Editor's Note: This article originally appeared inNational Underwriter,P&C.

WASHINGTON--The U.S. Supreme Court, in ruling on whatqualifies as a class action, has reinstated a suit that accusesAllstate of routinely refusing to pay interest when it is late witha claim payment.

The class action case was brought in New York where lower courtsruled that state's law prohibits class actions where the suitinvolved seeks penalties or statutory minimum damages. The courtconcluded that the interest charges qualify as a penalty.

But the high court disagreed and sent the case back for trial ona 5-4 ruling. Justice Antonin Scalia, who wrote the majorityopinion, said New York law does not have the power to negatefederal law that permits class actions.

The court found that under federal law there is "a categoricalrule entitling a plaintiff whose suit meets the specified criteriato pursue his claim as a class action."

"Congress, unlike New York, has ultimate authority over theFederal Rules of Civil Procedure; it can create exceptions to anindividual rule as it sees fit--either by directly amending therule or by enacting a separate statute overriding it in certaininstances," the court said.

"If the state law instead banned class actions for fraud claims,a would-be class-action plaintiff could drop the fraud counts fromhis complaint and proceed with the remainder in a class action. Yetthat would not mean the law provides no remedy for fraud; the banwould affect only the procedural means by which the remedy may bepursued," the court noted.

The decision mentioned that the ruling could lead to plaintiffsvenue shopping for friendly courts.

"We must acknowledge the reality that keeping the federal-courtdoor open to class actions that cannot proceed in state court willproduce forum shopping," Justice Scalia wrote.

"But, divergence from state law, with the attendant consequenceof forum shopping, is the inevitable (indeed, one might say theintended) result of a uniform system of federal procedure. Congressitself has created the possibility that the same case may follow adifferent course if filed in federal instead of state court," theopinion said.

"We cannot contort the text of federal rules, even to avert acollision with state law that might render it invalid," thedecision said.

The validity of a Federal Rule depends entirely upon whether itregulates procedure. If it does, it is authorized ...and is validin all jurisdictions, with respect to all claims, regardless of itsincidental effect upon state-created rights," the court ruled.

The case was brought on behalf of a Maryland medical group,Shady Grove Orthopedic Associates, that had treated Sonia Galvez,an Allstate no-fault policyholder from New York injured in an autoaccident. She assigned her benefit rights to the group, whichsubmitted a claim.

Allstate paid, but not within the required 30 day time periodunder New York law and Shady Grove, which contended it was beingdenied $500 in interest, sued on behalf of itself and other partiesthat had been denied interest.

Douglas W. Dunham, counsel in the complex mass torts andinsurance litigation group at Skadden, Arps, a lawyer who hasrepresented the insurance industry in several complex tort cases,cautioned that the decision "is not a sweeping victory for theplaintiffs' bar."

He said a concurring opinion by Justice John Paul Stevens meansthat the decision will most likely have to be applied on acase-by-case basis, looking at different types of statutes thatstates have enacted to place limitations on class actions."

"I think the concurring opinion by Justice Stevens will carrygreat weight" said Mr. Dunham, "It doesn't establish the clear-cutapproach that Justice Antonin Scalia proposes" in his majorityopinion.

Mr. Dunham submitted a friend of the court brief on behalf ofseveral property and casualty insurance industry trade groups andNew York business groups.

Specifically, in his concurring opinion, Justice Stevens said,"It is important to observe that the balance Congress has struckturns, in part, on the nature of the state law that is beingdisplaced by a federal rule."

And, in my view, he added, "the application of that balance doesnot necessarily turn on whether the state law at issue takes theform of what is traditionally described as substantive orprocedural. Rather, it turns on whether the state law actually ispart of a state's framework of substantive rights or remedies."

Justice Stevens said, "Federal rules must be interpreted withsome degree of 'sensitivity to important state interests andregulatory policies."' The same point was noted by Justice RuthBader Ginsburg in her dissenting opinion.

The case is Shady Grove Orthopedic Associates v. AllstateInsurance Co., No. 08-1008.

In a statement, a spokesman for Allstate said the decision isdisappointing, "The case before the court involves theapplicability of New York state law in federal court, not any issuepertaining to Allstate's claims practice or insurance."

"We believe that New York law clearly specifies that court casesinvolving statutory penalties cannot be brought as a classaction."

The spokesman added that the decision now returns to federalcourt in New York. "Today's ruling does not affect the merits ofthe actual case and Allstate will continue to defend itaccordingly."

A New York federal district court had dismissed the lawsuit, adecision was upheld by a panel of the U.S. 2nd Circuit Court ofAppeals.

In his decision, Justice Scalia said that the "line betweeneligibility and certifiability is entirely artificial and, in anyevent," and that Rule 23, which governs the eligibility of suits tobe certified for class action under federal law, "explicitlyempowers a federal court to certify a class in every case meetingits criteria."

He noted that, a federal procedural rule "is not valid in somejurisdictions and invalid in others--or valid in some cases andinvalid in others-- depending upon whether its effect is tofrustrate a state substantive law (or a state procedural lawenacted for substantive purposes)."

In her dissent, Justice Ginsburg said that, "that there are somestate procedural rules that federal courts must apply in diversitycases" because they essentially are part of a state's definition ofsubstantive rights and remedies.

She added that, "The Court today approves Shady Grove's attemptto transform a $500 case into a $5,000,000 award, although thestate creating the right to recover has proscribed thisalchemy."

Specifically, she said, If Shady Grove had filed suit in NewYork state court, the 2 percent interest payment authorized by NewYork insurance law as a penalty for overdue benefits would, byShady Grove's own measure, amount to no more than $500.

"By instead filing in federal court based on the parties'diverse citizenship and requesting class certification, Shady Grovehopes to recover, fort he class, statutory damages of more than $5million," she added.

Scott Nelson, a lawyer with Public Citizen Litigation inWashington, D.C. who argued the case for the plaintiffs, said thecase has broader applicability than just to cases involving unpaidinterest.

"It clearly means that if a state has procedural, rather thansubstantive, rules barring class action lawsuits, that that wouldnot apply to cases involving state law brought in federal court,"he said.

At the same time, he said that the scope of the decision mightbe limited because the court was "fractured" in its decision, andJustice Stevens' concurring opinion. But, he said, it is "a clearvictory for consumers," certainly in New York, where federal courtshave in the past viewed the state's procedural barriers to classaction lawsuit as compelling.

"Clearly, class action lawsuits based on New York state law willhave a far greater chance of succeeding in federal court than theyhave in the past," he said.