In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company , a diversity action in federal court, the U.S. Supreme Court ruled Wednesday that Federal Rule of Civil Procedure 23 (Rule 23) applies, notwithstanding a New York statute that generally prohibits class actions for penalties or minimum recoveries in New York courts. Already, a blog from Public Citizen, which served as counsel to Shady Grove before the Supreme Court, is trumpeting that the "case ensures that class actions will be available as a means for redress for plaintiffs advancing claims based on both state and federal substantive law if there is a basis for federal court jurisdiction over the case." While the plaintiff’s position carried the day in Shady Grove, the decision – particularly Justice John Paul Stevens' critically important concurrence – was dictated by the particulars of the New York statute at issue.   It is far from clear that the courts will reach the same result when they are confronted, as they inevitably will be, with different state-law limits on class actions.

As Public Citizen observed, Justice Antonin Scalia, joined by Chief Justice John G. Roberts, Jr., and Justices Clarence Thomas and Sonia Sotomayor, concluded that "federal procedural standards 'create a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action,' and that rule 'automatically applies' in all cases in federal court, even if a class action would not be allowed in a similar case brought in a state court." In dissent, Justice Ruth Bader Ginsburg, joined by Justices Anthony M. Kennedy, Stephen G. Breyer, and Samuel A. Alito, Jr., concluded that, in the circumstances of the case, Rule 23 should be construed to preclude the class action. Under Supreme Court precedent, however, it is the tie-breaking decision of Justice Stevens, who staked out an unaccustomed position in the middle, that should prove decisive.

The Stevens opinion afforded controlling weight to the Rules Enabling Act, the federal statute that empowered the Supreme Court to adopt Rule 23. In particular, Justice Stevens focused on a provision of the Act that states that the Rules of Civil Procedure "shall not abridge, enlarge or modify any substantive right." While Justice Stevens made clear that this prohibition applies fully to substantive state rights, not just federal rights, he concluded that the New York law at issue in the case was not intended to limit substantive rights. In support of this conclusion, he observed that the state law applied equally to class actions under New York and federal law and that, clearly, the New York Legislature could not limit federal rights.

It seems likely that plaintiffs' class action lawyers and groups such as Public Citizen will broadly argue, based on the plurality opinion, that federal courts addressing state-law claims should disregard state-law limits on class actions. Undoubtedly, this issue will be litigated in the federal courts for years to come.

Many state statutes create statutory penalties for technical violations that have not caused any actual damages. Because federal courts may be asked to ignore state-law limits on class actions and because, in any event, many such statutes do not limit recoveries in class actions, we strongly urge our clients to identify state statutes of concern and undertake a legal review to ensure compliance. Ballard Spahr is able to assist our clients in performing such a review.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky , 215.864.8544 or  

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