Shady Grove and CAFA: opening the federal door for class actions barred by states.

• Author: Lay, John T., Jr.
• Position: Class Action Fairness Act of 2005

This article originally appeared in the June 2010 Business Litigation Committee Newsletter.

Class action litigation, a lawsuit brought by one or a few representatives on behalf of a large group of similarly-situated people harmed by the same person or entity, can be devastating for businesses. Just the expense of defending a class action can be overwhelming, and settlements often require payments to persons who would have otherwise never filed an independent lawsuit. In recent years, tort reform advocates have succeeded in expanding federal jurisdiction over class action lawsuits in order to decrease forum shopping by plaintiffs seeking to sue in favorable state courts. Under the Class Action Fairness Act of 2005, (1) "complete diversity" is no longer required before a federal court can hear a class action law suit. Rather, once the jurisdictional dollar limit is met, a federal court can sit in diversity and hear a class action so long as the class has at least 100 members and minimal diversity is satisfied by the class. (2)

Under Shady Grove Orthopedics Assoc's, P.A. v. Allstate Ins. Co., decided March 31, 2010, businesses and tort reform advocates may discover that CAFA is a two-sided sword. Shady Grove may have significant impact across the country on businesses and industries by making class actions available to plaintiffs in federal court that cannot be brought in state court under existing state laws. Many states have passed laws that provide relief to persons seeking an individual recovery while including express limitations on the ability of similarly-situated persons to combine and pursue claims against a common defendant through class action litigation. (3) Shady Grove may change the landscape for businesses previously protected by explicit, state prohibition on class actions to recover statutory relief.

1. Overview of the Shady Grove Decision

   In Shady Grove, the Petitioner filed a federal class action under CAFA to recover from Allstate interest on an insurance claim allowed under a New York law. The district court concluded that it lacked jurisdiction because N.Y. Civ. Prac. Law Ann. [section]901(b). [section]901(b) explicitly bars claimants from pursuing a class action to recover statutory interest. The United States Court of Appeals for the Second Circuit affirmed the district court's decision, finding no conflict between [section]901(b) and Fed. R. Civ. P. Rule 23 because they address different issues; therefore, the Second Circuit held Rule 23 was not in conflict with the state bar on class action. In Shady Grove, the Supreme Court reversed by plurality decision, holding that Rule 23 and [section]901(b) were in conflict and that Rule 23 allowed the Petitioner to pursue a...