In in Mississippi ex rel. Jim Hood, Attorney General vs. AU Optronics Corp, the Supreme Court can rein in an abuse by state attorneys general.
Nov. 5, 2013 7:17 p.m. ET
When Congress rewrote the law on class-action lawsuits in 2005, it didn't figure on being thwarted by the nation's top law enforcers. Now the Supreme Court has a chance to close what has become a large and illegal loophole.
The High Court on Wednesday will hear arguments in Mississippi ex rel. Jim Hood, Attorney General vs. AU Optronics2409.TW -0.22% Corp. The protagonist is Mississippi AG Jim Hood, who is famous for moonlighting as a job creator for his trial-lawyer donors. The question is whether Mr. Hood's "state" lawsuits are really an attempt to circumvent the 2005 federal Class Action Fairness Act (Cafa).
In 2006 the Justice Department conducted a grand jury probe into alleged price-fixing by makers of liquid crystal display screens (LCDs). Some companies settled with the feds, others refused and weren't charged. The trial bar piled on with 100 or so copycat class actions.
In 2011 Mr. Hood filed his own lawsuit on behalf of his state, municipalities and Mississippians who purchased LCDs. His suit named the same six manufacturers targeted by the private class-action litigation, and 176 of his 206 paragraphs of allegations were verbatim or near-verbatim copies of the private litigation. This was no surprise since one of the two law firms Mr. Hood hired to prosecute his state suit—Zimmerman Reid—has also filed private LCD class actions.
This all looks like a run around the 2005 class-action reform. That law allows defendants hit with civil claims by 100 or more persons to seek removal to federal court, where the rules on classes are stricter and defendants can avoid biased state juries. The private LCD class actions have already been moved to federal court in San Francisco, and at least one defendant, Toshiba, 6502.TO +0.47% has won a case.
Mr. Hood and his trial-bar friends are trying to evade federal law by running their class-action through the AG's office. Mr. Hood's retention agreement with Zimmerman Reid and another firm, Abraham & Rideout, reads: "Assume Recovery by the State of Mississippi of a monetary, sum, benefit, or value equal to $600,000,000.00." Yes, $600 million.
The agreement stipulates a sliding scale payout for lawyers in any settlement, ranging from a 1% fee (for a settlement above $1 billion) up to 15% (for a mere $25 million win). Such contingency arrangements are routine in Mr. Hood's office and they are often made with out-of-state trial firms whose partners contribute to Mr. Hood's election coffers.
The defendants want Mr. Hood's class actions moved to federal court the way private suits are. Mr. Hood is resisting on federalism grounds, claiming he's obstructed from enforcing his state's laws. In fact, Congress's reform took special care to preserve state rights. Cafa excludes legal actions centered entirely within a state (versus interstate class actions). It also excludes cases in which the state itself is a defendant. Mr. Hood retains sweeping authority to bring a cross-border class action as long as it is heard in federal court.
Mr. Hood also claims that he can bring his suit because he is its only "named plaintiff." He wants the Justices to ignore that he is asserting claims on behalf of thousands of LCD purchasers, and that Cafa is clearly aimed at any "mass action" that could result in a "monetary" judgment.
Congress wrote the law with a particular worry about aggregated claims whose potential liability could cripple a defendant. Even Mr. Hood acknowledges that any illegal conduct ceased years ago, so his real interest is in financial restitution—precisely the sort of high-dollar "monetary" case that Cafa was designed to cover.
During the Cafa debate, 46 state AGs supported an amendment by Arkansas Senator Mark Pryor to exempt state AG actions. Utah Senator Orrin Hatch warned at the time that the exemption would "create a loophole that some enterprising plaintiffs' lawyers will surely manipulate in order to keep their lucrative class action lawsuits in State court." The Pryor amendment lost, 60-39.
The Fifth Circuit Court of Appeals ruled against Mr. Hood, but three other U.S. circuit courts have taken the opposite position in similar cases. The Supreme Court has a chance to clarify federal law and block a state dodge that is preventing the class-action reform that Congress intended.