The Class Action Fairness Act Turns One
First Year Is Marked By Battles To Apply and Avoid The Act

To those who recall the debate about whether the Class Action Fairness Act should become law in the first place, the first year of CAFA should look familiar. Class action plaintiffs have spent much of the last year trying to avoid being subject to the new Act, while defendants have sought to apply it to their respective cases whenever possible. With year one in the bank, the district courts and several circuit courts have provided some degree of clarity to this struggle. It is clear, however, that the real battles over CAFA are about to take place during the coming year.

Background

The Class Action Fairness Act of 2005 represents the most dramatic change to class action practice in decades. It was enacted to remedy perceived abuses in class action litigation, including "forum shopping" by plaintiffs' attorneys and unfair settlements--settlements which consisted of large attorney fee awards but "coupons" or other awards of little value for class members. Another concern was that defendants were being dragged into multiple local courts across the country, where they sometimes faced a strong bias against them.

The solution for Congress? Expanded federal jurisdiction over class action lawsuits. CAFA changed the rules of diversity jurisdiction. Where before there needed to be complete diversity of citizenship between plaintiffs and defendants to invoke federal jurisdiction, CAFA requires only "partial" diversity. Where any member of a class of plaintiffs is a citizen of a State which is different from any defendant, CAFA applies. Importantly, CAFA does not apply to smaller class actions--the amount in controversy must exceed $5 million.

CAFA inhibits a Plaintiff's ability to select his or her forum, and it places limitations on coupon settlements and attorneys' fees. As one might expect, the Plaintiffs' bar is generally opposed to CAFA, and it has sought to avoid CAFA's restrictions whenever possible. Defendants, on the other hand, have generally embraced CAFA and have welcomed the opportunity to remove state class actions to federal court whenever possible. This tension has resulted in an avalanche of reported decisions during the Act's rookie year concerning which actions are and are not subject to CAFA.

When Is An Action "Commenced?"

By its terms, CAFA applies to civil actions commenced on or after February 18, 2005. Congress, however, did not define the term "commenced" in the Act. The issue of when an action is "commenced" has been the subject of numerous decisions, both at the district court and the circuit court levels.

In an action arising in Arkansas, the Plaintiff filed an individual action in state court before the effective date of CAFA. Five months after CAFA was enacted, the plaintiff filed an amendment to the complaint, alleging for the first time that the case was being brought as a class action. The defendant removed the action to federal court pursuant to CAFA, and the plaintiff subsequently moved to remand the action to state court. The plaintiff argued that CAFA did not apply, because her action was "commenced" when she filed her original complaint. The defendant, noting that the case was not even removable under the Act until the class action amendment was filed, argued that the action commenced at the time of the amendment.

The district court noted that Arkansas state law provides that an action is commenced by the filing of a complaint. The court also observed that by definition, a civil action must have already been commenced before a pleading can be amended. Finding no ambiguity in the language of CAFA, the district court concluded that the action was commenced before the effective date of the Act, and that therefore, CAFA did not apply.¹

What about the situation where the plaintiff's complaint was filed before February 18, 2005, but the summons was not filed until two weeks later? Was that action "commenced" before the effective date of CAFA?

Such was the case presented to a district court in Alabama. Under a unique provision of Alabama state law, the filing of a complaint commences an action "only if it is filed with the bona fide intention of having it immediately served." The district court in this case concluded that by intentionally not filing the summons along with the complaint, the plaintiff objectively failed to show a bona fide intent to proceed with the action. The court concluded that the action was not "commenced" until the summons was filed on February 28, 2005 (after CAFA's enactment) and therefore, CAFA applied.²

Despite the variety of decisions throughout the country, one relatively clear rule has emerged. The determination of when an action was "commenced" for purposes of CAFA is established by state law. In most states (such as California) that means that the action was commenced when the initial complaint was filed. In some states (notably New York and Connecticut) that means that the action was commenced upon service of the summons.

The CAFA "Typo"

Historically, federal law has not allowed for appeals from remand orders, except in very limited circumstances. CAFA contains one of those rare exceptions. CAFA gives courts of appeal the discretionary jurisdiction to consider appeals of remand orders in certain class actions. Under CAFA, a party may appeal an order granting or denying a motion to remand a class action to the State court, if the appeal is taken "not less than 7 days after entry of the order."

The Ninth and Tenth Circuit Courts of Appeal have both concluded that Congress really meant to say "more" not "less" when the law was written. These Circuit Courts have observed that read literally, the "not less than" wording would give aggrieved parties an unlimited time to seek appellate review. The Courts also reviewed the legislative history of CAFA, and found a clear intent to impose time limits on such appeals. The Tenth Circuit called it a "typographical error," and the Ninth Circuit stated that there was no logical reason for the choice of the word "less" in the statute.³

Consequently, "less" is truly "more," at least in these two circuits. Until the dust settles, it is probably safest to do what one savvy defendant did, which was to file the notice on the seventh day following the remand order.⁴

Year Two: What's Up Next?

As time creeps further away from the effective date of CAFA, disputes over whether an action was "commenced" before or after the effective date of the Act will be less frequent. As CAFA cases mature, the parties and the Courts will turn their attention to other more "substantive" provisions. Certainly, there are jurisdictional issues which remain unsettled. Under CAFA, a federal district court has the discretion to decline the exercise of jurisdiction where more than one-third (but less that two-thirds) of the members of the class and the "primary defendants" are from the state where the action was originally filed. Similarly, where more than two-thirds of the class members are citizens of the state and a number of other conditions are met, then the case must remain in state court. Issues related to the mechanics of applying these rules are likely to be addressed by a number of Circuit Courts during the next few years.

CAFA also requires that defendants provide certain notifications regarding settlements to the "appropriate" State and Federal officials within 10 days. Questions about whether there was compliance with these notification requirements are also certain to draw the attention of the courts. Last but not least, CAFA also requires judicial scrutiny of "coupon settlements" and attorney fee awards sought in connection with such settlements. Those issues are also likely to occupy the courts for a number of years.

In short, although CAFA has already generated scores of reported decisions in its first year, the "real action" is about to begin. 2006 will undoubtedly be a watershed year for the interpretation of some of the more substantive provisions of CAFA.