Legal Hurdles in Class Action Cases

Despite their inherent advantages, class action cases present formidable legal hurdles for clients seeking compensation for their injuries and damages. In the last several years, numerous laws have been passed that have made class action practice more difficult and expensive for plaintiffs.

Class Action Fairness Act

The Class Action Fairness Act is a federal law passed in 2005 after much lobbying by big business and “tort reform” groups. The Act gives federal courts the ability to hear class action lawsuits that previously would have been heard by state courts. Specifically, the Act provides jurisdiction to federal courts in class action cases involving at least $5 million and in which at least one of the members of the class of plaintiffs is from a different state than any defendant. The Act allows a defendant sued in a state court class action to “remove” the case to federal court under certain circumstances. Most large corporations believe they are better off in federal court than state court because federal judges are often perceived to be more conservative than state court judges, federal juries are drawn from a larger, often more conservative, area than state court juries, and the procedures in federal court make it more likely a defendant can avoid liability without a trial.

Another change ushered in by the Class Action Fairness Act was greater court scrutiny of class action settlements. Under the Act, class action settlements involving coupons are given special scrutiny.

Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act, or PSLRA, was passed in 1995 and governs federal court lawsuits alleging securities fraud, many of which are brought as class actions. Under the PSLRA, plaintiffs are required to allege with great particularity in their initial pleading the way in which a defendant committed an act of securities fraud. For example, they are required to identify “each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” This is often difficult to accomplish at the outset of a lawsuit when the plaintiffs do not yet have access to the defendants’ internal documents.

The PSLRA also requires plaintiffs to allege that the defendant made the alleged misrepresentations with knowledge they were false or with recklessness as to whether they were true or false. Proving a defendant’s state of mind is always difficult. But it is particularly difficult in an initial pleading when documents have not yet been turned over by the Defendants and none of the Defendants or their employees has been deposed.

To make matters worse, the PSLRA imposes a “stay” on all discoveries once a defendant has filed an initial motion to dismiss the lawsuit on the basis that the claims against it were not adequately pled. Thus, the plaintiffs are forced to articulate all of the facts supporting their case in their very first pleading and are denied access to critical information they might obtain through the discovery process once the defendants have challenged that pleading.

The PSLRA has made it difficult for class action plaintiffs to successfully bring securities fraud lawsuits. Only plaintiffs with aggressive, well-educated and experienced attorneys like those at Heygood, Orr & Pearson have a fighting chance to receive the compensation they deserve.

Class Action Reforms

Class action reforms have been picking up steam during the last few years. One of the most significant reforms involves the appeal of class certification orders. As explained above, class action certification is the most important stage of class action litigation. Once a trial court has certified a class, allowing a class action lawsuit to proceed, large corporate defendants face significant defense costs and the risk of a substantial damage award should they litigate the case to a jury verdict. As a result, in the past, most cases settled favorably for the plaintiffs following class certification.

Recently, however, laws have been passed allowing Defendants to immediately appeal a class certification order rather than being forced to litigate the class action case to its conclusion before taking an appeal. For example, Rule 23(f) of the Federal Rules of Civil Procedure allows discretionary, immediate appeals of class action certification orders entered by federal district courts. Moreover, at least ten states also have laws permitting immediate appeals of such orders, and several other states are considering such laws.

By allowing these immediate, or “interlocutory,” appeals, these laws have made class action litigation much more difficult and expensive for plaintiffs. Such appeals allow a Defendant to avoid the costs and risks of class action litigation by immediately appealing any unfavorable class action certification order to a higher court. These higher courts, unfortunately, have proven to be sympathetic to the interests of big business, frequently overruling class action certification orders entered by lower courts and effectively stopping class action suits in their tracks. For example, since 2003, the Texas Supreme Court has sided with defendants appealing class certification orders approximately 90% of the time.