During the past decade or so the banking industry has been subjected to an avalanche of class actions challenging a wide array of practices pertaining to the industry's consumer loan and deposit products.
Congress answered the industry's call by enacting the Class Action Fairness Act, which became law on Feb. 18.
Despite the popular perception that the act will reduce, if not eliminate, the scourge of onerous class actions against the banking industry and the rest of corporate America, it is way too early to pop open the bottles of Dom Perignon. Bankers should consider the following:
- As a practical matter, it will be much more difficult to settle cases inexpensively through coupon settlements. Plaintiffs' attorneys want their fees, but they will no longer be able to obtain hefty fees from federal judges on the basis of the supposed "value" of coupons that have not been redeemed. Moreover, nobody knows for sure exactly what constitutes a coupon settlement under the act. Free minutes used to settle a class action against a cell phone provider?
- Courts may be tempted to extend the act's linkage of plaintiff's attorneys' fees with the actual redemption rate of coupons to cash settlements where a claim needs to be filed by a class member in order to receive cash. Thus, plaintiffs' attorneys may be reluctant to enter into claims-made settlements out of fear that their attorneys' fees will be based on the number of claims actually made. This would deprive defendants of another less expensive way to structure class-action settlements.
The act will force identical class actions into federal court, where they will be consolidated by the Judicial Panel on Multi-District Litigation.In the past, when overlapping class actions were filed in state and federal courts, defendants could negotiate a national class settlement with the most reasonable plaintiffs' attorneys, even if their case was in state court.
Under the act, all of the plaintiffs' attorneys are more likely to be present in the same federal court. Attempting to negotiate a settlement with multiple law firms promises to be significantly more cumbersome and difficult than negotiating with a single law firm.
- Banks and their affiliates will be required to notify state and federal bank regulators, and perhaps state attorneys general as well, of proposed class-action settlements in federal court. Those authorities can then attack settlements they don't like or, worse, initiate their own enforcement actions.
- The act invites plaintiffs' attorneys to attempt to game the system by filing a series of small, state-wide class actions in multiple plaintiff-friendly states, rather than a single nationwide class action. The act places considerable constraints on attempts of this type, but plaintiffs' attorneys are well networked and creative. Their ability to evade the intended restrictions of the act should not be underestimated.
A number of our bank clients have asked whether the enactment of the Class Action Fairness Act has eliminated the need for mandatory pre-dispute arbitration agreements. Our answer: Absolutely not!Consumer arbitration agreements and the class action waivers they contain remain alive and well in practically all federal courts and also in most state courts. Why give up a tried and true defense to meritless class actions in favor of the untested protections available under the Class Action Fairness Act? And why eschew the arbitration defense when it is wholly compatible with the act?
A defendant in a class action does not give up its rights under the act by moving to compel individual arbitration of the consumer dispute. We prefer to have both the belt and the suspenders.
While the Class Action Fairness Act is certainly a step in the right direction, it is not the panacea that many of those in corporate America believe it to be.
