May a Federal Court Dismiss a Class Action That is Barred by State Law, or Does Federal Rule of Civil Procedure 23 Prevail?

Abstract

This article previews the issues and arguments in Shady Grove Orthopedics Associates v. Allstate Ins. Co., a case before the Supreme Court on its 2009-10 Term docket. In this case, the Court will address the issue whether federal courts in diversity class actions must apply state provisions that limit or prohibit certain categories of class actions, or whether the federal class action Rule 23 trumps the field so as to override any countervailing state law provisions? 

A provision of the New York state civil code prohibits plaintiffs from pursuing a class action to recover statutory penalties or minimal recoveries. The plaintiff Shady Grove Orthopedics filed a class action in New York federal court to recover a 2% monthly late payment fee, on behalf of all class members, from the defendant Allstate Insurance Company. The federal district court applied the New York state provision that prohibits class actions for penalties or minimal recoveries, and dismissed the federal class action. The Second Circuit affirmed. The Supreme Court must decide whether the federal class action Rule 23, which contains no such prohibition on penalty fee cases, applies; or whether the lower federal courts were correct in dismissing the lawsuit based on New York state law.

This Shady Grove appeal involves an Erie problem familiar to every first year law student and presents an almost paradigmatic Erie examination question. The Shady Grove appeal could have significant consequences for the ability of plaintiffs to pursue certain federal diversity class actions, where state law would prohibit the prosecution of those same claims as a class action in state court.

The ultimate outcome in Shady Grove may very well hinge on which analytical model―which mode of Erie analysis―the Court chooses to resolve the issue whether the federal court was obligated to apply the New York limitation on penalty class actions. The parties to this appeal fundamentally disagree concerning which is the appropriate mode of Erie analysis to resolve the issue of state class action law in federal courts. Consequently, the parties also disagree concerning the appropriate conclusion under Erie analysis.

The Court’s resolution of the Erie dispute in Shady Grove is indeed significant for litigants potentially involved in class action litigation. The high-stakes nature of this appeal is captured by the amici aligned on both sides of the dispute. And, the appeal in Shady Grove demonstrates that litigation often can create strange bedfellows.

Public Justice, Inc. has joined with Shady Grove ― represented by Public Citizen ― to press the case for allowing federal Rule 23 to override any state laws or rules that would inhibit the ability of state plaintiffs to aggregate their claims in a class action, and to then pursue those class action claims in a federal court. To this end, these public interest law advocates focus on a discussion of the historical role of federal class actions as a vehicle for vindicating the rights of large numbers of injured claimants. In the Petitioner’s view, plaintiffs should be able to choose a federal forum to vindicate rights under state law, and federal Rule 23 should provide the only procedural yardstick for determining whether a proposed class action should proceed. To permit state procedural rules, including limitations on class actions, to frustrate the ability to pursue a federal class action would be unfair and inequitable.

Allstate is joined with amici from a variety of business and tort reform organizations,  arguing that New York’s state’s substantive policy decision to limit the eligibility of certain types of claims from class action treatment should be upheld through application of Erie doctrine, when such claims are pursued in federal court under Rule 23. The Respondent and its amici focus their policy arguments concerning the potential abusive nature of class action litigation, and the unfairness of permitting small penalty fee cases to balloon into exponential liability litigation merely by filing in federal court. Allstate notes the blackmail effect of class action litigation, and argues that state plaintiffs ought not to be able to gain such leverage by bringing a penalty class action in federal court, when they otherwise would be barred from doing so in state court.

Allstate and its amici attempt to focus the Court’s attention on this problem through its two Appendices which provide a sample list of federal and state statutory provisions that limit certain causes of action from being litigated as a class action. With regard to state laws limiting the use of the class action to prosecute those claims, the Court effectively would override every state legislative determination if Shady Grove prevails on its argument that Rule 23 trumps such state law provisions. Were this to occur, then federal court would indeed become a preferred forum to evade state courts, where state law limited certain types of claims from being pursued as class actions.