Shady Grove Orthopedic Ass. v. Allstate Insurance Co.

The Supreme Court has agreed to weigh in on a state legislature’s power to bar federal courts from ruling on class action cases that are based on state law claims.

Shady Grove Orthopedic Associates brought a class action lawsuit against Allstate Insurance Co., seeking statutory penalties under New York law for overdue payments of no-fault automobile insurance benefits. Shady Grove asserted federal jurisdiction under 28 U.S.C. § 1332(d)(2)(A), which authorizes class actions seeking more than $5 million in damages with a minimal showing of diversity.

In December 2006, the U.S. District Court for the Eastern District granted Allstate’s motion to dismiss on the grounds that Shady Grove’s claims are barred by Sect. 901(b) of the New York Civil Practice Law and Rules, which prohibits a lawsuit seeking a statutory penalty from being brought as a class action.

In November 2008, the U.S. Court of Appeals for the 2nd Circuit affirmed.

“Whereas this Court is bound by Rule 23 in this action, the strictures of § 901(b) do not contravene any federal rule,” the court held, adding: “This situation does not warrant an invocation of the Supremacy Clause or a discussion of the overlapping scope of § 901 and Rule 23. It would be patently unfair to allow a plaintiff an attempt at recovery in federal court for a state law claim that would be barred in state court.”

On May 4, 2009, the Supreme Court agreed to review the case. The justices will hear arguments when during the fall term, which begins Oct. 5.

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