The Supreme Court’s fractured decision on March 31, 2010 in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U.S. ___ (2010), appears to invalidate the enforcement in federal diversity class actions of many state law restrictions against proceeding on a class basis. Because numerous state statutes provide for civil actions to enforce state law rights but prohibit class actions, the decision has broad implications, particularly in view of the expansive federal jurisdiction over class actions conferred by the Class Action Fairness Act (CAFA).

Background

The litigation stemmed from Sonia Galvez’s injury in an automobile accident. Her car was registered in New York, and she held a New York no-fault policy with Allstate Insurance that provided her with medical reimbursement rights. Ms. Galvez received treatment at Shady Grove Orthopedic Associates, to which she assigned her medical reimbursement rights. Shady Grove contended that Allstate failed to comply with Section 5106(a) of New York Insurance Law, which requires payment to be made within 30 days of receipt of the claim. Shady Grove sued Allstate for statutory interest penalties under Section 5106(a), alleging that Allstate routinely failed to pay its claims within the statute’s mandated time frame and routinely failed to pay the statutory interest penalties when its claims were paid late. The interest penalties in Ms. Galvez’s case alone were only $500, but Shady Grove alleged damages of more than $5 million on behalf of a putative class of all individuals who were owed interest payments under the New York law. Shady Grove brought its action in federal court based on diversity jurisdiction under CAFA. 28 U.S.C. § 1332(d)(2)(A). Allstate moved to dismiss the action, relying on New York Civil Practice Law and Rules (“CPLR”) § 901(b), which prohibits class actions based on statutory penalties unless the underlying statute specifically allows class actions. Shady Grove argued that CPLR § 901(b) is inapplicable to class actions brought in federal court, because it is a state procedural rule that conflicts with Rule 23 of the Federal Rules of Civil Procedure.