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On Feb. 18, President Bush signed the Class Action Fairness Act of 2005 into law. The motivation for the new law was essentially two-fold. First, Congress felt that historically, successful plaintiffs in class actions often received little or no financial recovery on their claims while plaintiffs’ lawyers typically recouped large attorneys fees. Second, Congress believed that class actions of potentially national importance were often litigated in state courts, sometimes reaching judgments that adversely affected the rights of numerous out-of-state and non-participating residents. CAFA was enacted to redress these and other perceived problems with class litigation. At the time of this writing, only one federal decision has interpreted CAFA, Pritchett v. Office Depot, 563979 (D.Colo. 2005). There, the court interpreted the meaning of Section 9 of CAFA, which provides that the Act applies to any civil action “commenced on or after the date of enactment of this Act.” In Pritchett, the plaintiff had filed suit in Colorado state court in April 2003 (long before CAFA was enacted), and the defendant had removed the case to federal court in March of this year (just after CAFA was passed). Plaintiffs sought to remand the action to state court, so at issue was the question of whether CAFA applied retroactively to cases like Pritchett’s filed in state court before the date of CAFA’s enactment. While the court acknowledged Congress’ expressed intent to broaden the scope of federal jurisdiction over cases of interstate importance, the court held that CAFA did not apply retroactively, largely because the legislative history did not express any intention that CAFA permitted removal of presently pending cases. The court also noted that retroactive application would allow the removal of nearly every state-filed class action in every state court, which the court felt would overwhelm the already-burdened federal court system. Accordingly, the court held that CAFA applies only to actions filed on or after Feb. 18 and remanded Pritchett’s action back to state court. While Pritchettaddressed retroactive application of CAFA, one likely effect of CAFA going forward is that more suits filed against corporate defendants in state court will be removable to federal court. Before CAFA, class actions alleging violations of state law were seldom able to be litigated in federal court because the diversity rules generally required that no class plaintiff could be a resident of any state in which any defendant resided. Because class plaintiffs were often citizens of multiple states across the country, and because corporate defendants are considered to reside in both the state in which they are incorporated and the state in which they have their principal place of business, the likelihood of “complete diversity” in state-filed class actions was remote. See, e.g., Triggs v. John Crump Toyota, 154 F.3d 1289 (11th Cir. 1998) (class action remanded due to lack of complete diversity); Central Laborers Welfare Fund v. Philip Morris, 85 F.Supp.2d 875 (S.D.Ill. 1998) (motion to remand granted on reconsideration due to lack of complete diversity). CAFA dispensed with the complete diversity requirement. Under CAFA, federal courts have original jurisdiction over cases in which the amount in controversy exceeds $5 million and in which any plaintiff resides in a state different from that in which any defendant resides. Plaintiffs alleging state law claims historically shopped for what they perceived to be the most favorable state courts in which to litigate their claims. Now that complete diversity is no longer required, corporate defendants sued in state court will often be able to remove the case to federal court, where litigants have the benefit of fairly uniform rules of procedure and where the risk of runaway jury verdicts and prejudice against out-of-state corporations is generally perceived to be less. See Minot v. Eckardt-Minot, 13 F.3d 590, 593 (2nd Cir. 1994) (recognizing continued possibility of prejudice against out-of-state defendants in removal cases). MORE FORUM-SHOPPING? While CAFA was intended to minimize forum-shopping, the act may actually motivate plaintiffs’ counsel eager to avoid having to litigate in federal court to shop for potential suits in key states where most potential class members live and where most of the injury was suffered. Under CAFA, a district court must decline jurisdiction over cases involving “local controversies” — for example, cases in which more than two-thirds of the proposed class members live in the state where the action was originally filed; at least one defendant from whom significant relief is sought resides in the state where the action was originally filed; and the principal injuries suffered by the plaintiffs were incurred in the state where the action was originally filed. In other words, if more than two-thirds of a putative class of plaintiffs all reside in the same state and if they have all suffered injuries significantly caused by one defendant residing in that same state, plaintiffs’ attorneys can safely sue in state court without facing the risk of removal. Class counsel targeting these “local controversies” for state court litigation could conceivably craft narrow complaints alleging violations of only state law against corporate defendants transacting little or no interstate business in a conscientious effort to avoid triggering a federal court’s removal jurisdiction. Fraud claims arising out of insurance policies issued to forum state residents, claims related to statewide utility consumption and other types of consumer practices aimed at in-state residents would appear to be targets for activist plaintiffs’ attorneys looking to stay in state court. In addition to inviting potentially more forum-shopping, CAFA may also prompt creative class constitutions. Class counsel may, for example, try to draw one class of plaintiffs consisting of more than two-thirds of its constituents from residents of one state and another class consisting of more than two-thirds of its constituents from residents of another state. By drawing plaintiffs’ classes in this manner, attorneys could potentially maintain parallel but separate proceedings in multiple states. It remains to be seen whether this sort of creative classification will result from CAFA, but it seems a reasonable expectation in light of CAFA’s Section 4. POSSIBILITY OF EARLY SETTLEMENTS Another possible practical effect of CAFA may be earlier settlements of class actions than have been reached historically. As noted above, federal courts shall have original jurisdiction over class actions in which the number of potential class members is 100 or more; the amount in controversy exceeds $5 million; and there is diversity in citizenship between any one class member and any one defendant. By contrast, federal courts may decline to exercise jurisdiction over cases in which less than two-thirds but more than one-third of the class members are citizens of the state where the action was originally filed based on considerations (1) whether the claims alleged involve matters of national or interstate interest; (2) whether the claims asserted will be governed by the laws of the state where the action was filed; (3) whether the action was been pleaded in a manner seeking to avoid federal jurisdiction; (4) whether the number of citizens of the state where the action was filed is substantially more than the number of citizens from any other state; and (5) whether similar class actions asserting similar claims have been filed within the three-year period preceding the class action. In making these determinations and thus in determining whether it must or should exercise jurisdiction, a federal court will have to consider the size and location of putative class members, as well as the locus where most of the significant harm allegedly occurred. These determinations would appear to require significant discovery from defendants early in the litigation. If defendants are forced to reveal considerable information about the size and location of plaintiff-customers and the injuries they have sustained, that would seem to encourage early settlement because it would give plaintiffs’ counsel more information about their claims and potential damages earlier than they might otherwise obtain it. Indeed, Congress perceived the coercive effect of early discovery (at least in securities cases) to be so strong that it mandated a stay of discovery pending the motion to dismiss as part of the Private Securities Litigation Reform Act of 1995. See In re LaBranche Sec. Litig.,333 F.Supp. 178, 181 (S.D.N.Y. 2004) (recognizing that the purpose of the mandatory stay was to prevent plaintiffs from filing securities cases with the intent of using discovery to coerce early settlement). Class actions involving the rights and duties related to any security as defined by the Securities Act of 1933 are exempt from CAFA. 119 Stat. 4, sec. 4(a)(9). Thus, CAFA should have not any effect on securities class action litigation. By its terms, CAFA also does not apply to actions relating to the “internal affairs or governance of a corporation.” While the scope of this exemption has not been defined, it is reasonable to expect that plaintiffs’ attorneys will include allegations attacking the “internal affairs” and “business governance” of corporate defendants in their suits in an effort to avoid CAFA. In sum, although it is difficult to predict how litigation under CAFA will play out, there are several reasonable expectations. First, more state-filed lawsuits will likely be removed to federal court. Second, in order to determine whether they must or should exercise their jurisdiction under CAFA, federal courts will appear to require significant information about the size, location and relative injuries suffered by the proposed class plaintiffs — information that would seem to facilitate early settlement. Third, it is reasonable to expect that plaintiffs’ counsel will craft suits alleging “local controversies” and attacking the “internal affairs” of a corporation to avoid having to litigate in federal court. William Sullivanis a partner and James Fazio IIIis an associate in the San Diego office of Paul, Hastings, Janofsky & Walker where they both focus on securities litigation matters. They can be reached at [email protected]and [email protected].Practice Center articlesinform readers on developments in substantive law, practice issues or law firm management. Contact Associate Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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