Supreme Court Issues Major Class Action Decision

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The Supreme Court today handed down its decision in Shady Grove Orthopedic Associates v. Allstate Insurance Co., a case which is sure to find its way into CivPro textbooks and final exam hypotheticals for  years to come.

The case involves a class action law suit brought by Shady Grove against Allstate under New York state law.  Allstate is alleged to have failed to pay or dispute claims within the time frame allotted, entitling Shady Grove to statutory interest.  Shady Grove filed on behalf of itself and at least 100 similarly situated plaintiffs in federal court, under diversity jurisdiction.

Allstate claimed that the federal courts lacked jurisdiction because New York procedural laws do not permit class action suits to be brought for statutory penalties.  The district court sided with Allstate and the 2nd Circuit upheld the lower court decision.  The Supreme Court today, in an unusual alignment of justices, reversed and sent the case back down.

  

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At the heart of the case is Federal Rule 23, which lays out the requirements a class must meet to be certified as a class action in federal court.  According the majority opinion, written by Justice Scalia, Rule 23 is exhaustive and cannot by limited by state laws.  Allstate argued that §901(b) of the New York Civil Practice Rules was not in conflict with Rule 23 because Rule 23 determines whether a class may be certified while §901(b) determines the eligibility of a type of claim for class treatment but the Court rejected this formulation saying “…the line between eligibility and certifiability is entirely artificial. Both are preconditions for maintaining a class action.”

The Court noted that the New York law appeared to be addressing the concern that allowing class action suits to proceed for statutory damages could create situations where defendants are forced to pay out debilitating sums of money, far more than the original law envisioned.  Today’s opinion leaves open the possibility that state laws that capped or limited damages in class action suits might be acceptable but said  that whatever the intent of the New York legislature in this particular case, §901(b) sought to prevent the class from being formed at all in direct conflict with the controlling federal rule.

Andrew Tulumello, the vice-chair of Gibson Dunn’s class action and complex litigation group, noted in a story in the National Law Journal that states could effectively limit damages under this formulation but that state legislatures would have to be more careful in wording the limitations “in order to get it right.”