The GOP-pushed legislation would have taken most class-action lawsuits out of the hands of state courts — which often award multimillion-dollar judgments — and would have given jurisdiction to federal courts seen as less likely to grant such lucrative sums.
The Senate voted 59-39 — one vote short — on a motion aimed at breaking a Democratic filibuster.
"The message of this vote is that it is now time for us to sit down and negotiate. We recognize the need for reform but we also recognize that we've got to do it right," Senate Democratic Leader Thomas Daschle said after the vote. His Republican counterpart, Sen. Bill Frist, voiced regret that the matter couldn't be brought to a vote on the merits of the bill.
The GOP and their Democratic supporters pushed hard for legislation staunchly favored by businesses and corporations which say they're being sued out of existence.
But Democrats have said the bill was designed principally to hurt trial lawyers who litigate those cases and help businesses escape substantial monetary judgments for their wrongdoing.
Trial lawyers give most of their campaign contributions to Democrats, while business tends to support the GOP.
Republican senators complained that trial lawyers make more money from class action lawsuits than the actual victims, and said attorneys sometimes threaten companies with lawsuits in order to get quick financial settlements.
Moving the cases to federal court would curb frivolous lawsuits and keep trial lawyers from getting millions of dollars in fees while their clients get little compensation, GOP senators say. Federal courts are assumed to be less likely to issue multimillion-dollar verdicts against big corporations.
"U.S. companies are being driven into bankruptcy to pay for the cost of frivolous lawsuits," said Sen. George Voinovich, R-Ohio.
With a few Democratic senators on board, Senate GOP leaders say they have enough votes to approve the bill, which has already passed the Republican-controlled House. President Bush has said he would sign the legislation, which administration officials called an "important step in reforming class action litigation."
"The bill will remove significant burdens on class action litigants and provide greater protections for the victims whom the class action device originally was designed to benefit," the White House said in a statement Tuesday.
Democrats, who had said in advance of Wednesday's floor showdown that they had the necessary 41 votes, argued that the bill was written to reduce business liability at the expense of people who are injured by corporate wrongdoing.
"Defendant corporations don't want to be held liable for their misconduct and if held responsible they want to pay less money and that's what it comes down to," said Sen. Richard Durbin, D-Ill. "That's what this is all about. They want to protect themselves and limit their liability."
Democrats also say the bill was meant hurt to trial lawyers, a perennial Republican target.
Under both the House and Senate versions of the bill, class-action lawsuits in which the primary defendant and more than one-third of the plaintiffs are from the same state would still be heard in state courts. But if less than one-third of the plaintiffs are from the same state as the primary defendant, the case would go to federal court.
Also, at least $5 million would have to be at stake for a class-action lawsuit to be heard in federal court.