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On Feb. 18, President George W. Bush signed the Class Action Fairness Act, designed to revamp class action procedure and law. CAFA discourages forum-shopping by moving large, interstate class actions into federal courts. According to a Feb. 18 article on The Washington Post‘s Web site, Bush remarked at CAFA’s bill signing ceremony that the law “will keep out-of-state businesses, workers and shareholders from being dragged before unfriendly local juries” where they may be forced to accept “unfair settlements.” The article quotes proponents of the act as suggesting that federal courts offer a “clearer and more predictable body of law.” Opponents worry, though, that the new law will discourage suits that remedy important, though low-dollar, injustices to consumers. The president’s proposed reforms come on the heels of significant changes made to Texas class action law. Gov. Rick Perry included the overhaul in a broad litigation reform measure, House Bill 4, signed into law in June 2003 and effective in July 2003. The state legislation affected civil procedures for a wide range of substantive law, including class action, tort, medical malpractice and health care liability. Similar procedural changes to the class action rules, approved by the Texas Supreme Court, became effective on Jan. 1, 2004. CAFA specifically excludes securities and corporate governance claims from its expanded federal court jurisdiction provision and liberal removal rules that overlap with the Securities Litigation Uniform Standards Act. SLUSA already requires plaintiffs to bring actions involving publicly traded securities in federal court. House Bill 4, on the other hand, includes two important changes to Texas class action law and procedure that apply to securities suits. The first involves appellate review of certification rulings. The new law grants the Texas Supreme Court jurisdiction to review a trial court order granting or denying class certification, changing the previous interlocutory status of such rulings. However, changes to Texas Rule of Civil Procedure 42 (the counterpart to Federal Rule of Civil Procedure 23) temper this reform by allowing trial courts a longer period of time to decide certification issues. Now, as the Legislative Note to Rule 42 points out, the trial court must rule on certification at “an early practicable time,” rather than the previous version of Rule 42′s language that called for such a ruling “as soon as practicable after the commencement of [the suit].” The second change to Texas class action law that impacts securities suits involves Rule 42 management plans. Perhaps the most important procedural change, Rule 42 now requires litigants to propose a manageable, time-efficient trial plan to resolve issues affecting individual members should the class be certified. These federal and state legislative reforms reflect dissatisfaction with the practical implications of class action suits. Class actions in general and securities class actions in particular garner larger settlements and awards than similar claims brought by individuals, for no reason other than the bully effect of the class action mechanism. If the judge certifies the class, defendants face a substantially larger verdict than they’d face in a suit brought by an individual, along with an award of attorney fees. Texas courts’ reluctance to reject class certification — described by the Texas Supreme Court in 2000′s Southwestern Refining Co. Inc., et al. v. Bernal as “certify now and worry later” — only added to this class action inflationary effect. NECESSARY CHANGES? A careful look at recent Texas class action opinions indicates a shift in certification decisions, even before the recent reforms. Up until September 1996, only seven Texas appellate courts had reversed a trial court’s certification of a class action; appellate courts upheld 71 percent of the certified classes. In contrast, between September 1996 and September 2004, Texas state courts considered the issue of class certification in 93 cases. In 75 — or 81 percent — of those cases, the court denied or reversed certification; in 18 — or 19 percent — of those cases, the court granted or affirmed certification. The Texas Supreme Court rejected certification in all five cases it considered. Federal court certification decisions follow a similar statistical pattern. Since 1996, the 5th U.S. Circuit Court of Appeals reversed class action certification in 23 or 70 percent of the certification cases it considered. Federal district courts in Texas rejected class certification in 46 cases representing 72 percent of the certification cases decided in the same timeframe. The legislative reform of House Bill 4 may be too much, too late in light of the trend away from hasty class certification in Texas. Immediate appeal of certification rulings to the Texas Supreme Court theoretically allows defendants to appeal certification before expending extraordinary attorneys’ fees on substantive issues. However, coupled with the longer period in which trial courts may decide certification issues, the threat of immediate and almost certain appeal may perversely act as an incentive for trial courts to delay a ruling of class certification. In the meantime, parties likely will be forced to engage in costly, substantive discovery pursuant to the trial management plan they are required to submit early on in the litigation. The result is more protracted and, thus, more costly and damaging securities class action litigation. Amy Davis Benavides is a senior associate with Hermes Sargent Bates in Dallas, practicing business and commercial litigation, including securities and directors’ and officers’ liability actions. She is a member of the Commercial and Business Litigation Committee of the American Bar Association and serves as co-chairwoman of the Trade Secret and Unfair Practices Litigation Subcommittee of the ABA Litigation Section.

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