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Analysis: Sorting out an Erie sequel


It took the Supreme Court almost five months to sort out a modern sequel to the famous “Erie” decision, and it is no wonder.  In the end, Justice Antonin Scalia mustered just  enough votes to control the outcome, but an opinion that speaks only for Justice John Paul Stevens’ views turns out to be the one that will shape the real meaning of the new precedent as it is applied in future cases.  And Justice Ruth Bader Ginsburg fell just one vote shy of controlling both the practical outcome and the legal substance, and her views would have prevailed if phrased just slightly more narrowly.  In short, fully understanding Wednesday’s ruling in Shady Grove Orthopedic Associates v. Allstate Insurance (08-1008) requires a close reading of Scalia’s 22 pages and Stevens’ 22 pages, and suggests that reading Ginsburg’s 25 pages might be advisable, too.  The real-world effect seems clear: fewer state laws seeking to limit remedies available in federal court will now fall.

The decision came on a 5-4 vote.  But here is how it broke down in its several parts: 5-4, New York State may not bar this particular “class-action” lawsuit in federal court when a federal court procedural rule allowed it, and 4-1-4, the federal court rule is valid as applied in this case, with four votes for one view, one vote for a different, and four to find it invalid in this case.  Separately, three votes are cast to support comments that seek to refute Justice Stevens’ apparently controlling interpretation.  This complexity, though, can be explained.

The Shady Grove case, on its surface and in its specific result, turned on the scope of a federal court rule — Rule 23 — that governs when a lawsuit seeking civil damages may be pursued as a class action (that is, a lawsuit brought not by just one or a few individuals claiming they were harmed, but a whole group of them with the same kind of legal claim — in other words, a class-action lawsuit).  But it turned out that the decision on Rule 23 may be confined to this one, particular lawsuit.  Justice Stevens provided the fifth vote for the Rule 23 decision, but stressed that he was doing so only for “this case.”

First, the facts: The case involved an attempt by a medical facility with two clinics in Washington, D.C., suburbs, Shady Grove Orthopedic Associates, to revive a $5 million class-action lawsuit it had filed in federal court against Allstate Insurance Co., contending that Allstate owed a penalty payment for failure to pay off, in time, claims under no-fault accident insurance policies. One of the clinics had treated Sonia E. Galvez after she was hurt in an auto accident in May 2005; Galvez had an Allstate auto insurance policy.

The policy was governed by New York state law.  But, since Shady Grove is located in Maryland and Allstate is based in a different state (Illinois), it opted to sue in federal court.  Federal courts have jurisdiction to hear cases in which the two sides are citizens of different states, even though the case depends upon claims based on state law — in this case, an alleged breach of contract by Allstate for failing to pay claims promptly, as state law requires. Shady Grove said that, if it won, it would only get $500 in damages. But, since it sought to pursue the case as a class action, representing all whose claims had not been paid on time by Allstate, the class as a whole stood to gain $5 million in interest penalties — bringing it under the minimum $5 million claim for a federal court to hear any class-action case for damages.  Shady Grove was relying on federal court procedural Rule 23.

Shady Grove, though, encountered a problem.  While New York law allows class-action lawsuits, it does not allow such a lawsuit to seek to recover a penalty as part of the remedy.  Lower federal courts ruled that New York’s ban on such a remedy controlled in federal court, too,  because Rule 23 is only a procedural rule, while the New York law limiting the remedy was a substantive one.  Under the Supreme Court’s famous 1938 decision in Erie Railroad v. Tompkins, when a case is in federal court but involves a state law claim, federal procedural rules govern how the case proceeds but state substantive law determines who wins.

Now, Wednesday’s outcome. By a vote of 5-4, with Justice Scalia writing, the Supreme Court decided that Rule 23 controls when a class-action lawsuit can be filed in federal court, even when such a case in federal court will be decided based on state law.  New York’s law and Rule 23, that opinion said, are directly contradictory: both seek to control whether this class-action lawsuit could be filed at all in federal court.  Rule 23, however, must prevail, the Court concluded.  If Rule 23’s specific terms are met, on who may file a class-action lawsuit, the case may proceed in federal court, Scalia wrote.  Rule 23, his opinion said, does exactly what it says: it empowers a federal court to certify a class in each and every case where the Rule’s criteria are met.

Scalia went on to write even more expansively of Rule 23’s sweep, declaring: “Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules’ prerequisites are met.  We cannot contort its text, even to avert a collision with state law that might render it invalid.”  (The word “any” was italicized both times in that sentence.)

Justice Stevens opened his opinion by saying that he joined the part of the Scalia opinion that included that sentence.  But he also said that he agreed that Rule 23 “must apply in this case,” and that is why he joined Scalia on that point.  The New York law against a penalty remedy, Stevens said, was a procedural rule only, and had to give way to Rule 23.  But the remainder of the Stevens’ concurring opinion made it clear that he diverged — perhaps significantly — from Scalia on the general question of whether federal courts, applying what they considered to be federal procedural rules in a state-law case, would always trump a state procedural rule.

Stevens, in fact, spelled out a general rule of his own.  If a federal procedural rule “would displace a state law that is procedural in the ordinary use of the term but is so intertwined with a state right or remedy that it functions to define the scope of the state-created right,” then the federal procedural rule “cannot govern” such a case.  Congress, Stevens noted, had said (in the Rules Enabling Act) that federal courts may not craft procedural rules if such a rule would cut back on, expand, or modify “any substantive right” (Stevens italicized the word “any” here0″)  A federal court must undertake the inquiry necessary to sort out whether a state procedural rule, in operation. really counts as a substantive right or remedy, Stevens said.

Justice Scalia devoted one whole section of his opinion to disputing Stevens’ formulation of the controlling view, saying it would send the federal courts off into a complex inquiry into the scope of state procedural rules.  But that section of the Scalia opinion was explicitly not joined by Stevens, and only attracted the additional votes of Chief Justice John G. Roberts, Jr., and Justice Clarence Thomas.

Stevens’ view on this general point becomes controlling through the practice of the Court, when its nine members are deeply divided, of treating the narrowest view supporting the outcome as the controlling interpretation, in a legal sense.  (In the 1977 decision in Marks v. U.S., the Court said that when a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, “the holding of the Court may be viewed as that position taken by those members who concurred in the judgment on the narrowest grounds.”)  Stevens would protect state law provisions more than the Scalia opinion would, so Stevens’ less-sweeping view is, in essence, the decisive interpretation.  Stevens bolstered his differences with Scalia by noting that he agreed “with Justice Ginsburg that there are some state procedural rules that federal courts must apply in diversity cases because they function as a part of the state’s definition of substantive rights and remedies.”

Stevens also wrote, though, that his approach would apply only when there was “little doubt” that a state procedural law could actually qualify as one that protected a genuine right or remedy in a federal court case.  The mere chance that a federal rule would intrude on such a right or remedy, he said, “is not sufficient.”  Still, it would appear that the tone of the Stevens opinion, and the sentiment that seems to guide it, may well be interpreted by judges in future cases as giving the states greater leeway than the Scalia opinion would to fashion limits on remedies in cases that get into federal court but are based on state law claims.

The Ginsburg opinion is an almost rhapsodic tribute to “the Erie doctrine” as “one of the modern cornerstones of our federalism,” yielding much ground to states to fashion their own policies to govern lawsuits that are, at their core, based upon state law claims. The Court majority, Ginsburg wrote, has “radically” departed from judicial respect for “important state regulatory policies,” and “unwisely and unnecessarily retreat[ed] from the federalism principles undergirding Erie.”

While the dissenters, in a footnote, said the Court’s “one-size-fits-all” interpretation of Rule 23 would be likely to bar the enforcement of nearly 100, and perhaps more, state laws limiting remedies in class-action lawsuits, the qualifications that the Stevens opinion appeared to have put on that interpretation probably would not pose such a pervasive risk to such laws.

Justice Scalia drew the full support for all of his opinion only from the Chief Justice and Justice Thomas, drew the additional support of Justice Sonia Sotomayor for the conclusion that Rule 23 is a valid use of the rule-making power that Congress gave to federal courts, and the support of those four plus Justice Stevens for the outcome and much of the discussion of Rule 23 in relation to the New York law at issue.  Stevens drew no other Justice to his opinion.  The Ginsburg dissent was joined by Justices Samuel A. Alito, Jr., Stephen G. Breyer, and Anthony M. Kennedy.