite sure that you could not do ``a probing, rigorous review'' when the defendant was never even notified about the lawsuit before that order was entered and was provided no opportunity to tell its side of the story. Only a few days earlier, the same plaintiffs' attorney had filed another multistate class action--one alleging antitrust violations in the music/compact disc industry--before the very same Tennessee state court.\8\ Once again, in that major class action, the trial court entered an order granting class certification on the same day the complaint had been filed, long before the defendants were notified of the lawsuit and certainly before they had been afforded any opportunity to respond to the request for class certification. --------------------------------------------------------------------------- \6\ Sweet v. Ford Motor Company, Civil Action No. L-10463 (Cir. Ct. for Blount County, Tenn.) (filed Jul. 10, 1996). \7\ See Order Granting Nationwide Class Certification, Sweet v. Ford Motor Company, Civil Action No. L-10463 (Cir. Ct. for Blount County, Tenn.) (filed Jul. 10, 1996). \8\ Robinson v. EMI Music Distribution. Inc., Civil Action No. L- 10462 (Cir. Ct. of Blount County, Tenn.) (filed July 8, 1996). --------------------------------------------------------------------------- Another common problem with state court class actions is the ``I never met a class action I didn't like'' phenomenon. Although most state courts will at least give the defendant a chance to respond to a class certification motion, many of them employ standards that are so lax that virtually every class certification motion filed is granted, even where it is obvious that the case cannot, consistent with basic due process principles, be tried to a jury as a class action. This problem is evidenced by the frequency with which state courts are readily certifying cases as class actions, while federal courts conclude that the very same cases cannot be litigated on a class basis. For example, I am aware of cases in which a state-court judge certified a nationwide class of persons who allegedly claimed that the house siding they had purchased was defective. Later, however, a federal district court judge presented with the same case rejected any prospect of certifying a class in that matter, finding that affording class treatment in that case obviously would deny the due process rights of the defendants and the purported class members.\9\ --------------------------------------------------------------------------- \9\ Compare Naef v. Masonite Corp., No. CV-94-4033 (Circuit Court, Mobile County, Alabama), with In re Masonite Hardboard Siding Prods. Litig., 170 F.R.D. 417, 424 (E.D. La. 1997). --------------------------------------------------------------------------- 2. Consumers are being used and their rights are being trampled The real purpose of the vast majority of class action lawsuits is to make money--not for consumers, but for the lawyers bringing the suit. As a result, consumers often are exploited and rarely receive substantial awards, while class action counsel frequently walk away with millions. For instance: The Chicago Tribune reported that in a class action against Arista Records seeking to recover the prices paid for albums by the rock duo Milli Vanilli (that contained the voices of other performers), class members obtained a settlement recovery of $1 to $3 each. But the court awarded the lawyers $675,000. And for those lawyers, that was not enough. They petitioned the court to increase their fee to $1.9 million. Business Today reported that in a class action against a cereal maker regarding the use of a food additive that had not injured any consumer, the consumers received (in settlement) a coupon entitling them to free cereal (if they bought more cereal). Meanwhile, the lawyers for the class were paid nearly $2 million in fees--approximately $2,000 per hour. The Baton Rouge (La.) Advocate reported that in a settlement of a state court class action involving toxic pesticide fumes from a chemical plant, the residents of a New Orleans neighborhood each received a few thousand dollars. But the class action lawyers walked away with over $25 million in legal fees and expenses. An article in the San Diego Union Tribune criticized the settlement of a state court class action in which the author had received 93 cents and her class counsel had received $140,000. The Chicago Tribune reported that one state court class action settlement with a mortgage bank yielded an $8.5 million payment to the class attorneys, but a $91.33 debit to the class members' mortgage escrow accounts. I am also very disturbed by the circumstances (discussed in more detail below) in which class counsel waive the rights of the class members (whose rights they are supposed to protect) in an effort to make a case more amenable to class treatment. In short, in order to achieve the class counsel's personal objective--to create a class action business venture--counsel frequently jettison purportedly viable claims and take other actions that are adverse to the interests of class members. These reports are particularly disturbing because they reveal how grossly the class action device has been distorted. The class action device was intended to protect consumers. It was not created to enable lawyers to get rich. Before going any further, let me say that I am pleased that S. 353 addresses the issues of consumer exploitation and attorney misconduct in a number of its provisions.\10\ For example, the class notices that class member receive frequently are written in small print and legalese. Since those notices typically are telling class members that they are about to give up important legal rights (unless they take appropriate action), it is imperative that they understand what they are doing and the ramifications of their actions. The bill requires notice of proposed settlements in all class actions, as well as all class notices, must be in clear, easily understood English and must include all material settlement terms, including the amount of attorneys' fees. --------------------------------------------------------------------------- \10\ However, I would urge the Congress to work with the courts through the rule making process rather than legislatively amending Rule 11 of the Federal Rules of Civil Procedure. Specifically, Congress should be cautious in the area of ``mandatory'' judicial sanctions. I would urge leaving discretion with the federal judges as to when and whether sanctions are appropriate in each case. --------------------------------------------------------------------------- The bill also requires that state attorney generals be notified of any proposed class settlement that would affect residents of their states. The notice would give state attorney generals the opportunity to object if the settlement terms are unfair. Senate Bill 353 requires that attorneys' fees in class actions be based on a reasonable percentage of damages actually paid to class members, the actual costs of complying with the terms of the settlement agreement, as well as any future financial benefits. In the alternative, the bill provides that, to the extent the law permits, fees may be based on a reasonable hourly rate. This provision would discourage settlements that give attorneys exorbitant fees based on hypothetical overvaluation of coupon settlements, yet allows for reasonable fees in all kinds of cases. II. Federal Courts Are The Appropriate Forum For Litigating Interstate Class Actions State courts are simply not the appropriate tribunals for many class action lawsuits, particularly those with interstate commerce dimensions. In many (if not most) instances, state court class action cases involve putative class members from multiple jurisdictions suing defendants from outside the forum state. This engenders the bizarre situation in which a state court in one state (e.g., Massachusetts) is interpreting the state law of another (e.g., South Carolina) and resolving the claims of South Carolina residents. What business does a Massachusetts court have dictating to South Carolina what its laws mean and in resolving the claims of its citizens? It is far more appropriate for a federal court to interpret the laws of various states, which is inherently what the constitutional concept of diversity jurisdiction is all about. Other state courts have adopted a different, equally unsatisfactory approach. They apply their own state's laws to all claims asserted in a purported class action, even though the class is comprised primarily of out-of-state residents and even though the laws of those class members' respective home states may be radically different.\11\ --------------------------------------------------------------------------- \11\ See, e.g., Snider v. State Farm Mut. Auto. Ins. Co., No. 97-C- 114 (Ill. Cir., Williamson Co.) (order certifying nationwide class of state-law based claims). --------------------------------------------------------------------------- In addition to these problems, many state courts have neither the complex litigation experience nor the support staff necessary to address the complex, technical issues normally presented by class actions. And perhaps most importantly, they lack any mechanism for coordinating parallel litigation. Once a purported class action is filed, counsel in other jurisdictions often file ``copycat'' cases-- purported class actions asserting basically the same claims on behalf of basically the same class members. Because state courts have no mechanism to consolidate cases, as do the federal courts, defendants are unfairly required to expend substantial resources defending these duplicative lawsuits. In such circumstances, there is no mechanism for achieving coordination and avoiding inconsistencies in results. Indeed, in some instances, the two state courts are forced to compete, each vying to control the litigation. This situation often works against the interests of the class members, as class counsel in the various cases sacrifice class members' rights in an effort to jockey for controlling position. The situation is also unfair to defendants, potentially giving the same classes several bites at the apple against a class action defendant. If, however, overlapping or similar class actions are filed in two different federal courts, the multidistrict litigation process permits the transfer and consolidation of those cases for pretrial purposes, particularly the coordination of discovery. This is a much more efficient and effective system that does not needlessly waste judicial or corporate resources. Federal courts are by far the more appropriate forum in which to adjudicate class actions. Virtually all federal judges have two or three law clerks on their staff; state court judges typically have none. Federal court judges are usually able to delegate some aspects of their cases (e.g. discovery issues) to magistrate judges or special masters; it is not the norm for such personnel to be available to state court judges. The current law has been manipulated by plaintiffs' lawyers making removal of class actions to federal court virtually impossible. The state court class action environment has led to a sad reality: as a practical matter, the most important question determining the outcome of a class action lawsuit has now become, not the merits of the claims or the propriety of class treatment, but whether the case can successfully be removed to federal court. Because of the lackadaisical way in which some state courts treat class actions, a class action that stands practically no chance of succeeding in a federal court can result in a multi-million (or billion) dollar judgment if it ends up in state court. Thus, the fight over the existence of federal jurisdiction becomes, as a practical matter, the entire game. The lawyers who file class action lawsuits recognize this. Accordingly, they have become increasingly adept at manipulating their pleadings to keep their putative class actions out of federal court. Tactics include: (1) Filing a complaint that, fairly read, gives rise to a claim under some federal statute, thereby qualifying the case for the assertion of federal question jurisdiction. To disguise this fact, the complaint will omit any explicit reference to the federal claim, or may even expressly disclaim any intent to pursue an available federal claim. (2) On the diversity side, lawyers who want to keep a high- stakes class action out of federal court often manipulate the parties in an attempt to destroy complete diversity. Under traditional principles of diversity jurisdiction as applied to class actions, ``complete diversity'' exists only if the state of citizenship of all named plaintiffs is completely different than the state of citizenship of all named defendants. To destroy this, lawyers whose primary target is an out-of-state deep-pocket corporation sometimes name a token defendant who resides in the same state as one or more of the named plaintiffs. For example, a lawyer wanting to sue a company in Texas state court may name as a codefendant a Texas-based employee of that company. The inherently fraudulent nature of this tactic is obvious: although all putative class members may conceivably have a claim against the defendant corporation, few (if any) of the putative class members had any dealings with the token in-state defendants, meaning that a classwide judgment against these defendants is impossible. As all parties recognize, the corporation is the only real target of the lawsuit. The in- state defendants are there only to facilitate the remand of the action to state court on the basis of the ``absence of complete diversity.'' Once the jurisdictional battle is over, these defendants usually fall by the wayside. (3) Alternatively, lawyers sometimes include on the plaintiffs' side of the case a named plaintiff who lives in the same state as the defendant. Thus, a defendant may, under the present law be served with a complaint in Alabama state court which purports to be brought by three Alabama residents and one resident of its home state. Again, the manipulative intent here is clear. Why would a plaintiff who has a grievance against a company within his or her home state travel all the way to some other forum to file a lawsuit? Obviously, the reason is that her lawyers are trying to prevent the corporation from defending against this inherently nationwide controversy in a federal court. (4) The ``amount-in-controversy'' prong of the federal diversity requirement also is the subject of frequent manipulation. The U.S. Supreme Court's decision in Zahn v. International Paper \12\ has been interpreted as holding that, in a putative class action, the ``jurisdictional amount'' requirement (now $75,000) is met only if each and every putative class member's individual claim is worth that amount. Exploiting this general rule, class action complaints often declare over and over again that all putative class members seek less than the jurisdictional amount (sometimes $74,999). --------------------------------------------------------------------------- \12\ 414 U.S. 291 (1973). --------------------------------------------------------------------------- In recent years, some exceptions to the basic Zahn rule have developed. For example, some federal courts of appeals have held that class actions that seek punitive damages in excess of the jurisdictional amount may meet the amount-in-controversy requirement.\13\ In response, class action complaints now purport to ``waive'' any and all claims that might conceivably give rise to a punitive damage award (or at least limit punitive damages to a lesser amount). --------------------------------------------------------------------------- \13\ See Tapscott v. MS Dealer Serv.--Corp., 77 F.3d 1353, 1359 (11th Cir. 1996). These kinds of ``claims-shaving'' tactics raise disturbing issues of adequacy-of-representation and due process. While a single plaintiff suing solely in his own name surely is the ``master of his complaint'' and may limit the claims he asserts or the relief he seeks in order to stay in state court, a litigant (and his counsel) who seeks to represent large numbers of other people in a class action is constrained by his fiduciary obligations to the absentee members of the class. As several courts have recognized, it is inherently improper for a class action lawyer to unilaterally ``waive'' otherwise available claims that absentee claimants might wish to assert simply in the name of forum-shopping.\14\ Nevertheless, it happens every day--class counsel sacrifice the claims of unnamed class members in order to keep their cases in state courts. --------------------------------------------------------------------------- \14\ See, e.g., Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir. 1997); Ex parte Russell Corp., 1997 WL 641325 (Ala. Oct. 17, 1997). --------------------------------------------------------------------------- Crafty lawyers can exploit still other tricks to deprive an out-of- state class action defendant of its right to defend itself in a federal forum. For example, under current law, all defendants must consent to the removal of a case to federal court. If one defendant objects, the case cannot be removed. Accordingly, plaintiffs' lawyers sometimes join a ``plaintiff-friendly'' person or entity as a defendant, with the understanding the nominal defendant will use his status to veto any removal attempt. Another abuse stems from the requirement that any lawsuit be removed to federal court within one year after its ``commencement.'' Lawyers sometimes quietly file putative class actions in state courts that have no deadline for providing service, and then decline to serve the defendant until the one year deadline has expired. Alternatively, they include statements in their complaint designed to insulate the case from removal (such as assertions that only a nominal per-claimant amount is sought), wait one year, and then file an amended complaint that raises the amount-in-controversy or eliminates other impediments to removal only after the one year deadline has expired. These pleading tactics (and others like them) invariably are employed in purported class actions that, by virtue of the inherent diversity of the real parties in interest and the amounts actually at stake, ought to be litigated in federal court. They are complicated lawsuits that require the substantial resources and expertise that the federal courts are uniquely situated to devote to them (and that state courts, which spend most of their time handling smaller matters, are not institutionally well-suited to handle). They are also lawsuits that present exceedingly high-stakes for the defendant, and therefore give rise to the risks of parochialism and prejudice that the federal court system is designed to prevent (but that, regrettably, infect some state court systems). Such pleading tactics are intended to mask the inherently federal character of these lawsuits. They elevate the deliberately manipulated ``form'' of the lawsuit over its actual substance. They should be outlawed. The bulk of today's class actions--large cases with interstate commerce implications--plainly belong in the federal courts. Accordingly, I urge this Subcommittee to vote favorably on S. 353. S. 353 addresses and resolves the problems associated with the adjudication of class actions in state courts by allowing more class action lawsuits to be removed from state court to federal court. The bill allows unnamed class members to remove to federal court class actions in which their claims are being asserted (within 30 days after they are formally notified about the class action). (This is a critical change, because if a state court is not protecting the class members' interests, this will be the only viable mechanism by which unrepresented class members can get their day in court.) It also allows defendants to remove to federal court. With these removal possibilities in mind, the bill would create a modest expansion of federal jurisdiction over class actions. Under the bill, a class action would qualify for federal jurisdiction if the total damages exceed $75,000 and parties include citizens from multiple states. However, the bill provides that cases remain in state court where the substantial majority of class and primary defendants are from the same state and that state's law would govern, or the primary defendants are states and a federal court would be unable to order the relief requested. Lastly, the bar on removing cases to federal court after one year would not apply to class actions (although a defendant would still have to remove within 30 days after first becoming aware of federal jurisdiction). III. Conclusion The state court class action crisis has reached epidemic proportions. In order to close the floodgates on the filing of meritless class actions and recraft a legal tool that has been manipulated beyond recognition to the benefit of few and the greater detriment of millions of American consumers, the legislative system must provide the federal courts with the ammunition to enforce their right to hear interstate class actions cases. Under current law, most interstate class actions cannot be heard in federal court. The current statutes also allow plaintiffs' attorneys to game the system to keep class actions out of federal court. And finally, under the existing law, there is no mechanism by which class members can insist that their claims be heard in federal court. S. 353 would make modest procedural changes, but it would not alter substantive law. This legislation will clearly improve the efficiency of the judicial system because federal courts have special procedural tools for dealing with the complex litigation and are better able to manage claims involving parties from multiple states. Furthermore, the overall workload of our judicial system because allowing more interstate class actions to be heard in federal court will permit consolidation of duplicative, competing and overlapping cases. America needs class action reform badly. S. 353 is a balanced, modest approach to correcting class action abuse. The title of this bill--the ``Class Action Fairness Act''--is very appropriate. But it also points out a unique twist in the present class action environment. As members of Congress, you hear the word ``fair'' all the time. Usually, however, deciding what is fair involves choosing between two or more parties with vested interests. If the Government needs to close one of two defense facilities, the two cities in which those facilities are based will make arguments about why the other city's facility is the one that should be closed. And it may be left to Congress to decide what is ``fair''--to decide which city's facility should be closed. What is undeniable in that debate, however, is that both cities have a vested interest in the outcome. They both have community investments and jobs at stake. What is strange about the current class action situation is that it is not ``fair'' to any of the parties with proper, vested interests. For all the reasons I have set forth above, it is not ``fair'' to the class members whose claims are at stake. And it is not ``fair'' to the defendants against whom those claims are being asserted. At present, the system is irrationally designed to benefit primarily the parties involved who really do not have a proper, vested interest--the attorneys who bring these lawsuits. I therefore applaud this legislative initiative and urge its passage. Again, I thank the Committee for permitting me to present my views on this problem that is challenging our legal system. Senator Grassley. Professor Daynard. STATEMENT OF RICHARD A. DAYNARD Mr. Daynard. Thank you, Mr. Chairman. Like everyone else who has spoken today, I too find that there are class action abuses, some of them, particularly the one that has frequently been referred to, but others as well, I think quite outrageous. Where I disagree with most people who have spoken, but agree with Ms. Acheson, is that this is the wrong remedy for class action abuse. I think there are better remedies. I, too, would be happy to think with you or anyone else on the subject of the appropriate remedies. I think this is the wrong one, and I think the example of tobacco cases makes that clear. In the case of tobacco cases, the removal provisions of Senate bill 353 would impede justice by preventing plaintiffs from ever getting their day in court. That would be the practical effect. Beginning with the first lawsuits against the tobacco industry in 1954, and continuing for the next 4 decades, the industry managed to avoid ever paying damages to a single afflicted smoker, non-smoker, or family member. Its principal strategy was to use or abuse every possible procedural device for the purpose of discouraging plaintiffs' attorneys from bringing such cases through guaranteeing that their expenses will exceed any possible recovery. As an attorney for R.J. Reynolds Tobacco Company wrote following the dismissal of several individual cases, ``The aggressive posture we have taken regarding depositions and discovery in general continues to make these cases extremely burdensome and expensive for plaintiffs' lawyers, particularly sole practitioners. To paraphrase General Patton, the way we won these cases was not by spending all of our money, but by making that other son-of-a-bitch spend all of his.'' Now, to counter the tobacco industry's ``bankrupt the plaintiff lawyer'' tactics, plaintiffs' lawyers eventually began bringing class actions in both State and Federal courts on behalf of afflicted smokers and non-smokers. These class actions for the first time raised the amount of the possible recovery above the cost of bringing the cases, allowing plaintiffs' attorneys to prudently make the investment of time and money needed to even the playing field, thereby giving their clients a chance to have their cases heard on the merits. This is indeed the principal historic justification for all 23(b)(3) class actions, to recruit effective advocates for injured parties who would otherwise be without redress. Unfortunately, the Federal courts have been unwilling to permit individual tobacco victims to band together in class actions. Beginning with the Fifth Circuit's reversal of the trial court's class certification in Castano v. American Tobacco Co. in 1996, Federal courts have uniformly refused to certify these cases. They have articulated various reasons. Ironically, three of the reasons cut strongly against the remedy that you have provided in Senate bill 353. First, as the Castano court noted, there have been so few tobacco cases actually going through the courts that it is often difficult to know how the supreme courts of the various States, which are the ultimate arbiters of State-based common law under the doctrine of Erie Railroad v. Tompkins, would decide various legal issues that they present. Indeed, the court repeatedly refers to the Castano case, a national class action on behalf of all addicted smokers, as an immature tort. And it suggests quite reasonably that State courts should have the first crack at addressing these State law issues. Second, there is a concern expressed by the Federal courts in these cases that the Seventh Amendment may stand in the way of a viable class action trial plan to the extent that such a plan may risk having a later jury reconsider an issue decided by a previous jury. Whether or not that concern is justified is a matter of Federal constitutional law. It is simply irrelevant in State class actions, since the Seventh Amendment has not been held binding upon the States under the 14th Amendment. While various States may have similar constitutional provisions, the interpretation of those provisions are entirely a matter for the courts of each State and may well be less restrictive than the Seventh Amendment. Third, the Federal courts have been concerned about--and it is provided in the Federal rules, in rule 23(b)(3)(D)--they are concerned about the difficulties likely to be encountered in the management of the class actions. While it is perfectly appropriate for Federal courts to exercise their discretion to decline class certification in light of such difficulties, it is not appropriate for them to decide that the cases would also be too difficult for State courts to bother with. Yet, section 4 of 353 contemplates exactly that, that class actions could be removed from State courts, stripped of class action status, perhaps because of manageability problems, and then remanded to State court as a collection of individual actions. This would be an extraordinarily paternalistic act on the part of the Federal courts with respect to the State courts, telling them that they, the State courts, would have such difficulties running the case as a class action that they may not even try. The arrogance of this assertion becomes particularly clear if there are hundreds or thousands of named plaintiffs rather than just a handful. Many State courts could well decide that their docket control needs require the case to run as a class action. Yet, Senate bill 353 could easily end up preventing the State from operating its court docket in a cost-efficient manner, a result that I believe may well be forbidden by the Tenth Amendment. The State court tobacco cases, on the other hand, have been proceeding well. As might be expected, some classes have been certified, while others have not. And I mention in my written testimony at least four cases that have been certified and are important cases. The tobacco companies have, of course, notice that they are vulnerable to class actions in State court, but not in Federal court. The primary defendants in tobacco cases are from different States, guaranteeing that all tobacco class actions would be removable under Senate bill 353, all of them. Whatever the reasons for the uniform run of Federal court decisions, and whether or not these are justified in terms of the needs, capacities and priorities of the Federal court system, to send tobacco class actions to Federal court is to send them to their death. That is the practical effect. That is why section 4 of Senate bill 353 could well be entitled ``The Tobacco Industry Relief Act of 1999.'' Now, like Mr. Frank, I too have some thoughts about section 5 on rule 11. I won't go through them here. I think that rule 11 would have the unintended effect of essentially stymieing the development of the law, both common law and statutory interpretation and constitutional law. And I think that is also very ill-advised. Thank you. Senator Grassley. Thank you, Professor Daynard. [The prepared statement of Mr. Daynard follows:] Prepared Statement of Richard A. Daynard, J.D., Ph.D. My name is Richard Daynard. For the past 30 years I have been a law professor at Northeastern University School of Law. For much of this time I taught and thought about the nature of the legal process. For the last 15 of these years I have specialized in toxic torts and complex litigation, and especially in tobacco litigation. I would like to comment today on two aspects of S. 353, section 4 (removal jurisdiction) and section 5 (Rule 11). Though my comments on section 4 are brief, my comments on section 5 are even briefer, and I would like to begin with those. section 5 Section 5 would make sanctions mandatory for Rule 11 violations, and would make lawyers financially responsible if they are found that they have made a ``[]frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.'' This section would tend to stunt the natural processes for developing, extending, and refining legal doctrine, processes that all of us learned about in law school, and that Justice Cardozo, Prof. Karl Llewellan, and many others have described so well. The common law, constitutional law, and even the interpretation of specific statutes have developed as they have, thanks in no small part to the willingness of lawyers to challenge, and even radically challenge, existing doctrines and interpretations. Buick v. McPherson, Erie R.R. v. Tompkins, Baker v. Carr, Brown v. Board of Education--the list could go on, covering every field of law and many thousands of cases, where the law as it is today is the result of creative lawyers having thought and argued ``outside the box'', challenging the then-accepted paradigms, conventional wisdom, and politically correct thinking about what the law is and should be. Under Section 5 these organic processes, what Oliver Wendell Holmes called ``the life of the law'', would atrophy. Lawyers would be frightened to challenge the status quo, because it is often impossible to know in advance how a particular judge will respond to a creative, but perhaps politically incorrect, argument. The judge might accept the argument, might recognize the argument as nonfrivolous but reject it anyhow, or might reject it and find it frivolous. There is simply no way an attorney can know for sure which way the judge will respond. Section 5 strongly encourages the attorney to ``play it safe'' by not making the argument at all, even though the law (that is, all of us) might have benefited had the argument been made and accepted by the trial judge, or by a higher court on appeal. With the processes of legal development and refinement stymied, the law becomes stagnant and grows increasingly distant from justice. Not only is Section 5 poisonous to the natural processes of legal development; it is also totally unnecessary. Lawyers do not intentionally make frivolous arguments. ``Frivolous arguments'' are a subset of ``losing arguments'', and no one in his right mind intentionally makes a losing argument. Indeed, the fear of losing the case, and in the instance of contingency fee plaintiffs' attorneys of losing one's investment, is more than sufficient to discourage attorneys even from playing close to the line. section 4 Section 3 provides original federal district court jurisdiction for almost all class actions--those in which any class member is a citizen of a different state than any defendant. Abstention is required if the substantial majority of the plaintiff class are citizens of the same state as the ``primary defendants'', and the case is based primarily on that state's laws. This section, by itself, is benign. However, it provides the necessary predicate for Section 4, which permits any defendant or any plaintiff class member to remove any class action that is within the federal court's original jurisdiction. Unlike Section 5, Section 4 does not impede justice by interfering with the development of legal doctrine. Rather, in a range of cases, and particularly in tobacco cases, it impedes justice by preventing plaintiffs from ever getting their day in court. Beginning with the first lawsuits against the tobacco industry in 1954 and continuing for the next four decades, the industry managed to avoid ever paying damages to a single afflicted smoker, nonsmoker, or family member. Its principal strategy was to use or abuse every possible procedural device, for the purpose of discouraging plaintiffs' attorneys from bringing such cases by guaranteeing that their expenses will exceed any possible recovery. As an attorney for R.J. Reynolds Tobacco Company wrote, following the dismissal of several individual cases, ``the aggressive posture we have taken regarding depositions and discovery in general continues to make these cases extremely burdensome and expensive for plaintiffs' lawyers, particularly sole practitioners. To paraphrase General Patton, the way we won these cases was not by spending all of [RJR]'s money, but by making that other son of a bitch spend all of his.'' Haines v. Liggett Group, Inc., 814 F. Supp. 414 (D.N.J. 1993). To counter the tobacco industry's bankrupt-the-plaintiff's-lawyer tactics, plaintiffs' lawyers eventually began bringing class actions-- in both state and federal courts--on behalf of afflicted smokers and nonsmokers. These class actions for the first time raised the amount of the possible recovery above the cost of bringing these cases, allowing plaintiffs' attorneys to prudently make the investment of time and money needed to even the playing field, thereby giving their clients a chance to have their cases heard on the merits. This is, indeed, the principal historic justification for Rule 23(b)(3) class actions: to recruit effective advocates for injured parties who would otherwise be without redress. Unfortunately, the federal courts have been unwilling to permit individual tobacco victims to band together in class actions. Beginning with the 5th Circuit's reversal of the trial courts class certification in Castano v. American Tobacco Co., 84 F.3d 734 (1996), federal courts have uniformly refused to certify these cases. They have articulated various reasons. Ironically, three of the reasons given cut strongly against S. 353. First, as the Castano court noted, there have been so few tobacco cases that it is often difficult to know how the supreme courts of the various states--the ultimate arbiters of state-based common law under the doctrine of Erie Railroad v. Tompkins--would decide various legal issues that they present. Indeed, the court repeatedly refers to the case, a national class action on behalf of all addicted smokers, as ``an immature tort''. And it suggests, quite reasonably, that state courts should have the first crack at addressing these state law issues. Second, there is a concern that the Seventh Amendment may stand in the way of a viable class action trial plan, to the extent that such a plan may risk having a later jury reconsider an issue decided by a previous jury. Whether or not that concern is justified as a matter of federal constitutional law, it is irrelevant in state class actions, since the Seventh Amendment has not been held binding upon the states under the Fourteenth Amendment. While various states may have similar constitutional provisions, the interpretations of those provisions are entirely a matter for the courts of each state, and may well be held less restrictive than the Seventh Amendment. Third, the courts have been concerned about ``the difficulties likely to be encountered in the management'' of the class actions. While it is appropriate for federal courts to exercise their discretion to decline class certification in light of such difficulties, see Rule 23(b)(3)(D), it is not appropriate for them to decide that the cases would also be too difficult for state courts to bother with. Yet Section 4 of S. 353 contemplates exactly that--that class actions could be removed from state court, stripped of class action status (perhaps because of manageability problems), and then remanded to state court as a collection of individual actions. This would be an extraordinarily paternalistic act on the part of the federal courts with respect to the state courts--telling them that they (the state courts) would have such difficulties running the case as a class action that they may not even try. The arrogance of this assertion becomes particularly clear if there are hundreds or thousands of named plaintiffs, rather than just a handful: many state courts could well decide that their docket control needs require the case to run as a class action. Yet S. 353 could easily end up preventing the state from operating its court docket in a cost-efficient manner--a result that may well be forbidden by the Tenth Amendment. The state court tobacco cases, on the other hand, have been proceeding well. Some classes have been certified, while others have not. Among those that have been certified are Broin v. Philip Morris Companies, Inc., an action by a class of nonsmoking flight attendants tried in a Florida state court in 1997, and eventually settled by the tobacco industry for a $300 million research fund, waiver of the statute of limitations, and a de facto concession in the individual follow-on cases that environmental tobacco smoke causes a variety of disease; Engle v. R.J. Reynolds Tobacco Co., an action by a class of nicotine-addicted afflicted Florida smokers which has been in trial in a Florida state court since July, 1998; Scott v. American Tobacco Co., a class of addicted Louisiana smokers scheduled for trial in Louisiana state court this coming fall; and Richardson v. Philip Morris Companies, Inc., a class of addicted and of afflicted Maryland smokers, certified as a class by a Maryland trial judge in January 1998 and presently under appeal in the Maryland courts. The tobacco companies have, of course, noticed that they are vulnerable to class actions in state court, but not in federal court. The ``primary defendants'' in tobacco cases are from different states, guaranteeing that all tobacco class actions would be removable under S. 353. Whatever the reasons for the uniform run of federal court decisions, and whether or not these are justified in terms of the needs, capacity, and priorities of the federal court system, to send tobacco class actions to federal court is to send them to their death. That is why Section 4 of S. 353 could well be entitled, ``The Tobacco Industry Relief Act of 1999.'' Thank you. Academic preparation Massachusetts Institute of Technology (1970-1980): Ph.D. in Urban Studies and Planning (specializing in Law and Social Policy): Columbia University Sociology Department (1968-1970): M.A., Faculty Fellow; Harvard Law School (1964-1967): J.D. cum laude, Harvard Legal Aid Bureau; Columbia College (1960-1964): A.B. summa cum laude, Phi Beta Kappa, Siff (University-wide) Prize in Philosophy of Science, Kinne Prize in Humanities, Regents Scholarship; Bronx High School of Science (1957-1960): Mathematics Award, Honor Society. Professional employment Northeastern University School of Law: Assistant Professor of Law (1969-1972); Associate Professor of Law (1972-1973); Professor of Law (1973-present). Hon. Henry J. Friendly, United States Court of Appeals for the Second Circuit, New York City (July 1967-August 1968). Law Clerk; Columbia University School of Law (September 1968-June 1969); Associate in Law (teaching fellow); Tufts New England Medical Center; Instructor in Psychiatry (1976-1989). Consultant, Consumers Union, New York Office (1979); Consultant and Lecturer (1986-Present); Expert Witness before various state insurance commissions (1988). Bar admissions/recognition New York 1967; U.S. Court of Appeals, 6th Cir. 1986; U.S. Supreme Court 1986; U.S. Court of Appeals, 11th Cir. 1987, U.S. Court of Appeals, 5th Cir. 1996; Who's Who in American Law (6th ed., 1989; 7th ed., 1992; 8th ed., 1994, 9th ed. 1996, and 10th ed., upcoming); Who's Who in America (51st ed., 1997); Who's Who in the World (15th ed., 1998); Who's Who in Finance and Industry (31st ed., 1999); The Gleitsman Foundation Certificate of Special Recognition, (1998); Smoking or Health Award, American Lung Association of Massachusetts (1991). Smoking and health responsibilities President, Group Against Smoking Pollution of Massachusetts (1983- ); President, Stop Teenage Addiction to Tobacco (1995-), Vice President (1991-1995), Board of Directors (1990-); President, Clean Indoor Air Educational Foundation (1984-1992), Tobacco Control Resource Center, Inc. (1993-); Chairman, Tobacco Products Liability Project (1984-); Editor-in-Chief, Tobacco Products Litigation Reporter (1985-); Associate Editor, Tobacco Control: An International Journal (1998-); Member, Advisory Committee on Tobacco Policy and Public Health (Koop- Kessler Committee) (1997); Advisory Board, Tobacco Divestment Project (1990-); Member, American Society of Heating, Refrigeration and Air Conditioning Engineers, Standing Committee on Indoor Air Ventilation (SSPC-62), and Subcommittee on Health and Comfort (1992-); Member, National Coordinating Committee on Tobacco Policy Research (1990-1993); Secretary, Tobacco Control Council, National Association for Public Health Policy (1990-); Advisory Board, Foundation for a Smoke-Free America (1989-); Board of Directors, Americans for Nonsmokers Rights (1991-); Member, Harvard Institute for the Study of Smoking Behavior and Policy, Study Group (1986-1989); Chair, New England Tobacco Control Professionals Study Group (1989-1990). Principal Investigator, Robert Wood Johnson Foundation's Americans with Disabilities Act Smokefree Policy Research and Evaluation Project (1994-1995); Principal Investigator, Massachusetts Tobacco Control Program's (MTCP) Legal Policy Research Project (1994); Principal Investigator, MTCP Americans with Disabilities Act Smokefree Demonstration Project (1994-96), Principal Investigator, National Cancer Institute's Legal Interventions to Reduce Tobacco Use (1995-); Principal Investigator, Robert Wood Johnson Foundation Legal and Political Strategies and Local Tobacco Control; peer reviewer, medical and public health journals and book publishers, University of California Tobacco Related Disease Research Program, and 1995 Surgeon General's Report; submitted amicus curiae briefs in four appellate cases, as well as to the U.S. Supreme Court; wrote model for Massachusetts ordinances banning smoking in public places (1975). Testified (or submitted testimony) before congressional and state legislative committees, Federal interagency Committee on Smoking & Health, administrative agencies, and local governmental bodies in several states; Appeared on national television and radio programs (including ``Nightline,'' ``Today,'' ``This Week with David Brinkley,'' ``McNeil-Lehrer,'' ``Frontline,'' ``Crossfire,'' ``Inside Business,'' CBS, NBC and ABC Evening News, and ``All Things Considered''), on British, German, and Spanish television, on British, Canadian, Australian, and Korean radio, and on local programs in many cities; extensively quoted in national magazines and newspapers (including Time, Business Week, Barrons, New York Times, Washington Post, and Wall Street Journal), in the international press, in wire service stories, in syndicated columns, in regional newspapers throughout the U.S., and in legal and medical publications; Subject of feature articles in Wall Street Journal (April 20, 1987), New York Times (February 14, 1988), and Boston Sunday Globe (May 1, 1994). Delivered Ford Hall Forum lecture with Surgeon General Koop (October 10, 1985); lectured on tobacco products liability to doctors at several local hospitals and at the Royal Society of Medicine, London, to attorneys in bar committee and continuing legal education meetings, to public health students at Harvard and Boston University, to meetings of local lung, public health, and civic associations, and to annual conferences of Stop Teenage Addiction to Tobacco (1986-); Mellon lecture at University Of Pittsburgh Law School (1987); presented papers at 6th World Conference on Smoking and Health (Tokyo, 1987); Keynote address at Asian-Pacific Conference on Control of Cigarette Smoking (Teipei,1989); Keynote Address, 7th World Conference on Tobacco and Health (Perth, 1990); chaired or co-chaired 11 nationwide meetings of plaintiffs' attorneys and public health advocates, three ATLA section meetings, and several press conferences; invited speaker, American Public Health Association, 1986, 1988, 1989, 1990, 1992; 1996; 1997; American Society for Preventive Oncology (Washington, 1989); Commentator, Association for Consumer Research (New Orleans, 1989), on effects of cigarette advertising on smoking behavior; 15th International Cancer Congress (Hamburg, 1990); International Symposium on the Control of Tobacco-Related Cancer and Other Diseases (Bombay, 1990); Workshops on Passive Smoking and Nonsmokers' Rights, 7th World Conference on Tobacco and Health (Perth, 1990); World Conference on Lung Health (Boston, 1990); Faculty, Fifth Summer Conference, Stanford Center for Research in Disease Prevention (July, 1990); International Conference on Cancer Prevention (Bethesda, 1991); leader, Workshop on Legal issues in Tobacco Control, ``Tobacco Use: An American Crisis,'' Wash., D.C. (January 1993); Conference on ``Tobacco Use: An American Crisis'' (Washington, 1993) National Workers' Compensation and Occupational Medicine Seminar (Hyannis, 1993); American Society of Addiction Medicine (Atlanta, 1993); American Trial Lawyers Ass'n (Tucson, 1994); Mass. Tobacco & Youth Conference (Boston, 1994); President's Cancer Panel (Virginia, October 5, 1994); 9th World Conference on Tobacco and Health (Paris, 1994); European Conference on Tobacco and Health (Helsinki 1996); 10th World Conference on Tobacco and Health (Beijing 1997): lecturer to business executives on legal implications of smoking in the workplace at conferences sponsored by the New Hampshire, Massachusetts, Connecticut and Indiana Lung Associations (1986-); St. Louis ASSIST Coalition (1994), and at conferences an Connecticut, Rhode Island and Massachusetts sponsored by the Environmental Protection Agency (1994-); lectured to faculty seminar at Johns Hopkins University Department of Epidemiology (1995); lectured to National Dental Tobacco-Free Steering Committee (Bethesda, 1996); Harvard Law School Conference on the Tobacco Settlement: Should Tort Law Be on the Table? (Cambridge, Mass. 1997). Selected publications ``Tobacco Products Liability Litigation as an Antismoking Strategy,'' in Aoki, M. et. al. Smoking and Health 1987, 409-413; ``Tobacco Liability Litigation as a Cancer Control Strategy,'' 80 J. Nat. Cancer Institute 9 (1988); ``The Cipollone Documents,'' 24 Trial 50 (November, 1988) (with Laurie Morin); ``Up from the Ashes: Cigarette Litigation and the Dewey Decision,'' 5 Toxics Law Reporter 630 (1990); ``Proving Causation in Lawsuits Involving Environmental Tobacco Smoke,'' in Proceedings of Pre-conference Workshop on Passive Smoking (1990) 84-89; ``Worldwide Litigation,'' in Tobacco & Health 1990: The Global War, 189-191; ``Product Warnings--Tobacco'' (with Laurie Morin) in Handling Product Warning Cases (Wiley, 1991); ``Health Hazards of Secondhand Smoke'' (with Stanton Glantz), Trial (June 1991) 37-39; ``Recent Developments in Tobacco Litigation--1991,'' 1 Tobacco Control: An International Journal, 1992; 1:37-45; ``Tobacco Litigation--Purpose, Performance, and Prospects,'' in National Cancer Institute Monograph: International Conference on Cancer Prevention: Facts, Maybes, and Rumors (1992, #12, 53); ``Redress for Injury Caused by Environmental Tobacco Smoke'' (with Edward Sweda), 28 Trial #3, 50 (March 1992); ``Judicial Action for Tobacco Control,'' in Roemer, R., ed., Legislative Action to Combat the World Smoking Epidemic (1992); ``Controlling Cancer by Suing Tobacco Companies: The Potential for India in the Light of the U.S. Experience,'' Control of Tobacco-related Cancers and Other Diseases, International Symposium, 1990, P.C. Gupta, J.E. Hamner, III and P.R. Murti, Eds, (Oxford University Press, Bombay, 1992); ``Cipollone Ruling Sends Industry a Message: Say Goodbye to Federal License to Lie,'' 20 Prod. Safety & Liab. Rptr. 712 (1992); ``Tobacco in Court'' (edited special issue and wrote two articles), 17 World Smoking and Health #2 (1992); ``When Cigarettes Start Fires: Industry Liability,'' (with Andrew McGuire) 28 Trial 411, 44 (1992); 23 Trial Lawyers Quarterly 22 (1993); ``Report of the Tobacco Policy Research Study Group on Tobacco Litigation'' (with others), 1 Tobacco Control 537 (Supp. 1992); ``Tobacco Use as a Sociologic Carcinogen: The case for a Public Health Approach.'' (with Thomas Novotny, Patricia Shane, and Gregory Connolly), in Cancer 1992 (V. DeVita, ed.); ``Chipping Away at the Legal Immunity of Tobacco Companies,'' Priorities 11 (Summer 1993); ``Smoking Out the Enemy: New Developments In Tobacco Litigation,'' 29 Trial 16 (November 1993); ``Tobacco Products Liability Suits in Massachusetts--a Neglected Opportunity,'' 1 J. Mass. Aca. Trial Attys #3 50 (Jan. 1994) (with Friedman); ``Second- hand Smoke and the ADA: Ensuring Access for Persons with Breathing and Heart Disorders,'' 13 St. Louis Univ. Public Law Rev. 635 (1994) (with Mark Gottlieb and Jennifer Lew), ``Catastrophe Theory and Tobacco Litigation,'' 3 Tobacco Control 59 (1994); ``The Third Wave of Tobacco Liability Cases,'' 30 Trial (November 1994); ``The Third Wave of Tobacco Litigation in the U.S. and Beyond,'' World Health Organization Tobacco Alert (April 1995) (with Graham Kelder and Mark Gottlieb); ``The Tobacco Industry Under Fire,'' Trial (November 1995) (with Kelder); ``Tobacco Industry Tactics,'' British Medical Bulletin (January, 1996) (with Sweda); ``Waiting to Exhale: Tobacco Companies Hold Their Breath Over a New Legal Challenge That Could Have a Crushing Effect,'' The Boston Sunday Globe Focus Section (February 11, 1996) (with Kelder), ``Tobacco Litigation as a Public Health and Cancer Control Strategy,'' Journal of the American Medical Women's Association (March 1996) (with Kelder): ``The Role of Litigation on the Effective Control of the Sale and Use of Tobacco: Litigation as Substitute for and Supplement to Conventional Means of Regulation Thwarted by the Tobacco Industry,'' 8 Stanford Law & Policy Review 1 (1997) (with Kelder), ``The Many Virtues of Tobacco Litigation, Trial (November 1998) (with Kelder); ``A Year of Living Dangerously: The Tobacco Control Community Meets the Global Settlement,'' Public Health, (November/December 1998) (with Michele Bloch and Ruth Roemer). Richard A. Daynard holds a J.D. from the Harvard Law School and a Ph.D. in Urban Studies and Planning (specializing in Law and Social Policy). Since 1969, he has been a Professor of Law at the Northeastern University School of Law. Professor Daynard has been involved in a number of organizations devoted to the study of tobacco and public health policy and implementation. He has served as President of the Group Against Smoking Pollution of Massachusetts (GASP) from 1993- present; Chairman of the Tobacco Products Liability Project from 1984- present; President of the Tobacco Control Resource Center from 1984- present; Editor-in-Chief of the Tobacco Products Litigation Reporter; and President of Stop Teenage Addiction to Tobacco (STAT) from 1996- present, among others. He has published numerous articles in such journals as The Journal of the American Medical Association; Tobacco Control: An International Journal; Cancer; Trial; and Tobacco and Health. His experience and expertise on tobacco law, policy, and litigation places him in the middle of the public debate over smoking, leading to appearances on Nightline; Today; This Week with David Brinkley; Frontline; Crossfire, the ABC, NBC, CBS, CNN, MS-NBC, CNBC, and FOX news programs; and on National Public Radio, ABC, CBS, and BBC radio programs. Senator Grassley. Now, Mr. Beisner. STATEMENT OF JOHN H. BEISNER Mr. Beisner. Thank you, Mr. Chairman. I very much appreciate the opportunity to participate in this hearing this afternoon. What I would like to do is spend a few minutes highlighting parts of my written testimony and to respond to some of the points made earlier by the Justice Department. The first point I would like to make is that the Justice Department, particularly in its written testimony, seems to be saying that we don't see much of a problem out there with class actions. I think that statement was tempered somewhat by the oral statements of Ms. Acheson this afternoon, and I hope that that is a breakthrough, as Mr. Frank suggested earlier, for discussions on that subject. Hopefully, that will be a major outcome of this hearing today. I was particularly struck by Ms. Acheson's describing the hypotheticals that both of you presented to her as being, ``over the edge'' at one point. I am sure that the people back at my office this afternoon will be happy to hear that the cases that we are working on are deemed by the Justice Department to be, ``over the edge,'' because let me assure you that I have got a hundred on my docket that are exactly like the hypotheticals you were putting. These are not hypotheticals that are drawn out of the air. These are what these cases really are. And I fear that part of the problem may be that we need to perhaps do a better job of getting some more information to the Justice Department on this subject. Between this subcommittee and the House subcommittee, you have now had four hearings on this subject. This is the first one the Justice Department, I believe, has participated in, and I think that perhaps we may have an information flow problem here and we need to be getting more information to the Justice Department so that there is a better understanding of this issue. The second point I would make is that I am deeply troubled by what seemed to be in the Justice Department's testimony somewhat of a direct assault on the notion of Federal diversity jurisdiction. The Justice Department's testimony suggests that when a State law-based lawsuit is removed to Federal court, the State where the lawsuit was originally filed is somehow deprived of its right to resolve that controversy. That argument ignores what Federal diversity jurisdiction is all about. It is a mechanism by which a State law-based claim may be moved from a local court to a Federal court to ensure that all the parties are going to have a level playing field and to ensure that interstate commerce interests are protected. This isn't a concept that the courts made up. It is not something that Congress came up with. It is in Article III of the Constitution. As Professor Elliott testified earlier, that concept is particularly applicable to these sorts of interstate class actions. And, again, it is disturbing to me to hear the Justice Department seemingly suggest that that constitutional concept should be ignored in these sorts of cases. A third point I would make is that it is also somewhat troubling to me what the Justice Department seems to be suggesting as an alternative to the legislation that is being proposed here because I think that alternative really may be quite an affront to States' rights, as opposed to this legislation. The Department suggests that we should instead be talking about legislation--and I am quoting their written testimony here--``focusing on the appropriate limits on State authority to bind out-of-state plaintiffs.'' Now, under that approach, we would actually be curtailing the authority of State courts. Such legislation, I fear, although I haven't seen exactly what the Justice Department is talking about, might be a declaration that, contrary to the Full Faith and Credit Clause of the Constitution, State court judgments wouldn't be honored nationwide. Besides being constitutionally suspect, I fear that such an approach is unfair. Basically, what I think Justice is saying in their testimony is that it would be preferable to have a statute that would prevent State courts from issuing judgments that apply to out-of-state plaintiffs, while at the same time encouraging State courts to be able to issue judgments that would be applicable to out-of-state defendants. Finally, as has been discussed by a number of witnesses, we have this issue of whether the jurisdictional removal provisions of S. 353 would federalize all class actions. And others have noted, I really think that that suggestion ignores the current class action landscape. They have already been federalized. The oddity here, though, is that they have been federalized by State courts. We are not talking about the Federal Government coming in and telling States what to do, which is what you normally think of when you hear the word ``federalism.'' It is State courts going in and telling 49 other States what their laws are. I wanted to note that a shining example of this appeared last September 27 in the New York Times, on page 29 to be precise. In a full-page article, the Times reported on a multi-billion- dollar class action that is now pending in a county court in downstate Illinois. The banner headline on that article said, ``Suit Against Auto Insurer Could Affect Nearly All Drivers.'' The article said that all kinds of people are alarmed about this lawsuit. It quoted Public Citizen as being alarmed. Ralph Nader was alarmed. The attorneys general of Massachusetts, New York, Pennsylvania and Nevada were all alarmed. The National Association of State Insurance Commissioners were alarmed. Well, why were all these people alarmed? Well, their concern is that this county court in Illinois is on the verge of telling all of the other States what their auto insurance laws are going to be. In the context of this nationwide class action, that court is set to decide whether auto insurance companies' use of after-market auto parts, as opposed to the auto parts made by the original vehicle manufacturers, in repairing insureds' vehicles is fraudulent behavior. The problem is that some States encourage or require insurance companies to use those sorts of after-market parts as a way of lowering insurance costs. Nevertheless, the Illinois court is set to apply Illinois law to all 50 States, and according to the Times article may thereby, ``overturn insurance regulations or State laws in New York, Massachusetts and Hawaii, among other places.'' In short, this Illinois court, which was elected by and is accountable only to the 61,000 residents of Williamson County, IL, is going to make what amounts to a national rule of insurance. That is the sort of federalization that we are talking about with State court class actions. Thank you. [The prepared statement of Mr. Beisner follows:] Prepared Statement of John H. Beisner In hearings over the past eighteen months, this Subcommittee and its House counterpart have heard considerable evidence of a severe state court class action crisis. The record reflects an explosion in the number of such cases being filed, prompted largely by a lax attitude toward class actions among some state courts. Some state courts operate without basic class certification standards and in disregard of fundamental due process requirements, resulting in injury to both unnamed class members as well as to corporate defendants. Another problem is that certain state courts are ``federalizing'' such litigation. By their laxity, they have become magnets for a disproportionate share of interstate class actions and are thus dictating national class action policy. Further, in litigating multistate class actions, those state courts are also frequently dictating the substantive laws of other jurisdictions. Considerable waste and inconsistent judicial rulings are occurring because there is no mechanism for coordinating overlapping, ``competing'' class actions (i.e., cases in which the same claims are asserted on behalf of basically the same classes) pending simultaneously in state courts around the country. Witnesses at a March 5, 1998 House hearing (representing widely varied interests) expressed broad agreement that the wisest, least disruptive solution was the expansion of diversity jurisdiction over interstate class actions, allowing more such cases to be heard in federal courts. As one witness noted, ``you have heard today from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking * * *. that * * * you've heard from everyone * * * that * * * increasing the ambit of * * * diversity jurisdiction * * * to [encompass more class actions] is a good idea.'' S. 353's jurisdictional/removal provisions would be a significant step toward resolving the state court class action crisis. They would fix a technical flaw in our current diversity jurisdiction statutes (enacted before the modern day class action) that bars federal courts from hearing most interstate class actions--the judicial system's largest lawsuits, often involving millions of dollars disputed among thousands of parties residing in multiple jurisdictions. This change would also make more broadly available the statutory mechanisms by which federal courts (but not state courts) may coordinate overlapping, competing class actions. Those provisions would allow both plaintiffs and defendants greater access to our federal courts without undesirable side effects. The bill would not alter any party's substantive legal rights. The bill would leave purely local disputes to the exclusive purview of state courts. And the bill would still allow state courts to hear class actions when parties prefer that forum. The notice provisions of S. 353 would lessen the possibility that class actions will injure the interests of unnamed class members (as they now often do). The bill's attorney's fee limitations have potential to curtail some of the most egregious fee abuses, particularly some counsel's tendency to claim fees on the basis of speculative, amorphous benefits to a class. I very much appreciate this opportunity to participate in today's discussion of S. 353, the Class Action Fairness Act of 1999. At the outset, I want to disclose the sources of my perspectives on this subject. Basically, I am an ``in-the-trenches'' class action litigator. Over the past 19 years, I have been involved in defending over 250 class action lawsuits on a wide variety of subjects before the federal and state courts of 28 states at both the trial court and appellate level. On the basis of that experience, I wish to share a few thoughts about the problems that exist in the class action arena and about the respects in which I believe that S. 353 would be a positive, effective response to those problems. I. There Is A Continuing State Court Class Action Crisis It is exceedingly ironic that although class actions are probably one of the most complex procedural devices in our legal system, the general public has an acute awareness of what they are. From the citizen perspective, class actions are not pretty. Jury researchers-- the people who survey potential jurors in anticipation of trials--will tell you that in most locales, the general public tends to view class actions as a blight on our legal system. Citizens correctly perceive that not all class actions are bad. But if you ask for a definition of a class action in those jury research settings (as I have on occasion), you will probably get an answer like: ``Class actions are lawsuits in which the lawyers get all of the money and the people don't get anything.'' And you will also be told that class actions are usually lawyer-manufactured. The public senses that these lawsuits do not get started like a normal lawsuit does--a person walking into the lawyer's office and asking that redress for an injury be pursued. Instead, the public perceives that class actions are initiated when a lawyer gets an idea about filing a lawsuit (e.g., by reading about an issue in the newspaper) and then goes off to find somebody to front the lawsuit (i.e., the named plaintiff or class representative). I do not mean to suggest that Congress should legislate in this highly technical legal arena based on such public perceptions. But for better or worse, the record shows that these perceptions are disturbingly accurate. And those perceptions of class actions are adversely skewing the public view of our legal system as a whole. Because of their size and scope, class actions receive disproportionate amounts of press attention. But even more significantly, class actions regularly touch more citizens than virtually any other aspect of our legal system. Indeed, given the proliferation of class actions in recent years, each of us sitting in this room--whether we know it or not--is a class member in numerous pending class actions. If you have ever bought a product or used a service, there are multiple class actions on file in which somebody is supposedly trying to vindicate your rights in some way. And because of the notice rules, citizens get a lot of mail about these cases--the only mail that most people ever get from a court. Most of the legalese that they see in those notices, they do not fully comprehend. But what they do understand is that their rights are often being manipulated to benefit other interests. To understand the class action abuse problem, one need only consider for a moment the general concept that we are discussing. If I told you that the House had just passed a new bill that would allow lawyers to bring lawsuits without first obtaining permission from the parties on whose behalf the lawsuit supposedly was being brought, you presumably would be shocked. How could the House possibly conclude that we should allow lawyers to bring lawsuits not authorized by the claimants? Rightly or wrongly, that's exactly what class actions are. They are a giant anachronism. In the midst of a legal system in which individual rights are paramount--a system in which a lawyer normally cannot do much of anything without the informed consent of his or her client--we have this device through which a lawyer can walk into a court and say: ``I am bringing claims on behalf of millions of people, even though I don't know exactly who or where they are and even though I have not obtained their permission to bring this lawsuit on their behalf.'' Clearly, such a device invites abuse. It permits lawsuits in which the claimants play little or no role; lawsuits in which the lawyers call all of the shots without really even hearing the views and desires of their clients. Further, it allows attorneys to bring lawsuits where the real parties in interest have manifested no interest in suing. Plainly, such lawsuits present great risk that the lawyers who bring them will substitute their interests for those whose claims are at issue. In short, class actions are a powerful, abuse-inviting device that must be carefully policed by the courts to avoid legal catastrophe. Unfortunately, at least in many of our state courts, that careful supervision is not occurring. a. congress has already amassed an ample record of class action abuse This hearing is not the first occasion on which Congress has received indications of state court class action abuse. Over the past eighteen months, Congress has been bombarded with warnings that something is badly amiss with class actions. The alarm bells have been ringing. Almost daily, there are press reports about class actions being used to deny (not protect) due process rights--instances in which the legitimate interests of both class members and defendants are being ignored or injured. In October 1997, this Subcommittee held a hearing on class action abuses. Last year, the Subcommittee on Intellectual Property and the Courts of the House Judiciary Committee held two such hearings (one in March and another in June). The record that emerged from those three sessions indicates that the alarm bells are ringing for good cause: state court class action abuse is rampant. Those earlier hearings amply documented several serious problems: Some courts (particularly state courts) are not properly supervising proposed class settlements. The result is that class counsel become the primary beneficiaries; the class members (the persons on whose behalf the actions were brought) get little or nothing--or worse. For example, at all three hearings last year, there was discussion of the now infamous Bank of Boston class action settlement. At this Subcommittee's October 1997 hearing, both Senator Herb Kohl (D.--Wis.) and his constituent, Martha Preston, a member of the class, described the settlement as a ``bad joke.'' \1\ At a March 1998 House hearing, Ralph G. Wellington, a Philadelphia attorney, elaborated, noting that the state court in that case approved a class settlement under which --------------------------------------------------------------------------- \1\ Opening Statement of Sen. Herb Kohl, ``Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees,'' S. Hrg. 105-504 (Oct. 30, 1997). [m]ost of the 700,000 [class members] received minimal direct economic benefit; some received no direct benefit at all. Indeed, most had their mortgage escrow accounts * * * deducted in order to pay several million dollars to the class counsel who had been approved to protect their interests. In short, having been included in a lawsuit they never envisioned, they had their own money from their own escrow accounts taken to pay class counsel for what many believe to have been a very dubious benefit.\2\ --------------------------------------------------------------------------- \2\ Unless otherwise noted, quotations attributed to witnesses at the ``March 1998 Hearing'' are from the prepared statements of those persons submitted for the hearing. According to several data sources, there has been an explosion in the number of state court class actions in recent years. Witnesses tied this phenomenon to the tendency of certain state courts to have an ``anything goes'' attitude toward class actions. At the March 1998 House hearing, Rep. James Moran (D.--Va.) observed that ``[o]pportunistic lawyers have identified those states and particular judges where the class action device can be exploited.'' And offering specific examples, he decried the fact that ``legitimate business enterprises * * * are being severely harmed by existing class action practice'' and that ``[i]n other cases, where businesses may be legitimately at fault, injured consumers receive little, while the plaintiffs attorneys are enriched.'' Similarly, John W. Martin, Jr., then the Vice President-General Counsel of Ford Motor Company, observed that ``[t]he real purpose of the vast majority of class action lawsuits is to make money--not for consumers, but for the lawyers bringing the suit.'' Noting specific state court examples, he urged that ``[a]s a result, consumers are exploited and rarely receive substantial awards, while class action counsel frequently walk away with millions.'' The lax attitude toward class actions manifested by some state courts has constitutional (due process) ramifications. For example, Mr. Martin cited cases in which state courts had engaged in ``drive-by class certification[s]''--situations in which judges ``grant[] plaintiffs' motion to certify his claims for class treatment before the defendant even has a chance to respond to the motion (or, indeed, has even been served with the complaint).'' He also expressed concern about the `` `I never met a class action I didn't like' phenomenoe''--state courts that ``employ standards that are so lax that virtually every class certification motion is granted, even where it is obvious that the case cannot, consistent with basic due process principles, be tried to a jury as a class action.'' He cited examples of cases in which state courts had certified classes that federal courts had found uncertifiable. In some of those cases, the federal court cited due process or other constitutional reasons for finding class certification inappropriate; yet, the state courts charged ahead. Because the class action device is such a powerful tool, it can give an attorney unbounded leverage. John L. McGoldrick, Senior Vice President and General Counsel of Bristol-Myers Squibb Company, observed at the March 1998 House hearing that where class actions are not properly controlled by the courts handling them, there can be ``the perverse result that companies that have committed no wrong find it necessary to pay ransom to plaintiffs' lawyers because the risk of attempting to vindicate their rights through trial simply cannot be justified to their shareholders. Too frequently, corporate decisionmakers are confronted with the implacable arithmetic of the class action: even a meritless case with only a 5 percent chance of success at trial must be settled if the complaint claims hundreds of millions of dollars in damages.'' The fundamental problem is the failure of some state courts to manage class actions so as to avoid the considerable potential for abuse. Rep. Moran testified that ``[m]any state courts lack the complex litigation training, experience and resources necessary to deal with [interstate class actions]'' and that ``state court judges, who are elected in most states, are more prone to bias when the defendant is a large, out of state corporation.'' As Mr. McGoldrick put it, ``[i]n some places, state court judges do not appreciate the raw power of the class action device and the need to circumscribe its usage. As a result, the rights of both defendants and the class members on whose behalf the actions were brought get ignored.'' This situation has encouraged the all too frequent filing of frivolous class actions in state courts. For example, Mr. Martin offered specific examples illustrating that due to the erosion of state court class action standards, ``class actions that are being filed assert claims that are utterly without merit (or marginal at best).'' And he noted that in interviews conducted for a study on class actions by the RAND Corporation's Institute for Civil Justice, ``many attorneys (including some plaintiffs' counsel) observed that `too many non-meritorious [class action lawsuits] are [being] filed and certified' for class treatment.'' The current situation in which class action litigation is being focusing in state courts is resulting in enormous waste, inconsistent results, and the risk of harm to class members' interests. More specifically, both Mr. McGoldrick and Mr. Martin noted the problems created whenever overlapping or ``copycat'' class actions are filed, a frequent occurrence. When such ``copycat'' cases are pending in different federal courts, they may be consolidated before a single judge through the Judicial Panel on Multidistrict Litigation, thereby ensuring uniform management of the litigation and consistent treatment of all legal issues. But when duplicative class actions are filed in two or more state courts in different jurisdictions, the ``competing'' class actions must be litigated separately in an uncoordinated, redundant fashion because there is no mechanism for consolidation of state court cases. As a result, state courts may ``compete'' to control the cases, often resulting in harm to all parties involved. Counsel also ``forum shop,'' going from court to court trying to obtain a different result on class certification or other issues. And class counsel in the various cases may compete with each other to achieve a settlement, a phenomenon that can work to the disadvantage of the class members. Mr. Martin observed that ``[t]he `anything goes' mentality in state courts has led to a sad reality: as a practical matter, the most important question determining the outcome of a class action lawsuit has now become, not the merits of the claims or the propriety of class treatment, but whether the case can successfully be removed to federal court.'' He then offered numerous examples of ways in which lawyers who file class action lawsuits manipulate their pleadings to keep their purported class actions out of federal court (e.g., by naming defendants who defeat diversity but who have no real role in the litigation, by waiving class claims that might give rise to federal jurisdiction, by changing claims after the one-year removal deadline has passed). b. the state court class action crisis has not abated Little has changed since last year's class action-related hearings, except that we now have more data confirming that the state court class action crisis is for real. Most notably, a new publication--Class Action Watch--recently printed the results of a survey of major company experiences with class actions.\3\ In particular, the survey found that the number of class actions pending against the responding companies had increased dramatically over the ten-year period 1998-1998. As indicated by other data collection efforts, that growth was most pronounced among state court class actions. Over the ten-year period, the number of state court class actions pending against the respondents rose by 1,042 percent--a greater than ten times increase.\4\ In contrast, the growth of pending federal cases was substantially less-- only around 338 percent.\5\ --------------------------------------------------------------------------- \3\ Analysis: Class Action Litigation--A Federalist Society Survey,'' Class Action Watch (Federalist Society Litigation and Practice Group, Class Action Subcommittee) at 1 (Vol. 1, No. 1). \4\ Id. at 5. \5\ Id. --------------------------------------------------------------------------- The survey also provided strong support for the contention that if state courts in a particular locale begin manifesting an ``laissez- faire'' attitude toward class actions, they will become a magnet for such matters. For example, the survey noted that for years, the level of class action activity in Texas was relatively low. But of late, some Texas intermediate appellate courts have issued class certification- related decisions suggesting that Texas courts have a lower threshold for class certification than do our federal courts (even though Texas has adopted the federal class action rule and supposedly follows federal class action precedents). The effects of these decisions are not surprising. While the surveyed companies had experienced a 110 percent growth in the number of pending Texas state court class actions in the five-year period 1988-1993, that growth recently has accelerated dramatically.\6\ In the more recent five-year period (1993-1998), those companies reported a 338 percent increase in the number of class actions pending against them in Texas state courts.\7\ --------------------------------------------------------------------------- \6\ Id. at 7. \7\ Id. --------------------------------------------------------------------------- The survey also indicated that as the Texas courts seemingly became less rigorous about class actions, they were more frequently being called upon to hear class actions involving non-Texas residents. For example, the survey noted that both in 1988 and 1993, certified classes were almost always confined to Texas residents.\8\ By 1998, however, nationwide class actions were relatively common in Texas state courts.\9\ --------------------------------------------------------------------------- \8\ Id. at 8. \9\ Id. The survey also contains data supporting the view of Mr. McGoldrick and others noted above that class actions provide extraordinary leverage to force settlements, regardless of whether those settlements make sense for either the class members or the defendants. Id. at 7-8. --------------------------------------------------------------------------- c. other problems with state court class actions are emerging Over the past year, several other problems attributable to state court class actions have become increasingly apparent. I would like to focus on just two: 1. Overly broad classes put class member rights at risk Because of the entrepreneurial motivations that underlie most class actions, it is not surprising that counsel try to make them as broad as possible. In short, why sue for a class of 1,000 people when you can sue for a class of 20 million people? A 20-million person class gives an attorney far more leverage against the defendant. And it creates the potential for a much larger pot of attorneys' fees (with no significantly larger investment). The problem with this approach is that it causes the entire lawsuit to proceed on a lowest common denominator basis. The ``average'' claim becomes the claim by which the entire action is judged; class members with larger, more serious claims are simply lumped into the group and not given individual attention. Further, to make the litigation work as a class action, class counsel begin ``shaving off'' (i.e., waiving) the more complicated claims that may preclude trying the matter on a class basis. For example, certain legal theories requiring individual proof (e.g., fraud claims requiring individual demonstrations of reliance) may be thrown overboard. Likewise, claims for certain types of injuries (e.g., personal injury, property damage) may be excluded from the scope of the action. These ``shortcuts'' can be devastating for certain class members. Let me use as an example a recently filed class action lawsuit that has garnered considerable attention--the now infamous ``toothbrush'' class action. According to a press release, this lawsuit, which is pending in state court in Chicago, assails the American Dental Association and several toothbrush manufacturers for failing to warn of the risk of a toothbrush-related injury known as ``toothbrush abrasion'' \10\ According to a press report, the ``hard evidence'' that backs this lawsuit is, in significant part, a toothpaste commercial that claimed that 36 million people brushed their teeth too hard.\11\ I suspect that a lot of people have reacted to this lawsuit in the manner of one letter to the editor: --------------------------------------------------------------------------- \10\ The attorneys who brought the lawsuit have even set up a website regarding the action--at ``www.toothbrush.com.'' Among other things, it advises that if one suspects that he/she has toothbrush abrasion, they should ``[f]irst, take care of your health'' and then second, call for more information about the lawsuit at 1-877-SORE GUMS. \11\ Not Too Abrasive, But Suit Causes Ache, Chicago Tribune, April 14, 1999, at Business 1. I wonder if one can sue this attorney and his client for being abrasive and irritating. Any attorneys out there want to take up the challenge? We could make it a class-action suit against all ridiculous lawsuits such as this.\12\ --------------------------------------------------------------------------- \12\ Rubs the Wrong Way, Chicago Sun-Times, April 22, 1999, at 30. Admittedly, I know little about this lawsuit. But if it is like most actions of this general type, the proposed class includes (a) a few people who actually claim to have suffered physical injury and (b) millions of people who simply claim to be at risk of injury. This paradigm poses two major problems. The people who claim actual injury are going to get lost in the lawsuit. If the matter actually gets adjudicated or settled on a class basis, the focus will be on the biggest group--the people who supposedly are just ``at risk.'' If the case is tried, the jury likely would find for the defendants under this apparently bizarre theory. Or if the case is adjudicated in plaintiffs' favor or is settled, the remedy will focus on the ``at risk'' group (e.g., something like warnings and/or new toothbrushes). But what happens if somebody out there actually sustained physical injury? What if there actually are a few people who rightfully should have been warned by a dentist that they have a very rare dental situation requiring an unusual dental hygiene regimen? Unless those persons are properly notified of what is going on in the lawsuit and closely follow the content of the notices (assuming that is possible), they will be out in the cold. If the case is tried and the class loses, their rights to pursue their claim's for actual injury likely will be extinguished. Or even if plaintiffs win or obtain a settlement, the relief probably will not address their actual injury at all. And they will not be able to obtain individualized relief because the class victory or the settlement will preclude them from seeking more. In some cases, class counsel seek to avoid these potential results by excluding people who actually have sustained personal injury, limiting the purported class to people who are merely at risk. But that approach creates another similar problem. If the case proceeds on a class basis and the class loses, all of the class members probably will be precluded from pursing claims if in fact they do experience actual injury in the future, in which case they may have a more compelling individual case to present to a jury. (For example, in the toothbrush case, if a jury found the warnings provided by the defendants to be adequate, each class member presumably would be precluded from arguing to the contrary in a personal injury action in the future.) Likewise, if the case is resolved (by settlement or trial) on the basis of minimal relief, each class member likely would be precluded from later asserting claims against the defendants if the risk came to fruition-- if they discover later that they have actually experienced dental injury of some sort. Federal courts have become sensitive to this problem and increasingly have refused to proceed with class actions that put class members' rights at risk in this manner.\13\ In contrast, state courts generally have been oblivious to this problem. Indeed, I am not aware of any state court that has even attempted to address this issue. --------------------------------------------------------------------------- \13\ See, e.g., In re Ford Motor Co. Bronco II Prod. Liab. Litig., 177 F.R.D. 360, 368 (E.D. La. 1996) (denying class certification because requested relief ``does not encompass death, injury, property damage or other consequential damage''; noting that ``by attempting to tailor their action in such a way as to improve their ability to establish commonality, class representatives may in fact create an adequacy problem''); Feinstein v. The Firestone Tire and Rubber Co., 535 F. Supp. 595, 600-01 (S.D.N.Y. 1982). --------------------------------------------------------------------------- 2. State courts are ``federalizing'' substantive and procedural law I have heard criticisms that S. 353 would ``federalize'' all class actions. That criticism overlooks a perversity of the current class action landscape--class actions have already been federalized by the state courts. When I say ``federalized,'' I do not mean that the federal government has come in and told states what they are supposed to do. What I am talking about is ``false federalism''--the current situation in which one state court goes around telling the other 49 state courts what their laws should be. When state courts preside over class actions involving claims of residents of more than one state (especially nationwide class actions) as they are increasingly inclined to do, they end up dictating the substantive laws of other states, sometimes over the protests of officials in those other jurisdictions. A shining example appeared on page 29 of the September 27, 1998 edition of the New York Times. In a full-page article, the Times reported on a multi-billion dollar class action pending in a rural county court in down state Illinois.\14\ The headline says: ``Suit Against Auto Insurer Could Affect Nearly All Drivers.'' --------------------------------------------------------------------------- \14\ In the trial court, the action is captioned Snider v. State Farm Mut. Auto. Ins. Co., No. 97-L-114 (Ill. Cir. Ct., Williamson County). --------------------------------------------------------------------------- The article says that all kinds of people are ``alarmed'' about this lawsuit. Public Citizen is ``alarmed.'' Ralph Nader is ``alarmed.'' The Attorneys General of Massachusetts, New York, Pennsylvania, and Nevada are ``alarmed.'' The National Association of State Insurance Commissioners is ``alarmed.'' Why are all of these people ``alarmed?'' Their concern is that the rural county court in Illinois is on the verge of telling all of the other states what their auto insurance laws are going to be. In the context of a nationwide class action, that court is set to decide whether auto insurance companies' use of ``aftermarket'' auto parts (as opposed to auto parts made by the ``original equipment manufacturer'' (``OEM'')) in repairing insureds' vehicles is fraudulent behavior. The problem is that some states encourage or require insurance companies to use non-OEM parts, a policy intended to lower insurance rates. Nevertheless, the Illinois court is set to apply Illinois law to all other fifty states, and according to the Times article, may thereby ``overturn insurance regulations or state laws in New York, Massachusetts, and Hawaii, among other places.'' In short, this Illinois county court, which was elected by and is accountable only to the 61,000 residents of Williamson County, Illinois, is going ``to make what amounts to a national rule on insurance.'' The Illinois Supreme Court has declined to stop the court;\15\ the U.S. Supreme Court has also refused to intervene.\16\ --------------------------------------------------------------------------- \15\ See Insurance Indus. Litig. Reporter, April 1, 1998, at 18 (noting that the Illinois Supreme Court had denied petitions to halt the action). \16\ See Speroni v. State Farm Mut. Auto. Ins. Co., 119 S. Ct. 276 (1998). --------------------------------------------------------------------------- Another example of this phenomenon is a class action now pending in the state court for Coosa County, Alabama.\17\ That suit was brought on behalf of the over 20 million people who have certain types of airbags in their motor vehicles. The lawyers therein are asking that the court order that the design of those federally-mandated airbags be declared faulty. That court may be the ablest and the most conscientious in our judicial system. But from a federalism policy standpoint, this situation defies logic. Why should an Alabama state court tell 20 million people in all 50 states what kind of airbag that they may have in their cars? What business does an Alabama state court have in presiding over this purportedly nationwide action when fewer than 2 percent of the claimants are Alabama residents and none of the out-of- state defendants even do business in the court's district? That Alabama court is accountable only to the 11,000 residents of the county that elects the court. Nevertheless, if counsel in that case have their way, that court will be dictating national airbag policy. --------------------------------------------------------------------------- \17\ This lawsuit is captioned Smith v. General Motors Corp., et al., Civ. A. No. 97-39 (Cir. Ct. Coosa County, Ala.). Although the trial court initially certified a nationwide class in this action before the defendants were even served, the court subsequently lifted that order. --------------------------------------------------------------------------- Under the current situation, procedural class action law has also been federalized to a large extent--in the same perverse way. Even though only a minority of state courts are routinely failing to exercise sound judicial judgment on class action issues, those courts have become magnets for a wildly disproportionate share of the interstate class actions that are being filed. In short, attorneys file their class actions in the minority of courts that are most likely to have a ``laissez-faire'' attitude toward the class device. That distinct minority of state courts are essentially setting the national norm; they are effectively dictating national class action policy. The new Class Action Watch testimony (discussed previously) tends to confirm this observation. But anyone doubting that this phenomenon is occurring need look no further than the testimony of Dr. John B. Hendricks at the March 1998 House hearing. He offered a docket study of state court class actions in one jurisdiction showing (a) that class actions had become disproportionately large elements of the dockets of some county courts, (b) that many of the class actions were against major out-of-state corporations lacking any connection with the forum county, and (c) that the proposed classes in those cases typically were not limited to in-state residents and often encompassed residents of all 50 states. Dr. Hendricks identified one state court judge who had granted class certification in 35 cases over the preceding two years. As Dr. Hendricks stated, ``[t]hat's a huge number of cases when one considers that during 1997, all 900 federal district court judges in the United States combined certified a total of only 38 cases for class treatment.'' The study failed to uncover any instance in which that judge had ever denied class certification. Clearly, that court alone was playing a radically disproportionate role in setting national class action policy.\18\ --------------------------------------------------------------------------- \18\ The Alabama Supreme Court has recently issued several rulings that may dampen this behavior. But when such action is taken in one state, counsel simply move the class action show to another jurisdiction where the courts have shown a lax attitude toward regulating the class device. --------------------------------------------------------------------------- II. S. 353 Is A Modest, Well-Reasoned Answer To The State Court Class Action Crisis From the record now before Congress, one could develop strong support for far reaching (some would say ``radical'') responses to the state court class action crisis. For example, Congress could enact federal legislation simply prohibiting state courts from using the class action device at all. Or Congress could perform major surgery on the class device itself (e.g., change procedural rules to allow class actions to be used only to pursue injunctive relief (not monetary damages) and thereby eliminate the economic incentives that encourage abuse of the device). Instead, S. 353 takes a middle-of-the-road course, proposing very modest changes. Nevertheless, its multi-pronged approach should be effective in addressing many of the most serious class action problems that have been identified. a. provisions expanding federal jurisdiction At the March 1998 House hearing, the witnesses were asked their views about a suggestion that the state court class action crisis could be quelled by expanding federal diversity jurisdiction to accommodate more class actions with interstate implications: Prof. Susan Koniak, a member of the faculty at the Boston University Law School who described herself as being from the ``plaintiffs' bar,'' responded that expanding federal jurisdiction over class actions would be a good idea. There's the polybutylene pipe case, which is one of the biggest class actions, was in Union City, Tennessee, in the state court, where no one could get there, you couldn't fly in to object. And that's common. Often these [state] courts are picked, and they are in the middle of nowhere. You can't have access to the documents and I don't think it's a full answer, but I think it should be done.\19\ --------------------------------------------------------------------------- \19\ See Federal News Service Transcript, Mass Torts and Class Actions: Hearing before the Subcomm. on Intellectual Property and the Courts, House Comm. on the Judiciary (March 9, 1998), at 19 (``FNS Transcript''). Former U.S. Attorney General Dick Thornburgh concurred, --------------------------------------------------------------------------- noting that [m]ost of the complaints that arise out of alleged inequitable treatment in these suits in state courts are in states where the judges are elected, and must * * * depend on contributions which come from potential party litigants. He stated that an expansion of federal jurisdiction over class actions is warranted because ``federal courts have shown a much greater propensity to bring some sensible adjudication to the creation of classes and the progress of class cases.'' \20\ --------------------------------------------------------------------------- \20\ Id. at 19-20. In her prepared oral remarks, Elizabeth Cabraser, a leading --------------------------------------------------------------------------- plaintiffs' class action attorney, opined that much of the confusion and lack of consistency that is currently troubling practitioners and judges and the public in the class action area could be addressed through the exploration, the very thoughtful exploration, of legislation that would increase federal diversity jurisdiction, so that more class action litigation could be brought in the federal court. Not because the federal courts necessarily have superior judges, but because the federal courts have nationwide reach; they have the statutory mechanisms that they need to manage this litigation, so litigation can be transferred and coordinated in a single forum.\21\ --------------------------------------------------------------------------- \21\ Id. at 33-34. Both Mr. Martin and Mr. John Frank indicated their support for expanding federal diversity jurisdiction over purported class actions. And Mr. McGoldrick concluded the inquiry by --------------------------------------------------------------------------- telling the Subcommittee: [Y]ou have heard [today] from professors, from plaintiff's lawyers, from defense lawyers, from consumer representatives, from business people, from a whole range. And it is striking to me that those of us who frequently disagree--my friend Ms. Cabraser and I frequently disagree--but you've heard from everyone the notion that diversity jurisdiction, increasing the ambit of it to permit class actions, is a good idea. And it seems to me that that's something this committee should weigh heavily in its deliberations.\22\ --------------------------------------------------------------------------- \22\ Id. at 42. S. 353 embraces the simple, elegant response to the state court class action crisis considered by this diverse group of witnesses--a correction of the fact that federal courts lack jurisdiction to adjudicate interstate class actions, lawsuits that typically involve millions of dollars in dispute among thousands of parties residing in multiple jurisdictions. That change would aid resolution of the current state court class action crisis by eliminating restrictions that have forced both unnamed class members and defendants to have their claims heard before some tribunals that are ill-equipped to handle complex litigation and otherwise less vigilant about due process rights. Further, as Ms. Cabraser noted at the March 1998 House hearing, the change would make available in most class actions the ``statutory mechanisms'' that federal courts (but not state courts) may wield ``to manage [class] litigation,'' so that overlapping, competing class actions ``can be transferred and coordinated in a single forum.'' \23\ And most importantly, the change would contribute to greater uniformity in the standards for deciding whether a controversy may be afforded class treatment. --------------------------------------------------------------------------- \23\ See 28 U.S.C. Sec. 1407 (statute providing for transfer and consolidation of actions through multidistrict litigation mechanism). --------------------------------------------------------------------------- As drafted in S. 353, this solution would be implemented without undesirable side-effects. The bill would not alter any party's substantive legal rights. The bill would not permit removal of truly local disputes; such matters would remain within the exclusive purview of the relevant state courts. And the bill would not preempt state courts' authority to hear class actions of any sort; if the parties prefer to litigate a particular interstate class action before an appropriate state court, they may do so. The jurisdictional changes envisioned in S. 353 are entirely consistent with the current concept of federal diversity jurisdiction. At present, the statutory ``gatekeeper'' for federal diversity jurisdiction--28 U.S.C. Sec. 1332--essentially allows invocation of diversity jurisdiction in cases that are large (in terms of the ``amount in controversy'') and that have interstate implications (in terms of involving citizens from multiple jurisdictions). By nature, class actions typically fulfill these requirements. Because they normally involve so many people and so many claims, class actions invariably put huge sums into dispute and implicate parties from multiple jurisdictions. Yet, because section 1332 was originally enacted before the rise of the modern day class action, it did not take account of the unique circumstances presented by class actions. As a result, that section, as a technical matter, tends to exclude class actions from federal courts.\24\ That technical omission would be corrected by S. 353. --------------------------------------------------------------------------- \24\ At present, class actions not presenting federal questions often may not be brought in or removed to federal courts under diversity jurisdiction theories because of two U.S. Supreme Court decisions interpreting section 1332. First, in Snyder v. Harris, 394 U.S. 332, 340 (1969), the Court ruled that in determining whether the parties satisfied the diversity prerequisite, a court should look only to the named parties (ignoring the unnamed class members). That ruling allows class proponents to avoid federal diversity jurisdiction by naming as plaintiffs parties who are non-diverse with a defendant, even though a significant number of the unnamed class members (if not the vast majority of class members) do not share the defendant's citizenship. Second, in Zahn v. International Paper Co., 414 U.S. 291 (1973), the Court held that the ``amount in controversy'' requirement in section 1332 is satisfied in a purported class action only if each and every member of the purported class is shown separately to satisfy the jurisdictional amount threshold (presently $75,000). That ruling means that even though class actions invariably are huge controversies, involving millions (or billions) of dollars of claimed damages, they cannot be heard in federal court. For example, an action involving 100,000 class members may put millions of dollars at stake, but it would not be subject to federal jurisdiction unless each class member had $75,000 at issue or a total of $7.5 billion for the purported class! --------------------------------------------------------------------------- S. 353 would make this correction by amending 28 U.S.C. Sec. 1332 (the diversity jurisdiction statute) to extend federal diversity jurisdiction to cover any class action (with an aggregate amount in controversy in exceeding $75,000) in which there exists ``partial diversity'' between plaintiffs (including all unnamed members of any plaintiff class) and defendants, an approach wholly consistent with Article III of the Constitution.\25\ This expanded jurisdiction, however, would not encompass disputes that are not interstate in nature--cases in which a class of citizens of one state sue one or more defendants that are citizens of that same state would remain subject to the exclusive jurisdiction of state courts. Further, federal courts would be required to abstain from hearing certain local cases and state action cases. Thus, contrary to what has been argued by some critics, the bill would not move all class actions into federal court. Consistent with existing diversity jurisdiction precepts, it would preserve exclusively to state court jurisdiction what are primarily local controversies. --------------------------------------------------------------------------- \25\ See, e.g., State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530-31 (1967) (``in a variety of contexts, [federal courts] have concluded that Article III poses no obstacle to the legislative extension of federal jurisdiction, founded on diversity, so long as any two adverse parties are not co-citizens''). In State Farm, the Court noted that the concept of ``minimal diversity'' providing the basis for diversity jurisdiction in the class action context had already been discussed in Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). On several subsequent occasions, the Court has reiterated its view that permitting the exercise of federal diversity jurisdiction where there is less than complete diversity among the parties is wholly consistent with Article III. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 199-200 (O'Connor, J., dissenting) (``Complete diversity * * * is not constitutionally mandated.''); Newman-Green, Inc. v. Alfonzo-Larrian, 490 U.S. 826 (1989) (``The complete diversity requirement is based on the diversity statute, not Article III of the Constitution.''); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978) (``It is settled that complete diversity is not a constitutional requirement.''); Snyder v. Harris, 394 U.S. 332, 340 (1969) (in a class action brought under Fed. R. Civ. P. 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the putative class would destroy complete diversity). --------------------------------------------------------------------------- The amendments also would facilitate the removal to federal court of any purported class action that falls within the additional grant of federal diversity jurisdiction over class actions described above. The bill would not change the existing diversity jurisdiction removal procedures applicable to purported class actions, save for three exceptions intended to correct some of the tactics used by counsel to avoid federal jurisdiction over interstate class actions.\26\ In addition, the bill would authorize unnamed class members (not just defendants) to remove cases. This even-handed change would allow class members to move cases to federal court (within a reasonable time after notice is given) if they are concerned that the state court has not or will not adequately protect the absent class members' interests. --------------------------------------------------------------------------- \26\ First, the legislation would amend 28 U.S.C. Sec. 1441(b) to confirm defendants' ability to remove all purported class actions qualifying for federal jurisdiction under the revised section 1332 (as discussed above) regardless of the state in which the action was originally brought. Second, 28 U.S.C. Sec. 1446(b) would be amended to provide that a defendant could remove a putative class action at any time (even at a date more than one year after commencement of the action), so long as the action is removed within 30 days after the date on which the defendants may first ascertain (through a pleading, amended pleading, motion order or other paper) that the action satisfies the jurisdictional requirements for class actions (as set forth in the proposed section 1332(b)). This provision is intended to prevent parties from filing cases as individual actions and then recasting them as purported class actions (or as broader class actions) after the one- year deadline for removal has passed. Third, S. 353 would amend 28 U.S.C. Sec. 1446(a) to allow any class action defendant to remove an action. At present, an action typically may be removed only if all defendants concur. This provision is intended to address situations in which local defendants with little at risk or defendants ``friendly'' to the named plaintiffs may preclude other defendants with substantial exposure from gaining access to federal court. --------------------------------------------------------------------------- To avoid leaving before federal courts controversies not warranting the attention of the federal judiciary, the legislation would require a federal court to dismiss any case (that is in federal court solely due to the expanded diversity jurisdiction provisions) that it has determined may not be afforded class treatment. However, the bill specifies that an amended action may be refiled in state court. Further, the bill also protects the interests of the unnamed class members by specifying that federal tolling law will apply to the limitations periods on the claims asserted in the failed class action. b. the notice provisions The bill contains provisions (a) requiring that any formal, court- ordered notice to the class contain a ``short summary written in plain, easily understood language'' and (b) otherwise detailing the required contents of such notices. Further, the bill requires that the Attorney General of the United States and the attorneys general of any states in which class members reside be notified of any proposed class action settlement. As noted above, many state courts have not been vigilant about protecting the rights of unnamed class members, particularly those with claims that arguably may be more significant than the claims of the average class member. Further, some courts have not adequately balanced attorney compensation with what has been achieved for the class. Many of these problems will be alleviated if the federal courts are allowed to hear more interstate class actions. However, expanding public awareness of proposed class actions and proposed settlements thereof will lessen the possibility that class actions will injure the unnamed class members that they are intended to benefit. c. attorney's fees provisions As was detailed previously, attorney's fees are the root cause of the tidal wave of class actions that we are experiencing and of the most serious class action abuses that we are seeing. S. 353 would limit such fees to a ``reasonable percentage of the amount of'' (a) damages actually paid to the class, (b) future financial benefits to the class attributable to the cessation of alleged improper conduct, and (c) costs actually incurred by defendants in complying with terms of any order or agreement. Reasonable lodestar fees will be available in any event. These are very modest fee limitations. They do not address the fact ``percentage of fund'' fee awards in class actions are usually wholly unwarranted. Allowing plaintiffs' counsel to receive a significant percentage of the recovery in an individual lawsuit might be justified as bearing some relationship to the amount that an attorney legitimately should expect for prosecuting the claim (particularly when the attorney and his/her client presumably have agreed on the percentage). But a major purpose of a class action device is to achieve efficiencies--to prosecute large numbers of claims simultaneously with substantially reduced effort for all involved. Thus, counsel prosecuting a class action cannot reasonably expect a substantial percentage of whatever fund is created as a result of prosecuting a whole class of claims--there must be a substantial discount reflecting the efficiency of the class exercise. Otherwise, counsel are receiving a major, totally unjustifiable windfall. In short, if enacted, the attorney's fees provisions in S. 353 will not substantially slow the engine driving class action growth. However, the bill's provisions are modest steps in the right direction. They do have the potential to curtail some of the more egregious fee abuses, especially the tendency by some counsel to claim fees on the basis of theories of speculative, amorphous benefits to the class. III. Conclusion Thank you again for the opportunity to comment on S. 353. I respectfully urge the Subcommittee to recommend the bill favorably to the full Judiciary Committee. Senator Grassley. Thank you very much for your testimony. The Senator from Alabama, would you lead off? Senator Sessions. Thank you. Mr. Morrison, you talked about lawyers not talking to their clients in these cases. They don't know who they are. When I was attorney general, there was an election contest actually involving the very justice I just mentioned who made that closing argument before he was president of the Alabama Trial Lawyers Association. But at any rate, the lead plaintiff on the case was dead for 6 months. They filed a class action in the name of only one plaintiff, as I recall, so obviously they hadn't been consulting with their client. And there is just no pattern of that. Mr. Morrison. There is no pattern. Senator Sessions. I mean, the lawyers take over the case, and it is their case and they run it and there is no input from the client. Mr. Morrison. That is right, exactly, Senator Sessions, and that is how you get coupon settlements, $.08 settlements, future vague medical monitoring settlements. Those aren't about the health and welfare and well-being of so-called victims. Those are about the entrepreneurial litigator cashing out. In essence, what many lawyers have found--and let's just call a spade a spade--is that having a class action is better than having a ``dot com'' company go public in these days. That is what it is all about. Senator Sessions. Big money, that is for sure. I would like to ask you, Mr. Beisner, about this power. I remember back in law school, Dean Harrison used to ask a question: in the conflict of laws, may the isle of Tobago bind the whole world? Can a county in Chicago actually do this, a county court, in effect, under our system of respect for verdicts in many cases, be able to do that? Mr. Beisner. My understanding, although I am not involved in the case, is that this is going to happen. The Illinois Supreme Court has declined to intervene, and indeed the parties involved took the issue to the U.S. Supreme Court, which also declined to intervene. So it is going to happen. Senator Sessions. Under the current state of law, this complex public policy question will be decided by a county court in Illinois? Mr. Beisner. That is correct. Senator Sessions. With regard to the question of the mass tort, this is something I am not sure I can articulate the difference. What is the difference in the problem that we as policymakers deal with when you have a breast implant-type situation, which I guess was filed as a class action--or let's take asbestos that was not. Is there a distinction here? Mr. Beisner. Well, I think that if you are talking about the difference between mass torts and the use of class actions in that context and class actions generally--and I don't want to over-generalize here, but I think the main difference is that frequently or most often in a mass tort situation, you have people who are saying I have been injured in some way. You often in those cases have the sorts of people who may well go to a lawyer and say, I have a problem, would you please try to find a remedy here. These are claims that at least to some extent are going to be filed and are going to be part of the system anyway, and the challenge to the courts in those circumstances is how are we going to process those. When you are talking about non-mass tort class actions, I think you are often there getting more into the arena of lawyer-manufactured cases. Those are the instances where the claim is probably most apparent only in the mind of the lawyer who brought the case and where the vast majority of people out there probably don't care a whit about whether this claim is asserted. Senator Sessions. Now, asserted that you have 60 or 100 cases like this. Are you serious? I mean, you personally are working on 100 cases? Mr. Beisner. Yes. Senator Sessions. Give me an example of what you are talking about, the kind of litigation. Mr. Beisner. I can give you an example of one which is in your home State of Alabama, in Coosa County, to be straightforward about that. And this is a case---- Senator Sessions. I don't think that was one of the six counties. Mr. Beisner. No, it is a different one. Senator Sessions. But it is not much bigger than those. Mr. Beisner. It was a class action involving well over 20 million in all 50 States, and it is basically anybody who has an airbag in their vehicle. And they brought this lawsuit against GM, Chrysler and Ford, and they are basically asking that GM, Chrysler and Ford send back $500 to all of these people because they claim the airbag is defective in those vehicles. So what you have there is the potential that in this one court, where the judge has been elected by the 11,000-or-so residents of Coosa County, he will be presiding over this multi-billion-dollar trial, if the judge decides to go forward with it, deciding whether or not basically everybody's airbag out there is defective. And, indeed, that judge and that court will be setting our Federal airbag policy. Senator Sessions. Well, I think that is extraordinary, and it does raise serious questions. I think those are the kinds of decisions that may--well, let me ask you, it didn't get in Coosa county because the plaintiffs and the defendants somehow agreed that this would be a good place to try it? One party got to select the county, is that right? Mr. Beisner. That is correct. Senator Sessions. So, presumably, they searched all over to find the county they wanted to file in. They could have filed it in any county virtually in the United States? Mr. Beisner. That is correct, and we attempted to remove it to Federal court because none of the auto company defendants really do any business--there aren't even any auto dealers in that county. But because they named as a defendant an auto dealer in Alabama, we were unable to remove that case to Federal court. Senator Sessions. Mr. Chairman, that is a dramatic statement. What he has said is, as I understand it--correct me if I am wrong--this statement that you have a right to remove is really a hollow thing because you can almost always in a case like this add a non-diversity defendant. Mr. Beisner. And I could assure you the auto dealer who was named in that lawsuit didn't have a great deal to do with how the airbag in those vehicles was designed. Senator Sessions. But because he was a defendant, there was not complete diversity? Mr. Beisner. That is correct. Senator Sessions. Mr. Morrison, how do you see that as a policy? Mr. Morrison. Senator, as a policy what is happening is sham defendants, fraudulent defendants, are being joined in to prevent removal to Federal court. And I was struck earlier when the testimony of the Justice Department was finished and you were asking questions about the six counties in your State. If you had those same six counties and you had an extraordinarily high incidence of cancer, the public would want you to look into it and figure out what was going on. What you have is the legal equivalent of a high incidence of cancer in those six counties because people are self- selecting those counties, designing lawsuits to stay in those counties, and taking the class actions in those specific counties. Alabama is not the only place. I could name counties just about in every State where there is a friendly jurist or a friendly loosening of the rules that takes place, where people will design the case to stay before that judge, get it certified, get the blackmail settlement and basically go public with the attorneys' fees. Senator Sessions. I understood it, I think, but I did not really comprehend the depth of it that a plaintiff who has got an action in every airbag in America can search the whole United States to find the single county where there may be only one judge that he knows is favorable and bring the lawsuit there and get a verdict that binds the world. It is really pretty dramatic and I appreciate you sharing that with us. Senator Grassley. I will start with Mr. Morrison. I have just got a couple of short questions. Both the Justice Department and Professor Daynard have suggested that if this bill is passed, some people will not get their day in court. Are they right? Mr. Morrison. No, sir. I couldn't disagree more with that suggestion. This bill--and I think the genius of the bill is it doesn't have anything to do with the substantive rights of the individual. It doesn't change that individual's rights. If the individual has a claim under South Carolina law, my home State, or a claim under Michigan law, where I grew up, then that claim still exists and they have the right to pursue that claim vigorously in the Federal court, with full respect for that substantive law, or in the State court if that is the appropriate place for it and it is an appropriate State class action. Moreover, the door is not slammed. I think Professor Frank said it best. There are plenty of class actions that are, in fact, local class actions. A local water pollution case, a local water rights case, a local case against a county or a tax assessor where something has gone wrong--those are local State class actions and should be brought. This bill does nothing to diminish the substantive legal rights of one human being. What it does allow for is a fair adjudication of those rights in an appropriate forum. What it does allow for is the removal of interstate class actions. That is all it does. It is a very modest proposal with no damage to alleged victims. Senator Grassley. Mr. Beisner, your comments? Mr. Beisner. I am not sure there is much I can add to what Mr. Morrison said, but I think that one of the things we need to recognize is that the reason why in Federal courts, as Professor Daynard was suggesting earlier, some class actions are not certified is because frankly in a lot of instances the plaintiffs' counsel become over-ambitious with what they are doing. They try to mix together people whose claims really aren't common, and the Federal courts have been calling counsel on that and saying we are not going to allow you to do that. Frankly, that is the issue that I think is presented in a lot of these cases. I think that if the classes are properly crafted, that issue would not exist. And so to suggest that State courts are allowing classes Federal courts are not, I don't think is a fair comparison. I think that the problem is that the Federal courts are beginning to say you have got to craft these classes more carefully, and they are right from a due process standpoint. Senator Grassley. Mr. Beisner, let me ask you, the Justice Department, as you heard, suggests that the passage of the diversity removal provisions in the bill would somehow infringe on the State courts' ability to offer redress to their citizens. Is that accurate? Mr. Beinser. Again, I think the answer to that question really goes back to what Mr. Morrison was saying earlier. It will not prevent States from providing redress. Substantive law would not be affected by this bill. States may pass whatever statutes they wish to provide remedies for whatever sort of wrongdoing may exist out there. This won't affect that in the least. Senator Grassley. I thank you all for coming today. I think that this hearing has shown that there is a real problem with class actions. I think the Senator from Alabama has been impacted very heavily by this testimony, and I think that we should move forward with our bill to address this phenomenon. I think that fundamental fairness demands it, and I look forward to working with other Senators on the Judiciary Committee and with Senator Kohl and others to make this bill a reality. And I receive in advisement the suggestions of people today, the witnesses that we have had who have been willing to help as well. Thank you all very much. The subcommittee is adjourned. 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