Action Sacked

This story appears in the August 2005 issue of Entrepreneur. Subscribe »

The class Action Fairness Act of 2005, signed into law by President Bush on February 18, includes provisions that should protect small businesses from the class-action lawsuits that have increased over the past 10 years. While the lawyers who file class-action suits have typically targeted large corporations in hopes of wrangling huge settlements, small businesses were often getting dragged in, too.

This was due to "forum shopping," one of the more nefarious practices of class-action plaintiffs' lawyers. Having chosen a defective product or unfair business practice and recruited thousands of citizens as plaintiffs, the lawyer would choose a jurisdiction known for awarding large settlements. For instance, Madison County, Illinois, saw 82 class-action filings in 2004, though almost none of the defendants were from that county. To claim a geographical connection, the lawsuit would name as a co-defendant a local business somehow connected to the target corporation--such as a drugstore that sold the prescription drug in question.

Under the new law, all class-action lawsuits with plaintiffs from more than one state will have to be filed in federal courts, which tend to be less sympathetic to these suits. More important for small businesses, the law, which is now in effect, eliminates the need for a local business as co-defendant.

Critics complain that the new law will mean many cases will never be heard. It's not always clear how state laws apply in federal courts, which already have crowded dockets, so federal judges often refuse to grant standing to class-action plaintiffs. But since many class-action suits these days have more to do with lawyers seeking big settlements than consumers, who typically get very little, that's not necessarily bad news.