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The Supreme Court’s decision in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 130 S. Ct. 1431 (2010) does little to clarify the application of the Erie Doctrine.  While many courts endeavor to apply and follow Erie, the classification of statutes and rules as “substantive” or “procedural” is far from uniform.  In a plurality opinion by Justice Scalia, the Court held the New York class action rules would not apply to a federal court sitting in diversity, because Rule 23 is procedural in nature, and thus applies.

In Shady Grove, plaintiff filed a putative class action in diversity for statutory damages against an insurer after the insurer neglected to timely pay insurance benefits and altogether refused to pay the statutory interest that had accrued on the overdue benefits.  Plaintiff sought statutory damages under New York law, claiming that the insurer’s refusal to pay interest on overdue benefits was a routine and common practice.  The district court dismissed the suit for lack of jurisdiction, claiming that plaintiff’s putative class action was prohibited under N.Y. C.P.L.R. § 901(b), which expressly precludes plaintiffs from using class actions to recover penalties such as statutory interest.  Applying the Erie doctrine, the Second Circuit affirmed, finding that N.Y. C.P.L.R. § 901 was a substantive state law that must be applied by federal courts sitting in diversity.  The Supreme Court reversed.

In reversing the lower courts’ decisions, the Supreme Court found that the classification of N.Y. C.P.L.R. § 901 as procedural or substantive was of no consequence—under Erie, the Court reasoned, it is the substantive or procedural nature of the federal rule that matters.  Proceeding under this analysis, the Supreme Court determined Rule 23 to be procedural, as it governed only the manner and the means by which plaintiffs’ rights are enforced.  Because N.Y. C.P.L.R. § 901 conflicted with Rule 23 by purporting to limit Rule 23’s permission of all class actions that meet its requirements, the Court held that the conflicting state statute was not to be enforced.

The practical effect of Shady Grove likely will be forum shopping where federal and state class action rules differ.

The Supreme Court’s Shady Grove Decision – Erie Unexplained