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April 2010

U.S. Supreme Court Holds that Federal Rule on Class Actions Preempts State Law Restricting Pursuit of Class Claims

Shady Grove Orthopedic Assocs. v. Allstate Ins. Co. (No. 08-1008)

In a case with important implications for class actions in federal court, Shady Grove Orthopedic Assocs. v. Allstate Ins. Co. (No. 08-1008) presented the U.S. Supreme Court with the question of whether a state statute restricting class actions can prohibit a case from proceeding as a class in federal court under diversity jurisdiction. The Shady Grove Court considered the effect of Fed. R. Civ. P. 23, which sets forth the requirements for class certification in federal court, in light of Section 901(b) of the New York Civil Practice Rules, a state rule that precludes a class action to obtain penalties under state statutes unless the underlying statute specifically allows for a class claim.

The Court's consideration of the restrictive power of Section 901(b) involved the application of the Erie Doctrine, which provides that when a case is in federal court but involves state law claims, the court applies state substantive law and federal procedural law. The Court therefore was faced with the question of whether Section 901(b) was a substantive or procedural law.

The case arose from Shady Grove Orthopedic Associates' ("Shady Grove") provision of medical care to Sonia Galvez after a car accident. Allstate agreed to pay for certain of Galvez's medical costs and Galvez assigned to Shady Grove her right to recover the medical expenses from Allstate. Shady Grove then sent Galvez's claim to Allstate. Under New York law, such claims must be paid or denied within 30 days or face monthly interest penalties for payments made after the 30-day deadline. In this case, Allstate did not pay in a timely manner and the interest began to accrue.

Shady Grove filed a class action lawsuit in the U.S. District Court for the Eastern District of New York by invoking the district court's diversity jurisdiction. The putative class was defined as all persons to whom Allstate owes interest payments under New York insurance law as of April of 2000. Allstate filed a motion to dismiss, asserting that Section 901(b) prohibits class actions to collect a statutory penalty unless expressly authorized, and that the statute relied upon by Shady Grove did not authorize class actions. Shady Grove opposed the motion, arguing that Section 901(b) did not apply because it was a procedural rule and conflicted with Rule 23 governing class actions in federal court.

The district court granted Allstate's motion, holding that Section 901(b) substantively affected plaintiffs' rights to bring lawsuits in New York courts and therefore governed, effectively ending Shady Grove's class claim. Shady Grove appealed, and the Second Circuit Court of Appeals affirmed the ruling. The U.S. Supreme Court granted certiorari to decide whether New York's class action law precludes the potential for certain class actions in federal court.

The Supreme Court reversed, holding that Shady Grove could proceed in federal court, under Rule 23, notwithstanding that it could not proceed in New York state court under Section 901(b). The 5-4 majority, led by Justice Scalia, held that Rule 23 controls when a class action may be filed in federal courts, even when such a case in federal court will be decided based on state law. New York's law and Rule 23 are contradictory because both seek to control whether the Shady Grove class action lawsuit could be filed in federal court. In summary, if the Rule 23 requirements are met, the case may proceed in federal court notwithstanding that the same class action would be limited or banned in state court.

The impact of Shady Grove could be far-reaching. Indeed, Allstate's brief included a lengthy appendix of state statutes it asserted would be invalidated in the event the New York law should be held to be subordinate to Rule 23, as it was. How the Court's decision has impacted these cases has yet to be determined, but in the future, if read expansively, the decision could be used to evade other state laws that attempt to limit class actions.

Class Action

Holly L.K. Heffner
Kimberly D. Howatt


Class Action
Commercial Litigation

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