Class action reform in the US

July 2017 | PROFESSIONAL INSIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

July 2017 Issue

Although the US legal system is notable, perhaps notorious, for spawning class-action litigation, the pendulum appears to now be swinging in a new direction. In this regard, two recent developments deserve mention.

First, major class action reform legislation has been introduced in Congress. This legislation appears to have been spurred by a growing perception that class action practice has become abusive. Among other things, it is widely perceived that many of these suits are contrived by plaintiffs’ counsel in order to generate fees and do not confer any meaningful benefits on the class members.

As perhaps a harbinger of things to come, a proposed bill was recently introduced into the US Congress with the purpose of reforming class action litigation. The author of the bill, Rep. Rob Goodlatte (R. Va.), was also one of the authors of the Class Action Fairness Act, which was enacted in 2005. The pending bill introduced by Rep. Goodlatte goes much further in making the prosecution of class action litigation more difficult.

The key highlights of the proposed bill include the following: (i) restrictions on fee awards to class counsel, so that the amount of such fee awards will in no event exceed the total amount of money directly distributed to and received by all class members; (ii) requiring the disclosure of third-party litigation funding – i.e., disclosure of the identity of any person or entity (other than a class member or class counsel) who has a contingent right to receive compensation from any settlement or judgment in the action; (iii) requiring that an order certifying a class not be issued unless the party seeking to maintain such class action affirmatively demonstrates that each proposed class member suffered “the same type and scope of injury as the name class representative”; and (iv) requiring disclosure and prohibition of conflicts, especially where any proposed class representative or named plaintiff is a relative of, a present or former employee of, or a present or former client of class counsel.

Importantly, on 9 March, the House passed the bill, and the proposed legislation is now under review by the Senate Judiciary Committee. Although it remains to be seen whether this legislation will be passed by Congress and become law, its introduction reflects a swing of public sentiment in reaction to perceived class action abuses.

The other recent development in this area is the 2016 US Supreme Court decision in Spokeo v. Robbins. In that case, a consumer (Robbins) sued Spokeo, a company that operates a “people search engine”. Robbins alleged that Spokeo culled information from a wide spectrum of databases to gather personal information about individuals to a variety of users, including employers seeking to evaluate prospective employees.

Asserting that his Spokeo-generated profile contained inaccurate information, Robbins filed a federal class action complaint against Spokeo. The suit was based on the Fair Credit Reporting Act of 1970 (FCRA), a federal statute which, among other things, requires that consumer reporting agencies “follow reasonable procedures to assure maximum possible accuracy of” consumer reports.

The issue in Spokeo was whether Robbins’ bare allegation of a statutory violation under the FCRA was sufficient to give him standing to bring the class action as class representative. The Supreme Court held that Robbins needed to show more than just a facial statutory violation, but had to demonstrate “concrete” injury. According to the Court, concreteness requires that a plaintiff must have suffered an actual injury, and this requirement is not necessarily satisfied whenever a statute grants a right and purports to authorise suit to vindicate it.

Like the recently introduced class action reform legislation, the Spokeo decision also signals a tightening up of the requirements for suits of this kind. In light of the Spokeo decision, trial courts considering the certification of class actions will now have to examine whether the class representative and the members of the putative class have in fact suffered a measure of “concrete” harm sufficient to satisfy the standing requirements outlined in the Spokeo decision. Importantly, Spokeo’s holding is echoed in a key section of the proposed federal legislation which would bar class certification without the demonstration that “each proposed class member suffered the same type and scope of injury as the named class representative”.

While the foregoing developments do not foreshadow the end of class action litigation in the US, the pendulum seems to be swinging in the direction of cutting back on these kinds of suits. As noted last year by an intermediate federal appellate court in the context of merger objection class actions, a “class action that yields fees for class counsel and nothing for the class – is no better than a racket”. Suffice to say, US courts are giving greater scrutiny to this kind of litigation and the proposed legislative reform, if passed, will make those suits harder to bring.

Peter S. Selvin is an attorney at TroyGould PC. He can be contacted on +1 (310) 789 1230 or by email: pselvin@troygould.com.

Peter S. Selvin

TroyGould PC