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Classy Action on Class Actions

by John F. Tamburo, Editor in Chief, Publisher
Originally Posted: 2/17/2005 2:36:40 PM

Our President has today won a significant legal victory. Congress has, ahead of schedule, passed class action lawsuit reform.  The reforms start by eliminating most forum shopping for lucrative cases, by sending larger cases to Federal court.  There are also judicial review procedures to ensure that the lawyers that bring the class actions don’t make out like bandits while the consumers get table scraps, in those cases where there is a settlement.

"This legislation is so good for America that it’s hard to imagine any downside."

This legislation is so good for America that it’s hard to imagine any downside.  Right now, an attorney can gather a pile of plaintiffs from across the country, and make sure that at least one resides in Madison County, Illinois.  Then he can file in Madison County, known for plaintiff-friendly judges and outlandish jury awards.  Attorneys then push a settlement, designed more to render the attorneys a large cash payday, even if the actual aggreived parties receive little to nothing.  In the Federal court system, one finds judges that are generally more grounded in reality, and definitely more evenhanded.  This means that the federal judges are much more likely to ensure that the plaintiffs are more likely to get larger relief.

This has additional benefits.  Federal district judges, and even magistrate judges, all create binding authority, whereas most state courts do not make binding authority until one gets to the appellate level.  In Illinois, for example, the circuit judges’ decisions are not even reported (published for the purposes of citing to them as authority).  This means that the law will develop more evenly, and the number of cases testing the same legal premise repeatedly will drop.

If the reform works as well as expected, this reform may also have the effect of reversing the disturbing trend toward mandatory arbitration agreements that bar class actions.  Except for California, these agreements are generally valid, and prohibit the use of the class action, or even the courts themselves, to vindicate a wronged party.  Instead, the consumer is required to bring an action before an organization like JAMS or the American Arbitration Association.  The trouble is that these organizations generally conduct secret proceedings, and there are substantial filing fees for every pleading, limited fact discovery (finding evidence held by the other party) and no appeal even if the arbitrator’s decision gets the law totally wrong.

Companies started making agreements with bans on class actions and mandatory arbitration in order to contain some of the most egregious lawsuits brought by class action.  However, arbitration does not create any precedent, and leaves the law upon which courts must rely poorly developed.  California has the Ting v. AT&T case, where such arbitration agreements are invalidated because they preclude any meaningful challenge to a company’s practices.  But that only applies to agreements that specify California law.  For example, if you subscribe to Direcway Satellite, you cannot bring a class action and you must bring arbitration before the American Arbitration Association in Virginia.  It’s in your license agreement.  Substantially identical license agreements have been upheld by many courts.  Read the agreements for eBay, Paypal, and most other online services.

However, when our President signs this class action law, companies may be less likely to utilize the arbitration option and may go back to the courts, where the precedent of one case can preclude future cases, and in the long run save money for the company.  Personally, I would amend the Arbitration Act to invalidate all contracted bars to the class action, and also to permit all class actions exprtessly to be brought in the Federal courts, even if there is an arbitration agreement.

Kudos to our Congress and our President.