The Supreme Court recently held that a New York statute that prohibits class
actions cannot be applied in federal court. The Court held that doing so would
improperly restrict the scope of Rule 23 of the Federal Rules of Civil
Procedure. Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co.,
559 U.S. ___ (2010) [link
to opinion; link to concurrence, link to dissent]. As a result, a class-action lawsuit against
Allstate Insurance Company may proceed in the United States District Court for
the Eastern District of New York.
The case involves Allstate’s alleged
failure to timely pay insurance benefits to a medical facility and refusal to
pay interest that accrued on the overdue benefits in violation of New York law.
The medical facility filed a class action lawsuit against Allstate in federal
court based on diversity jurisdiction. The district court dismissed the class
action based on a New York law prohibiting an action to recover a statutory
penalty from being maintained as a class action (see 466 F. Supp. 2d 467,
472).
The Second Circuit affirmed the district court, noting that there was no conflict between the New York law and Rule 23 (see 549 F.3d 137). The Second Circuit held that, under the doctrine set forth in Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), federal courts sitting in diversity must apply the New York law (where applicable) because it is “substantive.”
The Supreme Court reversed the judgment and remanded the case. Only Parts I
and II-A of the opinion garnered a majority and are binding. The majority agreed
that, notwithstanding the New York law, the case “may proceed as a class action”
under Rule 23, which provides a “one-size fits all formula for deciding the
class-action question.”
An upshot of Shady Grove is that
plaintiffs will have far greater incentive to maintain certain class actions
based on state law in federal court. Additionally, corporate defendants should
carefully analyze the potential impact of this decision before removing a class
action from state to federal court. Please contact Ashley Trehan
for more information.
