Federal litigation - Where did it go off track?

Gregory P Joseph

Twenty-five years ago, it cost parties roughly the same to litigate in state and federal court. Plaintiffs chose federal court sometimes for expansive discovery or to get a good judge, even though state court was an available alternative and additur impermissible in federal court. Today, plaintiffs with non-federal causes of action flee federal courts, and those with federal claims scour the books for state law analogues. What happened?

1983: RULE 11

Federal Rule of Civil Procedure 11 has become a symbol of the disesteem into which contemporary litigation has fallen. Although the Rule was originally adopted in 1938, it had no real bite for 45 years. All that changed in August 1983, when it was amended to mandate compliance with objective standards and require judges to impose sanctions if those standards were not met. While there were more than 7,000 Rule 11 decisions reported on LEXIS during the first 10 years following the August 1983 amendment, it is apparent from the Federal Judicial Center's empirical studies that the actual activity under the Rule dwarfs this number. Rule 11 created a momentum for parties to seek sanctions against one another (predominantly, defendants seeking sanctions against plaintiffs) that did not abate even after the mandatory features of the rule were excised in 1993.


In 1986, the Supreme Court rendered three decisions intended to reinvigorate summary judgment practice in the federal court. Distinguished researchers at the Federal Judicial Center take the view that the increase in summary judgment is more attributable to the emphasis on managerial judging and changes in the civil rules that preceded the trilogy, rather than the trilogy itself. Whether the Summary Judgment Trilogy is the cause or an effect, there is no doubt that the number of summary judgment motions has increased over the past 25 years in commercial litigation. Coupled with subsequent developments (read Daubert), summary judgment motions have become part of virtually all substantial federal civil litigation.


Just in case Rule 11 was not bad enough, the Supreme Court declared in 1991 that the rules of civil and appellate procedure do not completely describe and limit the power of federal judges to sanction litigation misconduct. In Chambers v NASCO, Inc, 501 US 32 (1991), the court described and contoured the inherent judicial power to levy sanctions in response to abusive litigation practices. If sufficient time, money and vitriol had not been spent on sanctions motions before Chambers, the Supreme Court's decision gave accelerated the trend (with more than 2,300 reported inherent-power sanctions cases since Chambers was decided).
1993: DAUBERT; RULES 26(a)(2) AND 37(c)(1); RULE 26(a)(1) WITH OPT-OUTS 1993 witnessed a trifecta. First, the Supreme Court decided Daubert v Merrell Dow Pharms, 509 US 579 (1993). Initially, Daubert was perceived as liberalising the admissibility of expert evidence - especially novel scientific evidence - because it rejected the strictures of the Frye test. What a blunder. In December 2000, when the Advisory Committee on the Federal Rules of Evidence codified Daubert in Rule 702, it stressed in the Committee Note that: ‘A review of the caselaw after Daubert shows that the rejection of expert testimony is the exception rather than the rule. Daubert did not work a ‘seachange over federal evidence law,' and the trial court's role as gatekeeper is not intended to serve as a replacement for the adversary system'. Seven years later, compare the Third Circuit's observation in United States v Ford, 481 F3d 215, 220 n6 (3d Cir 2007): ‘Although we do not adopt the apparent presumption of exclusion enunciated by the Ninth Circuit, we agree with the spirit of our sister court's exhortation. In particular, district courts should tread carefully when evaluating proffered expert testimony, paying special attention to the relevance prong of Daubert.' The seachange may have approached covertly, but it has overtaken us.
Second, the Supreme Court promulgated the first mandatory disclosure rules. The expert disclosure rule (Rule 26(a)(2)(B)) immediately went into effect nationwide, mandating detailed reports and authorising expert depositions as a matter of course. District courts were allowed to opt out of fact disclosure (Rule 26(a)(1)) and the default pretrial order provision (Rule 26(a)(3)).
Third, the Supreme Court promulgated Rule 37(c)(1), the most important rule of evidence contained in the Federal Rules of Civil Procedure. Rule 37(c)(1) provides a self-executing sanction for a party's failure to disclose information required by Rule 26(a) without substantial justification. It bars the derelict party from using at trial, at a hearing or even on a motion any information - including the testimony of any witness - that was not but should have been disclosed pursuant to Rule 26(a) or (e)(1).


Over a Presidential veto, Congress enacted the Private Securities Litigation Reform Act to curtail securities class actions by imposing a series of procedural, pleading and substantive hurdles. In addition, the PSLRA barred Racketeer Influenced and Corrupt Organizations Act (RICO) claims based on conduct that would be actionable as securities fraud. Putting aside the wave of litigation associated with the huge corporate scandals of the early 2000s (Enron, WorldCom, Adelphia, Global Crossing) and the thus-far unsuccessful IPO litigation that is now largely behind us, the number of securities class actions has fallen substantially. And the RICO bar now extends to conduct that is not actionable by any private plaintiff, let alone the plaintiff before the court.


To prevent plaintiffs from circumventing the PSLRA by filing class actions in state courts, Congress passed and the President signed the Securities Litigation Uniform Standards Act of 1998. SLUSA permits defendants to move securities cases from state to federal court - including cases brought on behalf of plaintiffs who have no standing to sue for securities fraud in a federal court. Once in a federal court, SLUSA proceeds to abrogate all state law claims for relief.

2000: RULE 26(a)(1), (3) IMPOSED NATIONALLY; 37(c)(1) EXTENDED TO

In 2000, mandatory fact disclosure became the law of the land (no more opt-outs), and additional teeth were put in Rule 37(c)(1). The self-executing preclusion sanction was expanded to cover discovery as well as well as disclosure.

2003: RULE 23(f)

The 2003 class action amendments to the Federal Rules of Civil Procedure permitted appeals of class certification decisions, in the discretion of the appellate court. By 2006-07, this had effectively become a vehicle for appellate review of denials of motions to dismiss (which are unreviewable orders), under the Second Circuit's decisions in the Initial Public Offering Securities Litigation (Miles v Merrill Lynch & Co, 471 F3d 24 (2d Cir 2006) and 483 F3d 70 (2d Cir 2007)), and the Fifth Circuit's decision in Enron (Regents of the University of California v Credit Suisse First Boston, 482 F3d 372 (5th Cir 2007).

2005: DURA

The Supreme Court's 2005 decision in Dura Pharms, Inc v Broudo, 544 US 336 (2005), ostensibly concerned only the loss-causation requirements of the Private Securities Litigation Reform Act. Much like Daubert, the Dura opinion appeared relatively uncontroversial on first reading - just a pleading decision, and not a harsh one at that. As reflected in the fact that Dura was cited in more than 1,300 cases in a little more than two years after it was decided, the case has taken on a life of its own, imposing demanding causation requirements in cases of all sorts, with rare exception (eg, Merrill Lynch & Co v Allegheny Energy, Inc, 500 F3d 171 (2d Cir 2007)). In 2007, Dura became one of the progenitors of Twombly, a non-securities case of universal civil application.


The electronic discovery amendments to the Federal Rules of Civil Procedure in 2006 build additional cost into every case not only by mandating that the parties focus on electronic discovery from the outset of the litigation but also by erecting a series of battlegrounds (format, accessibility, cost-shifting) over which the parties wage war, as they search incessantly for spoliation. The lasting legal legacy of the current era of electronic discovery will most likely lie in the area of spoliation and sanctions. Parties long not so much for data as for evidence that data have been lost or destroyed. The prospects for meaningful sanctions are generally much higher in federal than in state court.
Ever-sensitive to the caseloads of state courts, Congress also enacted the Class Action Fairness Act in 2006 to pull into federal court as many state court class actions as possible - leading to more than 250 reported removal or remand decisions in the first 18 months of the statute's existence.


In 2007, the Supreme Court decided in the IPO Antitrust Litigation (Credit Suisse Sec (USA) LLC v Billing, 127 S Ct 2383 (2007)), that antitrust law is so complicated it could not even trust federal judges to get it right: ‘There is a serious risk that antitrust courts, with different nonexpert judges and different nonexpert juries, will produce inconsistent results'. This led the Court to conclude that certain behaviour subject to Securities and Exchange Commission regulation should be permitted no matter how anticompetitive it may be.
The Supreme Court also rewrote federal pleading requirements in 2007, without even amending the pleading rules, by issuing its decision in Bell Atlantic Corp v Twombly, 127 S Ct 1955 (2007). Twombly reversed a 50-year-old precedent holding that a complaint should not be dismissed for failure to state a claim ‘unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' Instead, the plaintiff must make ‘a ‘showing,' rather than a blanket assertion, of entitlement to relief,' and this necessitates ‘some factual allegation in the complaint.' The new duty is to furnish factual ‘allegations plausibly suggesting (not merely consistent with)' an ‘entitlement to relief.'
As of 10 November 2007 - less than six months after it was rendered - the revolutionary Twombly opinion had been cited in a remarkable 2,000 cases.
Collectively, rule changes, legislation and Supreme Court decisions over the past quarter century have made federal court procedurally more complex, risky and expensive. Plaintiffs who can avoid federal courts do so, while defendants strain to achieve a federal forum. Forum-shopping incentives have been institutionalised.

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