Shady Grove: duck-rabbits, clear statements, and federalism.

• Author: Hershkoff, Helen
• Position: Chief Judge Lawrence H. Cooke Fifth Annual State Constitutional Commentary Symposium

In The World As I Found It, novelist Bruce Duffy recounts Wittgenstein's famous example of the duck-rabbit: "a drawing that could be seen as either a duck or a rabbit before it dawned on the viewer that it was both or neither, or just one continuous line." (1) Can the duck-rabbit help us to understand Shady Grove, (2) the Supreme Court's latest foray into the Erie doctrine (3)--an area of law that aims, fruitlessly perhaps, to keep the duck pond of substance separate from the rabbit hole of procedure? New York's Civil Practice Law & Rules ("CPLR") 901(b), the state law at issue in Shady Grove, (4) bans class-wide enforcement of penalty clauses and so might be seen as a duck or rabbit: substantive, affecting the amount of damages payable in an insurance action, or procedural, affecting the joinder of claims. Justice Scalia's plurality opinion ignored the question of whether the state rule is a substantive duck or procedural rabbit; he cared only that Federal Rule 23 is a procedural rabbit and thus preemptive of a conflicting state rule under the Rules Enabling Act. (5) Justice Ginsburg's dissenting opinion saw the state rule as a substantive duck and so applicable under the Rules of Decision Act in "[t]he absence of an inevitable collision" with a Federal Rule, which she did not find. (6) Justice Stevens' concurring opinion saw the state rule as both a duck and rabbit, but found the state rule preempted by Federal Rule 23. (7) This was in part because the state had gone down the procedural rabbit hole and not placed the rule in the substantive statute that provided the basis for Shady Grove's lawsuit. (8)

Indulge the duck-rabbit analogy a bit more. Consider the other duck-rabbit that lurks in Shady Grove: the state law providing for interest on a claim that an insurer does not pay on time. (9) Whether this law constitutes a penalty or a form of compensation critically affected the Erie issue before the Shady Grove Court. Viewed as a penalty, the mandatory interest payment fell within the state ban on penalty class actions, unless New York specifically authorized its class-wide enforcement. (10) But viewed as compensation for the insurer's delay in settling a claim, the payment would have fallen outside the ban and been enforceable like any other remedy under New York law. Indeed, the conflict between the state class-action ban and Federal Rule 23 would have dropped out of the case entirely. (11) The district court viewed the interest payment as a penalty and found that state regulations contemplating their classwide enforcement were not sufficiently specific to take Shady Grove's suit outside the state ban. (12) The Second Circuit found that plaintiff had waived any objection to treating the interest payment as a penalty, (13) and agreed that regulations contemplating classwide enforcement of the payment did not clearly authorize the practice. (14) Thus, by the time the case reached the U.S. Supreme Court, this duck-rabbit had vanished from view. (15)

The duck-rabbit analogy is meant to remind us that in every diversity suit the federal court has a duty to ascertain the scope of the applicable state law and to determine whether the state law is subject to preemption by a conflicting Federal Rule of Civil Procedure or federal statute. (16) Both questions raise difficult interpretive issues and serious questions of federalism. When the diversity court ascertains the scope of state law, its assignment is to reach a result that comes as close as possible to how the state system would decide the issue. (17) But when the diversity court assesses whether the state law is preempted, its task is to ensure the uniformity of federal procedural law. (18) The district court and Justice Stevens' concurrence in Shady Grove, which lower courts are increasingly treating as the controlling opinion of the divided Court, (19) approached these twin questions in the same way. Both employed something close to a clear statement rule to determine how New York would treat class-wide enforcement of mandatory interest payments, although they reached different conclusions on whether such class actions should be permitted in federal diversity cases. (20)

This essay adds to the burgeoning literature on Shady Grove by examining the use of clear statement rules in diversity cases where the federal court must ascertain the scope of an applicable state law, as well as resolve an apparent collision between a state law and a Federal Rule of Civil Procedure. Part I recounts what was in dispute in Shady Grove. Part II examines how the district court resolved whether New York's ban on penalty class actions applied in a case involving statutory interest. Because lower courts are increasingly treating Justice Stevens' Shady Grove concurrence as the controlling opinion of the divided Court, Part III focuses on how these courts are resolving whether to apply a state procedural rule that involves substantive state policies in the face of a conflicting Federal Rule. Part IV raises concerns about the federal courts' interpretive approach at both stages of the analysis. I argue that requiring a clear statement both disempowers and over-empowers states in ways that subvert federalism and nationalism. I conclude by briefly discussing potential alternative approaches.

1. THE SHADY GROVE DISPUTE

   Shady Grove involved a lawsuit by an assignee who failed to receive timely payment on an insurance claim arising out of the assignor's car accident. (21) Under New York's no-fault automobile insurance statute, if an insurer fails to deny or pay claims within thirty days, it is subject to a statutory interest payment of two percent per month. (22) Plaintiff filed suit in federal court on behalf of a class of similarly situated insurance claimants. Defendant argued that the claim was barred from class-wide treatment under New York CPLR 901(b), which provides: "[u]nless 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." (23) When commenced, the Shady Grove dispute thus presented two unresolved questions of state law: whether New York's mandatory interest provision for late settlement of insurance claims is a compensatory payment or a penalty and, if treated as a penalty, whether the state insurance statute had specifically authorized class-wide enforcement of the interest provision as required by section 901(b). (24)

   The Second Circuit affirmed the lower court's dismissal of the action on jurisdictional grounds, (25) finding that the state had not specifically authorized class actions as required by section 901(b), (26) and it refused to certify the question of whether the mandatory interest payment is indeed a penalty. (27) The Supreme Court did not explore the question of whether the statutory interest provision is penal or remedial. Rather, it accepted the lower courts' classification and focused on whether Federal Rule 23, which governs certification of class actions in federal court, stands in irreconcilable conflict with section 901(b). (28) Five justices concluded that the state ban is at odds with the Federal Rule's "one-size-fits-all formula" (29) by barring a class action "to recover a penalty, or minimum measure of recovery created or imposed by statute." (30) As such, the state ban "cannot apply in diversity suits" unless the Federal Rule is invalid. (31) The Justices splintered on whether to consider the substantive effects of the state class-action ban in determining the validity and applicability of Federal Rule 23. (32) Justice Scalia, in a plurality opinion joined by Chief Justice Roberts and Justices Thomas and Sotomayor, considered this inquiry irrelevant: "the substantive nature of New York's law, or its substantive purpose, makes no difference." (33) Justice Stevens' concurrence, by contrast, recognized that "[a] federal rule ... cannot govern a particular case in which the 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." (34) Justice Stevens emphasized, however, that for a state procedural rule "to displace a federal rule, there must be more than just a possibility that the state rule is" a substantive rule of decision and found that the legislative history to section 901(b) did not meet that exacting standard. (35) Justice Stevens also emphasized that New York courts applied section 901(b) to causes of action arising under federal and non-New York substantive law. (36) The dissent, authored by Justice Ginsburg, resisted finding a conflict between the state ban and the Federal Rule, and concluded that "Erie should prevent a federal court from awarding statutory penalties aggregated through a class action when New York prohibits this recovery." (37)

2. USING A CLEAR STATEMENT RULE TO ASCERTAIN THE APPLICABLE STATE LAW

   Let us consider the duck-rabbit that did not appear before the Supreme Court: whether a mandatory interest payment is a penalty barred from class-wide enforcement under New York law. The district court determined that the statutory interest payment was a penalty, and that New York Insurance Law section 5106(a) had not authorized its class-wide enforcement with the requisite specificity under section 901(b). (38) Section 5106(a), the substantive basis for plaintiffs claim, does not use the term penalty but rather requires payment of interest at a specified rate. (39) Shady Grove's complaint stated that its claim for relief sought "compensatory damages, in the form of interest owed," (40) but also referred to section 5106(a) as authorizing the "payment of an interest penalty on overdue benefits." (41) Extra-contractual remedies, such as the mandated interest...