Shady Grove Gets Better

by Dechert LLP

Sometimes things turn out better than they first seemed.  Myriad examples come to mind:  The wild card in baseball.  Most anything that William Shatner does.  Madonna at the Super Bowl.  Ace Ventura, Pet Detective.  Wrapping figs in bacon (alright, that might’ve sounded good from the start).  You may not agree, but you get the idea. 
These examples popped into our heads (they really did) after we read Leonard v. Abbott Labs., No. 10-CV-4676 (ADS)(WDW), 2012 U.S. Dist. LEXIS 30608 (E.D.N.Y. Mar. 5, 2012), an opinion that addresses, among other things, a state-law restriction on class actions and whether that restriction or FRCP 23 applies in a federal diversity action.
Why does this make us think of things turning out better than they first seemed?  Because the Leonard decision applies the Supreme Court’s reasoning in Shady Grove Orthopedic Assoc. v. Allstate Ins., 130 S. Ct. 1431 (U.S. 2010).   And that decision didn’t seem very good (for us) when it first came out.  It raised the concern that plaintiffs, armed with this decision, would circumvent state limitations on class actions by filing a diversity action in federal court and arguing that the class action criteria of FRCP 23 apply, not the state-law limitation.   
To give you the background, Shady Grove involved a New York law that prohibited certain class actions “to recover a penalty.”  N.Y. Civ. Prac. Law Ann. §901(b).  The Shady Grove plaintiff sought to avoid this prohibition by filing his class action claims to recover certain penalty amounts in federal court instead of New York state court.  Ultimately, the Supreme Court decided whether this maneuver would work.  And it did.
The Supreme Court’s decision was as complicated as these procedural/substantive questions generally get, but it was made even more so by the fact that the Court’s decision was formed via plurality and partially concurring opinions.  For the plurality, Justice Scalia considered (1) whether FRCP 23 and the New York law actually conflicted, and (2) if so, then FRCP 23, not the New York law, must be applied, unless FRCP 23 is ultra vires (here, meaning non-procedural) of the Rules Enabling Act.  Shady Grove, 130 S. Ct. at 1437 (plurality opinion).  Justice Scalia found a conflict and determined that FRCP 23 was not ultra vires of the Rules Enabling Statute – that is, it was procedural.  Id. at 1437-44.  So FRCP 23 should be applied.  Id.
Justice Kennedy’s partially concurring opinion had a slightly different approach and is the key to the Leonard decision.  Justice Kennedy agreed with the two-step inquiry cited by Justice Scalia.  Id. at 1450-51 (concurring opinion).  But he believed that the second-step must address more than whether the federal rule was procedural.  The Rules Enabling Act also requires that federal rules “not abridge, enlarge or modify any substantive right.”  Id. at 1451.  So the Court must also consider whether applying the federal rule would alter state rights or remedies, even if the state law appears at first look to be only procedural: 
"A federal rule, therefore, cannot govern a particular case in which the rule would displace a state law that is procedural in the ordinary use of the terra but is so intertwined with a state right or remedy that it functions to define the scope of the state-created right."
Id. at 1452 (concurring opinion). 
If so, the state law will apply.  Now, despite this additional inquiry, Justice Kennedy still sided with the plurality because he determined that the New York law was in fact procedural, not substantive.  In other words, Justice Kennedy’s and Justice Scalia’s opinions ultimately got to the same conclusion and formed a majority holding that the class action criteria of FRCP 23 should apply, not the limitations of the New York law. 
This brings us back to Leonard.  That decision involves many plaintiffs and claims, but we’re interested in the part of the decision that addresses one plaintiff’s claim under the Ohio Consumer Sales Practices Act (OCSPA).  Like the New York law, the OCSPA had a provision prohibiting certain class actions.  Leonard, 2012 U.S. Dist. LEXIS 30608, at *27.  But it was quite different.  It wasn’t a broad prohibition against any class action seeking to enforce a particular remedy like penalties.  Rather, it prohibited only class actions that were brought under the OCSPA and based on acts or conduct that had not yet been declared deceptive or unconscionable by an Ohio administrative rule or court decision.  Id.
Now, the plaintiff in Leonard conceded that no Ohio administrative rule or court decision had declared the conduct about which he was complaining to be deceptive or unconscionable.  Id. *27-28.  So the defendant moved to dismiss.  The plaintiff, however, invoked Shady Grove, arguing that the OCSPA’s class action prohibition was abrogated by FRCP 23, which governed what claims can be maintained as class actions in federal court.  Id. at *28.
Here’s where Shady Grove gets better than it first seemed.  The Leonard court did not accept plaintiff’s rote application of the plurality reasoning in Shady Grove – that FRCP 23 abrogates all state-law limitations on class actions.  The Leonard court looked closely at the reasoning of both the plurality and concurring opinions in Shady Grove.  It determined, as other courts have, that the proper way to read Shady Grove is to apply the key portions of Justice Kennedy’s reasoning, which enunciates the “position taken by those [Justices] who concurred in the judgment on the narrowest grounds.”  Id. at *32. 
From that point, the decision to apply the OCSPA’s limitation on class actions became easy.  Justice Kennedy’s concurrence requires a review of whether the state law, even if seemingly procedural, so involves state-created rights that it defines their scope.  Well, the OCSPA limitation does just that.  It completely eliminates a plaintiff’s right to bring an OPSCA action based on conduct that has not been addressed by an administrative rule or court decision.   In other words, it is very much “intertwined with a right or remedy” so “that it functions to define the scope of the state-created right.”  Shady Grove, 130 S. Ct. at 1452 (concurring opinion).  This is much different from the New York law, which by its terms could apply to causes of action from jurisdictions other than New York.  As the Leonard court put it, the OCSPA limitation, unlike the New York law limitation:                      
"is not a pan-substantive rule that applies to federal claims or to claims based on other state’s laws.  Rather it applies only to a violation of [the OCSPA] – indicating its substantive nature."
Leonard, 2012 U.S. Dist. LEXIS 30608, at *35.
So, in practice, Shady Grove might not be so bad, at least when it comes to state-law limitations on class actions.  In fact, depending on the language of the state-law limitation, it could be another tool to prevent plaintiffs from forum shopping a class action that they otherwise might not have. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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