Washington

The U.S. Supreme Court has opened the door for plaintiffs to file more class-action lawsuits in a case involving Allstate Insurance Company, ruling that some litigation barred by state law can be brought in federal courts.

The decision, handed down on March 31, “may hamper the ability of states to place statutory limits upon the class-action mechanism,” according to lawyers at Nelson Levine de Luca & Horst LLC, of Blue Bell, Pa., in a paper interpreting the ruling.

In the paper, written by NLDH lawyers Robert T. Horst and Mark H. Rosenberg, the lawyers said expanded federal jurisdiction over putative class actions established by the Class Action Fairness Act “will provide plaintiffs with opportunity to bypass these [state] limits by bringing similar cases in federal court, consistent with [the latest decision].”

They added that, ironically, “the plaintiffs’ bar that long-resisted expanded federal jurisdiction over class actions may now utilize this jurisdiction to pursue otherwise-barred class claims.”

However, a lawyer who has represented the insurance industry in several complex tort cases cautioned that the decision is “not a sweeping victory for the plaintiffs’ bar.”

Indeed, a concurring opinion by Justice John Paul Stevens means the ruling will most likely have to be applied on a case-by-case basis, looking at different types of statutes states have enacted to place limitations on class actions, according to Douglas W. Dunham, a counsel in the complex mass torts and insurance litigation group at Skadden, Arps, in New York.

“I think the concurring opinion by Justice Stevens will carry great weight. It doesn’t establish the clear-cut approach that Justice Antonin Scalia proposes [in his majority opinion],” added Mr. Dunham, who submitted a “friend-of-the-court” brief on behalf of several property and casualty insurance industry trade associations and New York business groups.

Specifically, in his concurring opinion, Justice Stevens said: “It is important to observe that the balance Congress has struck turns, in part, on the nature of the state law that is being displaced by a federal rule.”

Judge Stevens added that in his view, “the application of that balance does not necessarily turn on whether the state law at issue takes the form of what is traditionally described as substantive or procedural. Rather, it turns on whether the state law actually is part of a state’s framework of substantive rights or remedies.”

Further, as noted by Justice Ruth Bader Ginsburg in her dissent, “federal rules must be interpreted with some degree of ‘sensitivity to important state interests and regulatory policies.”‘

The ruling came in the case of Shady Grove Orthopedic Associates v. Allstate Insurance Co. (No. 08-1008).

The court ruled 5-4 in the case, but divided under unusual lines, with two conservatives and two liberals siding with Justice Scalia and two conservatives and two liberals dissenting in an opinion written by Justice Ginsburg.

In a statement, a representative for Allstate said “the case before the court involves the applicability of New York state law in federal court, not any issue pertaining to Allstate’s claims practice or insurance.”

The Allstate official added that the company is “disappointed with the decision” of the Supreme Court and “we respectfully disagree” with it. “We believe that New York law clearly specifies that court cases involving statutory penalties cannot be brought as a class action.”

The official noted that the case now returns to federal court in New York.

“Today’s ruling does not affect the merits of the actual case, and Allstate will continue to defend it accordingly,” the representative said.

The case involves a federal class-action lawsuit in which the lead plaintiff is a group of orthopedic doctors who treated a patient who held a New York no-fault auto insurance policy.

They sued to recover interest applicable under New York insurance law on claims that were not paid within the time period mandated by New York law. In its suit, the practice claimed that Allstate routinely refused to pay interest on overdue benefits.

The medical practice sued on behalf of itself and at least 100 other practices that alleged in the lawsuit they had not been paid promptly, charging that Allstate had then refused to pay the interest mandated by New York law.

A New York federal district court dismissed the lawsuit, and that decision was upheld by a panel of the U.S. Court of Appeals for the 2nd Circuit. The courts held that statutory interest is a penalty under New York law, and that New York law barred such claims from proceeding as a class-action lawsuit.

Shady Grove Orthopedic’s claim was for approximately $500.

In his majority decision, Justice Scalia said the “line between eligibility and certifiability is entirely artificial.” He added that “in any event,” Rule 23–which governs the eligibility of suits to be certified for class-action status under federal law–”explicitly empowers a federal court to certify a class in every case meeting its criteria.”

Justice Scalia added that Allstate’s arguments, based on the exclusion of some federal claims from Rule 23′s reach pursuant to federal statutes, are “unpersuasive.”

He reasoned that a federal procedural rule “is not valid in some jurisdictions and invalid in others–or valid in some cases and invalid in others–depending upon whether its effect is to frustrate a state substantive law (or a state procedural law enacted for substantive purposes).”

In her dissent, Justice Ginsburg argued that “there are some state procedural rules federal courts must apply in diversity cases,” because they essentially are part of a state’s definition of substantive rights and remedies.

She added that “the Court today approves Shady Grove’s attempt to transform a $500 case into a $5 million award, although the state creating the right to recover has proscribed this alchemy.”

Specifically, she said, if Shady Grove had filed suit in New York State court, the 2 percent interest payment authorized by New York insurance law as a penalty for overdue benefits would, by Shady 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 Grove hopes to recover, for the class, statutory damages of more than $5 million,” she added.

Scott Nelson, a lawyer with Public Citizen Litigation in Washington, D.C., who argued the case for the plaintiffs, said the suit has broader applicability than just to situations involving unpaid interest.

“It clearly means that if a state has procedural, rather than substantive rules barring class-action lawsuits, that would not apply to cases involving state law brought in federal court,” he said.

At the same time, he said the scope of the decision might be limited because the court was “fractured” in its ruling, while also citing Justice Stevens’ concurring opinion–as noted by Mr. Dunham in his analysis of the decision.

However, Mr. Nelson called the ruling “a clear victory for consumers”–particularly in New York, where federal courts have in the past viewed the state’s procedural barriers to class-action lawsuit as compelling.

“Clearly, class-action lawsuits based on New York state law will have a far greater chance of succeeding in federal court than they have in the past,” he said.