State-court class-action abuse: myth or reality?

by Brian Wolfman

The Class Action Fairness Act of 2005 (CAFA) was sold to Congress in large part on the argument that state courts were abusing the class action--for instance, by certifying class actions that should not have been certified--and harming the interests of law abiding corporations that do business nationally. CAFA sought to remedy this alleged problem by bringing most class actions that involve parties from more than one state into federal court.

The Supreme Court issued its first CAFA decision recently in Standard Fire Insurance v. Knowles, which held that a named plaintiff's stipulation that the plaintiff class is seeking less than CAFA's minumum jurisdictional amount ($5 million) does not preclude a federal district court from assuming jurisdiction under the Act. (For more on Knowles go here.) The briefing of the defendant and its amici in Knowles sought to take advantage of CAFA as anti-state-court-abuse legislation. For instance, one of the early headings in the defendant's Supreme Court opening merits brief reads: "CAFA Expanded Federal Diversity Jurisdiction To Address Precisely The Class Action Abuses Exemplified By This Case."

But was the claim of CAFA's prononents of state-court class-action abuse accurate generally? That's the topic of a new law review article by Patricia Moore entitled "Confronting the Myth of 'State Court Class Action Abuses' Through an Understanding of Heuristics and a Plea for More Statistics." Here is the abstract:

The Supreme Court heard five cases involving class actions this term. One of these cases, Standard Fire Insurance Company v. Knowles, brought the Class Action Fairness Act to the Court for the first time. Petitioner insurance company and its numerous business-interest amici repeatedly claimed before the Court that "state court class action abuses" should justify removal of the case (which was based on state law and filed in state court) to federal court.

The charge of "state court class action abuses" echoes the same rhetoric that CAFA's supporters used in their ultimately successful efforts to pass the legislation. Hyperbolic assertions of a "flood of state court class actions" in which plaintiffs' lawyers were "abusing" the limits of diversity jurisdiction to keep cases in state court, and state courts were "abusing" the class action device by granting "drive-by" class certifications, fill the pages of CAFA's legislative history.

Unfortunately for the quality of the debate, then and now, no current data and very little past data about class actions are readily and publicly available, for federal or state courts. In other words, courts in the United States offer no data on such basic questions as the number of cases filed as class actions, the percentage of cases designated as class actions that are eventually certified as such, or the ultimate disposition of such cases.

To be sure, the herculean efforts of the Federal Judicial Center, the California Office of Court Research, and private academic researchers have resulted in the compilation of databases that provided partial answers to some of these questions. But these limited efforts are well beyond the resources and skill available to the public, the press, and even to most policy-makers and the Court.

What does the lack of baseline data on class actions mean? A wealth of psychological research has shown that human cognition and judgment are subject to a variety of heuristics and biases. For example, the mantra of "state court class action abuses" has a "priming effect" making it easier to see or imagine such "abuses." Further, the mind automatically attempts to create a coherent story out of the information it has, even if that information is incomplete or invalid. This manifests itself in many ways, including the "anchoring effect," the "availability heuristic," and the "representativeness heuristic," which are exploited by those spreading the myth of "state court class action abuses." Even if a person knew the base rate of class action filings or dispositions, for example, the "representativeness heuristic" would make it difficult to avoid making judgments about class actions based on negative stereotypical anecdotes. Without such base rates available at all, it will be almost impossible. One can only hope that the Court will resist the lure of class action mythology as it considers the five class action cases pending this term.

Comments

[Ted]

When the Arkansas state court judge seals the data of ratio of class action settlement attorney fees to class recovery precisely so that the victimized defendants and class members can't expose the abuses, defenders of the state court regime are in no position to call abuse a myth because of the lack of available data.