The U.S. Supreme Court last week ruled that certain state laws barring class actions cannot be utilized to dismiss such class actions in federal court. Shady Grove Orthopedic Associates PA v. Allstate Insurance Co., 2010 WL 1222272 (3/31/10).

The appellant, Shady Grove Orthopedic Associates PA, had sought to bring a $5 million class action against Allstate Insurance seeking penalties for interest on claims under no-fault accident insurance policies that the insurer allegedly paid late. The policy was governed by New York state law. And the Eastern District of New York found that a New York state law prohibited Shady Grove from bringing a class action. The law prohibits plaintiffs from recovering state statutory penalties in class actions unless class proceedings are authorized in the statute.

State substantive (contract) law governed the case, but since the case was in federal court under diversity jurisdiction, Rule 23 applied to the procedural aspects of the class action.  So how to deal with the fact that New York law does not allow such a lawsuit to seek to recover a penalty as part of the remedy? The lower courts ruled that New York’s ban on such a remedy controlled in federal court, too, because Rule 23 is only a procedural rule, while the New York law limiting the remedy was substantive.  (Remember Erie from civil procedure class?) The district court found that the interest Shady Grove sought to recover was a “penalty” under the statute, precluding a class action in the federal court, and the U.S. Court of Appeals for the Second Circuit affirmed.

In a majority opinion joined by four other justices, Justice Scalia wrote that F.R.C.P. 23, and not state law, is the controlling authority on whether this class action could be filed in federal court.  New York’s law and Rule 23, that opinion said, are directly contradictory in  that both purport to control whether the class action lawsuit could be pursued in federal court.  The Court rejected the Second Circuit’s belief that § 901(b) and Rule 23 do not conflict because they address different issues: that is, the lower court thought Rule 23 concerned only the criteria for determining whether a given class can and should be certified; section 901(b), on the other hand, addresses an antecedent question, thought the lower court, whether the particular type of claim is eligible for potential class treatment in the first place.

But Rule 23 prevails if there is such a conflict.  Rule 23 provides a one-size-fits-all formula for deciding the class-action question, said Justice Scalia.  If Rule 23’s specific terms are met, the class action case may proceed, because the federal rules empower a federal court to certify a class in every case where the Rule 23 criteria are met. “Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules’ prerequisites are met. We cannot contort its text, even to avert a collision with state law that might render it invalid.”  By its terms ,this provision creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action.

The Scalia group rejected Allstate’s point that allowing Shady Grove to sue on behalf of a class transforms the dispute over a five hundred dollar penalty into a dispute over a five million dollar penalty. First, Allstate’s aggregate liability, said the opinion, does not depend on whether the suit proceeds as a class action. Each of the 1,000-plus members of the putative class could (as Allstate acknowledged) bring a freestanding suit asserting his individual claim. More fundamentally, said Justice Scalia, the substantive nature of New York’s law, or its substantive purpose, makes no difference. A Federal Rule of Procedure is not valid in some jurisdictions and invalid in others, or valid in some cases and invalid in others-depending upon whether its effect is to frustrate a state substantive law (or a state procedural law enacted for substantive purposes).

In her dissent, Justice Ginsburg worried that the majority ruling would frustrate the intent of
the Class Action Fairness Act of 2005 by making it easier to file class actions. And the decision may give plaintiffs an incentive to file class actions in federal rather than state courts, at least where the latter may apply state laws limiting class actions. But the majority found that the short of the matter is that a federal rule governing procedure is valid whether or not it alters the outcome of the case in a way that induces forum shopping. The majority rejected the dissent’s apparent approach of determining whether state and federal rules conflict based on the subjective intentions of the state legislature as an enterprise destined to produce “confusion worse confounded.”

The decision came on a 5-4 vote, but the complex of opinions means only that New York may not bar this particular class action lawsuit in federal court when a federal court procedural rule allowed it. Justice Stevens wrote that he was joining only for “this case.”  In the remainder of the Stevens’ concurring opinion, he made it clear that he disagreed with Justice Scalia on the general question of whether federal courts, applying what they considered to be federal procedural rules in a state-law case, would always trump a state rule.  In particular, Justice Stevens was worried about a situation in which a state law that is procedural is so intertwined with a state right or remedy that it actually defines the scope of the state-created right.  His reading of the Rules Enabling Act was that federal courts may not craft procedural rules that modify “any substantive right.” Of course, the mere chance that a federal rule would intrude on such a right or remedy, he said, is not sufficient.

Justice Scalia responded that the test the Court has applied has always been whether the federal rule really regulates procedure, the judicial process for enforcing rights and duties recognized by substantive law and for justly administering remedy and redress for disregard or infraction of them. The test is not whether the rule affects a litigant’s substantive rights; most procedural rules do. What matters is what the rule itself regulates: If it governs only the manner and the means by which the litigants’ rights are enforced, it is valid; if it alters the rules of decision by which the court will adjudicate those rights, it is not.

We probably haven’t heard the last of this debate.