Erie and Class Actions: Waiting for the Supreme Court's Decision in Shady Grove

While many children are spending today waiting for Santa, I thought I'd talk about a Supreme Court decision that the civil-procedure world is eagerly awaiting: Shady Grove v. Allstate, which was arguedlast month. Unlike Santa, a Dec. 25th arrival is doubtful. But Shady Grove could be the most important decision on the Erie doctrine in years. The case confronts a significant issue at the intersection of judicial federalism and civil litigation: when is a federal court bound by state law on whether a class action should be certified? (If folks are interested in a pre-Shady Grove examination of this issue, check out my 2008 article What Is the Erie Doctrine? (And What Does It Mean for the Contemporary Politics of Judicial Federalism?), 84 Notre Dame L. Rev. 245.)

Shady Grove is a putative class action alleging violations of New York state insurance law. It was filed in federal court based on the new form of diversity jurisdiction created by the 2005 Class Action Fairness Act (CAFA). Here's the rub: New York law precludes class actions for statutory-damages claims like the one in Shady Grove. Federal law, on the other hand, would allow a class action if the general requirements of Rule 23 are satisfied. It's a classic Erie-Hanna-Rules Enabling Act problem. Is the federal court bound by New York's bar on this kind of class action? Or may the federal court apply the federal approach to class certification and, potentially, certify the class despite New York law?  

It is somewhat ironic that the Supreme Court is confronting the Erie/class action issue in a case where state law is more hostile to class actions than federal law. The conventional wisdom has long been that a defendant opposing a class action has better odds in federal court than in state court. But many of the arguments the Shady Grove defendants are making, if the Court accepts them, could benefit plaintiffs in cases where the state-law approach is indeed more friendly to class actions. If New York's law prohibiting certain class actions is held to be binding in federal court, a more lenient state-law approach to class actions could be binding as well.

So if the Supreme Court in Shady Grove agrees with the defendant and holds that state law governs, it may well be that what's good for the goose (defendants) is also good for the gander (plaintiffs). That could have a remarkable effect on judicial federalism in the post-CAFA era. Consider the common scenario, where a defendant invokes CAFA and removes a case to federal court in order to avoid a more lenient state-court approach to class certification. The logic of the defendant's arguments in Shady Grove could mean that the state's approach to class certification would be binding in federal court thanks to the Erie doctrine. The consequences could even extend beyond class certification. After the Supreme Court's decisions in Twombly and Iqbal, some litigants may find a federal pleading standard that is stricter than the one that applies in state court a block away. Depending on how Shady Grove is decided, it could pave the way for plaintiffs to argue that more lenient state-law pleading standards should be binding in federal court via Erie (my Erie article examines this possibility in more detail).

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(Cross-posted at Concurring Opinions)

PS: As in Shady Grove, the litigants in Erie were also not in their typical positions vis-a-vis the larger federalism question. The Erie plaintiff, Mr. Tompkins, wanted to use "federal common law" to displace state tort law. But as a general matter, such federal common law tended to benefit corporate and business interests like The Erie Railroad Company. That's probably why Erie's lawyers never made the argument, which Justice Brandeis ultimately embraced, that federal courts lacked authority to impose such federal common law.