Pending Legislation Could Significantly Impact American Federal Civil Litigation

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Pending Legislation Could Significantly Impact American Federal Civil Litigation

By Jeremy Gilman*

From January 3, 2017 through January 3, 2019, the 115th United States Congress is in session. It has been quite busy its first few months – the House of Representatives in particular – drafting and passing proposed legislation that, if enacted, could significantly impact the playbook for federal civil litigation in America.

This article discusses three particular bills that have already passed the House of Representatives this session. They are not yet law: that will require passage in the United States Senate and the President’s signature, but they are gathering steam.

H.R.720: The Lawsuit Abuse Reduction Act of 2017

This bill was swiftly passed by the House of Representative, being introduced only on January 30, 2017. On March 10, 2017, at 11:29 a.m., by a vote of 230 to 188, with eleven members not voting, the House of Representatives passed the Lawsuit Abuse Reduction Act of 2017.  Of the “ayes,” 227 were Republican and three were Democrats; of the “noes,” 183 were Democrats and five were Republicans. 

 

The full text of the bill passed by the House can be found at https://goo.gl/HXYnef.  Its purpose is to amend Federal Rule of Civil Procedure 11.

Rule 11 was promulgated, in the words of the U.S. Supreme Court, to “deter baseless filings in [federal] district court.”  Deterrence is accomplished by placing the specter of judicial sanctions – penalties – on those who baselessly file.  What renders a filing baseless is described in the Rule.

If enacted, H.R.720 would mandate the imposition of sanctions for violating Rule 11, which is now currently within the court’s discretion.  And those sanctions would include attorneys’ fees and costs incurred “as a direct result of the violation” of the Rule.  In other words, the court would be required to assess those particular sanctions.  It could also, at its discretion, impose non-monetary sanctions, including striking the offending party’s pleadings, dismissing its lawsuit, and requiring it to “pay a penalty into court.”

The bill would also eliminate the 21-day “safe harbor” provision currently embodied in Rule 11.  Under that provision, a Rule 11 motion “must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service” of the Rule 11 motion, or within such other time the court might order.  In other words, current Rule 11 is designed to notify an opposing party that a sanctions motion may be filed against it if the allegedly offending document is not withdrawn or corrected within 21 days of service of the motion.  That’s the “safe harbor.”  H.R.720 would eliminate that safe harbor, and allow sanctions motions under Rule 11 to be filed with the court without prior notice to the opponent.

On March 13, 2017, H.R.720 was received in the Senate and referred to the Senate Judiciary Committee.

If enacted, how would this proposed legislation change the landscape?  It would likely increase the number sanctions motions filed in federal district courts and also the number of Rule 11 threats lobbed between opponents.  It would also likely increase the number of sanctions orders issued by courts, and the size of the penalties. 

H.R.725: The Innocent Party Protection Act

This is another bill that was quickly approved by the House of Representatives., being introduced on January 30, 2017.  On March 9, 2017, at 7:19 p.m., by a vote of 224 to 194, with eleven members not voting, the House of Representatives passed the Innocent Party Protection Act.  All 227 “ayes” were Republicans, and of the “noes,” 184 were Democrats and 10 were Republicans. 

The full text of the bill passed by the House can be found at https://goo.gl/MWlWUY.  Its purpose is to codify the common law of fraudulent joinder in actions removed to federal court.

The typical fraudulent joinder scenario arises in this context: plaintiff sues several defendants in state court for an amount exceeding the federal diversity jurisdictional minimum ($75,000 excluding interest and costs).  The primary defendant – the main target of the lawsuit – resides in a state different from plaintiff; he is, in other words, a “citizen” of a different state, and the parties’ citizenship is therefore “diverse.”  If those were the only parties to the lawsuit, defendant could, if desired, remove the case to federal court.

But they are not the only parties.  Instead, plaintiff added another defendant to the lawsuit, and that defendant resides in the same state as plaintiff, meaning there’s no diversity of citizenship between them, and no “complete diversity” between plaintiff and defendants.

Defendants believe that plaintiff added the second defendant to the lawsuit for no legitimate reason, but solely to thwart defendants’ attempt to remove the lawsuit to federal court.  So what do they do?  They remove the case to federal court notwithstanding the lack of complete diversity and contend to the federal court that the second defendant was fraudulently joined in the lawsuit for the sole purpose of defeating federal diversity jurisdiction.

Plaintiff would prefer to stay in state court, so she responds by moving the federal court to remand the case to state court, claiming lack of subject matter jurisdiction, and denying fraudulent joinder.  Defendants oppose that motion and argue that plaintiff added the second defendant to the lawsuit for no reason other than to defeat diversity jurisdiction.  The federal court then considers the parties’ submissions and renders a decision, presumably in line with governing judicial precedents.

H.R.725 seeks to crystallize fraudulent joinder law in a federal statute.  Here is its operative text, which, if passed into law, would become 28 U.S.C. § 1447(f):

    The joinder of a defendant … is fraudulent if the court finds that—

        (A)     there is actual fraud in the pleading of jurisdictional facts with respect to that defendant;

 
        (B)    

based on the complaint and the materials submitted under paragraph (3), it is not plausible to conclude that applicable State law would impose liability on that defendant;

 

 
        (C)    

State or Federal law clearly bars all claims in the complaint against that defendant; or

 

 
        (D)     objective evidence clearly demonstrates that there is no good faith intention to prosecute the action against that defendant or to seek a joint judgment including that defendant.  
                 

 

The proposed legislation also provides that when considering whether a defendant has been fraudulently joined, the federal court “may permit the pleadings to be amended, and shall consider the pleadings, affidavits, and other evidence submitted by the parties.”  And if the court determines that the non-diverse defendants were fraudulently joined, it must dismiss without prejudice plaintiff’s claims against them and deny the remand motion.


The bill now goes to the Senate.


If enacted, how would this proposed legislation change the landscape?
 It would likely result in more state-court cases being removed to federal courts as well and litigation on the issue of whether defendants were fraudulently joined in lawsuits solely to defeat federal diversity jurisdiction.   


H.R.985: The Fairness in Class Action Litigation Act of 2017


One month after being introduced in the House of Representatives on February 9, 2017, on March 9, 2017, at 6:53 p.m., by a vote of 220 to 201, with seven abstentions, the House of Representatives passed the Fairness in Class Action Litigation Act of 2017.  All 220 “ayes” were Republicans and of the “noes,” 187 were Democrats and 14 were Republicans. 


The full text of the bill as passed by the House can be found at https://goo.gl/41J04k.  Here are some highlights (all emphases added):

 

    • The bill would heighten class movant’s burden.  It would prohibit federal courts from certifying personal injury or economic loss class actions seeking monetary relief “unless the party seeking to maintain such a class action affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” 
    • It would heighten the court’s duties when certifying a class.  Every class certification order issued by a federal court in a case seeking monetary relief for personal injury or economic loss “shall include a determination, based on a rigorous analysis of the evidence presented,” that each proposed class member suffered the same type and scope of injury as the named class representative or representatives. 
    • It would impose certain disclosure requirements upon class counsel.  In every class action complaint filed in federal court, class counsel would be required to “describe the circumstances under which each class representative or named plaintiff agreed to be included in the complaint and … identify any other class action in which any proposed class representative or named plaintiff has a similar role.” 
    • It would restrict when class counsel can be paid.  Under the bill, no attorneys’ fees may be “determined or paid” in federal class actions seeking monetary relief “until the distribution of any monetary recovery to class members has been completed.” 
    • It would restrict how much class counsel can be paid.  If a federal class action judgment or proposed settlement “provides for a monetary recovery,” any attorney fee award to class counsel attributable to the monetary recovery would be “limited to a reasonable percentage of any payments directly distributed to and received by class members.”  And “in no event shall the attorneys’ fee award exceed the total amount of money directly distributed to and received by all class members.”  An exception would exist in cases where another federal statute allows otherwise. 
    • It would limit the court’s ability to certify “particular issues” class actions.  Federal courts would be unable to enter class certification orders on “particular issues… unless the entirety of the cause of action from which the particular issues arise satisfies” various requirements in Rules 23(a) and (b). 
    • It would stay almost all discovery and other case activity pending the disposition of certain motions.  The bill provides that “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 determines upon either party’s motion “that particularized discovery is necessary to preserve evidence or to prevent undue prejudice.” 
    • It would establish mandatory federal appellate jurisdiction over orders granting or denying class certification:  The bill provides that federal appeals court “shall permit an appeal from an order granting or denying class-action certification under Rule 23 of the Federal Rules of Civil Procedure.”

 

The bill now goes to the Senate. 

 

If enacted, how would this proposed legislation change the landscape?  It would likely make it more difficult for plaintiffs to obtain class certification is federal courts and might consequently reduce the number of putative class actions filed in federal courts.  It might also correspondingly increase the number of putative class actions filed in state courts. 

 

We are following these bills closely at Benesch, so let us know if you would like to receive updates on each of these bills as the legislative process continues to unfold.

 


 

*Jeremy Gilman is a partner at TerraLex member firm Benesch, Friedlander, Coplan & Aronoff LLP, resident in its Cleveland, Ohio office.  He is co-chair of the firm’s Class Action Litigation Practice Group and can be reached at jgilman@beneschlaw.com.

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Cleveland, OH 
Wednesday, May 3, 2017
Litigation (Civil, Business and Commercial)