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

Brief Fact Summary.

Galvez, a third party, was insured by Allstate, and assigned her rights under her insurance policy to Shady Grove.  Shady Grove sued Allstate on behalf of itself and a class of others in New York federal court to recover unpaid statutory interest on the insurance benefits. The district court dismissed the lawsuit because a New York law prohibited the use of a class action lawsuit to recover a “penalty.” The court of appeals affirmed, finding no conflict between the New York law and Federal Rule of Civil Procedure 23. The Supreme Court granted certiorari.

Synopsis of Rule of Law.

The validity of a  Federal Rule depends on whether it regulates procedure; such a rule is authorized by 28 U.S.C. 2072 and is valid in all jurisdictions as to all claims, regardless of any incidental effect on state-created rights.

Facts.

Shady Grove provided medical care to Galvez, a third party who was injured in an auto accident. Galvez, who was insured by Allstate,  assigned her rights under her insurance policy to Shady Grove.  Allstate paid on Shady Grove’s claim, apparently not on time and without interest that accrued on overdue benefits. Shady Grove sued Allstate on behalf of itself and a class of others in federal district court, with jurisdiction based on diversity of citizenship, to recover unpaid statutory interest. The district court dismissed the lawsuit, for lack of jurisdiction, based on the applicability of a New York law that prohibited the use of a class action lawsuit to recover a “penalty.” The court of appeals affirmed, finding no conflict between the New York law and Federal Rule of Civil Procedure 23, which pertains to class action lawsuits. The Supreme Court granted certiorari.

Issue.

Did New York law, which prohibited class actions in lawsuits seeking penalties or statutory minimum damages, apply to preclude a federal district court in New York from entertaining such a class action in a diversity case?

Held.

No. Federal Rule of Civil Procedure 23 applied in this case; the New York law prohibiting class actions in lawsuits seeking penalties or statutory minimum damages did not preclude the federal district court in New York in a diversity case form entertaining the lawsuit.

Dissent.

Justice Ginsburg

Justice Ginsburg agreed with the lower courts that there was no conflict between the New York state law and Federal Rule of Civil Procedure 23, so that New York’s limitation on recovery of statutory damages in class actions would apply.

Concurrence.

Justice Stevens

Justice Stevens agreed that Federal Rule of Civil Procedure 23 applied in this case, but was also of the view that federal courts must apply some state procedural rules in diversity cases because they are part of the state’s substantive rights and remedies.

Discussion.

Federal Rule of Civil Procedure 23 unambiguously allows any plaintiff in any federal proceeding to proceed by class action (assuming the requirements are met). The Rule falls within the authorization of 28 U.S.C. 2072; the validity of the federal rule depends on whether it regulates procedure.