The Supreme Court issued an opinion in Shady Grove Orthopedic Associates v. Allstate Insurance Company yesterday.
The case stemmed from a class action that had been filed in New York state. The class action arose after a woman was injured in a car accident. She was treated by Shady Grove Orthopedic Associates (the plaintiff). To pay for the treatment, the woman assigned her insurance benefits to Sahdy Grove. Shady Grove submitted the claim, but Allstate paid it late, and did not pay the required 2% interest on the overdue benefits. So Shady Grove filed a class action on behalf of everyone to whom Allstate had refused interest on their benefits.
Allstate moved to dismiss the claim, invoking a New York statute (NY Civ. Prac. Law Ann. § 901(b)) that prohibited class actions for statutory penalties. Accepting this reasoning, the federal trial court dismissed the claim for lack of subject matter jurisdiction: since § 901(b) prohibited the class action, all that was before the court was a $500 claim, too little in controversy to allow for diversity jurisdiction. Shady Grove appealed, and, after the Second Circuit affirmed, appealed to the Supreme Court.
The majority (in an opinion by Justice Scalia) began from the premise that
Rule 23 provides a one-size-fits-all formula for deciding the class-action question.
Based on that premise (and an analysis of the consequences of allowing substantive state law to deprive federal plaintiffs of the benefit of the federal rules) the majority held the New York prohibition on penalty class actions could not prevent a New York plaintiff from bringing a class action in federal court.
The majority was careful to set out the limits of its holding:
Contrary to the dissent’s implication, we express no view as to whether state laws that set a ceiling on damages recoverable in a single suit, see App. A to Brief for Respondent, are pre-empted.
The majority was also realistic about the strategic consequences of the decision, specifically, that some plaintiffs might file class actions in federal court to get around state prohibitions of certain kinds of class actions.
We must acknowledge the reality that keeping the federal-court door open to class actions that cannot proceed in state court will produce forum shopping. That is unacceptable when it comes as the consequence of judge-made rules created to fill supposed ‘gaps in positive federal law. … But divergence from state law, with the attendant consequence of forum shopping, is the inevitable (indeed, one might say the intended) result of a uniform system of federal procedure.
But while this opinion represented a defeat for Allstate in the specific litigation, it did provide at least one tool for defense lawyers. In holding that a state law could not override Rule 23, the Supreme Court reaffirmed that the class action is a procedural device – not a substantive right, and that class members would still have to prove all of the elements of their claims as they would in an individual lawsuit.
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 and the rules of decision unchanged.
That analysis alone makes this a case that most class-action defendants will want to study.