Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company

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Argued November 2, 2009.

Authorship: Lyle Denniston of SCOTUSblog

Docket: 08-1008

Issue: Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?

Contents

Briefs and Documents

Oral Argument

Transcript (November 2, 2009)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Oral Argument Recap

Sometimes, the Supreme Court seems not so concerned about the case actually before it, as it is about the next case: where might a decision in the first case lead in the future? In lawyers’ shorthand, is the Court about to put a legal issue on a logical “slippery slope”? Will dire consequences occur if a ruling’s reasoning runs too far? The Justices found themselves looking down slippery slopes on Monday, as they heard argument in an important case pitting state sovereignty against federal court authority, the Shady Grove Orthopedic case (08-1008).

One version of unwanted consequences, emerging from comments both from the bench and from a lawyer for Shady Grove Orthopedic Associates, was that the Court risked encouraging states to cut off entirely consumers’ right to join together to pursue their legal claims, in class-action lawsuits in federal court. A different version, also emanating from the bench, and from a lawyer for Allstate Insurance Co., was that the Court risked overturning, by implication, an array of existing state laws defining what remedies consumers are allowed to seek for wrongs that are defined by state law.

There were several exchanges about basic fairness, but nothing like a consensus on that emerged. Shady Grove’s counsel contended that the right to aggregate claims in a class-action is not only fair but an efficient way to resolve like complaints that multiple plaintiffs may share, and Allstate Insurance’s counsel contended that, if a state has created a legal claim, it is only fair that it be allowed to define its terms.

New York State, fearing that class-action lawsuits seeking monetary penalties for misconduct defined by state laws would unduly magnify those penalties, simply barred lawsuits combining such claims, forcing individuals to sue for them one at a time.

In the Shady Grove case, Allstate Insurance persuaded the Second Circuit Court that New York’s class-action ban must be enforced even when claims based on those state laws are pursued in federal court. Reviewing the Circuit Court ruling, the Justices are considering whether that contradicts the federal court rule — Rule 23 — that allows collective lawsuits.

It was no surprise that much of Monday’s argument focused — as did the briefs — on whether New York’s class-action curb is procedural in nature (Shady Grove’s view), and thus is trumped by federal Rule 23 when the claim is brought in federal court, or whether it is substantive in nature (Allstate’s view), and thus trumps any federal interest asserted if the litigation goes to federal court. (The procedural vs. substantive dichotomy traces, of course, to the Supreme Court’s interpretation of its 1938 ruling in Erie Railroad v. Tompkins.)

Justice Ruth Bader Ginsburg, who started the questioning (and quickly showed sympathy for Allstate’s labeling of the New York ban as substantive), likened the restriction to a control on remedies, such as a ceiling on the amount of damages that could be recovered under a state law.

She told Shady Grove’s lawyer, Scott L. Nelson, “If New York wants to say this kind of claim can be brought only as an individual action, not as a class action, why shouldn;t the federal court say that’s perfectly fine; this class of cases can’t be brought as a class action; we respect the state’s position on that.” In effect, she said, if Nelson’s view prevailed, a federal court, having a case before it only because the parties were from different states, would be creating “a claim [under state law] that the state never created.”

Championing states’ rights, Ginsburg said the Court “has been sensitive to not overriding state limitations.” Nelson’s sparring with her took up much of his time at the podium. But he encountered the slippery-slope argument that Allstate wanted the Court to think about when Chief Justice John G. Roberts, Jr., pressed Nelson to confront the potential impact of Shady Grove’s argument on a list of state laws (in the appendix to Allstate’s merits brief) restricting class-action remedies.

Nelson tried, without notable success, to argue that the state laws listed were different, although he did concede that the validity of some of them might be in question under his argument. That led Ginsburg into a series of questions implying that Nelson was pushing his theory too far. Justice Sonia Sotomayor chimed in, intepreting Nelson’s responses as indicating that “there is absoluely nothing, no law that the state could pass that would not conflict with Rule 23 — with respect to class actions.” Shady Grove’s lawyer then backtracked a bit, and then returned to his central theme that the specific New York law at issue was clearly procedural.

Responding to a question from Justice Antonin Scalia, Nelson suggested that laws like New Yorks might not only restrict class actions on claims arising under New York law, but under other states’ laws, as well — another slippery slope. The ban, he argued, “clearly is applicable to rights of action brougth under any source of law.” At no point, however, was he able to deter Ginsburg’s aggressive questioning.

When Christopher Landau, Allstate’s lawyer, rose, and began to exploit the points that Justice Ginsburg had made. The case, he said, “falls within the heartland of Erie” because it was an attempt to allow a recovery under state law in federal court that could not be obtained in state court,

He had barely begun, however, when a deeply skeptical Justice Sotomayor pressed Nelson’s point about the potentially wide sweep of restrictions like New York’s. “Under your theory,” she told Landau, “any state could pass a law that says no cause of action under state law can be brought as a class action ever. That would be your theory because it’s substantive” under the Erie dichotomy. She suggested that would seriously undercut federal Rule 23.

Landau, however, insisted that Rule 23 only provided criteria for when a class could be recognized in federal court, and did not deal at all with whether a class could be recognized in the first place, when a state law at issue categorically barred such a lawsuit. But he did not disagree with the implication of Sotomayor’s broad question, saying that “if the state is talking about is own state law cause of action, the state is the master.”

After a few exchanges along those lines, Sotomayor said Landau had answered her question, so “under your view, a state could say, no class actions…and a federal court, sitting in diversity, could never aggregate those claims, those state law claims?: Allstate’s lawer said yes, for state law claims.

Picking up on the implicatons, the Chief Justice expressed implied concern about “an across-the-board” state ban on class actions when state law claims were at issue. And Landau soon was confronted with further skepticism, this time from Justice Stephen G. Breyer. If a state tries to curb class actions because it considers them to “lead to unjust, inefficient settlement of disputes,” Breyer asked, why isn’t that second-guessing the federal rule’s recognition of class litigation as an efficient way to achieve justice.

Landau and Breyer sparred a bit on the point, with the Justice ultimatley suggesting that what New York had done was no different from a state’s attempt to dictate the timing of when appeals could be pursued in federal court — an intrusion, Breyer said, that “wouldn’t last for two seconds.”

Allstate’s lawyer quickly turned back to the slippery slope issue that works in his favor — the potential threat of Shady Grove’s argument to the state laws that Landau listed in his appendix to the brief. Shady Grove, he said, clearly did not have “a clear answer” to the Chief Justice’s concerns on that point.

But that did not deter Justice John Paul Stevens from picking up on the answers Landau had given to Sotomayor, which she had interpreted as indicating a potential for a broad state assault on Rule 23. “Is it your position,” Stevens asked, “that if we follow your view in this case” that New York could pass a law “saying no cause of action based on New York law may be maintained as a class action.”

“Yes, Your Honor,” Landau replied. And he went on to concede that New York’s authority to bar class actions would apply not only to state statutes, but to New York common-law claims, too. The Chief Justice interpreted Landau’s responses as indicating that New York could pass an across-the-board law simply because it did not like class actions as a general matter.

When Justice Scalia moved in to explore the breadth of Landau’s arguments, the Allstate lawyer eased off a bit, saying that New York could not apply its ban to a cause of action based on out-of-state law.

Justice Ginsburg moved in to provide an assist, seeking to counter the questions by Justices Sotomayor and Stevens by noting that New York did not, in fact, have an across-the-board law attacking class action litigation as a general policy approach. “It has picked out a particular kind of action,” she noted. “Precisely, Your Honor,” Landau said, accepting the favor. He then returned to his central theme that what New York had done was, in fact, the adopting of a substantive policy.

Justice Stevens, though, had become aroused by the sweep of Landau’s argument, at least as characterized by Justice Sotomayor, and left no doubt that he was troubled. “It seems to me,” Stevens said, “that your position basically is that New York can decide what kinds of cases shall be brought as class actions. Period.” If New York did that for “substantive reasons,” Landau said, it could, for “New York causes of action.” The Chief Justice again expressed some sensitivity about the responses.

Again, though, Justice Ginsburg came back to aid Landau, suggesting that states should have the power to keep “clutter” out of their courts.

In the end, Landau tried to pull the Court back to the slippery slope of invalidating a host of other states’ laws. He said that his adversary in essence had been arguing that “Rule 23 requires that every cause of action that comes before it [a federal court] be eligible for class certificaetion. That would knock out each and every one of the statutes” in the appendix to his brief. Nelson, he said, had been unsuccessful in trying to minimize the threat to those other laws.

Nelson’s few minutes of rebuttal were taken up with sparring anew with Justice Gisnburg.

(The Court is expected to decide the case in late winter.)

Pre-Argument Articles

Argument Preview

Merits Briefs

Shady Grove, with lawyers from the Public Citizen Litigation Group in Washington taking over for the Delaware firm that filed the appeal, contended that the case should actually be decided not by what Erie allows, but under the Court’s 1965 ruling in Hanna v. Plumer. In that decision, the clinic’s merits brief noted, the Court had ruled that a valid federal procedural rule must be applied by a federal court in a case involving citizens of different states, “regardless of contrary state law.”

In this case, it went on, federal Rule 23 gave the federal courts the discretion to allow a class action, while the New York law, “if applicable in the federal courts, would deny that discretion. Under such circumstances, the federal rule, if valid, prevails.” And, it went on, Allstate made no argument that Rule 23 is not valid. A federal procedure rule, it argued, is valid if it does not infringe or change anyone’s substantive rights; in this case, allowing the clinic’s class-action claim would not alter either side’s rights.

If, however, the Court preferred to address “the intricacies of Erie,” the clinic’s brief contended, the New York class-action curb would have to give way because it is not a substantive provision. It does not define anyone’s rights or duties, does not “regulate primary conduct,” does not deny anyone in a class a right to recover the damages being sought from Allstate. “It governs only the mode of enforcing substantive rights, which is a matter properly considered procedural under Erie,” according to the brief.

The brief also mounted arguments against applying the state law to this case, saying that would “infringe…the inherent power of federal courts to govern their own procedures” and disrupt “the uniformity of federal practice” that federal rules laws promote. Moreover, it added, there would be no way to limit the override of federal procedure by a state law to the availability of class actions alone.

A legal advocacy group based in California, Public Justice, which said it specializes in lawsuits to protect “the victims of corporate and governmental abuse,” filed an amicus brief supporting the clinic’s appeal. Noting that it regularly represents consumers and employees in class-action lawsuits, the group devoted most of its brief to “a description of the history and evolution of representative litigation in federal court,” a history that it said actually traces back to English law “since the very beginning of that country’s legal system.”

Allstate Insurance’s merits brief, by lawyers from Kirkland & Ellis in Washington, sought to reinforce its simplest point: that the state law at issue was “a substantive policy choice by New York to limit the state statutory penalty that may be imposed in a single lawsuit.” It added: “At least since this Court’s seminal decision in Erie…, it has been clear that the federal courts must give effect to such substantive state policy choices in cases arising under state law.”

When a state has put a category of claims entirely outside of class-action treatment, such a ban never comes into conflict with federal Rule 23’s criteria governing when a class lawsuit may be filed in federal court, the brief asserted. If Rule 23 were read to override such a state “substantive policy decision,” Allstate added, that would directly violate a federal law, the Rules Enabling Act.

Firmly resisting the clinic’s claim that the New York curb is procedural under Erie, Allstate’s brief said “that argument boils down to the proposition that any limitation on class actions must be procedural because class actions themselves are procedural.” The brief appended a lengthy list of federal and state laws that, Allstate says, represent similar “substantive policy choices” by curbing class-action remedies or ruling out class claims altogether on specific topics.

The brief also sought to downplay the significance of the financial penalty that the clinic is seeking to recover for a class of hundreds. The curb on class actions, it said, does no more than limit the exploitation of “a technical violation of law that did not inflict any actual injury.” If that curb is not binding in federal court to thwart the clinic’s claim, the brief said, “Shady Grove can transform this dispute over a penalty of no more than $500 into a dispute over an aggregate penalty of no less than $5 million by simply crossing the street from state to federal court. Nothing in Erie either requires or tolerates that result.”

Supporting Allstate in the case with an amicus brief are the New York State Business Council (successor to the Empire State Chamber of Commerce, one of the primary advocates of the 1975 state law) along with other national and local business and insurance groups. That brief recites the history of the state law’s enactment; otherwise, it closely follows the substantive arguments made in Allstate’s own merits brief.

Analysis

The Court may well have reasons to try to decide this case narrowly, or it may wish to make some more sweeping declarations about how to define the meaning of Erie — either to clarify the distinction between “substantive” and “procedural” rules, or to reexamine the fundamental federal-state relationships that are affected by Erie’s approach.

One possible consideration for making a narrower ruling could work in Allstate’s favor. The Court might be somewhat uncomfortable, as an institutional matter, in probing too deeply into what New York’s legislature had in mind in passing the class-action bar in 1975. The Second Circuit Court is closer to the scene there, and the Justices may feel some need to defer to the appeals court’s reading of the state’s legislative purpose. Of course, the definition of what is “substantive” or “procedural” under Erie appears to be a federal question, but Allstate’s claim that what is at stake here is “policy” might be a deterrent to too-energetic a second-guessing of the Second Circuit’s view.

The Court also may be somewhat leery of raising doubts, by implication, about the validity of a host of state laws that impose restrictions on class-action. It was a potentially effective litgation ploy for Allstate to include the appendices with a recital of the laws that may be riding on the outcome of this case.

An alternative narrow approach might well work in Shady Grove Orthopedic’s favor, however. The clinic’s focus on the Hanna ruling could draw the Court to language — supported in 1965 by eight members of the Court — that suggests a need to protect the prerogative of federal courts to write what that opinion called “housekeeping rules.” Focusing on federal laws governing federal procedure could keep the case within some tight bounds. There also are institutional implications in defending the rules-making prerogatives of Congress and the courts. Note that the Hanna opinion concluded with this statement: “To hold that a Federal Rule of Civil Procedure must cease to function whenever it alters the mode of enforcing state-created rights would be to disembowel either the Constitution’s grant of power over federal procedure or Congress’ attempt to exercise that power in the [Rules] Enabling Act.”

It may also be in the clinic’s favor simply that the Court agreed to hear its appeal. Allstate apparently did not see it as a major case, initially forfeiting a chance even to answer it, and then failing to persuade the Court that the case was not worth its time. At least some members of the Court saw an issue of possibly fundamental importance, despite the somewhat breezy way in which the questions at issue were phrased by Shady Grove’s counsel.

That perception lends some support to the notion that the Court may well be tempted to approach the case from a broader perspective. If it does so, there is another aspect of Hanna — the concurring opinion of Justice John Marshall Harlan — that may support a deeper look at what is at stake. Harlan suggested that the eight other members of the Court had read Erie too narrowly, commenting: “I have always regarded that decision as one of the modern cornerstones of our federalism, expressing policies that profoundly touch the allocation of judicial power between the state and federal systems….[I]t recognized that the scheme of our Constitution envisions an allocation of law-making functions between state and federal legislative processes which is undercut if the federal judiciary can make substantive law affecting state affairs beyond the bounds of congressional powers in this regard.”

Leaving aside that the quotation seems to focus at least in part on the substantive-vs.-procedural dichotomy, Harlan’s defense of state legislative prerogatives puts the federalism implications of the Shady Grove case front and center. That could well bolster New York and its sister states — and, in the process, the legal interests in this case at least of corporations like Allstate.

One further factor may be in play: if the current Court majority is, as some analysts suggest, more business-friendly than the Court has been in some time, there is at least a speculative possibility that the Court might well have developed reservations about the modern phenomenon of class-action litigation, and this case could provide an occasion to express those thoughts.

Grant Write-Up

The venerable precedent that requires federal courts to decide some civil lawsuits based on state, not federal, law — the 1938 decision in Erie Railroad v. Tompkins — will be examined anew as the Supreme Court confronts the ongoing dispute between consumers and businesses over “class actions,” court cases that seek sometimes large damage verdicts for a broad group that has a common legal grievance. In this case, what started as a $500 claim by an individual litigant potentially could lead to a $5 million class verdict.

Background

Sometimes conflicting patterns of history run together when a consumer lawsuit challenging a business is taken to federal court, and the consumer’s individual complaint is one that is shared by others — perhaps many others. Chances are, in modern times, that lawsuit will be filed as a “class action.” The modern history of “class actions” has produced an ongoing debate between consumer and business adversaries, and the Supreme Court is fairly frequently drawn into the debate.

Consumer advocates favor “class-action” lawsuits because their clients stand to gain from banding together to pursue a common claim (a claim made by a single individual may not be worth much if pursued alone, so a lawsuit may be a too-expensive way to pursue it, but if the grievance is shared by a whole class, the stakes are higher, and a lawsuit to benefit the whole group may be quite a promising idea).

On their side, business advocates argue that the class-action technique is often misused to pump up a potential verdict and thus to put pressure on companies to settle to avoid what they fear might well be nearly ruinous liability. In almost any discussion among business groups about ideas for legal reform, doing something to curb class-action lawsuits is bound to be high on the agenda.

As this debate has moved into legislative halls, the result increasingly has been to put limits on class-action claims, either by curbing the remedies that can be pursued in such a lawsuit, or by simply barring the use of the class-action approach for specified claims. State legislatures have been especially active lately in adopting such restrictions.

The fact that many of these restrictions are written into state laws can bring on a new consumer-business clash, when a consumer “class-action” lawsuit is pursued in a federal, not a state, court. That invokes a second line of history – the history of the so-called “Erie doctrine.” For seven decades, applying that doctrine, federal courts have had a significant role as interpreters of state laws, in order to resolve legal disputes between citizens who live in different states and, for that reason, have access to a federal tribunal. The option of filing as a “class-action” is often chosen when citizens of many states could be affected by a consumer claim; federal court rules are quite generous in allowing “class actions.”

The ”Erie doctrine” takes its name from Erie Railroad v. Tompkins. Under that 1938 ruling, federal courts are not to fashion a mode of federal law to resolve a dispute among parties from different states, but rather must apply the law of the state where the court sits. One of the difficulties in doing so, however, is deciding when a state law, not a federal law, is to govern.

The Supreme Court has fashioned a rule-of-thumb to settle that issue, but it is a rule not easily applied. The Court has said that, in an Erie case, the merits of the case are to be decided by what state law says (that is, the substantive law to apply is state law), but the procedure to be used in reaching the decision is federal. When is a state law subtantive, and thus controlling, and when is it procedural, and therefore not controlling?

That is a key question the Supreme Court will confront when it hears the Shady Grove Orthopedic case this Term. Is a New York state law, enacted in 1975, to curb the use of a “class-action” lawsuit a “subtantive” law or a “procedural” law? If it is substantive, the orthopedic clinic’s lawsuit very likely will be out of federal court, but if it is procedural, the clinic has a chance to win its case there.

Here’s how the case developed:

It started with an auto accident in which a Maryland woman, Sonia E. Galvez, was hurt. Her car was registered in New York, and it was insured under a no-fault policy issued by Allstate Insurance Co. Ms Galvez was treated at the Shady Grove clinic, and she assigned to the clinic her right to recover the medical expense from Allstate. Eventually, Allstate paid the claim, after initially asserting that it had not received proof of the loss claimed.

The clinic, in the lawsuit it filed in federal court, claimed that Allstate had a practice of routinely failing to pay such claims on time. New York state law, governing “no-fault” auto policies like the one that Ms Galvez had, required such payment to be made within 30 days; overdue payments carry interest at 2 percent a month. Shady Grove Orthopedic claimed that Allstate owed it about $500 in interest on the Galvez claim. However, its lawsuit was filed as a class-action claim, seeking to recover more than $5 million in damages for the entire group, similarly affected by Allstate’s alleged policy on late payments. That figure represented the group’s damages for non-payment of interest on delayed coverage payouts. The interest on the Galvez claim was too little to give the federal court jurisdiction to rule on it; the class-action claim, however, was large enough to do so, if allowed.

Allstate moved to have the case dismissed. It cited the 1975 New York law that says that the class-action approach may not be used to seek any kind of penalty spelled out under New York law, unless the law creating such a penalty expressly allowed class litigation. The interest penalty for late “no-fault” payments, Allstate argued, was the kind of penalty covered by that law, but the law did not authorize a class-action claim to recover it. Moreover, Allstate asserted, the New York curb on class-action lawsuits is binding when a federal court, in a case like Shady Grove’s, is filed under federal court authority to hear disputes between citizens of different states.

New York’s curb on class-actions to recover penalties was passed primarily at the urging of business groups. The proponents contended that penalties were put into state law to encourage those who had suffered harms to sue individually, since a potential financial recovery would make it worthwhile to sue on their own claim. Availability of penalties was not necessary to bring on class-action lawsuits, so those should not be available to pursue penalties, it was argued. Moreover, business groups made their customary complaint that class-action lawsuits drive up the cost of doing business, resulting in higher prices to consumers.

In the Shady Grove case, Allstate won in lower courts, with dismissal of the clinic’s class-action lawsuit as outside the scope of federal court jurisdiction. The Second Circuit Court concluded that the 1975 state law was a “substantive” provision, not a mere “procedural” curb, and thus, under the Supreme Court’s Erie rule-of-thumb, was binding on the federal court. Although federal court Rule 23 governs the procedure that federal courts are to use in class-action lawsuits, the Circuit Court said, the New York law does not conflict because it is not procedural.

It would violate the command of Erie itself, the Circuit Court said, to allow a suing party like Shady Grove Orthopedic to recover in federal court on a class-wide basis keyed to state law when it was unable to do so in state court. Allowing the federal case to proceed, it added, would encourage lawyers to “migrate toward federal court to obtain the substantial advantages of class actions.” Moreover, the Circuit Court said, applying the New York curb to a federal class-action lawsuit does not permit a state legislature to dictate procedures that a federal court is to use.

Petition for Certiorari

The orthopedic clinic filed its petition in the Supreme Court in February 2009, arguing that “as a matter of basic federalism, no state legislature can dictate the use or non-use of the class action device in any federal court….If state legislatures can proscribe the use of class actions for particular claims in federal court, why can they not also proscribe other procedural devices?”

The petition raised three questions; paraphrased, they are whether a state legislature could bar a federal court from hearing a case based on state law and filed as a class action, whether state legislatures can control federal court procedure, and whether class-action lawsuits based on claims under state law could be wiped out altogether, as more state legislatures forbid them. “By permitting New York’s legislature to dictate procedure in the federal courts, the Second Circuit has effectively ceded federal authority to the states,” the petition contended.

Allstate initially waived its right to answer the petition. However, the Court on March 6 asked for a response. The brief in opposition then filed essentially tracked the Second Circuit ruling. It argued that the New York class-action ban was substantive, not procedural, because it was directly related to the scope of the right to take to federal court a plea that could not be pursued in state court, thus encouraging the very kind of “forum-shopping” that Erie was intended to discourage.

The company also contended that there is no conflict between the New York provision and federal court Rule 23, which controls federal procedures in class-action lawsuits. There is nothing in Rule 23, it said, that controls what legal claims can be made in such a lawsuit, or what remedies can be sought. On Shady Grove’s claim that legislatures would dictate federal court procedures, Allstate responded that federalism concerns actually work in New York’s favor, because that state created the underlying right to seek financial penalties for misconduct in violation of state law.

The Court granted the clinic’s petition on May 4.

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