Supreme Court Holds That Rule 23 Is Supreme in Conflicts With State Class Action Law
Class Action Alert
The U.S. Supreme Court issued a significant class action decision yesterday. Essentially, the Court held that Federal Rule of Civil Procedure 23 trumps state laws purporting to govern class actions in diversity cases in federal court.
Shady Grove Orthopedic Assoc. v. Allstate Ins. Co. was a suit to recover a statutory penalty imposed upon Allstate for late payment of a claim. The value of the penalty was about $500. New York law prohibits a claimant from seeking a class action in a statutory penalty case, presumably to prevent the “crushing liability” problem. Shady Grove sued in federal court and sought class certification, notwithstanding the state anti-class action statute.
The district court dismissed for lack of subject matter jurisdiction and the Second Circuit Court of Appeals affirmed. The Second Circuit reasoned that the New York state law and Rule 23 did not really conflict because the state statute governed only the eligibility of the case to be a class action and did not set forth requirements for certifiability.
The Supreme Court’s opinion, authored by Justice Antonin Scalia, did not buy the proposed distinction and held that the New York statute conflicted with the federal class action rule. Rule 23 itself does not exempt any particular type of case from class treatments and states may not enact laws that control procedures in federal court. It did not matter whether the New York statute was procedural or substantive; the only question was whether Rule 23, as applied in the case, violated the Federal Rules Enabling Act. Since the application of Rule 23 to the case did not change any of the substantive rights of the litigants, it was a valid exercise of rulemaking authority.
The dissent, led by Justice Ruth Bader Ginsburg, argued that the New York statute should be viewed as remedial. By allowing a class action, the majority allowed a $500 penalty to claim to morph into a $5 million class action, a result that New York did not intend when it passed the statute.
The immediate effect of Shady Grove is that limitations on class actions derived from state law simply do not apply in federal diversity cases. Class action practitioners must be mindful of this development, particularly when deciding whether to remove a class action to federal court.
The more long-term effects may be even more profound. Many states have enacted “tort reform” measures through various procedural rules, such as special joinder rules. Under the opinion, these measures may not be applicable in federal court even in diversity cases.
Also, attorneys will need to change the way they think about state/federal law conflicts. The familiar Erie doctrine, with its emphasis on the distinction between substantive and procedural law, no longer governs in cases where the Federal Rules of Civil Procedure are on point. The Rules will be applied unless doing so would actually violate the Rules Enabling Act.