McKennon Law Group HomepageMcKennon Law Group

E-Book Download Now

Free Phone Consultation Nationwide

(949) 504-5381

We Offer No Fee or Cost Unless You Get Paid

CALL US NOW
Blog
Get Legal Help Now

U.S. Supreme Court Hears Oral Arguments in Hardt v. Reliance Standard Life Insurance: Under What Circumstances Can a Court Award Attorneys’ Fees in ERISA Actions?

The U.S. Supreme Court heard oral arguments yesterday in the important ERISA disability case of Hardt v. Reliance Standard Life Insurance (09-448).  In that case, Bridget Hardt filed suit, arguing that Reliance Standard Life Insurance Co. wrongly denied her claim for long-term disability benefits.  The district court found that Reliance’s original decision denying benefits disregarded pertinent medical evidence in violation of ERISA and found that the decision was otherwise unsupported by substantial evidence. Based on those findings, the district court remanded the matter to Reliance for reconsideration, ordering it to make a new benefits determination, after which it finally granted the benefits due. The district court then awarded Hardt $39,149 in attorney fees.

The Fourth Circuit Court of Appeals reversed, holding that section 502(g)(1) of ERISA provides a district court discretion to award attorney fees only to a prevailing party, and Hardt was not a prevailing party because her only request for relief was the award of benefits, which the district court did not award.

The questions presented were: (1) Whether ERISA section 502(g)(1) provides a district court with discretion to award reasonable attorney’s fees only to a prevailing party; and (2) whether a party is entitled to attorney’s fees pursuant to section 502(g)(1) when she persuades a district court that a violation of ERISA has occurred, successfully secures a judicially ordered remand requiring a redetermination of entitlement to benefits, and subsequently receives the benefits sought on remand.

The justices interrupted both sides frequently during oral throwing out hypothetical questions in an apparent effort to find a rule that would work in situations where a result was achieved, even though it was not based on the award sought and did not result from a judgment.  There were many questions around the issue of a plan participant achieving substantial success with a remand to the claim administrator.  It appears that the court is poised to allow an award of attorney’s fees even if a plan participant does not obtain an award of benefits in litigation or does not achieve a judgment.  It is interesting that the Court’s new decision in Conkright v. Frommert, __ U.S. __ (April 21, 2010) came up five times in the context that this decision encourages remands, which will limit the opportunity of plan participants to obtain judicial decisions.  Indeed, rather than making a judicial decision, the decision makes it likely that the plan participant would prevail before the plan administrator.  Thus, given Conkright, denying an award of attorney’s fees in these types of situations will, according to Justice Roberts, “severely limit the circumstances under which Plaintiffs are entitled to fees.” The transcript is here.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com All rights reserved

What happens when an ERISA plan provides for a certain level of benefits and the required summary plan description (“SPD”) given to plan participants provides for greater benefits?  The District Court for the Central District of California answered that question recently with its holding in Skinner v. Northrop Grumman Retirement Plan B, 2010 U.S. Dist. LEXIS 6591 (C.D. Cal. Jan 26, 2010).  In that case, the court held that former employees who received an inaccurate SPD were not entitled to increased retirement benefits as a result of the error.  In so ruling, the court determined that plaintiffs failed to demonstrate “reasonable reliance” on the SPD, which plaintiffs contended did not provide them sufficient notice of the plan’s offset provision.  The district court applied the standard set by the Ninth Circuit in reversing a prior ruling granting a motion for summary judgment wherein the court, in an unpublished decision in Skinner v. Northrop Grumman Retirement Plan B, 334 Fed. Appx. 58, 2009 WL 1416725, *1 (9th Cir. May 21, 2009), concluded:

On remand, the district court should reconsider each of [Plaintiffs’] claims in light of our conclusion that (1) the 2003 SPD’s incorporation of the 1998 SPD by reference did not notify [Plaintiffs] that the annuity equivalent offset would apply to their transition benefits, and (2) in terms of [Plaintiffs’]  expectations for Part B of the transition benefit, the 1998 SPD’s description of the offset’s limited applicability controls over the 2003 Restatement’s description of the offset as universally applicable. (emphasis original)

Although plaintiffs disagreed, the court adopted defendants’ argument that the Ninth Circuit required a showing of “reasonable reliance.”  The district court reasoned that providing an additional benefit absent a showing of reasonable reliance would provide a windfall for the former employees and that is a “result abhorred by ERISA.”  The court further explained that although the Ninth Circuit has not addressed this issue specifically, a majority of circuits have so held at *24-*25:

Although the Ninth Circuit has not directly decided  whether reasonable reliance on a defective SPD is required in order to recover under its terms, three district courts in this Circuit — including one decision affirmed by the Ninth Circuit — have held that reasonable reliance is required in order to recover for a claim based on a defective SPD. For example, in Adams, which was affirmed by the Ninth Circuit, the district court found “that reasonable reliance is necessary before a plaintiff can recover under an SPD that conflicts with a [plan document].” Adams v. J.C. Penney, 865 F.Supp. 1454, 1460 (D. Or. 1994). In Kaiser Permanente Plan v. Bertozzi, 849 F.Supp. 692, 698 (N.D. Cal. 1994), the court held that “an employee who wishes to enforce the terms of an SPD, in lieu of conflicting terms contained in the actual plan, must first prove that he or she reasonably relied on those terms.” Similarly, in Berry v. Blue Cross, 815 F.Supp. 359, 364-65 (W.D. Wash. 1993), the court held that “an employee must have relied on a plan summary in order to prevail in a claim based on the language of the summary.” The holdings of Adams, Bertozzi, and Berry requiring reasonable reliance on a defective SPD are also consistent with the long line of Ninth Circuit cases requiring reliance before allowing recovery for alleged ERISA disclosure violations. (Citations and footnotes omitted).

Benefits that have already been accrued are governed by ERISA section 204(g)(1), which states: “[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan.”  However, the court rejected plaintiffs’ argument that defendants “retroactively altered the Plan, and retroactively reduced benefits” because they “reduced benefits already vested in participants and beneficiaries.”  Id. at *30.

This case is again on appeal to the Ninth Circuit so we will soon see if the district court was correct in adopting “reasonable reliance” standard.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com All rights reserved

In a case of first impression, the Ninth Circuit Court of Appeals held, for the first time under California law, that patent infringement can be covered as a “misappropriation of advertising ideas” under the advertising injury coverage of a general liability policy, where the patent is on a method of web based advertising.

In Hyundai Motor America v. National Union etc. et al., No. 08056527(April 5, 2010) Hyundai Motor America was sued for patent infringement after placing certain “build your own vehicle” features on its website. As a result, Hyundai sought a defense from its liability insurers under a comprehensive general liability policies (“CGL”) issued by National Union Fire Insurance Co. of Pittsburgh and American Home Assurance Co. Hyundai (“Defendants”)  claimed that the alleged patent infringement concerned an advertising method and thus, the lawsuit alleged an “advertising injury” as defined in the insurance policy. The insurers disagreed and declined to defend Hyundai. Consequently, Hyundai represented itself in the underlying patent infringement action.

Hyundai later sued Defendants in this diversity action, seeking to recover its defense costs in the earlier third-party action. The district court agreed with Defendants that the alleged patent infringement did not constitute an “advertising injury” under the insurance policy and granted summary judgment to Defendants. The Ninth Circuit reversed and remanded finding that it was covered under the advertising injury coverage of the CGL policy . The court held that to establish a duty to defend for an “advertising injury,” the insured must have been engaged in advertising during the policy period when the alleged injury occurred, the allegations must have created a potential for liability under a covered offense, and a causal connection must exist between the alleged injury and the advertising. The court explained that the term “advertising” means “widespread promotional activities usually directed to the public at large,” but it does not encompass “solicitation.”

In relying on Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004), the court distinguished its case with those cases dealing with more traditional types of patent infringement claims that are not covered as follows:

We find support for our conclusion in the persuasive authority, Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004) (applying Washington law).3 In that case, Ama zon.com used music-preview technology on its website; a company named Intouch sued Amazon.com for patent infringement; and Amazon.com’s insurers declined to defend it. Id. at 975-76. In addressing Amazon.com’s claim against the insurers, the court held:

The misappropriation [of advertising ideas] must occur “in the elements of the advertisement itself– in its text, form, logo, or pictures–rather than in the product being advertised.” [Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1506 (9th Cir. 1994).]

Patent infringement arising from the manufacture of an infringing product is not an advertising injury even if the infringing product is used in advertising. [Id.] But patent infringement may constitute an advertising injury “where an entity uses an advertising technique that is itself patented.” [Id. at 1507 n.5.] That was the essence of Intouch’s allegation against Amazon. . . . Intouch alleged that its patented music preview technology was an element of Amazon’s advertisement. The Intouch complaint thus conceivably alleged misappropriation of an [advertising] idea . . . .

Amazon.com, 85 P.3d at 977 (footnotes omitted; footnote citations in brackets). The same analysis applies here: Hyundai “use[d] an advertising technique that is itself patented,” and “[t]hat was the essence of [Orion’s] allegation against [Hyundai].” Id.

This is the first time that a court, interpreting California law, has specifically held that patent infringement can constitute an advertising injury that may be covered under a liability policy, where the patent is on an advertising process as opposed to a patent on the product being advertised.

In an article appearing in the April 12, 2010 editions of the Los Angeles and San Francisco Daily Journals, I discuss the impact of the California Fourth Appellate District’s Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company). Here it is:

In an important vindication of a California policyholder’s right to a jury trial to enforce an insurer’s duty to defend, the California Fourth Appellate District recently held that a liability insurer that fails to promptly acknowledge its insured’s right to independent counsel and begin funding that defense forfeits its rights to binding arbitration under Civil Code section 2860.  Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company), __ Cal.App.4th __, 2010 WL 1052745 (March 24, 2010).  In Intergrulf, the court ruled that the insured may proceed first to a jury trial, and, if successful, recover contract and tort damages against the insurer.

The Duty to Defend Under California Law

Under California law, a liability insurer must defend its insured if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy or if the complaint might be amended to give rise to a liability that would be covered under the policy.”  Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 299 (1993).  The duty to defend arises at the time the insured tenders defense of the third party lawsuit to the insurer.  Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. Montrose Chem. Corp., supra, 6 Cal. 4th at 295; Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal. 4th 35, 49 (1997) (“To defend meaningfully, the insurer must defend immediately”); 10 Cal. Code Regs., section 2695.7(b).  On occasion, an insurer will delay its decision to defend outright, defend under a reservation of rights, or deny coverage altogether while it “investigates” coverage, leaving the insured to its own devices.

An unreasonable delay in paying policy benefits or paying less than the amount due is an actionable withholding of benefits which may constitute a breach of contract, as well as bad faith, giving rise to tort damages. Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 720, 723 (2007);  Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 1209 (2009).  The general measure of damages for breach of the duty to defend consists of the insured’s cost of defense in the underlying action, including attorney fees.  Major v. Western Home Ins. Co., 130 Cal. App. 4th 1078, 1088-1089 (2005).  Breach of the duty to defend also results in the insurer’s forfeiture of the right to control the defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in Civil Code section 2860.  Fuller-Austin Insulation Co. v. Highlands Ins. Co. 135 Cal. App. 4th 958, 984 (2006); Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 426 F.Supp. 2d 1039, 1047 (N.D. Cal. 2005).

An Insurer’s Right to Invoke Civil Code Section 2860 Fee Arbitration

Under Civil Code section 2860, when a liability insurer reserves its rights to contest coverage for a third party’s suit against its insured, and defense counsel could manipulate the suit in a way that could impair the insured’s coverage, section 2860 requires the insurer to pay for independent counsel to defend the suit.  For example, defense counsel may be in a position to hire expert witnesses with particular perspectives, and guide their testimony on issues such as when damage occurred or whether particular damage was expected or intended—steering claims in or out of coverage.  Notably, section 2860(c) limits the hourly rates that the insurer must pay independent counsel, and requires the insured to submit any fee dispute to binding arbitration.

An Insurer’s Unreasonable Delay Forfeits its Right to Invoke Civil Code Section 2860

In Intergulf, Intergulf developed a condominium project in San Diego, California. Intergulf was an additional insured on policies issued to one of its subcontractors by Interstate Fire & Casualty Company, a division of Fireman’s Fund Insurance Company.  The policies provided that Interstate had the right and duty to defend any lawsuit seeking damages because of property damage.  While Interstate’s policies were in effect, the homeowners association sued Intergulf for alleged construction defects.

Intergulf promptly tendered its defense to Interstate.  Two weeks later, Interstate responded, not with an acknowledgment of its defense obligation, but by requesting information and reserving all of its rights.  Interstate wrote that, if it determined it had a duty to participate in Intergulf’s defense, it would impose “litigation handling guidelines,” and it would typically not pay hourly rates of more than $ 150 for partners, $135 for associates, and $ 75 for paralegals.  Intergulf defended with its own counsel—Luce, Forward, Hamilton & Scripps, LLP—billing at a blended rate of $250 per hour.

Seven months later, Interstate finally informed Intergulf that Interstate recognized a “potential” for a defense obligation, but did not actually acknowledge either a duty to defend or coverage.  Interstate offered to “participate” in the defense of Intergulf through the firm of Wood, Smith Henning & Berman.  Intergulf objected that Interstate’s reservation of rights created a conflict of interest for the Wood Smith firm, and demanded the appointment of its own independent counsel under section 2860.

Intergulf then asked Interstate to reimburse its out-of-pocket defense fees and costs.  No response.  About a month later, Intergulf asked again.  No response.  Approximately one year after it had tendered its defense, Intergulf had neither a commitment to defend with conflict-free counsel nor any reimbursement for outstanding defense fees and costs from Interstate.  Intergulf then sued Interstate for breach of the duty to defend, bad faith, and declaratory relief.  Two months after Intergulf filed suit, Interstate made a first payment of approximately $ 140,000; nine months later, Interstate made a second payment of approximately $ 98,000.

Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what it characterized as a section 2860 fee dispute.  Intergulf responded that the case was about the contract and tort damages that Interstate owed for breaching its duty to defend—not about a fee dispute.  It argued that because the questions of Interstate’s duty to defend, conflict of interest, and bad faith had not been resolved, Interstate did not satisfy the prerequisites for arbitration under section 2860(c).  The trial court, however, granted Interstate’s petition to compel arbitration and continued the trial, pending completion of  arbitration.

Intergulf challenged the trial court’s ruling by filing a petition for writ of mandate.  The appellate court summarily denied the petition. The Supreme Court granted Intergulf’s petition for review and transferred the matter back to the appellate court with directions to vacate the order denying mandate and issue an order to show cause why the relief sought should not be granted.

The appellate court agreed with Intergulf that the gravamen of the complaint was bad faith and breach of contract, not a dispute over the amount Interstate should pay independent counsel under section 2860(c).  By filing the action for breach of contract, bad faith, and declaratory relief, Intergulf gave Interstate notice that it was treating Interstate’s failure to acknowledge Intergulf’s right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend.  Intergulf  at *2-3, citing  Coughlin v. Blair, 41 Cal. 2d 587, 599 (1953) (filing suit gave defendant notice that plaintiff viewed its failure to perform as a total breach of contract); and Sackett v. Spindler, 248 Cal. App. 2d 220, 229-230 (1967)(seller could treat persistent delay in payment for stock as total breach of the purchase agreement).

Intergulf’s entitlement to damages for breach of contract and bad faith turned on (i) whether Interstate owed Intergulf a duty to defend in the first instance; and (ii) whether Interstate breached that duty by failing to defend Intergulf “immediately” and “entirely” on tender of the defense.  Intergulf  at *3, citing  Buss v. Superior Court, supra, 16 Cal. 4th at 49; and Montrose Chemical Corp., supra, 6 Cal. 4th at 295.  Neither of these questions had been resolved at the time the court granted Interstate’s petition to compel binding arbitration of the purported fee dispute pursuant to section 2860(c).

As the appellate court noted, ordering fee arbitration under section 2860 under these circumstances puts the cart before the horse. If Intergulf proves that Interstate breached the duty to defend or committed bad faith by failing to acknowledge Intergulf’s right to independent counsel or failing to immediately and fully fund its defense, Interstate forfeits its right to limit defense fees and costs under section 2860(c) fee arbitration.  Instead, a jury could award contract and tort damages in the trial court.  Intergulf at *4.  The appellate court issued a peremptory writ of mandate directing the trial court to vacate its order granting Interstate’s petition to compel arbitration under section 2860(c), and to enter an order denying the petition to compel arbitration.

Sound Public Policy

The appellate court’s decision is based on sound public policy.  If an insurer could delay a full and immediate defense for its insured, and then run for cover under section 2860’s rate limits and binding arbitration, it would have an incentive to fabricate a Cumis conflict, comforted by the knowledge that the attorney fee element of its insured’s damages would be limited by Cumis rates, claim management protocols, and binding arbitration, instead of being tried to a jury.  The insured’s right to have a jury determine breach and damages is fundamental to enforcing the insurer’s duty to provide a full and immediate defense.

In a case of first impression, the Fourth District Court of Appeal opened the door to new lawsuits against private Medicare plans that had previously been held to be preempted by the federal Medicare Act. In Cotton v. Starcare Medical Group Inc., __ Cal.Rptr.3d __, 2010 (Cal. App. 4 Dist.), the court found patients who are denied or suffer poor medical care by a private HMOs as part of a government-funded Medicare Advantage plan can bring state tort law claims against insurers who provide those plans and deny coverage under them. The case involved a Medicare Advantage plan where the federal government pays a fixed rate per month to a private insurer to manage the care of an elderly enrollee.

81-year-old T.J. Jackson died from an untreated infection while enrolled in a Medicare Advantage health plan called “Secure Horizons,” run by PacifiCare of California, Inc. (“PacifiCare”). After Jackson underwent surgery to repair a broken leg, he went to a nursing facility named St. Edna’s Subacute and Rehabilitation Center (“St. Edna’s”) operated by another named defendant, Covenathe nt Care California.  Plaintiffs, Jackson’s children, alleged that St. Edna’s failed to provide adequate care to Jackson, causing him to “suffer from starvation, dehydration, and infection, as well as emotional distress,” ultimately resulting in his death.  Neither PacifiCare nor the medical group, Starcare, would pay for the surgery. Jackson died of hemorrhaging in his skull waiting for surgery, according to the court opinion.

The complaint, which included causes of action for, among others, bad faith and fraud, alleged StarCare was obligated to oversee Jackson’s treatment while at St. Edna’s, but allowed its receipt of “a fixed or periodic fee” for services and its participation “in a risk sharing agreement” that gave it a portion of “any savings resulting from the denial of reasonably necessary medical care,” to affect its decisions concerning his health care.  Thus, Plaintiffs alleged that StarCare breached its duties to “review requests for . . . medical service” based solely on “whether the requested service was reasonably medically necessary” and to “conduct utilization review and quality assurance activities without regard for the cost,” and also failed to inform Jackson and his family of its financial conflicts of interest.

The trial court initially dismissed the lawsuit based on federal preemption by the Medicare Act.

The primary issue was whether Plaintiffs’ numerous state law causes of action are preempted by title 42 United States Code section 1395w-26(b)(3) of the Medicare Act.  It declares that, except for laws governing licensing and solvency, “[t]he standards established under this part shall supersede any State law or regulation . . . with respect to M[edicare ]A[dvantage] plans which are offered by M[edicare ]A[advantage] organizations . . . .” PacifiCare argued that Plaintiffs’ claims against it were either expressly or at least impliedly preempted by section 1395w-26(b)(3).  It further contended the statute’s licensing law exception was inapplicable because that provision only applies to the acquisition of a license, not its maintenance.  Plaintiffs disputed the preemption claim and alternately contended leave to amend should have been granted because some of the causes of action could be based on state tort laws.

The Court agreed with Plaintiffs and held that the Medicare Act did not expressly or impliedly preempt their state law causes of action. The court also rejected PacifiCare’s argument that Plaintiffs did not exhaust their administrative remedies.  The court rejected this argument, noting that Plaintiffs did not disputing an adverse determination concerning Medicare benefits.  Thus, the case was governed by McCall v. PacifiCare of California, Inc., 25 Cal.4th 412, 423 (2001), which rejected a failure to exhaust administrative remedies claim made under the Medicare Act “[b]ecause the [plaintiffs] may be able to prove the elements of some or all of their causes of action without regard, or only incidentally, to Medicare coverage determinations” where “none of their causes of action seeks, at bottom, payment or reimbursement of a Medicare claim or falls within the Medicare administrative review process, and because the harm they allegedly suffered thus is not remediable within that process . . . .”  Id. at p. 426, fn. omitted.  The court stated that “this case presents an even stronger basis for rejecting the failure to exhaust administrative remedies defense.”

The decision has broad implications, as it is estimated that as many as 1.6 million seniors in California are enrolled in Medicare Advantage plans.  There can be little question that with this decision, consumer attorneys will file suits focused on bringing Medicare-related complaints against HMOs and medical groups.

In a significant blow to business but a boon for consumers, the Supreme Court ruled yesterday that certain class actions barred or limited by state laws may proceed in federal courts. In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company, __ U.S. __ (March 31, 2010) a 5-4 majority, led by Justice Antonin Scalia, 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, the opinion said, are directly contradictory: both seek to control whether this class-action lawsuit could be filed at all in federal court, but Rule 23 prevails. The Court ruled that if Rule 23’s specific terms are met on who may file a class-action lawsuit, the case may proceed in federal court. The result: Rule 23 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.

Shady Grove Orthopedic Associates (“Shady Grove”) filed a class action lawsuit in federal court, arguing that Allstate Insurance Company (“Allstate”) violated New York law in failing to pay interest to policyholders. The district court dismissed the case on the grounds that New York law prevented a class action lawsuit in this context, and the Second Circuit affirmed. This case concerned the application of state law in federal court under the Erie Doctrine, particularly whether New York class action law applies in federal court and whether it conflicts with Rule 23 of the Federal Rules of Civil Procedure.

Shady Grove argued that Rule 23 is the comprehensive class action rule for federal courts, and that New York law cannot undermine federal court procedure. Allstate claimed that state law applies because plaintiffs would have different rights in state and federal court.

Shady Grove provided medical care to Sonia Galvez for her injuries as a result of a car accident in May, 2005. Under the Allstate automobile insurance policy and applicable New York law, Allstate agreed to pay for certain medical costs associated with car accidents. Galvez gave Shady Grove authority to apply to Allstate for payments on her behalf. Shady Grove sent Galvez’s claims for about $500 to Allstate, but Allstate failed to pay. Under New York law, an insurer must either pay or deny the claim within 30 days. The statute mandates a two percent monthly interest penalty for payment made after the 30-day deadline.

Shady Grove and Galvez filed a class action lawsuit in the Federal District Court for the Eastern District of New York, proposing a class of all persons to whom Allstate owes interest payments under New York insurance laws since April of 2000. Allstate filed a motion to dismiss the case, arguing that New York law barred Shady Grove and Galvez from filing this class action lawsuit. Allstate specifically alleged that, under Section 901(b) of the New York Civil Practice Law and Rules (“CPLR”), Shady Grove and Galvez could not use a class action lawsuit to collect a statutory penalty unless specifically authorized under the statute. Shady Grove and Galvez argued that CPLR 901(b) did not apply in federal courts because it was merely a procedural rule and conflicted with Federal Rule of Civil Procedure 23, which governs class action lawsuits in federal court.

The district court granted the motion to dismiss. The court found that New York insurance laws did not specifically authorize a class action for the recovery of interest, and, therefore, CPLR 901(b) prevented the filing of the class action. The district court held that the New York’s restriction on class actions applies in federal court because the law substantively affected plaintiffs’ rights to bring lawsuits in New York courts. Shady Grove appealed. The Second Circuit affirmed dismissal of the suit. First, it found that CPLR 901(b) and Rule 23 did not conflict. Next, it found that federal court should apply CPLR 901(b) because otherwise class action plaintiffs could recover in federal court even though they could not in state court. Finally, the court found that CPLR 901(b) did not undermine the authority of the federal system.

Scalia rejected arguments by Allstate and the Second Circuit that Rule 23 and the New York law did not conflict because they addressed different issues. Allstate contended that Rule 23 is procedural, governing whether a class should be certified, while the New York law is substantive, determining whether a particular type of claim is eligible for class treatment. He called the “eligibility-certifiability” distinction “entirely artificial,” explaining that both are prerequisites for maintaining a class action. Scalia wrote expansively of Rule 23’s sweep: “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.” Justice Stevens joined this part of the Scalia opinion but he also said that he agreed that Rule 23 “must apply in this case.” 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 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.

There is little question that the Court’s decision is good for those who use class actions as a remedy to rectify corporate wrongdoing. The decision will effectively overturn a large number of state statutes that limit remedies which can be sought by class actions or that outright prohibit certain class actions. It is noteworthy that in its Supreme Court brief, Allstate said at least 22 states limit remedies recoverable in class actions and at least 23 prohibit class actions for certain claims.

Get the Answers and Assistance You Need

  • This field is for validation purposes and should be left unchanged.