Removal of class actions: what danger lurks in Shady Grove.

• Author: Stern, Martin A.

IN 2010, the Supreme Court of the United States delivered a landmark decision in Shady Grove Orthopedic Associates v. Allstate Insurance. (1) The case presented an extraordinarily complex combination of procedural issues, primarily concerning a crossroads between federal and state law in the context of class certification. The result was nothing short of bewildering. In a plurality opinion, a majority agreed that a New York statute prohibiting class actions in suits seeking penalties or statutory minimum damages was preempted by Rule 23 of the Federal Rules of Civil Procedure. (2) As a result, the petitioner's suit could proceed as a class action in federal court, while ironically it would not have been able to do so in state court.

In the opening opinion, Justice Scalia gave a broad, sweeping application of Rule 23, finding that it "unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules' prerequisites are met." (3) But while Justice Stevens agreed with the result in this particular case, he disagreed with Justice Scalia's rationale, opining that if a federal procedural rule "would displace a state law that is procedural in the ordinary use of the term but is so intertwined with a state right or remedy that it functions to define the scope of the state-created right," then the federal procedural rule "cannot govern" such a case. (4)

Following Shady Grove, depending upon the proclivity of a district court to apply Justice Scalia's rigid, FRCP-deferential rationale, or Justice Stevens's more pragmatic theory, a motion for class certification could have strikingly different odds of success. If a district court follows Justice Scalia's approach, then the decision to remove a putative class action to federal court would result in the loss of the very grounds--a state law prohibiting class certification--that would otherwise defeat class certification in state court. However, should a district court follow Justice Stevens's approach, that same state law might apply even after removal, depending on whether it is so intertwined with the ability to proceed as a class action that it functions to define the scope of this right. Thus, before removing a putative class action, defense attorneys must be wary of the hidden dangers that lurk in the wake of Shady Grove.

Part I of this Article will discuss the Shady Grove decision in further detail, outlining the factual and procedural background, the majority's judgment, and the divergence between Justice Scalia and Justice Stevens on the issue of whether Rule 23 preempts every state law regarding class actions. Part II will examine the practical effect that judges employing Justice Scalia's rationale will have on the future of class actions, and will analyze recent court decisions affected by this reasoning. Part III will explore the practical effect that courts using Justice Stevens's approach will have in forthcoming class action cases, and outline a series of cases that were determined under this method.

This Article should provide defense practitioners with a sense of awareness when faced with the decision of whether to remove a class action to federal court, including the possibility that, ironically, this could result in certification of a class that otherwise might have been defeated in state court.

1. The Shady Grove Decision

   1. Background

      The underlying dispute arose when a medical facility, Shady Grove Orthopedic Associates, attempted to revive a $5 million class action suit it had filed in federal court against Allstate Insurance Co. (5) In the suit, Shady Grove contended that Allstate regularly failed to provide timely payments of claims under a New York law that required insurance companies to pay legitimate claims within thirty days of receipt. (6) Alleging that Allstate routinely refused to pay interest on overdue benefits, and invoking the Class Action Fairness Act, Shady Grove sought relief on behalf of itself and a class of all others to whom Allstate owed interest. (7) Allstate moved to dismiss, arguing that under New York law, N.Y.C.P.L.R. [section] 901(b) (hereinafter "5901(b)"), a suit to recover a statutory penalty cannot be maintained as a class action. (8) The district court agreed with Allstate and granted its motion to dismiss, (9) and the Second Circuit affirmed the district court's decision. (10) Shady Grove then petitioned for, and was granted, writ of certiorari to the Supreme Court. (11)

      The Court handed down a multi-part opinion with a majority of the justices agreeing with Justice Scalia's opening opinion only on the first step in determining whether to apply a state restriction on class actions in light of the provisions of Rule 23. (12) Just Scalia lost support from a majority in his interpretation of the Rules Enabling Act (hereinafter "REA"), (13) which governs situations in which federal and state procedural rules seemingly clash. (14) Justice Stevens penned a lengthy concurring opinion, in which he provided a different interpretation of the REA. (15)

   2. The Majority Decision

      Only a small fraction of the Shady Grove decision produced a binding effect on subsequent jurisprudence. In Parts I and II-A of the opinion, Justice Scalia was joined by Chief Justice Roberts, Justice Thomas, Justice Sotomayor, and Justice Stevens, resulting in a majority. This portion of the opinion concluded that New York's preclusion of class action suits for statutory damages does not bar "a federal district court sitting in diversity from entertaining a class action under Federal Rule of Civil Procedure 23." (16)

      This conclusion was based on a simple line of reasoning. The Court explained that in a situation in which a federal court is asked to apply a state procedural law, it must first consider whether the federal procedural law--Rule 23 in this case--"answer[ed] the question in dispute." (17) If it did, "it governjed]--New York's law notwithstanding--unless it exceeded] statutory authorization or Congress's rulemaking power." (18) From this reference point, the majority found that Rule 23 did, in fact, answer the question in dispute--whether Shady Grove's suit may proceed as a class action--when it stated that "[a] class action may be maintained" if certain criteria are met. (19) The majority further concluded that since the New York law attempted to answer the same question--prohibiting Shady Grove's suit from being "maintained as a class action" due to the relief it sought--the state law cannot apply in diversity suits unless Rule 23 is ultra vires. (20) In other words, because the state law was in direct conflict with the federal law, the state law gave way in favor of the federal law.

   3. The Divide--Differing Interpretations of the Rules Enabling Act Create a Plurality Opinion and a Defining Concurrence

      Justice Stevens withdrew his endorsement of Part II-B of Justice Scalia's opinion and instead offered his own view of the REA. As a result, courts have been left with two choices when looking to interpret a state law that appears to conflict with Rule 23--Justice Scalia's sweeping deference to Rule 23 or Justice Stevens's more nuanced view. (21)

1. Justice Scalia's Approach The "Facial Challenge" Test

   After determining that Rule 23 preempted [section] 901(b), Justice Scalia attempted to develop a bright-line rule for subsequent courts to apply when dealing with state laws that appear to conflict with Rule 23. (22) He first explained that the REA grants the Court the authority to promulgate and apply rules subject to its review (such as the Federal Rules of Civil Procedure, generally, and Rule 23, specifically), so long as those rules do "not abridge, enlarge or modify any substantive right." (23) Justice Scalia further noted that while a Rule may incidentally affect a party's rights, it is valid so long as it "regulated only the process for enforcing those rights," and not "the rights themselves, the available remedies, or the rules of decision by which the court adjudicated either." (24) He clarified that most procedural rules affect a litigant's substantive rights, so the test of the REA's "abridge-enlarge-modify" limitations is what "the rule itself regulates." (25)

   Using this framework, Justice Scalia concluded that when examining the validity of a FRCP under the REA, "it is not the substantive or procedural nature or purpose of the affected state law that matters, but the substantive or procedural nature of the...