December 9, 2009
Written By Attorney: G. Franklin McKnight IV
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In a case involving interpretation of the Erie doctrine and the principals of federalism, the United States Supreme Court will decide whether federal courts must abide by a New York statute that prohibits class actions under certain statutory recovery schemes or whether the Federal Rule of Civil Procedure governing class actions overrides the New York prohibition. In Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., No. 08-1008 (U.S.), Appellant, Shady Grove, requests that the Supreme Court overturn the Second Circuit's decision holding that New York Civil Practice Laws and Rules ("CPLR") § 901(b), which prohibits use of the class action mechanism to obtain relief under statutes that impose a penalty or minimum measure of recovery (unless specifically authorized by the statute), does not conflict with Federal Rule of Civil Procedure ("FRCP") 23, governing the procedural requirements necessary to obtain class certification. The Second Circuit found that CPLR § 901(b) is consistent with the aims of the Erie doctrine and does not raise fundamental concerns of federalism, as the Court found no evidence that the "availability of the class action device in all circumstances is an 'essential characteristic' of the federal court system, particularly where the very cause of action that Shady Grove seeks to assert is a creature of New York state statute." Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 549 F.3d 137 (2nd Cir. 2008).
In this case, Shady Grove alleged that Allstate failed to pay statutory interest penalties on overdue payments of insurance benefits owed to plaintiffs under no-fault automobile insurance policies issued by Allstate under New York Insurance Law ("N.Y. Ins. Law") § 5102(a). Shady Grove did not seek recovery of the insurance benefits themselves, which it conceded were eventually paid by Allstate.
Allstate filed a Motion to Dismiss Shady Grove's Complaint based on CPLR § 901(b), asserting that the statute prohibited use of the class action device with respect to actions under N.Y. Ins. Law § 5102(a), which imposes a penalty and does not specifically authorize use of the class action mechanism. Conversely, Shady Grove argued that CPLR § 901(b) is not applicable to class actions brought in federal court because it is a procedural rule in conflict with FRCP § 23. Agreeing with Allstate, the District Court dismissed the case.
Shady Grove appealed to the Court of Appeals for the Second Circuit, arguing that under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), a federal court should not apply a state procedural rule that would limit the use of a procedural device that is otherwise available under the Federal Rules of Civil Procedure, and the district court erred in failing to find that the exception clause of CPLR § 901(b) was triggered. The Second Circuit disagreed and affirmed the decision of the District Court.
In its decision, the Second Circuit found no conflict between CPLR § 901 and FRCP § 23. The Court noted that FRCP § 23 was insufficiently broad to cause a "direct collision" with CPLR § 901. Both CPLR § 901(a) and FRCP § 23 contain prerequisites for class certification, but only CPLR § 901 contains a separate section prohibiting class actions to recover a penalty or a minimum measure of recovery absent specific statutory authorization. The Court found that CPLR § 901(b) is a substantive provision similar to a statute of limitations that was enacted to mitigate the existing deterrent effect of statutory penalties by eliminating the class action device as a means of enforcement. Allowing plaintiff to pursue claims in federal court as a class action would circumvent this state policy.
The Court further found that CPLR § 901 was consistent with the aims of Erie and did not threaten any essential characteristic of the federal court system. Citing to the majority of district courts that have issued opinions on this issue, the Second Circuit agreed that CPLR § 901 is substantive law that must be applied in a federal forum, and a failure to do so would contravene the mandates of Erie by allowing plaintiffs to recover on a class-wide basis in federal court when they would be unable to do so in state court. The Second Circuit also noted that while the Erie doctrine does not require a federal court to apply a state rule where it would pose a threat to an essential characteristic of the federal court system, there was no evidence that unrestricted use of the class action device was such an essential characteristic. Furthermore, because the cause of action that Shady Grove sought to assert was a creature of New York state statute under N.Y. Ins. Law § 5102(a), this also mitigated against finding that the federal class action mechanism could not be curtailed by state substantive law.
Finally, the Court addressed whether N.Y. Ins. Law § 5102(a) contained a provision specifically permitting use of class actions to recover under the statute. Although Shady Grove pointed to a regulation, NYCRR § 65-3.9(c), which governed the accumulation of interest in class actions, the Court found that, at most, the regulation contemplates the recovery of a penalty and does not demonstrate that the statute "specifically authorizes" a class action recovery as required by CPLR 901(b). The Court noted that even if the plain meaning of the statute rendered the regulation superfluous, the statute controlled. The Court found that no such affirmative class action provision existed in N.Y. Ins. Law § 5102(a).
In accepting the Shady Grove appeal to evaluate New York's partial ban on class actions, the United States Supreme Court has given itself the opportunity to further define the interplay of federal and state law under the principals of federalism. However, maintaining an ideal balance between federal and state interests may not be an easy task. At present, two absolute positions have emerged from the parties: either States have the right to control the class action device or have no right to interfere with it. The Court will need to decide whether to accept one of these two positions or attempt to strike some balance between the two. A decision is expected in late winter. NLdH will continue to monitor this important case and will provide an update once a decision has been entered.
