Thursday, September 9, 2010

Shady Grove and Class Actions: Part Two of the Effect of Recent SCOTUS Decisions on Arbitration in South Carolina

By Shaun Blake

This post is the second in a series discussing the South Carolina Supreme Court’s decision in Herron in the context of recent United State Supreme Court decisions addressing arbitration. Click here for part one.

Update: you may want to click here and listen while you read.

Shady Grove

In Shady Grove the Petitioner filed a putative class action in Federal District Court under CAFA to recover from Allstate interest on an insurance claim allowed under a New York law. The District Court dismissed the action after concluding it lacked jurisdiction because N.Y. Civ. Prac. Law Ann. §901(b) explicitly bars claimants from pursuing a class action to recover a "penalty" such as statutory interest. However, the U.S. Supreme Court ultimately reversed this decision in a plurality decision, holding that Rule 23 of the Federal Rules of Civil Procedure and §901(b) conflicted, and therefore Rule 23 allowed the Petitioner to pursue a federal class action despite New York’s express prohibition.

Rule 23 defines when a federal class action “may be maintained.” The Court found that Rule 23 “unambiguously authorizes any plaintiff, in any federal proceeding, to maintain a class action if the Rule’s prerequisites are met.” Since §901(b) provides that certain claims “may not be maintained as a class action,” five members of the Court found that Rule 23 and §901(b) inherently conflicted with one another.

In reaching its conclusion, the Court considered Rule 23 in light of the Rules Enabling Act. 28 U.S.C. § 2072(b) limits the Federal Rules of Civil Procedure by stating that “such rules shall not abridge, enlarge or modify any substantive right.” The Plurality held that the Court must look to the federal rule and determine whether it regulates procedure ("the manner and the means by which litigants' rights are 'enforced'") or substance ("the rules of decision by which [the] court will adjudicate [those] rights.") The Plurality adopted a bright-line rule by focusing its analysis on the federal rule rather than the specific state provision. The Plurality found that Rule 23 does not violate the Rules Enabling Act. Notably, Stevens’ concurrence argues that the Court must look to the state law, not the federal rule, to determine whether a substantive right is affected - a view that requires courts to make a case-by-case determination.

Justice Ginsberg's dissent argued that the federal rules should be read "with sensitivity to important state interests and "to avoid conflicts with important state regulatory policies." In Ginsberg's view, Rule 23 and §901(b) do not conflict at all: “Rule 23 describes a method of enforcing a claim for relief, while §901(b) defines the dimensions of the claim itself.” Further, Ginsberg warned that the Court’s “ ‘one-size-fits-all’ reading of Rule 23” likely will prevent the enforcement of numerous state statutes in diversity actions.

Herron And Arbitration Provisions Banning Class Actions

In Herron, the Plaintiffs sought a class action against various auto dealers to recover administrative fees that Plaintiffs asserted were charged illegally. The Arbitration Agreement between the parties included a provision whereby the Plaintiffs waived their right to bring or participate in a class action. The South Carolina Supreme Court found this ban on class actions to be unenforceable on public policy grounds, because the Dealers Act (a statute whose purpose is consumer protection) expressly provided plaintiffs with the right to bring class actions. Accordingly, any contract that prohibits such class actions is void and unenforceable.

Herron differs from Shady Grove, in that the statute at issue in Herron allows for a class action rather than forbids it. Accordingly, the Dealers Act would not run afoul of Rule 23, FRCP like the New York state statute did in Shady Grove. However, South Carolina has many statutes that explicitly prohibit the use of class actions. Accordingly, Herron should not be broadly read for the principle that class action prohibitions are per se unenforceable when class certifications are sought for violations of consumer protection statutes. The result in Herron is driven by the explicit provision found in the Dealers Act allowing class actions.

Conclusion

The question remains, in light of Shady Grove, whether the class action prohibitions adopted elsewhere by the South Carolina Legislature are enforceable in actions brought under CAFA. For litigants in state court seeking to pursue class litigation where the Legislature has expressly forbidden same, it appears Herron will control. Rule 23 of the South Carolina Rules of Civil Procedure will not avail state-court litigants, as the South Carolina Constitution contains an express provision whereby the statutory law cannot be contradicted by the Rules propounded by the South Carolina Supreme Court. However, Shady Grove may open the door to class action litigation in Federal Court under CAFA.