When States Limit Class Action Litigation

Abstract

Commentary and analysis of the underlying litigation in Shady Grove Orthopedic Associates P.A. v. Allstate Insurance Co., on appeal to the United States Supreme court from a decision of the Second Circuit Court of Appeals, which dismissed the class action from federal court.

This piece also canvasses the arguments presented by the plaintiff/petitioner Shady Grove, asking the Court to hold that there is good federal jurisdiction pursuant to Fed. R. Civ. P. 23, as well as Allstate’s (the defendant/respondent) arguments that Rule 23 must give way to the more restrictive New York state class action rule and therefore federal dismissal was appropriate. 

The commentary discusses the New York Civil Law and Practice Rule 901(b) involved in the underlying litigation, which proscribes class actions for statutory penalties and therefore is more restrictive than Fed. R. Civ. P. 23, which does not. The defendant Allstate, in a federal district court diversity action, argued that section 901(b) of the New York procedural rules applied and precluded the federal court from maintaining the Shady Grove case as a class action in federal court.

Both the district court and the Second Circuit agreed, and dismissed the class action litigation. Construing the issue as an Erie problem, the Second Circuit concluded that there was no conflict between 901(b), prohibiting class actions in statutory penalty cases, and Fed. R. Civ. P. 23, authorizing class action litigation. Erie Railroad v. Tompkins, 304 U.S. 64 (1938) (federal courts sitting in diversity apply state substantive law).

The Court also concluded that the analysis mandated by its decision in Hanna v. Plumer, 380 U.S. 460 (1965) ― which applies when a federal rule conflicts with a state rule of procedure ― did not apply to determine the Erie problem in the circumstances of this litigation. 

Instead, applying Erie doctrine, the Second Circuit concluded that 901(b) was "substantive" because its application would affect the outcome of the litigation and, therefore, the federal court must apply state substantive law. In addition, the Court held that a failure to apply 901(b) would encourage forum-shopping, in violation of Erie.

The Supreme Court will hear the Shady Grove appeal to sort out the competing Erie contentions raised by the parties in this case, which decision will impact all federal courts in jurisdictions with divergent state class action rules.