House Of Reps.bmpBy Gerald L. Maatman, Jr. and Laura J. Maechtlen

This week the U.S. House Of Representatives Judiciary Sub-Committee on the Constitution and Civil Justice held a hearing on the subject of “Examination of Litigation Abuses.” Rep. Trent Franks (R, AZ), Chairman of the Sub-Committee, explained the purpose of the hearing as appropriate to ensure members of the Congress can understand the scope and nature of glaring dysfunctions in our litigation system before the committee considers any potential legislation. Not surprisingly, however, other members of the committee — including Ranking Member Rep. Jerrold  Nadler (D, NY), and Rep. John Conyers, Jr. (D, MI) — disagreed with the title assigned of the hearing itself, arguing that a “realistic understanding” of existing law would require a balanced view of the judicial system, recognition of the fact that some defendants are guilty of wrongdoing and may have some obligation to compensate plaintiffs, and that some public interest could be served through class action litigation.   

Following statements from Committee Members on their differing viewpoints on the scope and purpose of the hearing, the Committee then heard testimony from on the following topics, many of which raise important concerns for employers facing and litigating class actions.     

Cy Pres Settlement Awards

Theodore Frank, Adjunct Fellow at the Manhattan Institute Center for Legal Policy and as President for the Center for Class Action Fairness testified in his personal capacity regarding cy pres settlement awards, arguing that they are one of the leading ways for self-dealing class counsel to benefit themselves at the expense of the class. According to Frank, cy pres awards exacerbate existing conflicts of interest in the class action settlement context because class attorneys negotiate the class recovery and their own fee at the same time; thus, attorneys who do not adhere to their fiduciary responsibility to the class have an incentive to exaggerate class recovery to a court to maximize their fees through self-dealing and/or use of cy pres awards to inflate the overall settlement numbers upon which their fees are based.    

John H. Beisner, who testified on behalf of the U.S. Chamber Institute for Legal Reform (“ILR”), generally agreed with Frank, arguing that use of cy pres awards allow class counsel to justify big fees without having to craft settlements that deliver any direct benefit to those individuals actually injured by the defendant’s alleged misconduct. Because there is no indirect benefit to the class from the defendant’s giving the money to someone else, it is questionable whether most cy pres distributions effectuate the interests of the silent class members.

Frank proposed some ways to curb the abuse of cy pres awards, including:  

  • Limiting cy pres awards to circumstances in which direct distribution to individual class members is not economically feasible, or where funds remain after class members are given a full opportunity to make a claim.
  • Requiring that unclaimed funds in a class settlement escheat to the U.S. Treasury, rather than to a third party.
  • Reward contingent-fee attorneys solely for benefits going directly to the class, not for any percentage of a cy pres award.
  • If a cy pres settlement benefits the class attorneys directly or indirectly, that settlement should offset the attorneys’ fees.
  • Parties should be required to give notice to the class of who the cy pres recipients are, and whether there are relationships between the recipients and the parties, attorneys, and judge. 

Forum Shopping

Beisner argued that some federal courts have not fully embraced congressional intent when interpreting the Class Action Fairness Act of 2005, 28 U.S.C. Sections 1332(d), 1453, and 1711–1715, (“CAFA”) by: (1) broadly expanding federal jurisdiction over interstate class actions by imposing a “legal certainty” requirement for satisfying the CAFA’s amount-in-controversy threshold, and allowing plaintiffs to stipulate that they will not seek $5 million in damages and/or refusing to consider declarations submitted by defendants in support of removal notices;  (2) interpreting the CAFA’s “home-state” exception much more liberally than Congress intended; and, (3) by applying the “mass action” provision of the CAFA quite narrowly in rejecting removal jurisdiction for “mass” actions under the CAFA.

Elizabeth Milito, Senior Executive Counsel of the National Federation of Independent Business Small Business Legal Center also testified that forum shopping impacts small businesses. For example, a small business is harmed when it is named as a defendant in a case where the claim against the business is particularly weak, and the plaintiff’s apparent motive is to use the defendant as “body-shield” against invocation of federal jurisdiction. 

Third-Party Financing Of Litigation

Beisner testified that third party litigation financing (“TPLF”) generally falls into two broad categories: (1) consumer lawsuit lending, which typically involves individual personal-injury cases; and (2) investment financing, which includes investments in large-scale tort and commercial cases and alternative dispute-resolution proceedings. He testified that the latter type investments have negative impacts on civil justice because they increase the filing of questionable claims, change the traditional way litigation-related decisions are made, prolong litigation by deterring settlement, compromise the attorney-client relationship and diminish the professional independence of attorneys by inserting a new party into the litigation equation whose sole interest is making a profit on its investment. He further testified that there were several ways to curb these practices, including designation of a federal agency to oversee TPLF investors, enactment of statutory safeguards to avoid TPLF-related abuses, barring the use of TPLF in class actions, and amending the Federal Rules of Civil Procedure to address TPLF arrangements.

Additional Areas For Potential “Abuse” Highlighted By The Testimony  

The witnesses also raised some additional and interesting points regarding how various litigation “abuse” occurs in the class action context.  

Beisner testified that, following Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011), some courts are failing to undertake a “rigorous analysis” of the Rule 23 prerequisites to class certification, including recent decisions from the U.S. Courts of Appeals for the Sixth and Seventh Circuits. He further argued that another significant impetus for abusive aggregate litigation is the proliferation of arrangements under which state attorneys general hire outside counsel on a contingency basis to represent the state in civil litigation, arguing that these arrangements create an opportunity for unseemly liaisons between public enforcement officials and private, profit-motivated lawyers — but even more troubling — violate important constitutional rights of defendants, who find themselves facing lawsuits that combine the political power of the state and the financial power of deep-pocketed plaintiffs’ lawyers.

Milito testified that lawsuits create a climate of fear for America’s small businesses because they lack resources to defend litigation, and suffer incalculable psychological or financial costs defending them. Further, because there are financial incentives that encourage frivolous lawsuits, calculating attorneys know that they can often exact settlements from small businesses simply by holding the threat of a lawsuit over the business.

Finally, citing extensively to Seyfarth Shaw’s 2013 Workplace Class Action Litigation Report, Joanne Doroshow, President and Executive Director of the Center for Justice & Democracy at New York Law School, provided testimony supportive of class action litigation tools. She first testified that federal court budget reductions through sequestration, combined with chronically anemic state funding for courts, threaten access to justice for every American and put court petitioners, staff and judges in physical jeopardy. She further argued that numerous “incorrect” decisions from the U.S. Supreme Court have undermined consumer and plaintiffs access to justice, including the decision of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011), which – she argued – creates numerous problems for consumers, including inherent bias on the part of arbitrators who want repeat business from companies, and issuance of secretive decisions by arbitrators who are not required to have any legal training, nor required to follow the law. 

We will all have to wait to see whether the Sub-Committee holds additional hearings, and whether this testimony impacts consideration of potential future legislation impacting employers.