|April 16, 2010|
Previously published on April 1, 2010
On March 31, 2010, the U.S. Supreme Court issued an opinion that allowed a state-law class action in federal court even when state law itself would bar the class action in state court. In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company, 2010 U.S. LEXIS 2929 (March 31, 2010), a five-member majority ruled that Rule 23 of the Federal Rules of Civil Procedure, which provides for class actions, preempted a New York law barring class actions for recovery of a “penalty” even when the claim for a penalty arose under a New York law.
Four members of the majority also issued an opinion making clear they viewed the decision as being generally applicable to just about any state law that might limit the right to bring a class action in federal court under state law, while the fifth judge of the majority filed a concurrence indicating that whether a specific state law barring a class action would be preempted in federal court would depend on a detailed analysis of the particular state law. In addition, the majority opinion stated that, while the decision decides whether a federal court class action can proceed, the decision did not reach whether state-law limitations on remedies (such as a damages cap) would be binding in a federal court class action.
Shady Grove might have been of limited importance but for the Class Action Fairness Act of 2005 (CAFA). CAFA dramatically expanded federal-court jurisdiction over state-law class actions. Prior to CAFA, maintaining a state-law class action in federal court under diversity jurisdiction was nearly impossible; however, CAFA provided that many high-dollar state law class actions could be removed to or filed in federal court. Given that CAFA provides federal court jurisdiction for many significant state law class actions, a tension exists between Rule 23 and a myriad of state laws limiting or eliminating class actions for particular state-law claims. Allstate in its Supreme Court briefing identified 96 specific state statutes across the country that qualify or eliminate the right to bring a class action for particular claims. Shady Grove will doubtless spawn follow-up decisions by lower courts as its holding is applied to these specific state laws. However, the general impact is clear: the door to federal court for class actions to enforce state-law rights has been opened ever further.
Special Note for Readers with Virginia Interests: The potential impact of Shady Grove in Virginia is worth particularly close attention. Virginia is the only state that does not provide a class action procedure for state courts. Prior to Shady Grove, therefore, a class action based on Virginia state law was non sequitur. Shady Grove will start a new debate in Virginia, as plaintiffs will argue that Shady Grove overrules the implicit Virginia policy against class actions when federal court jurisdiction can be established under CAFA, while defendants will argue that Shady Grove’s ambiguities and unanswered questions leave open the question of whether a Virginia-law class action can be maintained in federal court.