The Supreme Court Restricts the Class Action:Zahn v. International Paper

In recent years, the class action has become a favorite tool of public interest lawyers and of small plaintiffs attacking large corporate defendants. It has, however, fallen into disfavor in many federal courts because of its potential for abuse. In December 1973, the Supreme Court dealt a not unexpected blow to the Rule 23 (b) (3) class action, ruling in Zahn v. International Paper Co.¹ that all members of the class, not merely the named plaintiffs, must satisfy the $10,000 jurisdictional amount for diversity suits in federal courts. The six-man "new majority" of the current Supreme Court declared its result to be dictated by the logic of Snyder v. Harris,² the 1969 decision in which the Court ruled that two or more plaintiffs with separate and distinct claims, none of which individually reached the $10,000 level, could not aggregate their claims to meet the statutory amount. Justices Brennan, Douglas, and Marshall dissented, arguing that Snyder was not controlling. The decision is not likely to have a major impact on environmental law, though other public interest litigators, particularly those representing consumer groups, may be hard hit.

The suit was brought by four Vermont lakeshore property owners on behalf of themselves and more than two hundred other unnamed members of the class, seeking recovery for damage caused by discharges into Lake Champlain from the International Paper Company's pulp plant located on the New York side of the lake. The district court refused to permit the suit to proceed as a class action, and the Second Circuit Court of Appeals affirmed. In upholding the appellate court's decision, the Supreme Court ruled that the district court could properly exercise jurisdiction over the four named plaintiffs, each of whom alleged damages of more than $10,000, but that the claims of all others must be dismissed for failure to show the requisite amount of injury.

[4 ELR 10035]

The major issue in the case was whether the statutory requirement that the "matter in controversy" must be $10,000 or more refers to the claim of the individual plaintiff or to the cause of action. The majority had no difficulty finding that the statute demanded that every plaintiff meet the jurisdictional amount. Snyder v. Harris, which held that the named plaintiffs in a shareholders' derivative action could not aggregate several claims of under $10,000 to reach the required sum, was cited as authority for this restrictive approach. Justice Brennan's well-reasoned dissent pointed out that Snyder dealt with the initial attempt to bring a cause of action before a federal court. In Zahn, on the other hand, the named plaintiffs' cause of action was undisputedly within the jurisdiction of the court. Therefore, according to the dissenters, the doctrine of ancillary jurisdiction should have been applied to permit litigation of other, smaller claims, which although not capable of being maintained independently in federal court involved substantially identical questions of law and fact. Except in states which have their own provisions for class actions, each plaintiff with a claim under $10,000 will now be forced to secure his own attorneys and expert witnesses and bring his action individually in state court; the obvious result will be a glut of redundant litigation in state courts, while many meritorious claims will not be brought because the cost of asserting them would exceed the recovery.

Environmental litigation in the past few years has concentrated on enjoining harmful activities or compelling beneficial acts before the damage has taken place; ensuring that adequate compensation is paid after the fact is at best a secondary goal. While this decision will not impede the work of lawyers seeking to prevent environmental damage, it does remove an important deterrent against such behavior, as the awards in major class actions can be astronomical.

The Supreme Court's restriction on the class action can in part be explained by the zeal of Chief Justice Burger and other recent appointees to the Court for cutting down the caseload of the federal judicial system. But the hostility of the courts to the class action must in large part be attributed to its frequent abuse. Because the attorney under a contingent fee agreement may receive 40 or 50 percent of the entire recovery, he becomes in effect the largest single claimant in any case. All too often, it is the attorney who finds the plaintiffs, rather than the other way around, and who obtains a windfall. Many shareholders' derivative actions have been brought with no intention of going to trial; the object is instead to induce a quick settlement from a company fearful of the cost in money and time of fighting the action. Often members of the class have no actual notice that their claims are being litigated; the Second Circuit in 1973 tightened the requirements on giving notice to members, in a decision which the Supreme Court is expected to affirm shortly.³

In a recent case in federal district court in Washington, D.C., Judge Charles Richey disallowed a contingent fee agreement in a suit brought against the United Mineworkers by retired unionists to recover pension benefits wrongfully denied them,⁴ and stated that in his court, such agreements in class action cases would henceforth be void as against public policy. The judge stated that he himself would decide what fee would be just, taking into account the time and effort expended, the novelty and difficulty of the issues, the skill required, the extent to which the attorney could draw on earlier cases, the risk involved, and the results obtained for the clients. Judge Richey determined that in the case before him, a fee of $62,048 was justified; had the contingent fee agreement been allowed to stand, the attorney would have received more than $1,600,000. Judicial intervention in such instances is necessary, the court observed, if the legal profession is to refute the charge expressed by an old Italian proverb: "A lawsuit is a fruit tree planted in a lawyer's garden."

The fact that the class action is susceptible of abuse does not detract from its desirability for legitimate uses in such areas of the law as consumer protection and, to a lesser extent, environmental law. Clearly what is needed is new legislation from Congress which can at the same time make the class action more effective and less subject to abuse. Reform would seem appropriate in three areas. First, the reasoning expressed by the dissenters in Zahn should be applied to allow the courts to exercise jurisdiction so long as one named plaintiff meets the $10,000 limit. Without such a provision the usefulness of the class action is greatly diminished. Second, Judge Richey's criticism of contingent fee arrangements in class actions and his remedy for the problem should be incorporated into the law. Third, better provision should be made for assuring adequate notice to all members of the class, so that a person's rights are not adjudicated without his knowledge. Certainly it is preferable that these reforms be effected in the class action than that it become a dead letter.

1. 4 ELR 20100 (U.S. Dec. 17, 1973).

2. 394 U.S. 332 (1969).

3. Eisen v. Carlyle & Jacqueline, 479 F.2d 1005 (2d Cir., May 1, 1973), cert. granted, 42 L.W. 3212. (Oct. 15, 1973).

4. Kiser v. Miller, 364 F. Supp. 1311 (D.D.C. 1973).