March 31, 2010

Supreme Court Decides Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co.

On March 31, the Supreme Court decided Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., No. 08-1008, holding that a federal court could entertain a class action based on a claim under New York state law, even though a New York statute prohibited class actions for the type of relief that the action was seeking.

When Allstate Insurance failed to pay its policyholder, Shady Grove, interest that had accrued on Shady Grove's policy claim, as required by a New York statute, Shady Grove filed a putative class action in federal court. The district court held that it lacked diversity jurisdiction over the claim, because another New York statute prohibits class actions to recover a "penalty," including the type of remedy that Shady Grove was seeking, and Shady Grove's individual claims did not meet the amount-in-controversy threshold. The Court of Appeals for the Second Circuit affirmed, holding that the statute prohibiting class actions in this situation was a "substantive" state law under Erie Railroad Co. v. Tompkins and that a federal court therefore was required to apply it to Shady Grove's diversity-based claim, although Rule 23 of the Federal Rules of Civil Procedure would have permitted the class action.

The Supreme Court reversed. In a portion of the opinion joined by five justices, it first held that Rule 23 and the statute were in conflict. The Court rejected as artificial the Second Circuit's attempt to distinguish Rule 23 and the statute by saying that the former addresses the criteria for certifying a class and the latter addresses whether a particular claim is "eligible" for class treatment. Rather, the Court said, Rule 23 requires a federal court to permit a plaintiff to maintain a class action whenever the Rule's criteria are met, and it therefore supersedes a contrary provision of state law—unless, of course, Rule 23 is not a valid exercise of federal rule-making authority.

As to that latter question, no analysis commanded a majority of the Court. Three justices joined an opinion by Justice Scalia reasoning that the Rules Enabling Act, not Erie, controls the validity of a federal Rule and that, as long as a rule "really regulates procedure," it is valid under the Enabling Act even if it incidentally affects a party's substantive state-law rights. The question is not whether the state law can be characterized as substantive rather than procedural, but whether Rule 23 is procedural—which it is. "A class action, no less than traditional joinder (of which it is a species), merely enables a federal court to adjudicate claims of multiple parties at once, instead of in separate suits. And like traditional joinder, it leaves the parties' legal rights and duties intact and the rules of decision unchanged."

Justice Stevens, who provided the fifth vote for the Court's judgment, was unwilling to go this far. He suggested that a federal Rule would be improper under the Enabling Act if it displaced state procedural rules that "function as a part of the State's definition of substantive rights and remedies." But New York's bar against class actions seeking "penalties" is not such a statute; it is purely a procedural rule that is not part of New York's substantive law.

Justice Scalia announced the judgment of the Court and delivered the opinion of the Court, in which Chief Justice Roberts and Justice Thomas joined and Justices Stevens and Sotomayor joined in part. Justice Stevens filed an opinion concurring in part and concurring in the judgment. Justice Ginsburg filed a dissenting opinion in which Justices Kennedy, Breyer, and Alito joined.

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