High Court Class Action Ruling Revives Suit Against Allstate

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

"Congress, unlike New York, has ultimate authority over the Federal Rules of Civil Procedure; it can create exceptions to an individual rule as it sees fit–either by directly amending the rule or by enacting a separate statute overriding it in certain instances," 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 from his complaint and proceed with the remainder in a class action. Yet that would not mean the law provides no remedy for fraud; the ban would affect only the procedural means by which the remedy may be pursued," the court noted.

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

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

"But, divergence from state law, with the attendant consequence of forum shopping, is the inevitable (indeed, one might say the intended) result of a uniform system of federal procedure. Congress itself has created the possibility that the same case may follow a different course if filed in federal instead of state court," the opinion said.

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

The validity of a Federal Rule depends entirely upon whether it regulates procedure. If it does, it is authorized …and is valid in all jurisdictions, with respect to all claims, regardless of its incidental 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 auto accident. She assigned her benefit rights to the group, which submitted a claim.

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

Douglas W. Dunham, counsel in the complex mass torts and insurance litigation group at Skadden, Arps, 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."

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

"I think the concurring opinion by Justice Stevens will carry great weight" said Mr. Dunham, "It doesn't establish the clear-cut approach that Justice Antonin Scalia proposes" in his majority opinion.

Mr. Dunham submitted a friend of the court brief on behalf of several property and casualty insurance industry trade groups 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."

And, in my view, he added, "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."

Justice Stevens said, "Federal rules must be interpreted with some degree of 'sensitivity to important state interests and regulatory policies."' The same point was noted by Justice Ruth Bader Ginsburg in her dissenting opinion.

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

In a statement, a spokesman for Allstate said the decision is disappointing, "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."

"We believe that New York law clearly specifies that court cases involving statutory penalties cannot be brought as a class action."

The spokesman added that the decision 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."

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

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

He noted 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 said that, "that there are some state procedural rules that 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 $5,000,000 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, fort he 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 case has broader applicability than just to cases involving unpaid interest.

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

At the same time, he said that the scope of the decision might be limited because the court was "fractured" in its decision, and Justice Stevens' concurring opinion. But, he said, it is "a clear victory for consumers," certainly 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.