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WASHINGTON – The justices of the U.S. Supreme Court aggressively questioned lawyers yesterday, arguing a case that will determine whether federal courts must abide by a state law barring class actions.

The case, Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., stems from a class action filed by an automobile accident victim and the medical office where she was treated against Allstate, claiming the insurer violated a New York statute requiring insurance claims be paid within 30 days.

The suit, which claimed more than 100 class members in multiple states, was brought in federal court pursuant to diversity jurisdiction.

Allstate moved to dismiss the suit, claiming that New York rules of procedure bar class actions based on the statute at issue. The district court agreed and dismissed the claim.

The plaintiffs appealed, arguing that Federal Rule of Civil Procedure 23 authorizes class actions, creating a conflict with the New York law, and therefore the federal rule should trump according to the Supreme Court’s 1965 ruling in Hanna v. Plumer.

But the 2nd Circuit affirmed, holding that the New York rule was substantive, not procedural. Accordingly, under the 70-year-old doctrine established by Erie Railroad v. Tompkins, the state rule governed and the class action was barred.

The U.S. Supreme Court agreed to hear the case, a decision that could have significant impact on mass tort litigation.

Procedure or substance?

The plaintiffs in the case are represented by Public Citizen and supported by amicus curiae Public Justice. They argue that a ruling for the defendant would allow states to unfairly and inequitably cut off access to federal class actions.

Scott L. Nelson, an attorney at the Public Citizen Litigation Group in Washington, argued that the New York law barring class actions is procedural, and therefore Hanna should govern.

But Justice Ruth Bader Ginsburg seemed unconvinced that the case was so clear cut.

“This is a procedural standard that has a manifestly substantive purpose,” Ginsburg said.

She also expressed concerns about forum shopping.

“What lawyer would bring a $500 case in state court when she can bring a $5 million case in federal court?” Ginsburg asked.

Nelson said federal procedural rules are clear on the issue of class actions.

“Rule 23 actually does address this issue, [saying] the matter can be certified as a class action,” Nelson said. “The state has no authority to displace federal law.”

But Ginsburg pointed out that state law governs the penalty available under a statute – a substantive issue.

“Even if New York had provided a specific penalty, the federal court could disregard that and allow class actions even where a statute [only] provides an individual right?” Ginsburg asked.

“The right in a class action is still an individual right” asserted by numerous plaintiffs in a combined case, Nelson replied.

The defendant and supporting amici, including the U.S. Chamber of Commerce and tort reform organizations, take the position that a ruling for the plaintiff would encourage forum shopping and thwart states’ ability to limit the amount of state law statutory damages.

Christopher Landau, who heads the Appellate Litigation Practice at Kirkland & Ellis’ Washington office, argued that the state law was substantive and clearly designed to prohibit class action remedies for this cause of action.

“This case falls squarely in the heartland of Erie,” Landau said.

Justice Sonia Sotomayor asked if Landau’s argument would effectively weaken federal procedural rules.

“Isn’t Rule 23 a judgment by Congress that class actions [are] fair and efficient?” Sotomayor asked.

“If a state makes a policy choice [about remedies for a cause of action], it is a substantive policy choice,” Landau replied. “A state court abolish the cause of action altogether.”

A ruling from the Court is expected this term.

Questions or comments can be directed to the writer at: kimberly.atkins@lawyersusaonline.com

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