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 and the rules of decision unchanged."
Justice Stevens, the fifth justice in the majority, agreed with the dissent "that there are some state procedural rules that federal courts must apply in diversity cases because they function as a part of the state's definition of substantive rights and remedies." Nevertheless, Justice Stevens concluded that both Rule 23 and CPL § 901 were procedural in nature and, therefore, that there was no infringement on any substantive right. Justice Scalia criticized this analysis as erroneous because it looked to the purpose of the state statute, whereas the plurality emphasized that "it is not the substantive or procedural nature or purpose of the affected state law that matters, but the substantive or procedural nature of the Federal Rule [and] that the validity of a Federal Rule depends entirely upon whether it regulates procedure."
The dissenting opinion, authored by Justice Ginsburg, focused on the fact that New York, in creating the substantive right, attempted to prohibit the "alchemy" of transforming "a $500 case into a $5,000,000 award" through the mechanism of a class action. The dissent accused the majority and plurality of being insufficiently sensitive to the interests of the state creating the right of action and of applying Rule 23 and the Rules Enabling Act in an unduly inflexible and dogmatic way.
The bottom line here is that Rule 23, as presently written, preempts attempts by states to restrict the availability of class action treatment of claims for statutory penalties and the like. Class action plaintiffs' lawyers, therefore, may be relied upon to seek a federal forum in which to raise class claims that would be unavailable to them in state court. The game is not over for class action defendants, however, because claims for statutory penalties, such as those prescribed by New York's automobile insurance law here, presumably would be recoverable by a class overwhelmingly composed of in-state citizens. The mandatory and/or discretionary abstention provisions of 28 U.S.C. § 1332(d)(3) and (4), therefore, may well apply, resulting in the dismissal of such cases on abstention grounds. Moreover, since the result is a matter of statutory interpretation, not constitutional mandate, Congress is free to amend Rule 23 (as well as § 1332) to preclude class treatment of claims where state law prohibits their maintenance on a class basis.
More broadly, the state of the law for analyzing whether a rule is "substantive" or "procedural" for purposes of preemption of conflicting state laws appears to be in flux – and the split is not along the usual ideological lines. Justice Scalia's plurality opinion declaring that the intent of the state law is irrelevant was joined by Chief Justice Roberts and Justices Thomas and Sotomayor. But it appears that a majority of the Court consisting of Justice Stevens and the Justices who joined Justice Ginsburg's dissent, Kennedy, Breyer, and Alito, are prepared to be more deferential to the intentions of state legislatures in enacting statutes that conflict with the federal rules, perhaps with outcome-determinative consequences. Whether this nascent philosophical disagreement will have any practical consequences remains to be tested in future cases.
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