Dispute

Shady Grove, a Maryland corporation, sued Allstate, a New York corporation, in diversity for unpaid statutory interest in a class action. Under New York law, class actions may not be maintained for any “action to recovery a penalty, or minimum measure of recovery created or imposed by statute.” The federal trial court dismissed for lack of jurisdiction, arguing class actions were barred and the amount did not meet controversy requirements for subject matter jurisdiction in diversity. The Second Circuit affirmed and the case was appealed to SCOTUS.

Questions of law

Does FRCP 23 answer the question of whether a class action can be maintained for a statutory penalty? If so, would it exceed statutory authorization or Congressional rulemaking power? Is the eligibility of a class in a federal class action in diversity dependent on a specific state cause of action?

Conclusions

The trial court and the Second Circuit believed that FRCP 23 on class actions touched on a different issue than New York law. SCOTUS, however, ruled that the federal rule on class actions was dispositive with respect to the formation of a class action.

SCOTUS further ruled that Rule 23’s “[a] class action may be maintained” was different from “may be permitted” because the litigants maintain the action, not the court. Discretion rests with the litigants, not with the court.

SCOTUS said that the federal rules permit all class actions that meet Rule 23 requirements, and a state cannot structure its statutes to limit that permission. No argument grounded in the New York legislative purpose could override the clear text of the federal rule, and such a basis would only confuse because it could result in two states with identical statutes, one which overrides federal law and one which does not.

The test is not whether a rule affects a litigant’s substantive rights, but what it regulates. “If it governs only “the manner and the means” by which the litigants’ rights are “enforced,” it is valid if it alters “the rules of decision by which [the] court will adjudicate [those] rights,” it is not.” Rules allowing multiple claims to be litigated together are valid because they neither change plaintiffs’ separate entitlements to relief nor abridge defendants’ rights. The fact that some plaintiffs would not bring individual suits for relatively small sums has no bearing on substantive rights.

It is not the substantive or procedural nature or purpose of the affected state law, but the substantive or procedural nature of the Federal Rule.

The forum-shopping potential of this decision would be unacceptable if it resulted from judge-made law, but because it arises from the FRCP, it is the inevitable and “one might say the intended” result of the uniform system of federal procedure enacted by Congress.