Reforming Class-Action Suits

The Senate Judiciary Committee took an important step last week when it approved a bill to curb abuses in class-action lawsuits.

Class actions are an important tool for protecting citizens' rights. But currently, most class-action suits must be heard in state courts. So companies operating nationwide get haled into local courts that plaintiffs' lawyers have found particularly willing to accept class actions - and to hit out-of-state firms with costly judgments.

This situation allows state judges at the county level to issue rulings that "federalize" their decisions - effectivelywriting rules for the whole country. In recent years, for example, an Illinois court imposed Illinois law on the insurance laws or regulations of New York, Massachusetts, and Hawaii.

Class-action suits have also become an ATM for unscrupulous lawyers, who win millions of dollars for themselves but sometimes leave clients empty-handed. Last year, lawyers suing Blockbuster Video reached a settlement giving their clients coupons for free movie rentals. The lawyers pocketed $9.25 million - and Blockbuster was allowed to continue the late-fee practices that triggered the lawsuit. Plaintiffs suing Columbia House record club got nothing but a discount on future purchases. Their lawyers took home $5 million, plus expenses. Sometimes, plaintiffs lose money while lawyers get fat fees.

The Class Action Fairness Act passed by the Senate committee would move most class-action cases involving interstate commerce to federal court. If fewer than one-third of the plaintiffs reside in the state in which the suit is filed, it will automatically be transferred to federal jurisdiction if either party requests it. If more than two-thirds reside in that state, it would remain in state court. In the intermediate cases, a federal judge would decide whether the case is heard in a federal or state court. This will help end situations in which courts in different states fight over jurisdiction.

The measure also contains consumer protections: Notices sent to plaintiffs must be in plain English, judges must review settlements that provide plaintiffs with nothing more than coupons, federal judges cannot approve settlements in which plaintiffs lose money, and settlements must not award more to out-of-state plaintiffs than to those in state.

In general, federal law should not needlessly trump state law. Class- action suits involving significant interstate commerce or plaintiffs in many states, however, belong in federal courts and before federal judges.

The House has passed a version of the Class Action Fairness Act. The Senate should now do the same.