- The Washington Times - Wednesday, January 26, 2005

In his State of the Union speech next week, President Bush will urge Congress to pass the Class Action Fairness Act, a critical element of his agenda for civil justice reform. The bill passed the House last year, but died in the Senate when supporters failed by a single vote to overcome a filibuster on various amendments to the bill.

The bill’s main provision would make it easier for defendants to transfer some class-action lawsuits from state court to federal court. Opponents argue that plaintiffs who bring cases under state law have a right to litigate in state court, and that the bill impermissibly encroaches on state sovereignty. Neither argument holds up under scrutiny.

Most class-action lawsuits are filed in state courts. That is as it should be in our state-based tort litigation system — provided plaintiff class members reside in the state where the case is filed. It makes sense for state courts to apply state statutes and common law to cases involving their own state’s residents.

The class-action reform bill backed by the president and congressional leadership would not change this. Instead, the bill takes aim at the handful of state courts that routinely certify and decide multistate class actions — where the plaintiff class is drawn from many states — in a way that makes law for as many as 49 states in addition to their own.

This form of “regulation through litigation” turns the concept of federalism on its head: Instead of state sovereignty being threatened by an overreaching federal government, multistate class actions allow a single state court to impose its policy preferences on the rest of the country. The Class Action Fairness bill would remedy this by allowing multistate class action litigants to move their cases from state to federal court.

The case of Avery vs. State Farm Insurance illustrates the mischief possible when state courts assume jurisdiction over multistate class actions. Plaintiff attorneys claimed State Farm had cheated its customers by specifying generic crash replacement parts for insured auto repairs, instead of more expensive parts supplied by auto companies. The case was filed in an Illinois court on behalf of nearly 5 million State Farm policyholders drawn from 48 states.

Plaintiffs’ policy agreements clearly stated generic parts could be used, and the class attorneys failed to show the practice did any harm. And the lead plaintiff was a Louisiana resident.

Nevertheless, the judge certified the class and allowed the case to go forward. At the trial, he refused to admit evidence that generic parts save substantial sums for policyholders. When the jury returned a verdict in favor of plaintiffs — including a $1.2 billion award — its decision applied not just to State Farm’s handling claims in Illinois but in the other 47 states as well.

Some of those states had passed laws encouraging insurers to use generic repair parts, and one — Massachusetts — even required they do so. Nevertheless, by declaring an insurer’s use of generic auto parts constitutes “fraud” — and applying its decision to transactions outside Illinois — the Illinois court effectively trumped the laws of 47 other states.

Some argue cases like Avery are atypical and that most state courts routinely administer evenhanded justice. But a dozen or so “judicial hellholes,” as the American Tort Reform Association calls them, can wreak havoc on the entire nation: Multistate class-action attorneys can “forum shop,” seeking jurisdictions where local judges and juries are renowned for their hostility to out-of-state corporate defendants.

Not surprisingly, judicial bias against out-of-state defendants is particularly common where state judges are elected, according to a recent study by Eric Helland of Claremont-McKenna College and Alexander Tabarrok of George Mason University.

Allowing defendants to transfer multistate class actions to federal court would solve this problem. While federal judges would apply the relevant state law, their national perspective and nonelected status immunizes them from home-town bias, and makes them likelier to balance competing interests of the various states represented by class members.

Today, multistate class actions in plaintiff-friendly jurisdictions allow state courts to do the very thing the federal Constitution was written in part to prevent. Much of the impetus for the Constitutional Convention of 1787 can be traced to the woeful condition of interstate commerce under the Articles of Confederation. When the Constitution’s Framers granted Congress the authority “to regulate commerce … among the several states,” they hoped to correct states’ tendency to impair their neighbors’ sovereignty and stifle their prosperity.

Congress could fulfill the Framers’ intent — and do the nation a great service — by heeding President Bush’s call to pass the Class Action Fairness Act.

David A. Winston is senior vice president for federal affairs at the National Association of Mutual Insurance Companies.

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