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The American Law Institute Proposal to Bring State Law Small Claims Class Actions
Creighton Law Review (2002)
  • Lloyd C. Anderson, University of Akron School of Law
Nearly thirty years ago, the United States Supreme Court held in Zahn v. International Paper Co., that every member of a federal court class action asserting claims based solely upon state law must have a claim in excess of the minimum amount in controversy required by the statute conferring federal subject matter jurisdiction based upon diversity of citizenship. The Zahn decision had the effect of eliminating federal jurisdiction over small-claim state-law class actions, thus requiring such actions to be filed in state court. The prestigious American Law Institute (ALI) is now considering a proposal to recommend to Congress that it abrogate the Zahn decision through legislation that would grant federal courts supplemental jurisdiction over claims of class members, so long as the named plaintiffs' claims exceeded the minimum jurisdictional amount. The current supplemental jurisdiction statute provides federal district courts with jurisdiction over nonfederal claims that are substantially related to federal claims, but it does not expressly extend such jurisdiction to class actions. The ALI proposal, however, would replace the current statute and, in the process, make it explicit that supplemental jurisdiction extends to class actions. This proposal, if adopted by Congress, would reverse three decades of class action jurisprudence and foster the return of small-claim class actions based upon state law to federal court, either by plaintiffs who choose to file suit in federal court or by defendants who elect to remove such actions, originally filed in state court, to federal court. The ALI proposal to overturn Zahn is embedded in a broader proposal to address perceived problems with the current supplemental jurisdiction statute, and it must be understood in that context. Congress enacted the current statute (28 U.S.C. § 1367) in 1990, in response to the Supreme Court's decision in Finley v. United States. In Finley, the Court held that federal courts may not exercise pendent jurisdiction over claims by plaintiffs that lack an independent basis of jurisdiction, even if such claims are closely related to claims by other plaintiffs over which federal courts do have jurisdiction (known as pendent party jurisdiction). The Court reasoned that Congress had not conferred statutory authority to exercise pendent party jurisdiction. Pendent jurisdiction, and its sister ancillary jurisdiction, were long-established, judicially-created doctrines that were designed to facilitate joinder of related claims and parties, as a means of efficiently packaging litigation in a single forum. The Finley decision, however, did not merely eliminate pendent party jurisdiction. It also cast doubt upon the legitimacy of pendent and ancillary jurisdiction in their entirety, because they were judge-made doctrines with no statutory basis. Thus, out of concern that the court had upset well-settled understandings of federal jurisdiction in a way that threatened efficient joinder of claims and parties, Congress soon enacted the current statute. This statute was intended to restore pre-Finley jurisdictional law, codify the doctrines of pendent and ancillary jurisdiction under the common terminology of supplemental jurisdiction, and abrogate the holding in Finley. A storm of academic criticism quickly engulfed the infant statute. Commentators charged that it unduly restricted the use of supplemental jurisdiction in diversity cases and that, read literally, it would abrogate well-settled rules of jurisdiction in diversity cases and prevent efficient packaging of federal diversity cases. Over the next decade, federal courts of appeals rendered conflicting interpretations of the statute. In particular, a difference of opinion emerged over the effect of the new statute on small-claim state-law class actions. In In re Abbott Laboratories, the Fifth Circuit adopted the literal reading of the statute and held Congress had abrogated Zahn. In contrast, the Tenth Circuit in Leonhardt v. Western Sugar Co., refused to read the statute strictly, concluding that Congress did not intend to overrule Zahn. The criticisms and split of judicial authority led to calls to amend the statute, and the ALI took up the challenge. Its latest tentative proposal would completely reconceptualize supplemental jurisdiction in “claim-specific” terms, and codify much of the prior law of supplemental jurisdiction in diversity cases. At the same time, it would abrogate other pre-existing jurisdictional law, generally expanding the scope of diversity jurisdiction. Specifically, the ALI proposal would expressly abrogate Zahn, thus permitting plaintiffs--or defendants on removal--to channel small-claim state-law class actions into federal court. The thesis of this Article is that this particular proposal lacks sufficient justification at best, and at worst reflects profound disrespect for the proper role of state courts, in our constitutional system, to adjudicate matters of state law. As such, the ALI should drop this particular proposal from any supplemental jurisdiction statute it proposes to Congress, and, if the ALI retains this proposal in a recommendation to Congress, Congress should reject it. Part I of this Article describes the law of diversity jurisdiction that provided the backdrop for the decision in Zahn and analyzes the Zahn decision itself. Part II examines the genesis of the current supplemental jurisdiction statute, from its common law antecedents of pendent and ancillary jurisdiction, through the controversial decision in Finley, to its current form. Part III explains the ALI proposal to amend the statute by reconceptualizing supplemental jurisdiction in claim-specific terms, codifying some jurisdictional doctrines, and abrogating others, including Zahn. Part IV analyzes the justifications for overruling Zahn and rechanneling small-claim state-law class actions into federal court. Part IV also provides a rebuttal of each such justification, especially the notion that federal courts are superior to state courts in managing complex, multi-state litigation. The Article concludes that there is insufficient justification for abrogating Zahn, and that doing so contravenes the constitutional structure of our government. Thus, this portion of the ALI proposal should be rejected.
  • American Law Institute,
  • small claims class actions,
  • federalism
Publication Date
Citation Information
Lloyd C. Anderson, The American Law Institute Proposal to Bring State Law Small Claims Class Actions, 35 Creighton Law Review 325 (2002).