The U.S. House of Representatives concluded the week by passing three significant civil justice reforms. If passed by the Senate, these bills will bring needed changes to class action and mass tort litigation, prevent tactics employed by plaintiffs’ lawyers to avoid neutral federal courts, and provide a viable remedy to defendants that face frivolous claims. The likelihood of these bills becoming law is significantly higher than at any time in the past decade.

The Fairness in Class Action Litigation Act: Addressing Abuses in Class Action, Mass Tort, and Asbestos Litigation

The Fairness in Class Action Litigation Act (FICALA), H.R. 985, will have a broad impact not only on class action litigation, but also mass tort litigation. If enacted, the legislation’s impact will be particularly felt in litigation targeting consumer products, pharmaceuticals and medical devices, as well as asbestos claims filed in or removed to federal court.

The 2017 version of FICALA is significantly broader than legislation with the same name considered in the 114th Congress. The prior version of the bill solely addressed no-injury class action litigation through prohibiting certification when a class representative alleges an injury but the class definition includes many members who did not experience a loss. The bill that the House passed this week includes a wider range of class action litigation reforms and also responds to abuses in mass tort litigation.

FICALA makes needed changes to class action litigation by:

  • Stopping no-injury litigation. FICALA requires a party seeking class certification to show that each proposed class member suffered the same type and scope of injury as the named class representative or representatives. It also adopts an ascertainability requirement, precluding certification of class actions where there is no reliable and feasible way of identifying and distributing money to class members. The legislation would curb lawyer-driven litigation by requiring class counsel to disclose, and prohibiting certification, when a proposed class representative is a relative or present or former employee of the class counsel.
  • Ensuring that class actions primarily benefit class members, not lawyers. FICALA limits attorney fee awards to a reasonable percentage of any payments directly distributed and received by class members. It would prohibit fee awards that exceed the amount of money received by class members. The legislation also requires class counsel to submit to the Administrative Office of U.S. Courts (AO) an accounting of how settlement money is distributed, allowing the AO to provide an annual report showing whether class actions are actually benefitting class members.
  • Reducing pressure on defendants to settle meritless cases. FICALA stays discovery in class actions until after the court rules on a motion to dismiss. The bill also provides both plaintiffs and defendants with the right to immediately appeal a class certification order.
  • Requiring disclosure of third-party litigation funding. Requires class counsel to disclose the identity of any person or entity that has a right to receive compensation from any settlement, judgment or other relief.

The bill addresses abuses in mass tort litigation by:

  • Preventing plaintiffs’ lawyers from circumventing federal jurisdiction by filing multi-plaintiff cases. FICALA resolves a circuit split by extending the doctrine of fraudulent misjoinder to all federal courts. The legislation requires federal courts in multi-plaintiff personal injury or wrongful death actions to sever and remand claims of nondiverse plaintiffs, while retaining jurisdiction over the remaining claims.
  • Requiring plaintiffs to verify claims in an MDL. Under FICALA, plaintiffs’ counsel in any personal injury claim transferred for coordinated or consolidated pretrial proceedings must file, within 45 days of transfer, evidence supporting the alleged injury, the exposure to the risk that allegedly caused the injury, and the alleged cause of the injury. Failure to submit evidentiary support requires dismissal without prejudice and, if not addressed within 30 days, dismissal with prejudice.
  • Prohibiting bellwether trials in the MDL court. The bill reaffirms existing law that limits the MDL court to deciding pretrial matters and requires actions to be transferred back to the court in which the case was originally filed or removed for trial unless all parties consent to a waiver of venue and personal jurisdiction.

In addition, the Judiciary Committee merged FICALA with the Furthering Asbestos Claim Transparency (FACT) Act, which was introduced separately as H.R. 906. The FACT Act would increase transparency between asbestos litigation and the claims filed with trusts established by a bankrupt company to pay asbestos-related claims. The bill requires plaintiffs with asbestos claims in federal court to disclose to defendants any claim they have filed, or plan to file, seeking compensation from an asbestos trust. It addresses mounting evidence that plaintiffs’ lawyers routinely allege in the tort system that solvent companies caused their injuries, and then, after receiving a settlement, file claims seeking compensation through the trust system, alleging that insolvent companies are responsible for their exposure to asbestos.

The House of Representatives passed FICALA, 220-201, largely along party lines. Aside from a Manager’s Amendment that made technical tweaks and clarifications to the bill, there were no amendments approved.

The Innocent Party Protection Act: Adopting a Uniform “Plausibility” Standard for Fraudulent Joinder

While FICALA addresses situations in which plaintiffs’ lawyers name additional plaintiffs to destroy complete diversity (fraudulent misjoinder), the Innocent Party Protection Act (IPPA), H.R. 725, responds to similar gamesmanship in which plaintiffs’ lawyers attempt to prevent an out-of-state corporate defendant from removing a case to federal court by naming a local individual or business as an additional defendant (fraudulent joinder). Plaintiffs’ lawyers, for example, often name small businesses, such as retailers and distributors, or an individual employee of the company, to keep their claim in a local jurisdiction where the trial bar has a significant home field advantage against out-of-state businesses.

Federal courts have long recognized the fraudulent joinder doctrine, which allows them to disregard the citizenship of a non-diverse defendant, dismiss the claim against that defendant without prejudice, and retain jurisdiction over the action. The courts are divided, however, in the standard they apply to determine whether a plaintiff included a local defendant to oust a federal court of jurisdiction. Some courts have set the bar for finding fraudulent joinder so high that they remand cases to state court so long as the plaintiff has a “glimmer of hope” of recovering against the local business or individual added to the lawsuit. Other courts find joinder is fraudulent when the plaintiff has not stated a “plausible claim” against the non-diverse defendant. See, e.g., Int’l Energy Ventures Mgmt., L.L.C. v. United Energy Group, Ltd., 818 F.3d 193 (5th Cir. 2016).

IPPA would set a unified standard for all federal courts to follow that is grounded in existing law. Federal courts would evaluate whether the plaintiff has stated a plausible claim for relief against the non-diverse defendant, the standard routinely applied by federal courts when deciding motions to dismiss. The bill clarifies that courts may consider whether the plaintiff has a good faith intention of seeking a judgment against a non-diverse defendant. It also codifies case law that allows federal courts to consider information beyond the four corners of the complaint when evaluating whether the plaintiff has fraudulently joined a defendant.

IPPA was first introduced and passed the House of Representatives as the Fraudulent Joinder Prevention Act in 2016. Aside from the name, the bill passed this week by a 224-194 margin. It is identical to the version that the House passed in February 2016.

Lawsuit Abuse Reduction Act

The Lawsuit Abuse Reduction Act (LARA), H.R. 720, provides defendants facing frivolous lawsuits with a viable remedy. The one-page bill reverses changes to Federal Rule of Civil Procedure 11 adopted in 1993 that, in the words of Justice Antonin Scalia, rendered the rule “toothless,” allowing unscrupulous litigants to “file thoughtless, reckless, and harassing pleadings, secure in the knowledge that they have nothing to lose. . . .” As he predicted, today Rule 11 largely goes unenforced, as defendants would be ill-advised to spend time and money pursuing sanctions without a reasonable likelihood of receiving compensation for the harm they suffered.

Rule 11 provides for sanctions against those who file claims for an improper purpose, to harass or cause unnecessary delay or needless increase in the cost of litigation, or include claims that are not warranted by existing law or lack a factual or evidentiary basis. LARA does not change the existing standard under which a court evaluates whether a claim or defense is frivolous. Rather, the bill (i) eliminates a 21-day safe harbor that requires a defendant to draft a motion for sanctions, but does not allow the defendant to file the motion until it is shared with the plaintiffs’ lawyer, who can withdraw the frivolous lawsuit without penalty; (ii) if the court finds a complaint or defense is frivolous, the bill provides that sanctions are mandatory, rather than discretionary; and (iii) allows a court to award sanctions for the purpose of reimbursing an injured party for litigation costs incurred to defend against the frivolous claim, rather than limiting monetary awards to an amount that will deter abuse.

The House passed LARA by a vote of 230-188. This is the fifth time the House of Representatives has passed LARA since it was first introduced in 2004.

The Path Forward

These three civil justice reform bills will now move to the Senate Judiciary Committee. Chairman Chuck Grassley (R-Iowa) is strongly committed to civil justice issues and successfully shepherded the Class Action Fairness Act of 2005 (CAFA). Each of these bills has broad support in the business community.

The potential for these bills to advance in the Senate has significantly improved over past years for three reasons:

  1. President Barack Obama issued Statements of Administration Policy (SOP) threatening to veto each of these civil justice reform bills. The Trump Administration is not expected to issue an SOP. Given President Donald Trump’s emphasis on encouraging business in the United States, it appears likely that he would sign these bills into law.
  2. The Senate leadership has changed. Sen. Chuck Schumer (D-NY) has replaced Sen. Harry Reid as Minority Leader. Sen. Reid, a former trial lawyer, was a staunch opponent of any civil justice reform opposed by the plaintiffs’ bar. By way of contrast, Sen. Schumer has demonstrated openness to such proposals. For example, he was among those who supported CAFA. In addition, Sen. Dianne Feinstein (D-Calif.) has replaced Sen. Patrick Leahy (D-Vt.) as Ranking Member of the Senate Judiciary Committee. Like Sen. Reid, Sen. Leahy was a fierce opponent of civil justice reforms opposed by the plaintiffs’ bar. Sen. Feinstein, however, has expressed concern with abusive lawsuits and coercive demand letters in her home state.[1] Like Sen. Schumer, she voted for CAFA.
  3. The House Judiciary Committee favorably reported and the House passed these bills remarkably early in the 115th Congress. The House’s quick action leaves more time than in the past for the Senate to consider these bills.