Class Action Fairness Act Raises Issues for Employment Litigation

In February, President Bush signed his first piece of “tort reform” legislation, the Class Action Fairness Act (the Act), into law. The Act expands federal diversity jurisdiction to encompass most large class actions, including employment law related class actions. One area of employment litigation that the Act may likely impact is in the wage and hour class action context where, as discussed below, litigants file wage and hour class actions in state court while also pursuing Fair Labor Standards Act (FLSA) collective actions in federal court.

What's in the Act

Generally stated, the Act provides a right to remove to federal court any state court class action (or mass action of 100 or more plaintiffs) commenced after the effective date of the Act, Feb. 18, 2005, in which:

• there is minimal diversity (at least one member of the proposed class is from a different state than at least one defendant); and
• the amount in controversy is more than $5 million.

A federal court may decline to exercise jurisdiction if between one-third and two-thirds of the potential class members and the primary defendants are citizens of the state where the case was filed. The Act precludes federal courts from exercising jurisdiction where at least two-thirds of the potential class members and at least one of the primary defendants are citizens of the state in which the case was filed. It also puts significant limits on attorney fee awards in cases where the class members receive “coupons” instead of cash payments. The Act further requires that defendants notify the appropriate federal and state authorities prior to court approval of any settlement.

What About the FLSA?

In the FLSA context, the Act may impact the already contentious issue of simultaneous federal and state court class action cases; whereby plaintiffs pursue both an opt-in collective action under the FLSA and an opt-out class action under state law, thus improving their chances of having a larger number of potential class members. These two parallel actions also allow plaintiffs' attorneys to find potential class members in states with favorable state wage laws, resulting in federal claims filed in one state while state-law claims are filed in another. Depending on the composite of the parties, the state law class claims could be removed to federal court under the new Act. This area, however, is likely to remain muddled for some time. While the Act suggests the opportunity to remove class actions to federal court, the impact of the Act in the employment context remains to be seen.

In February, President Bush signed his first piece of “tort reform” legislation, the Class Action Fairness Act (the Act), into law. The Act expands federal diversity jurisdiction to encompass most large class actions, including employment law related class actions. One area of employment litigation that the Act may likely impact is in the wage and hour class action context where, as discussed below, litigants file wage and hour class actions in state court while also pursuing Fair Labor Standards Act (FLSA) collective actions in federal court.

What's in the Act

Generally stated, the Act provides a right to remove to federal court any state court class action (or mass action of 100 or more plaintiffs) commenced after the effective date of the Act, Feb. 18, 2005, in which:

• there is minimal diversity (at least one member of the proposed class is from a different state than at least one defendant); and
• the amount in controversy is more than $5 million.

A federal court may decline to exercise jurisdiction if between one-third and two-thirds of the potential class members and the primary defendants are citizens of the state where the case was filed. The Act precludes federal courts from exercising jurisdiction where at least two-thirds of the potential class members and at least one of the primary defendants are citizens of the state in which the case was filed. It also puts significant limits on attorney fee awards in cases where the class members receive “coupons” instead of cash payments. The Act further requires that defendants notify the appropriate federal and state authorities prior to court approval of any settlement.

What About the FLSA?

In the FLSA context, the Act may impact the already contentious issue of simultaneous federal and state court class action cases; whereby plaintiffs pursue both an opt-in collective action under the FLSA and an opt-out class action under state law, thus improving their chances of having a larger number of potential class members. These two parallel actions also allow plaintiffs' attorneys to find potential class members in states with favorable state wage laws, resulting in federal claims filed in one state while state-law claims are filed in another. Depending on the composite of the parties, the state law class claims could be removed to federal court under the new Act. This area, however, is likely to remain muddled for some time. While the Act suggests the opportunity to remove class actions to federal court, the impact of the Act in the employment context remains to be seen.