INTRODUCTION I. THE SHADY GROVE DISPUTE II. SHADY GROVE AND THE RULES ENABLING ACT: MISSING THE FOREST AND THE TREES A. False Start B. Damage Control: From Too Little to Too Much Power in the Federal Rules C. Sibbach's Inadequacies Revealed D. The Court' s Incoherent Jurisprudence of Scope E. Reinterpreting the Enabling Act III. RECAPTURING THE ROLE OF LIABILITY AND REGULATORY POLICY IN AGGREGATE LITIGATION A. Federal Rule 23 B. Section 901(b) CONCLUSION [L]egal abstraction, while never socially neutral, always remains socially volatile. Without constant reference to changing social dynamics and consequences, students of procedure [including judges] can scarcely know what they are talking about. (1)
Edward A. Purcell, Jr.
In Memory of Ben Kaplan
Few subjects in the field of Procedure are characterized by greater legal abstraction than the collection of doctrines that govern the relationship between the federal and state courts. The grand experiment by which the drafters of the Constitution "split the atom of sovereignty," (2) as Justice Kennedy memorably put it, has not always produced readily administrable doctrines for the actual business of running parallel and overlapping judicial systems. The Court's efforts to harmonize the operation of those systems through the Erie doctrine and its interpretations of the Rules Enabling Act (3)--the statute that both authorizes and limits the Federal Rules of Civil Procedure--have been most successful when undertaken with an informed awareness of social dynamics and consequences. (4) But successful harmonization of the judicial systems has been the exception, not the rule.
Two related problems under the Enabling Act cry out for pragmatism informed by both knowledge of history and realism about contemporary conditions, but have languished for decades without proper resolution. The first involves a broad interpretive question: how can the limitations on rulemaking authority contained in the Act be applied in a manner that reflects the separation-of-powers concerns that animated them (5) while also exhibiting respect for the state regulatory arrangements that govern much of our economic and social activity? The Supreme Court has not yet provided a useful answer to that question. Instead, it has often relied on a rigid formalism that creates perverse incentives, leading the Court to give some Federal Rules implausibly broad interpretations in order to apply federal law while emptying others of content in order to avoid an Enabling Act challenge.
The second problem involves the intersection of the Enabling Act with class action practice: following the 1966 amendments to Federal Rule of Civil Procedure 23 and the ascendance of the class action to a position of central importance in the enforcement of many regulatory policies, how can Rule 23 be squared with any reasonable account of the Enabling Act's prohibition against rules that abridge, enlarge, or modify substantive rights? (6) The prospect of class certification is the single most important factor in the dynamics of litigation or settlement in any proceeding in which class treatment is on the table. Certification can transform unenforceable negative-value claims into an industry-changing event and dramatically alter the litigation or settlement value of high-stakes individual claims. After almost half a century of doctrinal development under modern Rule 23, the possibility that the entire endeavor may have unfolded in violation of the Enabling Act seems increasingly compelling, but the disruptive consequences of such a conclusion would be unacceptable.
Shady Grove Orthopedic Associates v. Allstate Insurance Co., (7) a closely watched case decided in the 2009-10 Term, presented the Supreme Court of the United States with an opportunity to speak to both issues. Shady Grove was a federal diversity case involving a potential conflict between a provision of New York law that prohibits the award of penalties or statutory damages on a classwide basis unless expressly authorized, (8) and Federal Rule 23, which broadly authorizes federal courts to certify, manage, and hear class action proceedings. (9) Sadly, the case shed little light. In a fractured opinion written for a divided Court, Justice Scalia held that Rule 23 displaced New York's law on the issue of classwide penalty liability. In the portion of his opinion that spoke for a majority, Justice Scalia offered an interpretation of Rule 23 that found a conflict with New York law where none need exist. (10) And when speaking for a plurality, he provided an account of federal and state policies on aggregate litigation that ignored the practical realities of the modern class action and the animating impulses behind it, an account that more accurately reflects class action practice in 1938 than in 2010. (11) There are some valid insights in the plurality opinion dealing with the proper interpretive approach to the Enabling Act, but they are eclipsed by oversimplification and overwhelmed by the tide of confusion that characterizes the rest of the opinion. Shady Grove called for a restrained and enlightened interpretation of both the Enabling Act and Rule 23, but the Justices did not deliver.
This Article seeks to redeem the missed opportunities of Shady Grove and provide the clarifying accounts of the Enabling Act and Rule 23 that the opinions fail to offer. After a brief overview of the Shady Grove dispute in Part I, Part II addresses the proper interpretive approach to the Rules Enabling Act. Building upon past work, (12) we identify the need for a more dynamic approach to the text of Federal Rules than the Court has exhibited--one that recognizes the indeterminacy inherent in prospective rulemaking, the role of federal common law in the interpretation of the Rules, and the role of the Rules in federal common law--and the need to revisit the line between "procedure" and "substance" in light of practical experience and evolving legal norms.
Part III then turns to the status of class action litigation under the Enabling Act. We regard Shady Grove as the occasion for a shift in understanding of the sources and content of aggregation policy. Although some may view the reorientation we propose as radical, it has deep roots in the history of the class action and its treatment under Rule 23, and it is consistent with much existing class action practice. The solution to the seeming dilemma caused by Rule 23's dramatic impact upon substantive liability and regulatory regimes is that Rule 23 is not the source of the aggregate-liability policies that generate that impact, and it never has been. Rather, courts must look to the substantive liability and regulatory regimes of state and federal law in determining whether aggregate relief is appropriate and consistent with the goals of that underlying law. Rule 23 is merely the mechanism for carrying an aggregate proceeding into effect when the underlying law supports that result. It is an important mechanism, and one that makes its own controlling policy choices for the federal courts about such matters as notice, opportunity to opt out, and immediate appeal of certification. But Rule 23 does not set policy on the propriety of aggregate remedies as a means of accomplishing regulatory goals--and it could not possibly do so. (13) In the dispute that produced Shady Grove, section 901 (b) of the New York Civil Practice Law and Rules set liability policy under New York law. The Court did violence to the Enabling Act when it concluded that Rule 23 could supersede that policy.
THE SHADY GROVE DISPUTE
Shady Grove arose out of a dispute between Allstate Insurance and Shady Grove Orthopedic concerning payments due under a no-fault insurance scheme. (14) Shady Grove had provided medical treatment to an injured individual who was covered by no-fault automobile insurance as required by New York law. (15) After the individual assigned all her payment rights to Shady Grove, the company sought reimbursement directly from Allstate. (16) Allstate eventually paid, but not within the thirty-day period that was required for uncontested claims. (17) New York law imposes two percent monthly interest on late payments under the no-fault insurance scheme, a penalty that totaled around five hundred dollars in this instance. (18)
On the basis of this claim, Shady Grove became the named plaintiff in a putative class action filed against Allstate in federal court under the Class Action Fairness Act of 2005. (19) The suit alleged that Allstate regularly failed to make uncontested payments within the required thirty-day period, and that even after rendering payment for covered services it consistently failed to pay the two-percent monthly penalty required under New York law, (20) or otherwise acted in bad faith in seeking to avoid that penalty. (21) Plaintiff sought certification of a class to prosecute these claims on behalf of all insurance beneficiaries or their assignees whose rights Allstate had allegedly violated in this fashion. (22)
New York law includes a provision specifically addressing the availability of statutory-penalty or minimum-damage remedies in a class proceeding, which was enacted when New York updated its general class action provision following the 1966 amendments to Federal Rule 23. (23) In section 901 (a) of the New York Civil Practice Law and Rules, New York adopted general requirements for certification of a class action that broadly parallel the requirements of its federal counterpart. (24) Section 901(b) further specified as follows: "Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action." (25) Section 901 (b) thus creates a default rule against the availability of classwide statutory...