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Capitol Comment 242 – Class Action Torts and Federalism

Before Congress adjourns for its summer recess, the House Judiciary Committee is set to consider legislation designed to enhance federal “diversity jurisdiction” over class-action liability cases. The purpose of H.R. 1875, the Interstate Class Action Jurisdiction Act, is to make it easier for defendants in multi-state class-action torts to transfer their cases from state courts to federal court.

As it becomes more and more a form of regulation, tort law will become more susceptible to structural tinkering designed to benefit special interests, much like the tax code.

Interestingly, the proposed class action diversity bill is supported by many of the same forces — namely, conservative Republicans and the business community — that have applauded the transfer of power from Washington to the state capitols. On the other hand, those who wish to preserve the dominance of state courts in class-actions — namely, trial lawyers and their allies in the Democratic party — are generally among the most consistent champions of federal supremacy vis-a-vis the states. Both sides understand, however, that large-scale tort litigation has become a full-blown substitute for economic regulation. And given a choice, American businesses would rather be regulated by federal courts. Plaintiff attorneys prefer state courts, mainly because of the opportunities for forum shopping that state jurisdiction affords. Which course best serves the public?

Class-action tort law as a form of regulation. It was only last February that former Clinton Administration Labor Secretary Robert Reich informed readers of USA Today that “the era of big government may be over, but the era of regulation through litigation has just begun.”1 But in fact, regulation through litigation has been going on since at least the 1960s. Then, legal scholars began promoting the idea that tort litigation should no longer be viewed strictly as a mechanism for forcing at-fault parties to compensate the losses of those whom they harmed, but rather as a way to force businesses to alter practices bearing on matters as varied as product design, marketing, hiring and promotion, worker health and safety, and the natural environment. Liberal judges helped facilitate the regulation-through-litigation movement by repudiating and replacing legal rules and theories that had been entrenched for decades.

A persuasive case can be made that the trend toward regulation through litigation is a dangerous assault on the Constitution’s separation of powers. Nevertheless, the trend is gaining momentum, so much so that as a practical matter, the relevant question, at least for the time being, is not whether regulation through litigation is constitutional, but whether de facto regulation of large national industries should occur under the aegis of federal courts rather than state courts. The latter, after all, are the traditional venue for tort litigation. But problems arise when state courts regulate business through the medium of the class-action lawsuit.

Consider the case of Rosen v. Primus Automotive Financial Services.2 Attorneys representing a plaintiff class consisting of millions of motorists filed suit in a Minnesota district court, contending that auto leasing companies should be required to pay interest to consumers on their security deposits. The district court’s ruling in the plaintiffs’ favor applies not only to any Minnesotan who pays a security deposit in connection with an auto lease, but to millions of people in 43 other states as well. Perhaps requiring interest payments on security deposits is good public policy, but should one state court be allowed to make that decision for virtually the entire country?

In effect, regulation through litigation in state courts allows jurors in one state to impose local values on the citizens of other states. A state that wished to increase competition in the auto leasing industry by attracting more firms to the market might decide that legally mandated interest payments on security deposits would run counter to that objective. Furthermore, apart from impinging on other states’ sovereignty, allowing fifty state courts to regulate interstate commerce can only result in a patchwork regulatory regime characterized by uncertainty and inefficiency. A federal court would be more inclined to balance competing state interests, and to promote consistency and uniformity — the sine qua non of any regulatory regime.

Class-action jurisdiction and the Constitution. Nowadays, “federalism” is usually invoked by partisans who wish to advance the cause of state and local authority over that of the national government. Indeed, there is no shortage of recent cases that illustrate the tendency of federal courts to intrude into precisely the sort of social policy issues that the Constitution leaves to the states. But apart from insisting that Congress refrain from extra-constitutional meddling in social policy, a proper understanding of federalism also acknowledges the substantial role that the Constitution’s Framers envisioned for the national government in managing the country’s economic affairs. Much of the impetus for the Constitutional convention of 1787 can be traced to the woeful state of interstate commerce and trade under the Articles of Confederation. It is no small matter that the Framers conferred upon Congress an explicit authority over “commerce … among the several states.” The Framers wanted the national government to correct the enervating tendency of states to behave toward each other in ways that are predatory, protectionist, or otherwise self-serving. There is no reason to think such conduct is less likely to occur today than in the eighteenth century. Thus, for state courts to preside over regulation-by-litigation is to invite the very economic pathologies that the federal Constitution was written in part to prevent.

As it becomes more and more a form of regulation, tort law will inexorably lose its jurisprudential trappings and become more “political” — that is, more susceptible to structural tinkering designed to benefit special interests, much like conventional regulatory regimes and tax codes. The folly of transforming tort law into a de facto national regulatory system will be mitigated if interstate class action litigation is administered under federal auspices. Americans rejected the anti-federalist position on economic regulation more than two centuries ago, for good reason, and to good effect — we should do the same today.

1Robert Reich, “Litigation is out, regulation is in,” USA Today, February 11, 1999.

2No. CT 98-002733 (Minn. filed June 23, 1999).