Class Action Defense Cases–Shady Grove v. Allstate: Divided Supreme Court Reverses Dismissal Of Class Action Holding New York Law Barring Class Actions Seeking Penalties Falls To Rule 23

Apr 6, 2010 | By: Michael J. Hassen

District Court Erred in Dismissing Class Action Based on New York law Barring Class Actions that Seek Penalties or Statutory Damages because the Statute is Incompatible with Rule 23’s Mandate Allowing Class Action Certification if Requirements are Met Supreme Court Holds

Plaintiff, a medical care provider, filed a class action in New York federal court against Allstate Insurance; the class action complaint alleged that plaintiff provided medical care to an Allstate insured and accepted an assignment of the insured’s rights to benefits of her Allstate policy, and that Allstate paid benefits under the policy “but not on time, and it refused to pay the statutory interest that accrued on the overdue benefits (at two percent per month).” Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., ___ U.S. ___, 130 S.Ct.1431, 2010 WL 1222272, *3 (March 31, 2010). (The class action asserted federal court jurisdiction under the Class Action Fairness Act (CAFA), id. n.3.) According to the allegations underlying the class action complaint, “Allstate routinely refuses to pay interest on overdue benefits” so plaintiff “sought relief on behalf of itself and a class of all others to whom Allstate owes interest.” Id. Defense attorneys moved to dismiss the class action for lack of jurisdiction on the grounds that New York law, § 901(b), prohibits class actions which seek only to recover “penalties” as damages. Id. Defense attorneys moved to dismiss the class action complaint, id. The district court granted the motion, concluding that statutory interest constituted a “penalty” under § 901(b), and dismissed the class action. See 466 F.Supp.2d 467 (2006). On appeal, the Second Circuit held that no conflict existed between § 901(b) and Rule 23 because they address different issues; accordingly, the Circuit Court affirmed the dismissal of the class action. See 549 F.3d 137 (2008). The Supreme Court granted certiorari and, in a sharply divided decision, reversed.

The Supreme Court explained, “New York law prohibits class actions in suits seeking penalties or statutory minimum damages.” Shady Grove, at *3 and n.1 (citing N.Y. Civ. Prac. Law Ann. § 901(b) (West 2006) [“Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.”]). The issue before the Court was “whether this precludes a federal district court sitting in diversity from entertaining a class action under [Rule 23].” Id. The High Court explained the framework for its analysis as follows: “We must first determine whether Rule 23 answers the question in dispute…. If it does, it governs-New York’s law notwithstanding-unless it exceeds statutory authorization or Congress’s rulemaking power…. We do not wade into Erie‘s murky waters unless the federal rule is inapplicable or invalid….” Id., at *4 (citations omitted).

In the view of a plurality of the Supreme Court, Rule 23 answered the question by providing that “[a] class action may be maintained” if the lawsuit satisfies the four elements of numerosity, commonality, typicality, and adequacy of representation set forth in Rule 23(a), and one of the subdivisions of Rule 23(b). Shady Grove, at *4. The Court interpreted Rule 23 as “creat[ing] a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action.” Id. The Court then found that § 901(b) “attempts to answer the same question,” and that under § 901(b) the complaint could not proceed as a class action based solely on the relief sought therein. Id. In so holding, the High Court disagreed with the Second Circuit’s determination that “§ 901(b) and Rule 23 do not conflict because they address different issues.” Id. In the opinion of the Circuit Court, Rule 23 “concerns only the criteria for determining whether a given class can and should be certified;” while 901(b) concerns the “antecedent question” of “whether the particular type of claim is eligible for class treatment in the first place – a question on which Rule 23 is silent.” Id. (citing 549 F.3d at 143-44). The Supreme Court, however, found that Rule 23 also addresses the types of claims that are eligible for class action treatment, see id., at *5. And the Court similarly rejected Allstate’s argument that Rule 23 “addresses only certifiability” of lawsuits as class actions. Id.

The plurality opinion stressed that the Court was “not decid[ing] whether a state law that limits the remedies available in an existing class action would conflict with Rule 23; that is not what § 901(b) does.” Shady Grove, at *6. Rather, § 901(b) bars class actions that seek “statutory penalties”; thus, the statute “prevents the class actions it covers from coming into existence at all.” Id. For this reason, the Supreme Court concluded that the statutes “flatly contradict each other.” Id., at *7. Accordingly, the state law must fail, and the dismissal of the class action complaint had to be reversed. Id., at *12. The Court recognized that its decision “will produce forum shopping.” Id. But it found that this result could not be avoided: “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. To hold otherwise would be to ‘disembowel either the Constitution’s grant of power over federal procedure’ or Congress’s exercise of it.” Id. (citation omitted).

NOTE: The Court was sharply divided. Not only did Justice Ginsburg file a dissent that was joined by 3 justices, see Shady Grove, at *22 et seq., but the plurality opinion (written by Justice Scalia) was less than kind to arguments advanced in the concurring opinion of Justice Stevens (which may be found id., at *13 et seq.), see e.g., id., at *11 n.9 and nn.11-13.

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