On The Case

Class action reform isn’t dead. It’s just not coming from Congress.

(Reuters) - In the heady days of January 2017, when Republicans dreamed of a limitless legislative horizon, Bob Goodlatte, the Virginia Republican who headed the House Judiciary Committee, introduced a breathtaking bill to change the rules of class action and multidistrict litigation. The Fairness in Class Action Litigation Act was fantasy fulfillment for class action critics, proposing solutions for all kinds of perceived abuses. Courts would be precluded from certifying classes unless plaintiffs' lawyers could prove every class member suffered the same injury and that class membership was easily ascertainable. Class certification decisions would be automatically appealable.

Plaintiffs lawyers’ employees and relatives could not serve as class representatives. Class lawyers would have to disclose ongoing contractual relationships with lead plaintiffs, as well as third-party funding deals. Lawyers wouldn’t get paid until all money has been distributed to class members – a process that can take years. As I said at the time, if Goodlatte’s bill were enacted, class actions and MDLs would be reduced to a shadow of their former selves.

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That’s not going to happen. The Fairness in Class Action Litigation Act passed the House with alacrity but never even made it to a vote in the Senate Judiciary Committee, let alone the full body. Goodlatte, who had made a class action reform a signature issue, did not run for reelection in 2018. Democrats, who will control the House in the next Congress, will not be reintroducing Goodlatte’s bill and seem unlikely to pass anything similar that might emerge from the Republican-controlled Senate. If there were ever a moment when class action critics had an opportunity to gut the cases by an act of Congress, that moment has passed.

But what struck me as I went back to read the Goodlatte bill again is that courts – including the U.S. Supreme Court – are actively considering most of the issues the proposed law sought to resolve. Give credit to class action critics: They have succeeded in prompting trial and appellate judges to think about systemic class action concerns – and in prompting the Justice Department and state attorneys general to oppose objectionable settlements. Class action reform isn’t dead. It’s just not coming from Congress.

In addition to well-considered amendments to Rule 23 that will, among other things, discourage spurious class action objectors, the most intriguing development is new rules in the Northern District of California that require class counsel to disclose all kinds of information when they move for final approval of proposed settlements, including “the total settlement fund, the total number of class members, the total number of class members to whom notice was sent and not returned as undeliverable, the number and percentage of claim forms submitted, the number and percentage of opt-outs, the number and percentage of objections, the average and median recovery per claimant, the largest and smallest amounts paid to class members.”

The court will also require plaintiffs' lawyers to reveal their track record in similar cases when they ask for preliminary approval, presumably to give judges a chance to weigh whether class lawyers are fit to represent absent class members, and to disclose detailed plans for notifying class members and facilitating their claims process. In all, the new California rules – which follow a district-wide standing order requiring disclosure of third-party funding in class actions - will assure accountability in class litigation. In federal court in Northern California, a hotbed of class actions, neither plaintiffs nor defendants can game the system at the expense of class members.

Trial judges have also awakened to potentially problematic relationships between class lawyers and their clients. In federal court in Boston, as you probably recall, U.S. District Judge Mark Wolf ordered an inquiry into ties between an Arkansas pension fund and its lawyers after he awarded those lawyers $75 million in fees in a class action against State Street bank. The high-profile probe, in which class counsel from Labaton Sucharow ended up agreeing to pay back nearly $5 million of those fees, should at the very least have put other trial courts on notice.

We’ve seen district court judges push back this year against fees for lawyers who file and quickly settle class action challenges to M&A deals, perhaps as a prelude to Supreme Court review of whether shareholders even have a right to bring such cases in federal court. The justices have also been invited to consider the certification of so-called issue classes, in which judges certify classes to litigate certain questions even when the entire class action doesn’t meet certification requirements – another item in the now-abandoned House Republican wishlist.

The justices ducked on classes with uninjured class members in 2016 and dodged ascertainability in 2017, but I have a feeling the Supreme Court will soon have a new opportunity to consider whether classes can be certified without assurances that every class member has suffered the same injury. Congress couldn’t manage to legislate class membership but appellate courts are working on it.

The most widely criticized elements of the House bill would have impeded class action lawyers by restricting their ability to represent repeat plaintiffs and by capping and delaying their fees. I haven’t seen courts adopt similar one-size-fits-all rules, but I’ve written several stories this year about judges policing fees for class counsel, including haircuts of tens of millions for dollars for lawyers in multibillion-dollar class actions against Petrobras and banks accused of rigging the foreign exchange market. And, of course, the Supreme Court heard arguments last fall in a case that could put an end to lawyers receiving fees for settlements that provide only indirect benefits to class members via cy pres contributions to charity. (As I’ve reported, the justices were distracted in Frank v. Gaos by concerns about the constitutional standing of class members to bring their privacy case against Google; the parties have since briefing the standing issue at the Supreme Court.)

Class actions are an imperfect vehicle, no doubt. But at a time when companies are just beginning to understand the consequences of their years-long campaign to force workers and consumers into individual arbitration, Congress was right to let the House bill die.