Whether a state legislature may prohibit federal courts from using the class action device for state law claims?
Shady Grove Orthopedic Associates filed a class action lawsuit in federal court, arguing that Allstate Insurance Companyviolated New York law in failing to pay interest to policyholders. The district court dismissed the case on the grounds that New York law prevented a class action lawsuit in this context, and the Second Circuit affirmed. This case concerns the application of state law in federal court under the Erie Doctrine, particularly whether New York class action law applies in federal court and whether it conflicts with Rule 23 of the Federal Rules of Civil Procedure. Shady Grove argues that Rule 23 is the comprehensive class action rule for federal courts, and that New York law cannot undermine federal court procedure. Allstate claims that state law applies because plaintiffs would have different rights in state and federal court. The case will address Rule 23 and the ability of states to restrict class action lawsuits.
Questions as Framed for the Court by the Parties
1. Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?
2. Can state legislatures dictate procedure in the federal courts?
3. Could state-law class actions eventually disappear altogether, as more state legislatures declare them off limits to the federal courts?
Shady Grove Orthopedic Associates (“Shady Grove”) provided medical care to Sonia Galvez for her injuries as a result of a car accident in May, 2005. See Shady Grove Orthopedic Assocs. v. Allstate Ins. Co. (“Shady Grove I”), 466 F. Supp. 2d 467, 469 (E.D.N.Y. 2006). Galvez held an automobile insurance policy from Allstate Insurance Company, an Illinois corporation. See id. Although Galvez is a Maryland resident, her car was registered in New York and was insured under an Allstate “New York Private Passenger Auto Insurance Policy.” See id.
Under the automobile insurance policy and applicable New York law, Allstate agreed to pay for certain medical costs associated with car accidents. See Shady Grove I, 466 F. Supp. at 470. Galvez gave Shady Grove authority to apply to Allstate for payments on her behalf. See id. Shady Grove sent Galvez’s claims for about $500 to Allstate, but Allstate failed to pay. See id. at 469–70. Under New York law, an insurer must either pay or deny the claim within 30 days. See id. at 471. The statute mandates a two percent monthly interest penalty for payment made after the 30-day deadline. See id.
Shady Grove and Galvez filed a class action lawsuit in the Federal District Court for the Eastern District of New York, proposing a class of all persons to whom Allstate owes interest payments under New York insurance laws since April of 2000. See Shady Grove I, 466 F. Supp. 2d at 470. Allstate filed a motion to dismiss the case, arguing that New York law barred Shady Grove and Galvez from filing this class action lawsuit. See id. at 471–72. Allstate specifically alleged that, under Section 901(b) of the New York Civil Practice Law and Rules (“CPLR”), Shady Grove and Galvez could not use a class action lawsuit to collect a statutory penalty unless specifically authorized under the statute. See id. at 470–72. Shady Grove and Galvez argued that CPLR 901(b) did not apply in federal courts because it was merely a procedural rule and conflicted with Federal Rule of Civil Procedure 23, which governs class action lawsuits in federal court. See id. at 472.
The district court granted the motion to dismiss. See Shady Grove I, 466 F. Supp. 2d at 476. The court found that New York insurance laws did not specifically authorize a class action for the recovery of interest, and, therefore, CPLR 901(b) prevented the filing of the class action. See id. at 471–73. The district court held that the New York’s restriction on class actions applies in federal court because the law substantively affected plaintiffs’ rights to bring lawsuits in New York courts. See id.
Shady Grove appealed to the Second Circuit Court of Appeals. See Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company (“Shady Grove II”), 549 F.3d 137, 141 (2d Cir. 2008). The Second Circuit affirmed dismissal of the suit. See id. at 146. First, it found that CPLR 901(b) and Rule 23 did not conflict. See id. at 143–45. Next, it found that federal court should apply CPLR 901(b) because otherwise class action plaintiffs could recover in federal court even though they could not in state court. See id. at 145. Finally, the court found that CPLR 901(b) did not undermine the authority of the federal system. See id.
The Supreme Court granted a writ of certiorari on May 4, 2009 to decide the question of whether New York’s class action law precludes the potential for certain class actions in federal court. See Questions Presented.
Shady Grove brought its class action case in federal court by invoking the district court’s diversity jurisdiction under 28 U.S.C. § 1332(d)(2)(A). See Shady Grove Orthopedic Assocs. v. Allstate Ins. Co. (“Shady Grove II”), 549 F.3d 137, 140 (2d Cir. 2008). This statute allows plaintiffs to bring a class action in federal court when the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interests or costs, and there is minimum diversity between plaintiffs and defendants. See 28 U.S.C. § 1332(d)(2)(A). Minimum diversity is satisfied where “any member of a class of plaintiffs is a citizen of a State different from any defendant.” Id. Shady Grove alleges that Allstate Insurance violated N.Y. Insurance Law § 5106(a), which mandates that overdue payments to claimants shall bear two percent interest per month. See Shady Grove II at 140. Allstate contends that the New York Civil Practice Law and Rules (“CPLR”) § 901(b) bars this action because an action to recover a penalty (the two percent interest) may not be maintained as a class action. See Brief for Respondent at 10. As this is a New York State statute, Shady Grove counters that this statute is not applicable in federal court because Federal Rule of Civil Procedure 23 governs class actions in federal court and gives a federal court “discretionary authority to certify class actions.” See Brief for Petitioner at 9–10. Rule 23 maintains that in order to certify as a class, the class must be so numerous that joinder of all members would be impracticable, there must be common questions of law or fact, the claims or defenses of the representatives must be similar to that of the class, and the representatives must fairly and adequately represent the class’ interests. Fed. R. Civ. P. 23.
When a court must choose whether a state or federal rule applies, the court looks toward the considerations established by Erie Railroad v. Tompkins and its progeny. See Shady Grove II, 549 F.3d at 141–43. According to the Erie Doctrine, “federal courts sitting in diversity apply state substantive law and federal procedural law.” Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996). This doctrine applies to any claim that is rooted in state law. See In re Gaston & Snow, 243 F.3d 599, 607 (2d Cir. 2001). Determining whether a rule is substantive or procedural, however, has proved difficult. See Gasperini, 518 U.S. at 427. Moreover, if a state rule is in conflict with a Federal Rule of Civil Procedure, the Supremacy Clause dictates that the Federal Rule should control, as long as it is consistent with the Rules Enabling Act, as codified in 28 U.S.C. § 2072, and the Constitution. See id. at 427, n.7. This means that application of a the federal rule cannot “abridge, enlarge, or modify a substantive right” that an individual would otherwise have in state court. See 28 U.S.C. § 2072. If the state rule does not conflict with the federal rule, the inquiry turns to whether the application of the rule would undermine the “twin aims” of Erie: (1) to obtain substantially the same results in state and federal court considering the same cause of action and (2) to discourage forum shopping. See Shady Grove II, 549 F.3d at 142.
Is CPLR § 901(b) a Substantive or Procedural Rule?
Shady Grove argues that § 901(b) is not a substantive rule under Erie and, therefore, does not apply in federal diversity actions. See Brief for Petitioner at 44. According to Shady Grove, the rule cannot be substantive because:
CPLR does not define or limit the duties owed by one person or entity to another, determine whether a person possesses a right of recovery for the breach of such duties, bar any person from asserting such a right (as under a statute of limitations) or otherwise provide a defense to a claim, determine the proper amount of recovery for a breach of duty, or decide what substantive law will be selected to resolve such issues.
Contrarily, Allstate cites New York’s legislative history to conclude that § 901(b) is in fact substantive. See Brief for Respondent, Allstate Insurance Co., at 25–26. Allstate reasons that § 901(b) is interested in the outcome of the litigation, not in the litigation process itself. See id. at 26. Allstate contends that New York, wishing to protect against excessive or ruinous liability characteristic of some class actions, had substantive reasons for restricting the class action device. See id. at 24–27. Amici curiae for the respondent, Partnership for New York City, et al., agree, noting that § 901(b) was enacted to avoid the harsh results of a class action containing the calibration of the many statutory penalties contained in New York law. See Brief of Amici Curiae The Partnership for New York City, et al. (“Insurers”) in Support of Respondent at 8.
Does CPLR § 901(b) Conflict with FRCP 23?
The Court of Appeals for the Second Circuit determined that § 901(b) and Rule 23 do not conflict. See Shady Grove II, 549 F.3d at 143. The court reasoned that Rule 23’s requirements for federal class actions could be applied concurrently with the restriction of § 901(b). See id. at 144. Shady Grove contends that this assertion is false because while the two rules address class actions generally, they impose “inconsistent standards.” See Brief for Petitioner at 19. Both Rule 23 and Section 901 set forth the prerequisites necessary to maintain a class action, yet, according to Shady Grove, the different statutes define the prerequisites differently. See id. For example, § 901 does not include certification of class actions that seek injunctive or declaratory relief. See id. at 19–20. In addition, § 901 provides a categorical rule against certifying class actions seeking statutory penalties. See id. at 20. Shady Grove contends that Rule 23 must be given broad application and that New York’s rule cannot apply in federal court because it would preclude the discretionary approach to class certification provided by Rule 23. See id. at 21. Public Justice, amicus curiae for Shady Grove, claims that Rule 23 and § 901(b) are inconsistent because “901(b) prohibits class actions in cases in which Federal Rule 23 expressly allows class actions to go forward.” Brief of Amicus Curiae Public Justice in Support of Petitioner at 15.
Allstate counters that the laws are “entirely compatible,” claiming that § 901(b) “removes a category of claims from the realm in which a federal court may exercise its discretion, but does not interfere with the exercise of that discretion with respect to claims eligible for class certification.” Brief for Respondent at 13 (quoting Leider v. Ralfe, 387 F. Supp. 2d 283, 290 (S.D.N.Y. 2005)). Allstate argues that “the application of Rule 23 presupposes that a particular cause of action is eligible for class certification.” See id. Allstate’s position is that New York’s § 901(b) simply makes certain causes of action ineligible for class certification, and that Rule 23 only governs eligible class actions. See id.
Does § 901(b) Abridge, Enlarge, or Modify Substantive Rights as Prohibited by the Rules Enabling Act?
Shady Grove contends that applying the federal rule, Rule 23, would not abridge, enlarge, or modify substantive rights because class certification impacts the process of enforcing rights, but not the underlying rights themselves. See Brief for Petitioner at 31. Essentially, the class action would permit valid individual claims to be adjudicated in one proceeding. See id. Shady Grove urges that here, a class action in federal court “will not lead to a recovery by any class member who did not have a valid claim for relief under New York Law as of the filing of the complaint . . . .” Id. at 32.
Allstate counters that allowing Rule 23 to override § 901(b) would abridge, enlarge, or modify substantive rights in this case because § 901(b) makes a particular cause of action categorically ineligible for class certification. See Brief for Respondent at 23–24. Moreover, the New York legislature specifically enacted § 901 to limit the liability that may be imposed in a single lawsuit. See id. at 25. The non-application of § 901(b) would produce a substantial difference in the penalties that may be imposed in a single litigation and overall. See id. Section 901 is concerned with the outcome of the process and is therefore substantive in nature. See id. at 26.
Does Application of § 901(b) in Federal Court Serve the Twin Aims of Erie?
The “twin aims” of Erie are (1) to obtain substantially the same results in state and federal court considering the same cause of action, and (2) to prevent forum shopping. See Shady Grove II, 549 F.3d at 142. The Court of Appeals determined that failing to apply § 901(b) in federal courts would encourage forum shopping, as plaintiffs would prefer the benefits of class actions seeking penalties in federal courts. See id. at 145. Shady Grove argues that Erie’s concerns about forum shopping do not apply in this case, as those concerns were not targeted at forum choices determined by a “preference for superior rules of federal practice and procedure.” See Brief for Petitioner at 12. Instead, it claims that Erie is concerned with plaintiffs who could not recover in state court and bring their actions in federal court seeking a different result. See id. at 48–49. Here, any class member can obtain recovery in state court, through an individual proceeding, as well as in federal court. See id. Allstate counters that this argument merely begs the question as to whether § 901(b) is procedural or substantive. See Brief for Respondent at 48. Allstate contends that it is substantive, therefore placing this kind of forum selection within the purview of the Erie concerns. See id.
This case largely turns on whether § 901(b) is interpreted as procedural or substantive in nature. The Court’s decision may set a clearer precedent on how courts may interpret statutes in the context of the Erie doctrine.
This case addresses whether a New York class action law applies in federal court when there is a differing federal class action law. The application of state law in federal court is governed by the Erie Doctrine, which is derived from Erie Railroad Company v. Tompkins and its progeny. Under the Erie Doctrine, federal courts apply state substantive law and federal procedural law. See Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 427. In this case, the Supreme Court will determine the extent to which New York law may limit class actions brought in federal court. See Alexandra D. Lahav, Cert Granted in Important Class Action Case. Although the Erie Doctrine is fairly complex, its two principal concerns are forum shopping and fairness. The doctrine also affects states’ rights and the uniformity of federal courts.
Under the Erie Doctrine, a court should consider whether applying different laws in federal and state courts would encourage forum shopping, or whether a ruling would encourage a plaintiff to choose either a state or federal court because of a more favorable set of laws. See Hanna v. Plumer, 380 U.S. 460, 468 (1965). Allstate asserts that failure to apply New York law in federal court would allow for forum shopping because plaintiffs could bring class action suits in federal court that they could not bring in state court. See Brief for Respondent, Allstate Insurance Company, at 46. Shady Grove contends that, while there would be different laws, Congress approved of increased federal class action lawsuits through the passage of the Class Action Fairness Act (CAFA). See Brief for Petitioner, Shady Grove Orthopedic Associates, at 48–49. Shady Grove claims that CAFA was a Congressional modification of class actions, and that to dismiss this suit would run counter to Congress’s choice. See id. at 50–53. Allstate counters that this case is clearly forum shopping within the scope of the Erie doctrine because it would allow a maximum state court claim of $500 to become a $5 million lawsuit in federal court. See Brief for Respondent at 48.
The second major issue in Erie Doctrine cases is whether application of state law in federal court would result in an “inequitable administration of justice,” or whether the result is fundamentally fair. See Hanna v. Plumer, 380 U.S. 460, 468 (1965). Shady Grove argues that the “fairness” considered in Erie cases is whether the rights of litigants varied based on the application of federal or state law. See Brief for Petitioner at 48. In this case, Shady Grove claims that the rights of both the class members and the defendants are the same in federal and state court, and that therefore the court does not need to apply CPLR 901(b). See id. Allstate argues that allowing class recovery would be unfair because state and federal courts would provide different remedies, in this case by allowing a large class sum instead of the individual claim of $500. See Brief for Respondent at 45–46.
Federalism and Judicial Economy
Another major issue in Erie Doctrine cases is the conflict between states’ rights to have their laws enforced and the federal government’s ability to set “laws of the land” under the Supremacy Clause. See Byrd v. Blue Ridge Rural Elec. Coop., Inc., 356 U.S. 525, 537–38 (1958); see also Petitioner’s Reply Brief at 10. Shady Grove generally argues that application of New York class action rules in federal court will impair the uniformity of federal law. See Petitioner’s Reply Brief at 26–27. Shady Grove first claims that this would undermine the authority of federal courts to permit class actions. See Brief for Petitioner at 54–55. Shady Grove next argues that this would create unnecessary complexity by requiring federal judges to become familiar with multiple state class action schemes. See id. at 55. In addition, Shady Grove asserts that an adverse ruling will undermine the uniformity of other federal rules of civil procedure, such as intervention and joinder. See id. at 55–56. Amicus Public Justice, in support of Shady Grove, argues that the class action system is an “essential characteristic” of the federal judiciary that promotes judicial economy and compatible results. Brief of Amicus Curiae Public Justice in Support of Petitioner at 20.
Allstate argues that Shady Grove’s statements are overbroad. Allstate claims that, under Rule 23, federal authorities have never had the broad authority to allow class actions that are ineligible in state courts. See Brief for Respondent at 49–50. Allstate also argues that applying New York law would conserve federal judicial resources by forcing Shady Grove and similarly situated plaintiffs to bring their small individual claims in state court. See id. at 50–51. Allstate claims that federal courts will not have to apply a complex combination of state class action procedures because Rule 23 governs certification of all eligible federal class actions. See id. at 52. In support of Allstate, the Partnership for New York City and others argue that CPLR 901(b) was designed by the New York legislature to protect New York businesses from devastatingly costly class actions. See Brief of Amicus Curiae Partnership for New York City, Inc., et al. in Support of Respondent at 20. They claim that allowing this kind of class action to proceed in federal court would have harmful social and economic consequences throughout the state of New York. See id.
This case chiefly addresses how the Erie Doctrine affects class action lawsuits in federal courts. More specifically, this case deals with the power of New York and other states to control the extent of state-created civil penalties by barring their recovery through class action proceedings. This level of control will largely be determined by the extent to which the Court interprets § 901(b) as substantive or procedural. Whereas Shady Grove argues that Federal Rule 23 clearly controls, and that class action rules, and § 901(b) in particular, are procedural, Allstate contends that the New York law affects are substantive and must apply in federal courts in order to protect individual rights as well as to avoid forum shopping and unfairness. As the Court has yet to define a steadfast rule on how to determine whether a rule is substantive or procedural, this case may set precedent that would shed light on this nebulous inquiry.