Why Federal Courts Should be an Option in All Cases Brought Against Out-of-State Defendants
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A recent ruling by U.S. Bankruptcy Court Judge George Hodges for the Western District of North Carolina highlights the seriously tilted playing field facing out-of-state defendants in state courts. In his ruling, Judge Hodges exposed a “startling pattern of misrepresentation” and extensive abuse by plaintiffs’ lawyers, withholding exposure evidence in asbestos lawsuits, which has resulted in “unfairly inflating” recoveries.
In his ruling in the trial of In re Garlock Sealing Technologies LLC., et al., involving a maker of sealers and gaskets, Judge Hodges found that plaintiffs’ lawyers routinely withhold evidence in state courts of asbestos exposure related to bankrupt companies, in order to pin a greater share of liability on solvent companies. For example, Judge Hodges found that “in 15 settled cases, the court permitted Garlock to have full discovery. Garlock demonstrated that exposure evidence was withheld in each and every one of them…These were cases that Garlock had settled for large sums. The discovery in this proceeding showed what had been withheld in the tort cases — on average, plaintiffs disclosed only about 2 exposures to bankruptcy companies’ products, but after settling with Garlock, made claims against about 19 such companies’ Trusts.”
Relying on Garlock’s experience in the state tort system, the plaintiffs’ lawyers in this case estimated Garlock would owe $1- $1.3 billion to current and future claimants; however, Judge Hodges, eschewing the less rigorous standards of the state-based tort system, estimated Garlock’s asbestos liabilities to be $125,000,000. That is a spread of $875,000,000 to almost $1.2 billion.
Why such a discrepancy?
One theory, for which Judge Hodge’s ruling provides more evidence, is that many plaintiffs’ attorneys exploit the system of federal and state courts by “forum shopping” for plaintiff-friendly state courts. These courts are known to follow more relaxed rules of evidence and to regularly hand out generous verdicts against out-of-state defendants. The American Tort Reform Association calls these “Judicial Hellholes.” While Garlock has belatedly received some vindication through Judge Hodge’s remarkable ruling, a company and its shareholders certainly shouldn’t have to declare bankruptcy before securing a neutral federal forum in order to get fair treatment from the American courts.
The Garlock decision underscores the extent to which the failure of federal courts to take jurisdiction in cases involving out-of-state defendants, has distorted the American civil justice system. This approach to federal jurisdiction has undoubtedly helped fuel the litigation explosion over the last 50 years, contributing to the imposition of billions of dollars of costs on American consumers, the loss of hundreds of thousands of American jobs, reduced foreign investment, increased medical costs, and fewer potentially lifesaving medical products being made available to patients.
This Issue Backgrounder focuses on the American Coatings Association’s (ACA’s) effort to find a way out of the morass of damaging mass-tort litigation, through an organization called the Access to the Courts Initiative, or ACI. ACI’s mission is to increase the number of diversity cases removable to federal court and to encourage Congress to finish the work it started when it passed the Class Action Fairness Act (CAFA), in order to provide a neutral forum for out-of-state defendants. ACI seeks to achieve this objective through a return to the fundamental principles embodied in Article III of the Constitution, which was specifically intended to avoid the perils of “home cooked” justice. The premise of the ACA/ ACI project is that the most effective solution for many of the problems of “Judicial Hellholes” is to restore the Founders’ original vision of diversity jurisdiction as a protection against bias toward out-of-state defendants in state courts
Unfortunately, ACA member companies have been targeted in a number of parens patriae lawsuits filed by private, contingency-fee attorneys on behalf of state attorneys general and local government officials pursuing out-of-state defendants as a source of revenue for their states. ACA, accordingly, has a unique perspective on the constitutional issues raised when out-of-state defendants are compelled to defend against mass action-type claims in state courts. It is for this reason that ACA has an active amicus program, whereby it regularly submits legal briefs in select cases on behalf of its members and other like-situated defendants as amicus, or “friend of the court,” where it may offer a unique perspective not provided by the parties to the legal issue before the court.
In 2013, ACA helped found ACI, a 501(c)(6) advocacy organization dedicated to promoting the common interests of its members in fair and expeditious access to federal courts for resolving interstate disputes, as envisioned by those who framed and ratified Article III, Section 2 of the Constitution. The central goal of the ACI is to codify, through federal legislation, the intent of the Framers of the Constitution that an out-of-state defendant be empowered to remove a case filed against it in a potentially biased state court to a neutral federal court. In essence, ACI seeks to clarify, through legislation, that “minimum diversity” rather than “complete diversity” should be sufficient for removal to a federal court. This remains a critical issue for our industry and businesses across the country, as the plaintiffs’ bar continues to file mass tort and serial litigation in biased state courts in their pursuit of friendly judgments and highly questionable theories of liability.
ACI is responding to the fact that the plaintiffs’ bar, heavily capitalized and very influential in state politics, has worked the court system to the severe disadvantage of out-of-state industry defendants, who now find themselves caught in the dragnet of state courts that often seem all-too-inclined to serve up “home-cooking.” The Access to Courts Initiative’s objectives are to systematically inform the public, properly influence courts, and persuade Congress to enact legislation consistent with the plain meaning of the actual wording of the U.S. Constitution. The writings of the Founders clearly instruct that such defendants are entitled to the assurance of fair trials for such disputes by having them heard in impartial federal courts, if desired.
ACA believes that this return to the Founders’ intent would secure substantial benefits to companies now caught in the currently tilted system of justice — companies that often find no choice but to settle often for outrageous sums, as they face the “decision” with a proverbial gun to their head. If armed with the ability to avail themselves of an unbiased federal court, these same companies would be able to proceed based upon the actual merits of a claim, with the assurance of a tribunal bound by neutral substantive and procedural rules. For example, rules that require that plaintiffs prove with real science and supportive facts that a defendant’s product actually caused the alleged harm(s) in the dispute.
As part of its effort to contribute to intellectual debate and increase the number of cases removable to federal court, ACI and the National Association of Manufacturers (NAM) filed an amicus brief on Sept. 10, 2013, in theU.S. Supreme Court in State of Mississippi ex rel. Jim Hood, Attorney General v. AU Optronics Corp., et al., No. 12-1036. In this case, the court was asked to resolve when lawsuits filed by state attorneys general that assert “monetary relief claims of 100 or more persons” can be removed from state court to federal court under CAFA.
The ACI/NAM brief urged the court that, “[I]n light of the plain language of Article III specifically extending federal jurisdiction to controversies such as this one and the important purposes such jurisdiction was intended to serve… CAFA should, at a minimum, be interpreted without any presumption against removal…Indeed, it should be interpreted generously, with a presumption favoring removal, to effectuate the constitutional design.”
While the Supreme Court ruled that there was no federal jurisdiction under CAFA “Because Mississippi is the only named plaintiff, this suit does not constitute a mass action under CAFA,” the court did not discuss the history or purposes of the diversity jurisdiction. Notably, it did not find, as urged by 45 state attorneys general, that states have a sovereign right to try out-of-state defendants in their own state courts. Rather, as ACI and NAM urged, the opinion treated the case as a matter of straight statutory interpretation without any thumb on the scale in favor of, or against, removal.
ON A MISSION
Charles J. Cooper, a noted Constitutional lawyer, states’ rights advocate, and member of the board of ACI, recently co-published an article in the Harvard Journal of Law and Public Policy with Howard C. Nielson Jr., a partner at Cooper & Kirk PLLC and Distinguished Lecturer at Reuben Clark Law School at Brigham Young University. In “Complete Diversity and the Closing of the Federal Courts,” Cooper and Nielson write that it “is because the Framers were apprehensive of actual or perceived state court bias in favor of local interests that they took care to extend federal jurisdiction, in the words of Alexander Hamilton in the Federalist Papers, to ‘cases in which the State tribunals cannot be supposed to be impartial.’”
The article demonstrates that, over the last 200 years, the federal courts have erected one barrier after another to federal jurisdiction, making it difficult, if not impossible, for out-of-state defendants to get their cases removed to the “neutral” tribunals federal courts were designed to be. These barriers are inconsistent with the plain language of the Constitution.
In passing the CAFA in 2005, the article notes, Congress took an important step toward restoring the protections against state court bias the Constitution was supposed to provide. The legislation itself states that a primary purpose of CAFA was to “restore the intent of the Framers of the United States Constitution by providing for federal court consideration of interstate cases of national importance under diversity jurisdiction.”
However, CAFA loopholes are the result of judicial and legislative departures from its original design: Article III, Section 2 mandates that “[t]he judicial Power shall extend to,” among other things, “Controversies between two or more States; — between a State and Citizens of another State; — between Citizens of different States; —between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.”
It is now time for that next step: ACI’s mission is to close loopholes to the Class Action Fairness Act and to promote straightforward legislation more consistent with Article III of the Constitution. ACA and ACI propose the codification of intent of Article III via The Fairness in Interstate Litigation ACT (FILA), by which 28 USC 1332 should be amended to provide that:
District courts shall exercise jurisdiction over any civil action in which the matter in controversy exceeds the sum or value of $75,000 (*The amount in controversy is subject to adjustment based on studies of the potential impact of FILA on federal court caseloads.*), exclusive of interest and costs, and the defendant is not a citizen of the forum state, when the controversy is between:
- Two or more states;
- A state and any citizen of another state;
- Any citizens of different states;
- Citizens of the same state claiming lands under grants of different states; or
- A state, or the citizens thereof, and foreign states, citizens or subjects.
Judge Hodges’ meticulous decision in Garlock makes clear that the time has come for Congress to finish the work it started with CAFA and to pass legislation, which codifies the intent of the drafters of the Constitution that the federal judicial power shall extend to controversies between a state and any citizens of another state and between any citizens of different states. Our Constitution’s Framers believed that out-of-state defendants should have a right to have their cases heard in a neutral federal court. Congress should make that right clear.
Former Sen. Christopher Dodd (D-CT) asked on the floor of the Senate while CAFA was being debated, “Why are Connecticut companies being trapped in Mississippi state courts?” That question stands today. It is indisputable that was not the intent of those who framed and ratified the Constitution in 1789 or of the Congress, which passed the Class Action Fairness Act in 2005.
Through its Amicus and Legal Tracking System program, ACA supports the coatings industry through targeted “friend of the court” briefs on selected issues of potentially broad impact, including the importance of sound science in the courtroom, the need for clear standards for corporate conduct, and fundamental rules of fairness that require plaintiffs to establish such foundational elements as improper conduct, causation, and damage as a precondition for judicial recoveries. Since the program’s 2007 inception, ACA has filed more than 40 amicus briefs. ACA’s briefs chiefly concentrate on toxic tort and public nuisance actions, insisting that tribunals require science-based proof, actual causation, and actual harm.