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A new look at the “Erie doctrine”

The Supreme Court will hear oral argument at 11 a.m. Monday in Shady Grove Orthopedic Associates v. Allstate Insurance Co. (08-1008). Scott L. Nelson of Public Citizen Litigation Group, Washington, will be representing the Shady Grove, MD, clinic in the case, and Christopher Landau of Kirkland & Ellis, Washington, will be representing the insurance company.  The briefs and other filings in the case are available at this link on ScotusWiki.

Argument Preview

The venerable precedent that requires federal courts to decide some civil lawsuits based on state, not federal, law — the 1938 decision in Erie Railroad v. Tompkins — will be examined anew as the Supreme Court confronts the ongoing dispute between consumers and businesses over “class actions,” court cases that seek sometimes large damage verdicts for a broad group that has a common legal grievance.  In this case, what started as a $500 claim by an individual litigant potentially could lead to a $5 million class verdict.


Sometimes conflicting patterns of history run together when a consumer lawsuit challenging a business is taken to federal court, and the consumer’s individual complaint is one that is shared by others — perhaps many others.  Chances are, in modern times, that lawsuit will be filed as a “class action.”  The modern history of “class actions”  has produced an ongoing debate between consumer and business adversaries, and the Supreme Court is fairly frequently drawn into the debate.

Consumer advocates favor “class-action” lawsuits because their clients stand to gain from banding together to pursue a common claim (a claim made by a single individual may not be worth much if pursued alone, so a lawsuit may be a too-expensive way to pursue it, but if the grievance is shared by a whole class, the stakes are higher, and a lawsuit to benefit the whole group may be quite a promising idea).

On their side, business advocates argue that the class-action technique is often misused to pump up a potential verdict and thus to put pressure on companies to settle to avoid what they fear might well be nearly ruinous liability.  In almost any discussion among business groups about ideas for legal reform, doing something to curb class-action lawsuits is bound to be high on the agenda.

As this debate has moved into legislative halls, the result increasingly has been to put limits on class-action claims, either by curbing the remedies that can be pursued in such a lawsuit, or by simply barring the use of the class-action approach for specified claims.  State legislatures have been especially active lately in adopting such restrictions.

The fact that many of these restrictions are written into state laws can bring on a new consumer-business clash, when a consumer “class-action” lawsuit is pursued in a federal, not a state, court.  That invokes a second line of history – the history of the so-called “Erie doctrine.”  For seven decades, applying that doctrine, federal courts have had a significant role as interpreters of state laws, in order to resolve legal disputes between citizens who live in different states and, for that reason, have access to a federal tribunal.  The option of filing as a “class-action” is often chosen when citizens of many states could be affected by a consumer claim; federal court rules are quite generous in allowing “class actions.”

The “Erie doctrine” takes its name from Erie Railroad v. Tompkins. Under that 1938 ruling, federal courts are not to fashion a mode of federal law to resolve a dispute among parties from different states, but rather must apply the law of the state where the court sits.  One of the difficulties in doing so, however, is deciding when a state law, not a federal law, is to govern.

The Supreme Court has fashioned a rule-of-thumb to settle that issue, but it is a rule not easily applied.  The Court has said that, in an Erie case, the merits of the case are to be decided by what state law says (that is, the substantive law to apply is state law), but the procedure to be used in reaching the decision is federal.  When is a state law subtantive, and thus controlling, and when is it procedural, and therefore not controlling?

That is a key question the Supreme Court will confront when it hears the Shady Grove Orthopedic case this Term.  Is a New York state law, enacted in 1975, to curb the use of a “class-action” lawsuit a “subtantive” law or a “procedural” law?  If it is substantive, the orthopedic clinic’s lawsuit very likely will be out of federal court, but if it is procedural, the clinic has a chance to win its case there.

Here’s how the case developed:

It started with an auto accident in which a Maryland woman, Sonia E. Galvez, was hurt.  Her car was registered in New York, and it was insured under a no-fault policy issued by Allstate Insurance Co.  Ms Galvez was treated at the Shady Grove clinic, and she assigned to the clinic her right to recover the medical expense from Allstate.  Eventually, Allstate paid the claim, after initially asserting that it had not received proof of the loss claimed.

The clinic,  in the lawsuit it filed in federal court, claimed that Allstate had a practice of routinely failing to pay such claims on time.  New York state law, governing “no-fault” auto policies like the one that Ms Galvez had, required such payment to be made within 30 days; overdue payments carry interest at 2 percent a month.  Shady Grove Orthopedic claimed that Allstate owed it about $500 in interest on the Galvez claim.  However, its lawsuit was filed as a class-action claim, seeking to recover more than $5 million in damages for the entire group, similarly affected by Allstate’s alleged policy on late payments.  That figure represented the group’s damages for non-payment of interest on delayed coverage payouts.  The interest on the Galvez claim was too little to give the federal court jurisdiction to rule on it; the class-action claim, however, was large enough to do so, if allowed.

Allstate moved to have the case dismissed.  It cited the 1975 New York law that says that the class-action approach may not be used to seek any kind of penalty spelled out under New York law, unless the law creating such a penalty expressly allowed class litigation.  The interest penalty for late “no-fault” payments, Allstate argued, was the kind of penalty covered by that law, but the law did not authorize a class-action claim to recover it.  Moreover, Allstate asserted, the New York curb on class-action lawsuits is binding when a federal court, in a case like Shady Grove’s, is filed under federal court authority to hear disputes between citizens of different states.

New York’s curb on class-actions to recover penalties was passed primarily at the urging of business groups.  The proponents contended that penalties were put into state law to encourage those who had suffered harms to sue individually, since a potential financial recovery would make it worthwhile to sue on  their own claim.  Availability of penalties was not necessary to bring on class-action lawsuits, so those should not be available to pursue penalties, it was argued.  Moreover, business groups made their customary complaint that class-action lawsuits drive up the cost of doing business, resulting in higher prices to consumers.

In the Shady Grove case, Allstate won in lower courts, with dismissal of the clinic’s class-action lawsuit as outside the scope of federal court jurisdiction.  The Second Circuit Court concluded that the 1975 state law was a “substantive” provision, not a mere “procedural” curb, and thus, under the Supreme Court’s Erie rule-of-thumb, was binding on the federal court.  Although federal court Rule 23 governs the procedure that federal courts are to use in class-action lawsuits, the Circuit Court said, the New York law does not conflict because it is not procedural.

It would violate the command of Erie itself, the Circuit Court said, to allow a suing party like Shady Grove Orthopedic to recover in federal court on a class-wide basis keyed to state law when it was unable to do so in state court.  Allowing the federal case to proceed, it added, would encourage lawyers to “migrate toward federal court to obtain the substantial advantages of class actions.”  Moreover, the Circuit Court said, applying the New York curb to a federal class-action lawsuit does not permit a state legislature to dictate procedures that a federal court is to use.

Petition for Certiorari

The orthopedic clinic filed its petition in the Supreme Court in February 2009, arguing that “as a matter of basic federalism, no state legislature can dictate the use or non-use of the class action device in any federal court….If state legislatures can proscribe the use of class actions for particular claims in federal court, why can they not also proscribe other procedural devices?”

The petition raised three questions; paraphrased, they are whether a state legislature could bar a federal court from hearing a case based on state law and filed as a class action, whether state legislatures can control federal court procedure, and whether class-action lawsuits based on claims under state law could be wiped out altogether, as more state legislatures forbid them.  “By permitting New York’s legislature to dictate procedure in the federal courts, the Second Circuit has effectively ceded federal authority to the states,” the petition contended.

Allstate initially waived its right to answer the petition.  However, the Court on March 6 asked for a response.  The brief in opposition then filed essentially tracked the Second Circuit ruling.  It argued that the New York class-action ban was substantive, not procedural, because it was directly related to the scope of the right to take to federal court a plea that could not be pursued in state court, thus encouraging the very kind of “forum-shopping” that Erie was intended to discourage.

The company also contended that there is no conflict between the New York provision and federal court Rule 23, which controls federal procedures in class-action lawsuits.  There is nothing in Rule 23, it said, that controls what legal claims can be made in such a lawsuit, or what remedies can be sought.   On Shady Grove’s claim that legislatures would dictate federal court procedures, Allstate responded that federalism concerns actually work in New York’s favor, because that state created the underlying right to seek financial penalties for misconduct in violation of state law.

The Court granted the clinic’s petition on May 4.

Merits Briefs

Shady Grove, with lawyers from the Public Citizen Litigation Group in Washington taking over for the Delaware firm that filed the appeal, contended that the case should actually be decided not by what Erie allows, but under the Court’s 1965 ruling in Hanna v. Plumer.  In that decision, the clinic’s merits brief noted, the Court had ruled that a valid federal procedural rule must be applied by a federal court in a case involving citizens of different states, “regardless of contrary state law.”

In this case, it went on, federal Rule 23 gave the federal courts the discretion to allow a class action, while the New York law, “if applicable in the federal courts, would deny that discretion.  Under such circumstances, the federal rule, if valid, prevails.” And, it went on, Allstate made no argument that Rule 23 is not valid.  A federal procedure rule, it argued, is valid if it does not infringe or change anyone’s substantive rights; in this case, allowing the clinic’s class-action claim would not alter either side’s rights.

If, however, the Court preferred to address “the intricacies of Erie,” the clinic’s brief contended, the New York class-action curb would have to give way because it is not a substantive provision.  It does not define anyone’s rights or duties, does not “regulate primary conduct,” does not deny anyone in a class a right to recover the damages being sought from Allstate.  “It governs only the mode of enforcing substantive rights, which is a matter properly considered procedural under Erie,” according to the brief.

The brief also mounted arguments against applying the state law to this case, saying that would “infringe…the inherent power of federal courts to govern their own procedures” and disrupt “the uniformity of federal practice” that federal rules laws promote.  Moreover, it added, there would be no way to limit the override of federal procedure by a state law to the availability of class actions alone.

A legal advocacy group based in California, Public Justice, which said it specializes in lawsuits to protect “the victims of corporate and governmental abuse,” filed an amicus brief supporting the clinic’s appeal.  Noting that it regularly represents consumers and employees in class-action lawsuits, the group devoted most of its brief to “a description of the history and evolution of representative litigation in federal court,” a history that it said actually traces back to English law “since the very beginning of that country’s legal system.”

Allstate Insurance’s merits brief, by lawyers from Kirkland & Ellis in Washington, sought to reinforce its simplest point: that the state law at issue was “a substantive policy choice by New York to limit the state statutory penalty that may be imposed in a single lawsuit.”  It added: “At least since this Court’s seminal decision in Erie…, it has been clear that the federal courts must give effect to such substantive state policy choices in cases arising under state law.”

When a state has put a category of claims entirely outside of class-action treatment, such a ban never comes into conflict with federal Rule 23’s criteria governing when a class lawsuit may be filed in federal court, the brief asserted.  If Rule 23 were read to override such a state “substantive policy decision,” Allstate added, that would directly violate a federal law, the Rules Enabling Act.

Firmly resisting the clinic’s claim that the New York curb is procedural under Erie, Allstate’s brief said “that argument boils down to the proposition that any limitation on class actions must be procedural because class actions themselves are procedural.”  The brief appended a lengthy list of federal and state laws that, Allstate says, represent similar “substantive policy choices” by curbing class-action remedies or ruling out class claims altogether on specific topics.

The brief also sought to downplay the significance of the financial penalty that the clinic is seeking to recover for a class of hundreds. The curb on class actions, it said, does no more than limit the exploitation of “a technical violation of law that did not inflict any actual injury.”  If that curb is not binding in federal court to thwart the clinic’s claim, the brief said, “Shady Grove can transform this dispute over a penalty of no more than $500 into a dispute over an aggregate penalty of no less than $5 million by simply crossing the street from state to federal court. Nothing in Erie either requires or tolerates that result.”

Supporting Allstate in the case with an amicus brief are the New York State Business Council (successor to the Empire State Chamber of Commerce, one of the primary advocates of the 1975 state law) along with other national and local business and insurance groups.  That brief recites the history of the state law’s enactment; otherwise, it closely follows the substantive arguments made in Allstate’s own merits brief.


The Court may well have reasons to try to decide this case narrowly, or it may wish to make some more sweeping declarations about how to define the meaning of Erie — either to clarify the distinction between “substantive” and “procedural” rules, or to reexamine the fundamental federal-state relationships that are affected by Erie‘s approach.

One possible consideration for making a narrower ruling could work in Allstate’s favor.   The Court might be somewhat uncomfortable, as an institutional matter, in probing too deeply into what New York’s legislature had in mind in passing the class-action bar in 1975.  The Second Circuit Court is closer to the scene there, and the Justices may feel some need to defer to the appeals court’s reading of the state’s legislative purpose.  Of course, the definition of what is “substantive” or “procedural” under Erie appears to be a federal question, but Allstate’s claim that what is at stake here is “policy” might be a deterrent to too-energetic a second-guessing of the Second Circuit’s view.

The Court also may be somewhat leery of raising doubts, by implication, about the validity of a host of state laws that impose restrictions on class-action.  It was a potentially effective litgation ploy for Allstate to include the appendices with a recital of the laws that may be riding on the outcome of this case.

An alternative narrow approach might well work in Shady Grove Orthopedic’s favor, however.  The clinic’s focus on the Hanna ruling could draw the Court to language — supported in 1965 by eight members of the Court — that suggests a need to protect the prerogative of federal courts to write what that opinion called “housekeeping rules.”  Focusing on federal laws governing federal procedure could keep the case within some tight bounds.  There also are institutional implications in defending the rules-making prerogatives of
Congress and the courts.  Note that the Hanna opinion concluded with this statement: “To hold that a Federal Rule of Civil Procedure must cease to function whenever it alters the mode of enforcing state-created rights would be to disembowel either the Constitution’s grant of power over federal procedure or Congress’ attempt to exercise that power in the [Rules] Enabling Act.”

It may also be in the clinic’s favor simply that the Court agreed to hear its appeal.  Allstate apparently did not see it as a major case, initially forfeiting a chance even to answer it, and then failing to persuade the Court that the case was not worth its time.  At least some members of the Court saw an issue of possibly fundamental importance, despite the somewhat breezy way in which the questions at issue were phrased by Shady Grove’s counsel.

That perception lends some support to the notion that the Court may well be tempted to approach the case from a broader perspective.  If it does so, there is another aspect of Hanna — the concurring opinion of Justice John Marshall Harlan — that may support a deeper look at what is at stake.  Harlan suggested that the eight other members of the Court had read Erie too narrowly, commenting: “I have always regarded that decision as one of the modern cornerstones of our federalism, expressing policies that profoundly touch the allocation of judicial power between the state and federal systems….[I]t recognized that the scheme of our Constitution envisions an allocation of law-making functions between state and federal legislative processes which is undercut if the federal judiciary can make substantive law affecting state affairs beyond the bounds of congressional powers in this regard.”

Leaving aside that the quotation seems to focus at least in part on the substantive-vs.-procedural dichotomy, Harlan’s defense of state legislative prerogatives puts the federalism implications of the Shady Grove case front and center.  That could well bolster New York and its sister states — and, in the process, the legal interests in this case at least of corporations like Allstate.

One further factor may be in play: if the current Court majority is, as some analysts suggest, more business-friendly than the Court has been in some time, there is at least a speculative possibility that the Court might well have developed reservations about the modern phenomenon of class-action litigation, and this case could provide an occasion to express those thoughts.