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President Signs Class Action Fairness Act of 2005 into Law

LCT Staff
Posted on March 17, 2005

WASHINGTON, D.C. – The U.S. House of Representatives recently joined the U.S. Senate in approving legislation that allows employers to remove many class action cases to federal court and that requires courts to carefully review class action settlements for fairness. President Bush signed the bill into law, which is called the “Class Action Fairness Act of 2005.”

Congress found that this Act is necessary because of a history of conduct by plaintiffs’ lawyers that has harmed class members. Such conduct includes unduly large attorneys’ fees while class members receive awards of little or no value, and unjustified rewards to certain plaintiffs at the expense of others. In addition, Congress noted that plaintiffs use “artful pleadings” to avoid litigating class actions in federal court. In state courts, as opposed to federal courts, less scrutiny is generally given to the merits of the case, and defendants are forced into settlements to avoid potentially devastating judgments from juries.

The Act requires federal courts to formally review any settlement agreement in order to protect against: unfair or unreasonable settlements; net loss by class members; discrimination amongst class members by geographic location; and disproportionately larger payments to class representatives. The legislation requires that a class action must be filed in federal court, rather than state court, whenever the matter involves parties from two or more states, where the suit seeks $5 million or more in damages and where less than two-thirds of the parties are citizens of the state in which the action was originally filed.

This Act is significant for employers who are facing or are threatened with large multi-state class action employment lawsuits. Employers faced with interstate class action employment lawsuits can now move to have their cases heard in federal court. This will limit the ability of plaintiffs’ lawyers to “forum shop” in an attempt to find more favorable judges and juries.

As a result of this Act, if an employer is faced with a lawsuit involving numerous plaintiffs, and more than one-third of the plaintiffs are from a state other than the employer, then the employer should consult with counsel to determine whether to plea for removal to federal court.

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