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Recent Changes to Federal Class Action Rules Will Likely Impact Class Actions in the Carolinas

    Client Alerts
  • June 04, 2004

Who Wants to be a Millionaire?

Who really "wins" in class action lawsuits? Many believe the only people who truly benefit from class action lawsuits are the attorneys who bring them. One does not have to look very far for examples to support this statement. In Texas, a lawsuit against Blockbuster Video over late fees ended with class members getting coupons for two free rentals; their lawyers received approximately $9 million. A lawsuit against Cheerios over food additives resulted in class members receiving free boxes of cereal; their lawyers received approximately $2 million. A lawsuit against Crayola over alleged asbestos in its crayons resulted in class members receiving 75 cent coupons towards the purchase of more crayons; their lawyers received $600,000 in fees. And the most striking example of all: In Alabama, a lawsuit against BancBoston Mortgage Corporation resulted in class members actually losing money because the court allowed the bank to deduct the $8.5 million in attorneys’ fees from the accounts of the 300,000 class members who joined the settlement.

Recent Changes to Federal Rule 23

As a result of the perceived abuses of the class action device, lawmakers have recently changed the federal rule that governs class actions. The amendments to Rule 23 are the product of a ten year study by the Advisory Committee on Civil Rules. The amendments to Rule 23 apply both to future class actions and to existing class actions insofar as is fair and practical. Some of the more significant changes to Rule 23 are summarized below.

Timing, Issuance and Modification of Class Certification Orders

Amended Rule 23 provides that the decision of whether to certify a class should be made "at any early practicable time," as opposed to "as soon as practicable after the commencement of an action," which was the timeline established in the earlier rule. While this change may not seem significant, it is important, particularly for defendants. Specifically, the drafters state in the notes that a delay in initial certification may be justified by a need to conduct discovery to identify the nature of the issues to be presented at trial. A delay would also allow motions by the party opposing the class certification so they can seek a dispositive ruling against the individual plaintiffs without certification. While the notes state that an evaluation of the probable outcome on the merits is still not properly part of the certification decision, it is now appropriate to conduct "controlled discovery into the ‘merits,’ limited to those aspects relevant to making the certification decision on an informed basis." The ability to conduct limited discovery and to have dispositive motions heard prior to certification are both effective mechanisms to assist defendants in quashing class action lawsuits that are meritless.

Another change to Rule 23 that could benefit defendants allows a class action order to be "altered or amended before final judgment." Previously it could only be altered or amended until "the decision on the merits." In other words, the certification order is now subject to revision even after a determination of liability and until final judgment. If damages remain undecided, the class certification order can still be modified.

Plain English

A few years ago, the Securities and Exchange Commission issued new rules requiring companies to use plain English in documents and certain other communications with the public. In a similar vein, amended Rule 23 requires that notices sent to class members be “in plain, easily understood language” and sets forth the six topics that must be covered in the notice.

A Second Chance to Opt Out

Class members have traditionally been allowed a single chance to opt out of a class. If a settlement was reached after a class member’s chance to opt out had passed, that absent class member generally was not allowed to opt out of that settlement. The drafters of the amended rules were concerned that "inertia and a lack of understanding may cause many class members to ignore the original exclusion opportunity." Accordingly, amended Rule 23 now allows judges to provide class members with a second opportunity to opt out. This change certainly creates a degree of uncertainty for both plaintiffs and defendants as they approach a settlement. Defendants in particular must assess the likely percentage of individuals who may choose to opt out of the settlement the second time around and possibly pursue their own individual suits when determining the value of the claim.

Dismissal and Settlements

The rule was amended to "strengthen the process of reviewing proposed class action settlements" since court review and approval are important to ensure adequate representation of absent class members. The standard for approving a proposed settlement is that it must be "fair, reasonable, and adequate."

Under the amended rule, any side agreements between the parties must be disclosed to the court. In the past, parties would enter into side agreements prior to settlement that would establish a maximum number of opt outs before defendants had the right to walk away from the settlement. The court must now be provided with copies of these side agreements.

Class Counsel and Attorney’s Fees

Many commentators felt that the most important issue to address with this amendment was excessive attorney’s fees. In response to these concerns, the drafters added two new sections to Rule 23. Rule 23(g) and (h) establish new procedures for the appointment of class counsel and provide that a separate motion seeking an award of attorney’s fees must be filed, on notice to the class. The court "must find the facts and state its conclusions of law" regarding any award. The notes that accompany the new Rule 23 also instruct the court to "assess [ ] the value conferred on class members." Finally, the notes indicate that careful consideration should be given "to the manner and operation of any applicable claims procedure." Plaintiffs’ lawyers have traditionally argued that they should recover fees based on the full amount of the settlement without regard to how many eligible class members actually submit a claim. The notes indicate that in some instances it may be appropriate to "defer some portion of the fee award until actual payouts to class members are known."

How will these Changes Affect Companies in the Carolinas?

Statistics show that class action filings increased by more than 1,000 percent in state courts over the past ten years. Americans are paying approximately $1,200 a year more for goods and services because of lawsuit abuse. And there is no end in sight. John Banzhaf III, a George Washington University law professor and self-proclaimed leader of the food litigation movement, recently served as an advisor on a class action lawsuit brought by two obese teenagers against McDonald’s claiming, among other things, that their food is addictive.

While the McDonald’s class action was eventually dismissed, Mr. Banzhaf has already begun planning additional lawsuits against fast food and drink companies. For instance, he has threatened the milk industry because of their "Got Milk" ads, which he alleges do not disclose the benefits of skim milk. Similarly, he has threatened to sue numerous ice cream chains for failing to disclose the amount of fat and calories in their product. Mr. Banzhaf is not alone. In June 2003, he organized the first ever public health conference to discuss how to sue food and drink companies using the tobacco lawsuits as a model. Over 120 people attended the conference.

Whether these lawsuits against the food and drink industry should or will ever succeed is debatable. What is not debatable is that these new targets illustrate that no company is safe from class action lawsuits. These changes to the rules governing class actions are important for all companies.

While North Carolina and South Carolina have their own rules that govern state filed class action lawsuits, the changes to federal Rule 23 will likely impact state class action lawsuits. There is very little case law in North Carolina or South Carolina that deals with class actions, and state courts often look for guidance from federal case law. Furthermore, a bill entitled the Class Action Fairness Act of 2003, which the Senate Judiciary Committee is to take up in April of 2004, would substantially expand federal jurisdiction over class action lawsuits. This means that many lawsuits that would have previously been filed in North Carolina or South Carolina state courts may now end up in federal court where amended federal Rule 23 would govern.