United States Supreme Court: Federal Rule 23 Trumps State Law Limitations on Class Actions

On March 31, 2010, the Supreme Court ruled 5-4 that Federal Rule of Civil Procedure 23 preempts a New York statute that prohibits the maintenance of class actions seeking recovery of statutory penalties or minimum recoveries. This decision, Shady Grove Orthopedic Associates P.A. v. Allstate Insurance Company, No. 08-1008, ("Shady Grove"), paves the way (as the Court itself recognized) for forumshopping plaintiffs to aggregate claims as class actions in federal courts that they could otherwise only bring as individual claims in a state court.

In the case, filed in New York federal court pursuant to diversity jurisdiction, medical provider Shady Grove sued auto insurer Allstate claiming that Allstate routinely refused to pay statutory interest penalties owed on late payments to medical providers in New York. Allstate argued that the case should be dismissed because New York Civil Practice Law § 901(b) ("CPL § 901") provides that a claim to recover statutory penalties or damages may not be maintained as a class action. Allstate contended, and the lower courts agreed, that CPL § 901 does not conflict with Federal Rule 23 because CPL § 901 is "substantive," determining whether a particular type of claim is eligible for class action treatment, whereas the federal rule is "procedural," governing whether a class action should be certified.

The Supreme Court, however, disagreed and reversed in an opinion authored by Justice Scalia, finding that the lawsuit may proceed as a federal class action notwithstanding CPL § 901. Rejecting as "artificial" the purported substantive/procedural distinction embraced by the lower courts, the court found that CPL § 901 and Federal Rule 23 "flatly contradict each other." The court then went on to address whether Rule 23 was a valid exercise of authority under the Rules Enabling Act, which does not permit the procedural rules to "abridge, enlarge or modify" litigants' substantive rights. A four-justice plurality opined that Rule 23 passed muster because it was purely procedural, even if permitting the agglomeration of small claims into a class action made it more likely that Allstate would face more claims that otherwise would have gone unasserted: "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...