The U.S. Supreme Court, in ruling on what qualifies as a class action, has reinstated a suit that accuses Allstate of routinely refusing to pay interest when it is late with a benefit payment.  

The class action case was brought in New York where lower courts ruled that state’s law prohibits class actions where the suit involved seeks penalties or statutory minimum damages. The court concluded that the interest charges qualify as a penalty.

But the high court disagreed and sent the case back for trial on a 5-4 ruling. Justice Antonin Scalia, who wrote the majority opinion, said New York law does not have the power to negate federal law that permits class actions.

 The court found that under federal law there is “a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action.”

 “Congress, unlike New York, has ultimate authority over the Federal Rules of Civil Procedure; it can create exceptions to an individual rule as it sees fit—either by directly amending the rule or by enacting a separate statute overriding it in certain instances,” the court said.

“If the state law instead banned class actions for fraud claims, a would-be class-action plaintiff could drop the fraud counts from his complaint and proceed with the remainder in a class action. Yet that would not mean the law provides no remedy for fraud; the ban would affect only the procedural means by which the remedy may be pursued,” the court noted.

The decision mentioned that the ruling could lead to plaintiffs venue shopping for friendly courts.

“We must acknowledge the reality that keeping the federal-court door open to class actions that cannot proceed in state court will produce forum shopping,” Justice Scalia wrote.

“But, divergence from state law, with the attendant consequence of forum shopping, is the inevitable (indeed, one might say the intended) result of a uniform system of federal procedure. Congress itself has created the possibility that the same case may follow a different course if filed in federal instead of state court,” the opinion said.

“We cannot contort the text of federal rules, even to avert a collision with state law that might render it invalid,” the decision said.

The validity of a Federal Rule depends entirely upon whether it regulates procedure. If it does, it is authorized …and is valid in all jurisdictions, with respect to all claims, regardless of its incidental effect upon state-created rights,” the court ruled.

The case was brought on behalf of Shady Grove Orthopedic Associates, that had treated Sonia Galvez, an Allstate no-fault policyholder from New York injured in an auto accident. She assigned her benefit rights to the group, which submitted a claim.

 Allstate paid, but not within the required 30 day time period under New York law and Shady Grove, which contended it was being denied $500 in interest, sued on behalf of itself and other parties that had been denied interest.

A concurring opinion by Justice John Paul Stevens means that the decision will most likely have to be applied on a case-by-case basis, looking at different types of statutes that states have enacted to place limitations on class actions.”

Specifically, in his concurring opinion, Justice Stevens said, “It is important to observe that the balance Congress has struck turns, in part, on the nature of the state law that is being displaced by a federal rule.”

Justice Stevens said, “Federal rules must be interpreted with some degree of ‘sensitivity to important state interests and regulatory policies.”’ The same point was noted by Justice Ruth Bader Ginsburg in her dissenting opinion.

The case is Shady Grove Orthopedic Associates v. Allstate Insurance Co., No. 08-1008.

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