In a significant blow to business, the Supreme Court on Wednesday ruled that certain class actions barred or limited by state laws may proceed in federal courts.
In Shady Grove Orthopedic Associates v. Allstate Insurance Co. (pdf), a 5-4 majority, led by Justice Antonin Scalia, held that the federal class action rule, Civil Procedure Rule 23, trumped a New York law prohibiting class actions that seek to recover statutory penalties or minimal recoveries.
“The Court’s decision is good for those who use class actions as a remedy to corporate wrongdoing,” said Scott Nelson of Public Citizen Litigation Group, who argued the case for Shady Grove. “The Court did the right thing today.”
But the decision will “upend” a large number of state statutes that limit remedies which can be sought by class actions or that outright prohibit certain class actions, said Archis Parasharami, co-chair of Mayer Brown’s consumer litigation and class action practice.
“This is a major decision affecting statutory claims,” he added. “We now have cases that under controlling state law could never proceed as class actions in state court transformed into completely different litigation.”
In its Supreme Court brief, Allstate said at least 22 states limit remedies recoverable in class actions and at least 23 prohibit class actions for certain claims.
The issue before the justices stemmed from a federal class action filed by Shady Grove to recover statutory interest on overdue benefit payments by Allstate. Shady Grove alleged that Allstate routinely refused to pay interest on overdue benefits. The medical provider sought relief on behalf of itself and at least 100 other members of the class.
The federal district court dismissed the lawsuit after finding that statutory interest is a “penalty” under New York law and that law barred the action from proceeding. Shady Grove’s individual claim-roughly $500-fell short of the amount that would have allowed its claim to remain in federal court. The 2nd U.S. Circuit Court of Appeals affirmed.
In the Supreme Court, the case presented a classic civil procedure conundrum that only law professors could love. And in the end, it produced splintered voting and unusual alignments of the justices. …
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