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From Securities Regulation Daily, March 10, 2017

Trio of litigation reform bills passes House

By Lene Powell, J.D.

Three litigation reform bills have passed the U.S. House of Representatives, largely along party lines. The proposed legislation would amend Title 28 of the U.S. Code to put in place new procedural restrictions on class actions and multidistrict litigation, and amend the Federal Rules of Civil Procedure (FRCP) to toughen Rule 11 sanctions.

H.R. 985: Fairness in Class Action Litigation Act of 2017. Sponsored by Rep. Bob Goodlatte (R-Va), H.R. 985 would make a number of procedural changes relating to Federal court class actions and multidistrict litigation proceedings.

Focusing particularly on a provision requiring class action injuries to be of the same type and scope, the Council of Institutional Investors cautioned in a letter to House leaders that this would unreasonably preclude many meritorious securities class actions, harming long-term investors and the U.S. capital markets. According to CII, the provision is unnecessary because the rigorous pleading standards of the Private Securities Litigation Reform Act of 1995 already curtail meritless lawsuits.

Other provisions include:

  • Class counsel would have to disclose specified relationships to any class representative or named plaintiff, and courts could not certify a class action if any specified relationships existed;
  • Parties seeking relief would have to show a reliable mechanism for courts to determine whether members fall within a class and to distribute monetary relief to a substantial majority of class members;
  • Attorney fees could not be determined or paid until monetary distribution to class members is completed. Fee awards would be limited to a "reasonable percentage" of relief, and could not exceed the total amount of money received by class members;
  • For settlements, class counsel would have to submit a detailed accounting of the disbursement of all funds paid by the defendants under the settlement agreement;
  • Courts could not certify a class for particular issues under FRCP Rule 23(c)(4) unless the entire action cause of action from which the particular issues arise satisfies certain class action requirements;
  • Discovery would be stayed pending various motions, including motions to dismiss, unless needed to preserve evidence or prevent undue prejudice to a moving party;
  • Class counsel would have to disclose the identity of anyone other than a class member or class counsel with a contingent right to receive compensation from the action;
  • Courts of appeal would have to allow appeal from orders granting or denying class certification;
  • In deciding remand motions in multidistrict personal injury or wrongful death actions removed on the basis of diversity, courts would apply the jurisdictional requirements of Section 1332(a) to the claims of each plaintiff individually, and sever and remand any claims that did not meet requirements;
  • Within given timeframes, counsel for plaintiffs would have to make an additional submission to verify factual allegations, and courts would have to rule on the sufficiency of the submission and dismiss the action if insufficient.

The measure passed the House by a vote of 220-201. It was designated a Key Vote by the U.S. Chamber of Commerce, who said it would require the disclosure of secret hedge fund investments in class actions, among other provisions.

H.R. 725: Innocent Party Protection Act. In civil actions removed to federal court solely on the basis of diversity jurisdiction, the court would be required to dismiss claims against any defendants fraudulently joined in the action and deny remand. "Fraudulent" is defined as one of four alternative grounds, including a lack of good faith intention to prosecute the action against a defendant.

H.R. 725 was sponsored by Rep. Ken Buck (R-Colo.) and passed the House by a vote of 224-194. It was designated a Key Vote by the U.S. Chamber of Commerce.

H.R. 720: Lawsuit Abuse Reduction Act. The proposed legislation would require courts to impose sanctions under Rule 11 if the court determines the rule was violated. Currently, courts may impose sanctions for various Rule 11 violations including misrepresentations to the court, but are not required to.

The measure would also remove a current provision prohibiting a motion for sanctions if the challenged item is corrected within 21 days after service. In addition, the court would be required to order the sanctioned party or parties to pay reasonable expenses incurred as a direct result of the violation, including reasonable attorneys’ fees and costs.

H.R. 720 was sponsored by Rep. Lamar Smith (R-Tex.) and passed the House by a vote of 230-188. It was supported by the U.S. Chamber of Commerce.

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