Defective Process Cripples Flawed Class Action Proposal

On March 9, 2017, the House of Representatives passed, without committee hearings, an act radically to change Rule 23 in the Federal Rules of Civil Procedure, which governs the procedure for bringing of class actions. (HR985) Bypassing the Supreme Court, the Rules Enactment Act and probably the Constitution, the new Congress placed in the forefront of its work for this Session a Bill of such thoughtlessness as it would be a fault in the extreme, and a slander, to label it “conservative.”  The Bill is currently in the Senate Judiciary Committee.

We provide these thoughts about the Bill’s problematic constitutionality, its deeply flawed proposals, and the true impact on policy and people of what is proposed.  The Bill would directly impact substantive rights authorized by other legislation – employment, civil rights, antitrust, securities, consumer rights.  In fact, that seems to be its intended purpose.  There are serious institutional, even constitutional issues, involved in the passage of the Act by the House, as well as within the terms of the proposed legislation, which require some attention.

The Congress seeks to impose on the Federal Courts a new class action procedural rule.  It does not have, or seek any, approval from the Supreme Court. It wholly ignores the process required by the Rules Enactment Act.  Both of these failures may be fatal to the Bill’s enforcement.

The process for changing the Federal Rules enabling in other legislation requires careful, deliberate, and balanced deliberation, by the courts through the Judicial Conference, as experience with the Federal Rules teaches the Bench, Bar and Academy.  All procedural change must be approved by the Supreme Court.  Under the Rules Enabling Act, Congress can disapprove proposed rules. It never has.  The Bill makes wholesale changes through explicit amendments to Rule 23.  The effect (and obvious purpose) would be to seriously wound or end class actions.

The non-conforming pathway taken by the Congressional leadership to avoid these learned constituencies of experience risks Constitutional overturn.

This new Bill, by its terms seeks directly to amend Rule 23, leaving nothing within it unmodified.

*       A “conflicts of interest” provision between class counsel and named plaintiffs, providing the clients may not select lawyers; instead a law firm may not represent current (or past) clients.

*       Requiring that no person may retain its same counsel for a class action.

*       Staying discovery pending much motion practice.

*       The provisions require strict “typicality” requirements.

*       A requirement for “administratively” feasible way to identify particular class members.

*       Requiring the Courts of Appeal to accept appeals of class action rulings.

*       The distribution of fees to class counsel.

*       Limiting fees.

*       Changes in a procedure for multi-district litigation.

The Bill was passed along with two other similarly intended bills:  dealing with “fraudulent” joinder of parties; and reporting of payment to plaintiffs in asbestos cases.

In passing the bill, the House of Representatives seems to have assumed, without examination, its authority to change Rule 23 without approval by the Supreme Court under the current governing statute, The Rules Enabling Act, or the Constitution of the United States.

The Federal Rules of Civil Procedure were promulgated in 1937 in response to dissatisfaction with the then practice of the District Court utilizing the procedural rules of each particular state where the District Court sat.  Congress was given a role, however small, in the adoption of the Federal Rules of Civil Procedure.  The Rules Enabling Act in 1934, delegated all authority to initiate any rules or rules change to the United States Supreme Court for the development and ongoing supervision of the Federal Rules of Civil Procedures, subject only to the ability of Congress to disagree during a limited period of seven months.  To the best of my research, Congress has never disagreed with any proposal by the Supreme Court concerning the Federal Rules of Civil Procedure.

The Judicial power of the United States is vested in the Article III courts.  Those courts have authority to determine whether their own practices satisfies due process with the ultimate decision on those issues made by the United States Supreme Court.  There is no other body within the Constitution, or by practice, that has any authority over the Courts with respect to its own rulings, or procedures.

Article III, Section 1 vests the judicial power of the United States court system, and specifically the United States Supreme Court with that Court’s authority outlined in Section 2.  Nowhere is Congress given authority, other than to authorize courts inferior to the Supreme Court, a power described within Article III.

In searching for any basis for Congressional authorization to have a hand in internal court procedure, one can only look to Article I’s “necessary and proper” clause.  It is with the “necessary and proper” clause that the early cases held that federal and not state processes for collection of judgments rested.  Wayman v. Southard, 23 U.S. 1 (1825), Bank of United States v. Halstead, 23 U.S. 51 (1825), Beers v. Haughton, 34 U.S. 329 (1835). Accordingly, Congressional authority over the Federal Rules of Procedure would rest on this thinnest of rationale.

In 1965, the Supreme Court held that the Federal Procedure Rules governed all district court proceedings including diversity cases.  Hanna v. Plumer, 380 U.S. 460 (1965).  The Court held that state procedures would be improper to override the federal court’s power over their own procedure, emphasizing that such power is plainly paramount. Burlington N.R.R. Co. v. Woods, 480 U.S. 1 (1987).  Further, because of Supreme Court approval, the rules of practice and procedure promulgated are presumed to be constitutionally valid. Sibbach v. Wilson & Co., 312 U.S. 1 (1941).

The Rules Enabling Act provided to Congress limited authority to only accept or reject rules governing the practice before the federal courts that otherwise arise from the courts themselves, not propose and enact its rules for that separate branch of the federal government.  It has been both the law and the practice for 80 years or a third of the constitutional life of this Country, to follow that statute and respect the delegation of whatever authority Congress has.  The Act also contains a “super-session clause” stating that “all laws in conflict with shall have no further force and effect.”[1]

The specific procedure required by the Rule Enabling Act is as follows:  The Judicial Conference of the United States is coordinated by the Judicial Conference Committee, commonly referred to as the Standing Committee.  The Standing Committee has five (5) advisory committees dealing respectively with the Appellate, Bankruptcy, Civil, Criminal, and Evidence Rules.  The judicial conference consists of the Chief Justice of the Supreme Court, the chief judge of each circuit, the chief judge of the Court of International Trade and one district judge from each judicial circuit.  In theory, the Chief Justice appoints the sub-committees who report to the Judicial Conference.  The Committees consists of members of the Judiciary, the Bar and the Academy.  The proposals are public, transparent and debated.  The Committees as well as the Standing Committee receive comments on any proposal.  Before going into effect, the proposed rule change is sent by the Chief Justice arranges for the Rule to be transmitted to Congress which has seven months to disagree.

More significantly, as far as I can tell, Congress has never interfered with that process by amending the Federal Rules of Civil Procedure.  Indeed, the Constitutional authority of those rules rests on the authority of the Supreme Court of the United States – and not Congress – see Burlington N.R.R. Co., 480 U.S. 1 (1987) and its progeny.

As the current effort by the House of Representatives eludes the Constitutional problems, as well as the Rules Enabling Act, I suggest there will be several lines of expected challenge on the validity of the Bill, if passed. One must ask whether the entire edifice of the new law will ultimately collapse upon Congressional authority problems.

In opposing the Bill, the American Bar Association wrote on March 6, 2017, “This legislation would circumvent the time-proven process of Amending the Federal Rules of Civil Procedure established by Congress in the Rules Enabling Act . . . the Rules Enabling Act, which reflects a healthy respect for the separation of powers doctrine and the role of the federal courts in determining their own rules.

“Courts have inherent authority to control the proceedings in their courtrooms, including the power to regulate attorneys.  Federal statutory changes in these areas would have substantial adverse effects on the fairness, efficiency, and timeliness of relief under class action processes, ultimately usurping the traditional regulatory authority of the courts.”

It is no accident that the modern class action practice began in 1965 with the establishment of the modern Rule 23, which with minor amendments, has been used by those seeking access to the Courts for more than 50 years as a wholesale replacement of the previous class action 1938 regime in federal courts. That 1965 Rule 23 was first and foremost intended to strengthen and give further law enforcement abilities of the civil rights movement and legislation of those years.  Rule 23 was intended in the first instance to provide an avenue of African Americans in particular, to enforce those new federal laws in an aggregate manner through the federal courts.  The current proposal would cripple these rights.  In addition, because of later developments, it would also cripple the enforcement of the Federal Antitrust laws, the Securities Laws, Consumer Law and others, by affecting their economic practicality. Without class actions, the economic reality of litigation would eliminate many substantive rights.

The U.S. House of Representatives proposed legislation would constrict class actions to choke them off. The legislation, in sum, proposes a new Rule 23 which renders class actions often impractical. It would extend the period of resolution of those lawsuits beyond five years to nearly a decade. Few law firms will wish to engage in pursuing claims made so complex that the financial outlays to prosecute could not be justified. Only the most obvious of cases will be taken where liability is nearly certain and damages large.

The proposed legislation that seeks to overturn legislative and common law substantive rights (both Senate and Federal) without seeming radically to change United States public policy. It would make economically impractical the enforcement of laws barring discrimination on perceived race, sexuality, national origin, disabilities and economic rights arising from the fair competition; laws dealing with access to health care and drugs, and laws dealing with finance, consumer protection and wage and hours, among others.

One of the most nefarious of the proposed changes to Rule 23 would bar class actions unless the plaintiff “demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” Exactly what is meant by this proposed change or how it is to be measured has eluded most lawyers. To the extent it is intended to mean that it must be shown at the motion stage and before claims are submitted from absent class members that each absent class member of the proposed class has suffered the identical (“same”) injury with the same damages (at least per transaction), it is a standard impractical to satisfy.

Similar proposals have been urged upon courts and been rejected. The reason is that any reasonably defined class is certain to contain (upon claims examination), members who were not injured by the wrongful act, or whose damages will vary somewhat from others — but can be calculated through the facts found by the jury or otherwise dealt with through an administrative process or other post-liability determination process.

The requirement that proposes a class lack a single unharmed member might require discovery of every class member to “prove” the negative. Discovery of absent class members would be extraordinarily expensive and suppress class participation. Damages to be paid would also be reduced, assuming that with elimination of absent class members who refuse to participate in discovery, a claim could then be certified.

The American Bar Association  stated: “This requirement places a nearly insurmountable burden for people who have suffered personal injury or economic loss at the hands of large institutions with vast resources, effectively barring them from bringing class actions.” March 6, 2017.

Similarly, the bill would require at class certification stage the plaintiff to demonstrate that “there is a reliable and administratively feasible mechanism” for the court to determine if an individual is a class member and the funds distribution to a substantive majority of class members. This is no more than a surrender to the highly criticized and mostly court-rejected “ascertainability” requirement. Professor John Coffee of Columbia University commented that the proposal would make class action certifications “generally impossible” in consumer class actions involving relatively “small ‘negative values’ claims.”

The proposed legislation provides a new pleading requirement: disclosing:

(a) REQUIRED DISCLOSURES. — In a class action complaint, class counsel shall state whether any proposed class representative or named plaintiff in the complaint is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action) class counsel. In addition, the complaint shall describe the circumstances under which each class representative or named plaintiff agreed to be included in the complaint and shall identify any other class action in which any proposed class representative or named plaintiff has a similar role.

Exactly how or what the legislation seeks to accomplish with these pleading requirements, irrelevant to stating of a claim for relief or otherwise satisfying Rule 23 requirements, is somewhat mysterious. It only seems to seek the answer to the question: “Where, oh lawyer, did you get your client?” If, however, this information is of such urgent national importance, it is even more so on the defense side where corporate boards owe fiduciary duties to the corporation and shareholders to limit expenditure of corporate assets — the “old boy network” is notorious. In short, if the question is of something more than ideal curiosity, it is more important where actual money is changing hands — class lawyers having fees paid typically only from funds created and as approached by the court.

A likely imbalance of data collection, concerning the costs of litigation, requires plaintiffs only to report on third-party funding. More: The Federal Judicial Center is required to collect and report on the use of all funds paid by a defendant pursuant to the settlement agreement. If the total costs of class actions are of national interest, crucial data should be collected from the defense side whose costs are said to be more than those of the plaintiffs: costs of attorneys, experts, accountants, consultants, electronic document hosting and the like. This data for plaintiffs is currently reported to the court by class counsel.

Additionally, the proposed legislation would prohibit the courts from certifying common issues for a class determination such as questions going to liability.  In so doing, the proposed act would strip a tool of efficiency from the judiciary. Courts currently may decide to certify issues common to a large number of persons, leaving individual damages for the other proceedings.  The reason is clear– to eliminate the res judicata and collateral estoppel impact on judgments by the decision on issues common to class. In short, the bill provides another means for defendants to avoid liability determinations where damage calculations may differ.

Provisions as to payment of expense and fees are also intended to discourage law firms from prosecuting claims by class actions.

For example, where cases result in a favorable judgment or settlement, payment of attorneys’ fees must wait until the completion of the claim’s administration. Attorneys’ fees would not be dependent on the total settlement fund achieved. Instead, fees would be measured on the actual amounts paid out to class members regardless of amounts achieved in settlements. Settlements would merely be a ceiling for payouts. For noncash results, the fee attributable to equitable relief “shall be limited to a reasonable percentage of the value of the equitable relief” — presumably after further proceedings about that value, regardless of what the parties may stipulate.

In short, payment policy will be most radically changed from present practice.

Such a change provides further incentives for those benefiting from delay of litigation  claims by class members diminish over time as people move, lose records, die, lose interest, etc.  Consistent with this incentive-constricting approach, the proposed bill builds years of delay into all class actions: “All discovery and other proceedings shall be stayed during the pendency of any motion to transfer, motion to dismiss, motion to strike class allegations, or other motion to dispose of the class allegations,” unless the court allows particular discovery necessary to preserve evidence or prevent undue prejudice.  Appeals shall be permitted from any class certification order.

The goal of these proposals seems evident to allow lawmakers to make radical changes in public policy– supporting the laws against racial discrimination or discrimination based on gender, or for consumer rights as examples  while voting to make it economically impracticable to enforce those rights.

It is to be hoped that the United States Senate demonstrates common sense.


By Fred Taylor Isquith

[1] Granted, this provision of “no force” could be read as applying to past law and practice—but not necessarily.