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Proposed Class Action Fairness Act Could Negatively Affect Institutions' Securities Class Action Recovery

Recently introduced legislation pending before the U.S. House of Representatives attempts to make wide-sweeping reforms to the procedural rules governing class actions and, if implemented, could permanently alter the class action landscape and render class actions a “shadow of what we know today,” according to Reuters.

Rep. Bob Goodlatte (R-VA), Chairman of the U.S. House of Representative’s Judiciary Committee, along with co-sponsors Reps. Pete Sessions (R-TX) and Glenn Grothman (R-WI), recently introduced the “Fairness in Class Action Litigation Act of 2017” in the Committee.  The bill circumvents the traditional rulemaking process under the Rules Enabling Act, judicial interpretation of Federal Rule of Civil Procedure 23, and the Advisory Committee on Civil Rules’ amendment process.

The bill’s stated purpose is to “diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system.” Should the bill pass the House and the Senate in its current form and be signed by President Trump, plaintiffs’ ability to bring and certify class actions as currently understood could be severely hampered.

If enacted, the bill would make two changes to existing class action law could impact the ability of institutional investors to recover in class actions alleging violations of the U.S. securities laws.

Conflict of Interest Provision:  Sec. 3, proposed § 1717

First, the bill seeks to prohibit class certification where any proposed class representative or named plaintiff is:

  1. A relative of class counsel;
  2. A present or former employee of class counsel;
  3. A present or former client of class counsel, other than with respect to the class action before the court; or
  4. Engaged in any contractual relationship with class counsel, other than with respect to the class action before the court.

If enacted, the bill would severely restrict the ability for pension funds and other institutional investor plaintiffs to engage a single experienced outside counsel for representation in securities class actions.  These institutional plaintiffs are now regularly involved in securities class action litigation as a result of the Private Securities Litigation Reform Act of 1995, and most have long-standing relationships with specific firms as a result.  The bar against class counsel representing repeat clients would prohibit these attorney-client relationships.

Stay of Discovery Provision:  Sec. 3, proposed § 1721:

The bill would require all discovery be stayed during the pendency of any motion to dismiss, transfer, or strike class allegations, absent a need to preserve evidence or prevent undue prejudice, thus removing a judge’s discretion to grant or deny a motion to stay.  This provision would likely encourage defendants to file motions in order to get the benefit of the automatic stay, thereby impacting overall costs of litigation.

While the Private Securities Litigation Reform Act of 1995 currently imposes a mandatory stay of discovery and other proceedings during the pendency of a motion to dismiss, the proposed bill would broaden automatic stays in cases subject to the Act to motions to transfer or strike class allegations.  If a motion to dismiss is denied, however, it does not appear that the stay will continue during class certification motion practice.

Other Changes

The bill also seeks to make the additional following changes:

  • The bill limits certification of a class seeking monetary relief to only classes where, after a court’s analysis, the class can demonstrate that “each proposed class member suffered the same type and scope of injury as the named class representative or representatives.”
  • The bill bars federal courts from certifying classes seeking monetary relief unless the “class is defined with reference to objective criteria and the party seeking to maintain such a class action affirmatively demonstrates that there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within class definition and (b) for distributing directly to a substantial majority of class members any monetary relief secured for the class.”
  • The bill would abolish issues classes, where courts could previously certify an issues class on liability and bifurcate damages to individual proceedings in which the defendant could examine each plaintiff.
  • The federal circuit courts must permit an immediate interlocutory appeal from any class certification order. This removes the Courts of Appeals’ current discretion to decline decisions on class certification motions under Rule 23(f).
  • In cases of monetary recovery for class plaintiffs, all attorneys’ fees must be limited to a “reasonable percentage of any payments distributed to or received by class members,” and class counsel cannot recover fees in excess of the total amount of money “directly distributed to and receive by all class members.”
  • In cases of equitable relief, class counsel’s attorneys’ fees awards are limited to “a reasonable percentage of the value of the equitable relief, including any injunctive relief.”
  • Class counsel is required to disclose the identity of anyone other than a class member or class counsel who has a right to recover compensation from an award.  Thus, class counsel would have to disclose the identity of any third-parties who are funding the litigation.
  • The bill also applies to any civil action “pending” on the date of enactment of the Act. This provision could provide grounds in current pending cases for defendants to seek decertification of previously certified classes, and could potentially affect a trial court’s ability to approve pending settlements that propose attorneys’ fees awards that are inconsistent with the provisions of the Act.

The bill has come under heavy criticism from a number of different affected parties, including the American Bar Association, a group of law firms and legal advocates, civil rights organizations, disability rights organizations, and various legal scholars.  The bill has found substantial support from, among others, the U.S. Chamber of Commerce.

After a hearing on February 15th, the bill passed out of the House Judiciary Committee by a 19-12 vote, and now proceeds to the vote of the full House.  Even assuming the bill passes the Republican-controlled House, it would have to secure sixty votes in the Senate to overcome likely Democratic opposition and a likely filibuster.

The last time Congress attempted to enact large-scale legislation intended to address class action issues was the Class Action Fairness Act of 2005; the revisions enacted by CAFA may be considered modest when compared to  this Act.  CAFA, the first version of which was introduced in 1998, was defeated by filibuster several times between 1998 and 2004, and was only able to secure a filibuster-proof majority after the drafters made revisions necessary to address the objections of the Senate opposition.  Then, as now, Republicans controlled Congress and the White House, but lacked a filibuster-proof majority.  If past is prologue, CAFA’s tortured legislative history suggests that substantial compromise and negotiation will be necessary before any version of this Act will be enacted.

We will continue to monitor the movement of this bill, and will keep you apprised of any developments.

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Patrick is an associate in the litigation practice where he focuses on securities and shareholder litigation, as well as investigations and securities enforcements. He represents clients from early-stage start-ups to publicly-traded companies in numerous industries, including life sciences and biotechnology companies, financial services, consumer products and retail, and clean technology.

Joel D. Rothman

Special Counsel

Joel D. Rothman is an attorney who handles commercial, securities, insurance, and employment litigation matters for Mintz clients. Joel advises institutional investors on securities class actions, represents shareholders in merger disputes, and counsels insurers in coverage disputes.