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Class Action Reform Bill Could Hurt Pension Funds, Institutional Investors, Law Firms

Bill may prohibit institutional investors from hiring the same law firm more than once.

A class action reform bill currently before Congress would be a serious setback for pension funds and institutional investors, and is possibly unconstitutional, according to legal scholars.

The “Fairness in Class Action Litigation Act of 2017,” (H.R. 985), which was introduced last week by Congressman Bob Goodlatte (R-Va.), seeks to maximize recoveries by victims, while eliminating unmeritorious claim.

“Class action lawsuits are rife with abuse,” said Lisa Rickard, president of the US Chamber of Commerce’s Institute for Legal Reform, which supports the bill. “The Fairness in Class Action Litigation Act will ensure that class members get paid first, and that lawyers only earn a percentage of what class members actually receive. It will also protect businesses from abusive lawsuits, and the economic damage that they cause. 

However, there are some provisions in the bill that have raised serious Constitutional concerns by legal experts. Particularly damaging to pension funds and institutional investors is a conflict of interest provision that states:

“A Federal court shall not issue an order granting certification of any class action in which any proposed class representative or named plaintiff is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action) class counsel.”

In other words, “no institutional investor could hire the same law firm more than once in a class action,” John Coffee Jr., director of Columbia Law School’s Center on Corporate Governance, told CIO. “It’s like saying you can’t see the same doctor twice.”

Since all the major pension funds have already used the major plaintiff law firms at least once, they would be cut off from their existing counsel, Coffee added. “That to me is invalid and is a major concern,” he said. “The committee should be shown that the attempt to say you can only use a lawyer once is probably unconstitutional.” 

Elizabeth Chamblee Burch, a law professor at the University of Georgia who specializes in class actions and mass torts, also found problems with the conflict of interest provision in the bill.   

“People naturally turn to those that they trust the most to prosecute their claims. Whether those previous relationships create disabling conflicts of interest is something that the courts already monitor,” said Burch in comments submitted to Congress. “Judges already test the relationship between class members and the named representative ... as such, restricting a client’s freely chosen counsel is unnecessary.”

Another provision that could cause problems pensions and institutional investors is one that triggers an automatic appeal of class certification. This allows a defendant to automatically appeal any class certification against it, something almost every defendant would likely choose to do. Coffee says this automatic appeal provision could add a year or more to any class action litigation.

While Coffee did say he found some aspects of the bill to be “sensible and even desirable,” he believes the bill was intentionally written to be as broad and sweeping as possible “to try to shut down the existing economic arrangement between plaintiffs and law firms.”

Myriam Gilles, vice dean of Yeshiva University’s Benjamin N. Cardozo Law School, said in comments submitted to Congress that “the bill would radically restrict access to justice for injured consumers, employees and small businesses by, among other things, imposing requirements upon class plaintiffs that are both unrealistic and unnecessary.”

 

By Michael Katz