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CAFA (CLASS ACTION FAIRNESS ACT OF 2005)

Class action litigation is rampant in the United States, and defending against a class action lawsuit is both expensive and time-consuming. In enacting CAFA (Class Action Fairness Act of 2005), Congress acknowledged that class actions are an important and valuable part of the legal system “when they permit the fair and efficient resolution of legitimate claims of numerous parties by allowing the claims to be aggregated into a single action against a defendant that has allegedly caused harm.” However, Congress also recognized that the abusive use of class actions has harmed the public, harmed businesses, and undermined public respect for the judicial system.

In particular, Congress was concerned that many class actions benefited plaintiffs’ counsel more than the public. “Class members often receive little or no benefit from class actions, and are sometimes harmed,” whereas “[plaintiffs’] counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.” Moreover, certain plaintiffs receive unjustifiable awards at the expense of other class members.

Congress was also concerned that by manipulation of diversity jurisdiction plaintiffs’ counsel had managed to keep cases of “national importance” in state court, and that state courts would “sometimes act[] in ways that demonstrate bias against out-of-State defendants” and enter judgments that would “impose their view of the law on other States and bind the rights of the residents of those States.”

Congress therefore enacted the Class Action Fairness Act (“CAFA”) for several purposes. When a proposed class action settlement awards coupons to class members, then CAFA requires that the federal district court expressly find that the settlement is fair, reasonable and adequate. The federal court also cannot approve such a settlement if attorney fees awarded to class counsel result in a net monetary loss to the class unless the court expressly finds that the monetary loss is substantially outweighed by nonmonetary benefits to the class. CAFA also specifies the calculation of contingent and other attorney fee awards when the proposed class action settlement involves providing coupons to class members. Finally, CAFA prohibits class settlements that give greater benefits to some class members because they are geographically nearer to the court. To ensure the fairness of proposed class settlements, CAFA requires that notice of proposed settlements be served on the appropriate State and Federal officials, and forbids the court from approving such settlements less than 90 das after service of such notice.

CAFA also provides class action defendants with greater access to federal courts. For example, CAFA gives federal district courts original jurisdiction of any lawsuit between citizens of different States, or citizens of a State and a foreign State or its citizens or subjects where the amount in controversy is greater than $5 million, exclusive of interest and costs. Additionally, federal courts must exercise jurisdiction over any class action where more than two-thirds of the members of the proposed class (as well as the primary defendants) are citizens of a sister State.

Congress also provided that federal courts may, in their discretion, exercise jurisdiction over class actions where more than one-third but less than two-thirds of the proposed class members (as well as the primary defendants) are citizens of a sister State. In deciding whether to exercise such jurisdiction, the federal court is to consider several factors, including (1) whether the lawsuit involves issues of national interest, (2) whether the laws of a sister State will control, (3) whether class counsel pleaded the action in order to avoid federal court jurisdiction, (4) whether the State in which the lawsuit was filed has a nexus with the class members, the class harm and/or the class defendants, (5)whether the relative number of class members in the forum State is substantially larger than the number of class members in any other State, and (6) whether other class actions advancing the same or substantially similar claims have been filed on behalf of the same persons during the prior three years.

A lesser-known provision of CAFA, but one with extraordinary implications, provides for appellate review of federal court orders granting motions to remand class action lawsuits to state court. 28 U.S.C. § 1453. (By contrast, the general rule is that remand orders are not appealable.)