Pomerantz LLP


Class Action “Reform” In The Age Of Trump

ATTORNEY: J. ALEXANDER HOOD II
POMERANTZ MONITOR MARCH/APRIL 2017

In February 2017, Rep. Goodlatte (R-Va.), Chairman of the House Judiciary Committee, introduced the Fairness in Class Action Litigation Act (H.R. 985), a bill that, if passed as written, would make it more difficult for plaintiffs to pursue class action litigation. Rep. Goodlatte was an author of the Class Action Fairness Act of 2005, which limited the ability to bring class actions in state courts. With Republicans now controlling both chambers of Congress and the White House, H.R. 985 stands a very real chance of becoming law. While the ultimate impact on securities class actions is unclear, as written the bill presents a near existential threat to the class action in its current form.

In a press release announcing the bill, Rep. Goodlatte made clear his disdain for class action litigation. “The current state of class action litigation has become an expensive business, and one easily gamed by trial lawyers to their own advantages.” He went on to describe the bill’s goal as “to maximize recoveries by deserving victims, and weed out unmeritorious claims that would otherwise siphon resources away from innocent parties.” According to Rep. Goodlatte, H.R. 985 “will keep baseless class action suits away from innocent parties, while still keeping the doors to justice open for parties with real and legitimate claims, and maximizing their recoveries.” Touting his experience authoring the Class Action Fairness Act of 2005, Rep. Goodlatte highlighted several provisions of the bill purportedly designed to close attorney-exploited loopholes and advance “fairness” for both “deserving victims” and “innocent parties”: preventing class actions filed by attorneys who are relatives of parties in the litigation; requiring that plaintiffs’ attorneys may only be paid after class members have been paid; and requiring disclosure to the court of any third-party litigation funding agreements.

Yet key features of H.R. 985 have nothing to do with weeding out frivolous claims or protecting “innocent parties.” Rather, the bill, as designed, would make it more difficult to prosecute any claims in class actions. For example, the bill prohibits federal judges from certifying a class unless “each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” Limiting the range of injuries to be adjudicated in a single action naturally educes the number of claims that can be aggregated.

Perhaps of the greatest significance for securities class actions, however, is a subsection titled “Prohibition of Conflicts,” which precludes federal judges from certifying a class for which the lead plaintiff is “a present or former client of . . . or has any contractual relationship with” class counsel. This provision would make it significantly more difficult to bring claims, either as a plaintiff or class counsel. In particular, this provision would prevent institutional plaintiffs from selecting the same firm as lead counsel in multiple litigations. The broad language of the bill, which precludes a lead plaintiff from retaining a firm it has “any contractual relationship with” whatsoever, would even prevent an investor from selecting as lead counsel a firm that
had previously merely provided portfolio monitoring services to the investor. 

As Professor John Coffee, an eminent commentator on securities law, stated in his recent article critiquing this bill, “the standard pattern in securities class actions” is for a “public pension fund [to] act as a lead plaintiff and retains a major plaintiff’s law firm that it has used before (presumably because it was satisfied with its prior efforts) …. Because the client may not use a firm that it has ever previously retained (apparently for any purpose), the result is to impose a legal regime of “one night stands” on clients and their counsel. Who benefits from this? The only plausible answer is: defendants!” Professor Coffee also notes that the provision may be unconstitutional because “several Circuits have repeatedly held that the Due Process Clause guarantees not simply the client’s right to retain counsel in a civil case, but “the right to choose the lawyer who will provide that representation.” Similarly, legal blogger Alison Frankel observed that “[s]ophisticated plaintiffs in complex securities and antitrust litigation need specialized lawyers, just like defendants in the same cases. … Why should a corporation be allowed to have an ongoing relationship with outside counsel but not a pension fund acting as a lead plaintiff?”

Interfering with an institution’s choice of counsel has nothing to do with weeding out frivolous claims or protecting the innocent. It is simply intended to discourage any financial institution from acting as a class representative. Notably, existing law (The Private Securities Litigation Reform Act of 1995 (the “PSLRA”)) already prohibits any institution from serving as a lead plaintiff in more than five securities class actions over a three year period.

The effect of this provision stands in marked contrast to the stated goal of the PSLRA, which was to encourage institutional investors to assume a greater role in securities class actions. In part, the rationale underlying this goal was that institutional investors, compared to “retail” investors, are sufficiently sophisticated to take an informed and active role in the litigation process, thus ensuring that the interests of the plaintiff remain front and center, while minimizing concerns about attorney-driven litigation. This new bill, for its part, purports to protect plaintiffs from unscrupulous attorneys who would take advantage of them, but actively
denies institutional investors the option of working with attorneys with whom they have an existing relationship, practically ensuring that the most sophisticated plaintiffs assume a diminished role in class actions.

H.R. 985 would also provide a host of other procedural obstacles to the prosecutions of class actions, whether or not those actions are meritorious. As Professor Coffee notes, the bill “would also slow the pace of class actions to a crawl. [because it] permits appeals of orders granting or denying class certification as a matter of right. Today, such interlocutory appeals are discretionary with the appellate court (and are infrequently granted). … Second, discovery
is halted if defendant makes any of a variety of motions ….Predictably, such motions will be made one after another, in seriation fashion, to delay discovery.” 

At present, the full scope and application of H.R. 985 remains unclear. A recent Wall Street Journal article reported that Lisa Rickard, president of the Institute for Legal Reform of the U.S. Chamber of Commerce, a major backer of the bill, has indicated that the bill is not intended “to restrict securities class actions . . . and will likely be clarified as it moves forward through the House and Senate.” Nonetheless, as drafted, nothing in H.R. 985 limits the scope
of its provisions to exclude securities class actions, and Ms. Rickard has previously characterized securities class actions as “betraying the individual investors [they are] designed to assist.” Several amendments proposed by Democrats that would have provided carve-outs for certain types of class actions were voted down in committee.

All of this, of course, presupposes that the legislation ultimately passes both the House and Senate and is signed into law—and even with Republican majorities in both chambers, this is not a foregone conclusion. At the time of this writing, H.R. 985 had narrowly passed through the House by a margin of 220-201, with all Democrats and 15 Republicans voting against it. Legitimate doubts exist as to whether the Senate Judiciary Committee, despite being controlled by Republicans, would let the bill out of committee without some measure of bipartisan support.