The U.S. Court of Appeals for the Second Circuit recently affirmed a district court's dismissal of a class action case brought under the federal Telephone Consumer Protection Act ("TCPA") for lack of federal jurisdiction, even after reconsidering the case in light of the Supreme Court's holding in Shady Grove v. Allstate. (See our prior update on the Supreme Court's ruling in Shady Grove, below.)
A copy of the opinion is available at: http://www.ca2.uscourts.gov/decisions/isysquery/5c2c261f-e997-4937-925d-34aa7478d369/2/doc/07-2191-cv_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/5c2c261f-e997-4937-925d-34aa7478d369/2/hilite/
As the Second Circuit noted, this case centers on the intersection of four laws:
(a) the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, which provides a statutory penalty of $500 for each instance of unsolicited, commercial fax transmission and a federal cause of action "if otherwise permitted by the laws or rules of court of a State." Id. § 227(b)(3) (emphasis added);
(b) New York C.P.L.R. 901(b), which prohibits class-action suits seeking statutory damages;
(c) Federal Rule of Civil Procedure 23, which authorizes class-action suits in federal courts when various criteria are met; and
(d) the federal Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d)(2)(A), which gives federal courts jurisdiction over class actions alleging at least $5 million of damages so long as there is minimal diversity among the parties.
Plaintiff brought this putative class action in federal court under, alleging violations of the TCPA by defendant. Plaintiff grounded federal jurisdiction in the Class Action Fairness Act ("CAFA"). Defendant moved to dismiss, claiming that the district court lacked jurisdiction pursuant to New York C.P.L.R. 901(b), which prohibits class action suits seeking statutory damages. The district court agreed and the Second Circuit affirmed, based on its ruling in Bonime v. Avaya, which raised the same issue. The Supreme Court vacated the decision and remanded the case for reconsideration in light of its holding in Shady Grove v. Allstate that N.Y.C.P.L.R. 901(b) conflicts with Fed. R. Civ. P 23. This opinion followed.
In Bonime, the Second Circuit held that C.P.L.R. 901(b) applied to TCPA actions in New York for two independent reasons: (1) because Congress directed that the TCPA be applied as if it were a state law, the Erie doctrine required federal courts to apply C.P.L.R. 901(b) to TCPA claims in New York and (2) the specific language of the TCPA that allows a person to sue under it only "if otherwise permitted by the laws or rules of court of a State … constitutes an express limitation on the TCPA."
Ultimately the Second Circuit ruled that the Supreme Court's holding in Shady Grove abrogated its first rationale because "if the requirements of Rule 23 are met and if federal jurisdiction otherwise exists, C.P.L.R. 901(b)'s bar of New York class-action suits seeking statutory damages is irrelevant."
The Court, however, also held that "[b]ecause Shady Grove says nothing about Bonime's second ground, we find that ground continues to control this case." The Court explained that under its interpretation of the TCPA, "Congress intended to give states a fair measure of control over solving the problems that the TCPA addresses." As applied here, the Court held that "[t]he ability to define when a class cause of action lies and when it does not is part of that control."
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
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From: Ralph T. Wutscher
Sent: Thursday, May 06, 2010 6:44 PM
To: Ralph Wutscher
Cc: SoCalOffice; D.C. Office; Chicago Office
Subject: FYI: US Sup Ct Says Rule 23 Allows Class Action, Despite State Law Prohibition On Class Actions for Remedy Sought
The U.S. Supreme Court ruled recently that a state law precluding class actions to recover "penalties" such as statutory interest did not prevent a federal district court sitting in diversity from hearing the same issue in a class action under Federal Rule of Civil Procedure 23. A copy of the opinion is attached.
Under New York law, Allstate Insurance Co. ("Allstate") had 30 days within which to either pay Shady Grove Orthopedic Associate's ("Shady Grove") insurance claim, or deny it. Allstate paid the claim, but did so late and refused to pay statutory interest that accrued on the overdue benefits. Alleging that Allstate routinely refused to pay interest on overdue benefits, Shady Grove filed a diversity suit in the U.S. District Court for the Eastern District of New York to recover the unpaid statutory interest and also sought relief on behalf of itself and a class of all others to whom Allstate owed interest.
The District Court dismissed the case for lack of jurisdiction. The court held that N. Y. Civ. Prac. Law Ann. §901(b) ("§901(b)")--which precludes a class action to recover a penalty--applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Because statutory interest is a "penalty" under New York law, the court reasoned, §901(b) prohibited the proposed class action. The Second Circuit concluded that Rule 23 and §901(b) were not in conflict and affirmed. The Supreme Court reversed and remanded, but divided its ruling into five parts, with several concurrences in each part.
In the judgment of the court (Parts I and II-A of the opinion), Justices Scalia, Roberts, Stevens, Thomas and Sotomeyer first noted that Federal Rule 23 would control if it conflicted with §901(b), and that Rule 23 specifically states that "[a] class action may be maintained" where certain conditions are met. The court then rejected the Second Circuit's holding, ruling that since §901(b) establishes specific conditions under which a suit "may not be maintained as a class action," it could not apply in diversity suits. The court further expanded on this, explaining that Rule 23 explicitly empowers a federal court to certify a class in each and every case where the Rule's criteria are met.
The majority also discounted the dissent's claim that §901(b) could coexist with Rule 23. The dissent had characterized §901(b) as applying only to the remedy that might be available in a class action, as opposed to the question of whether a suit could be maintained as a class action. However, the majority disagreed, again noting that "Rule 23 permits all class actions that meet its requirements." Allowing the imposition of additional requirements--such as those presented by §901(b)--would render Rule 23 partially invalid, the majority ruled.
Justices Scalia, Thomas, Sotomeyer and the Chief Justice further concurred in Parts II–B and II–D of the decision, holding that the Rules Enabling Act (28 U.S.C. §2072), rather than the Erie Doctrine, controls the validity of a given rule. Citing Sibback v. Wilson & Co. (312 U.S. 1, 14 (1941)), the court interpreted Section 2072(b)'s requirement that a rule "not abridge, enlarge or modify any substantive right" to mean that a rule will remain valid only as long as it governs "the manner and the means" by which the litigants' rights are enforced. A rule may not alter "the rules of decision by which [the] court will adjudicate [those] rights," or the available remedies.
Finally, in Part II-C, Justice Stevens distinguished the judgment of the court. First noting that under §2072(b), a federal rule cannot govern when the application of that rule would "abridge, enlarge or modify any substantive right," Justice Stevens argued that there could be rare cases of state law so "bound up" or "intertwined" with substantive rights and remedies that the state law could effectively define the scope of the state-created right and that application of a federal rule in such a case could violate the Rules Enabling Act. The plurality disagreed, concluding that the correct analysis was established in Sibback's single test of "whether a Federal Rule regulates substance or procedure" and that Justice Stevens' approach would be unworkable, as it "would allow States to force a wide array of parochial procedures on federal courts so long as they are 'sufficiently intertwined' with a state right or remedy."
Under New York law, Allstate Insurance Co. ("Allstate") had 30 days within which to either pay Shady Grove Orthopedic Associate's ("Shady Grove") insurance claim, or deny it. Allstate paid the claim, but did so late and refused to pay statutory interest that accrued on the overdue benefits. Alleging that Allstate routinely refused to pay interest on overdue benefits, Shady Grove filed a diversity suit in the U.S. District Court for the Eastern District of New York to recover the unpaid statutory interest and also sought relief on behalf of itself and a class of all others to whom Allstate owed interest.
The District Court dismissed the case for lack of jurisdiction. The court held that N. Y. Civ. Prac. Law Ann. §901(b) ("§901(b)")--which precludes a class action to recover a penalty--applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Because statutory interest is a "penalty" under New York law, the court reasoned, §901(b) prohibited the proposed class action. The Second Circuit concluded that Rule 23 and §901(b) were not in conflict and affirmed. The Supreme Court reversed and remanded, but divided its ruling into five parts, with several concurrences in each part.
In the judgment of the court (Parts I and II-A of the opinion), Justices Scalia, Roberts, Stevens, Thomas and Sotomeyer first noted that Federal Rule 23 would control if it conflicted with §901(b), and that Rule 23 specifically states that "[a] class action may be maintained" where certain conditions are met. The court then rejected the Second Circuit's holding, ruling that since §901(b) establishes specific conditions under which a suit "may not be maintained as a class action," it could not apply in diversity suits. The court further expanded on this, explaining that Rule 23 explicitly empowers a federal court to certify a class in each and every case where the Rule's criteria are met.
The majority also discounted the dissent's claim that §901(b) could coexist with Rule 23. The dissent had characterized §901(b) as applying only to the remedy that might be available in a class action, as opposed to the question of whether a suit could be maintained as a class action. However, the majority disagreed, again noting that "Rule 23 permits all class actions that meet its requirements." Allowing the imposition of additional requirements--such as those presented by §901(b)--would render Rule 23 partially invalid, the majority ruled.
Justices Scalia, Thomas, Sotomeyer and the Chief Justice further concurred in Parts II–B and II–D of the decision, holding that the Rules Enabling Act (28 U.S.C. §2072), rather than the Erie Doctrine, controls the validity of a given rule. Citing Sibback v. Wilson & Co. (312 U.S. 1, 14 (1941)), the court interpreted Section 2072(b)'s requirement that a rule "not abridge, enlarge or modify any substantive right" to mean that a rule will remain valid only as long as it governs "the manner and the means" by which the litigants' rights are enforced. A rule may not alter "the rules of decision by which [the] court will adjudicate [those] rights," or the available remedies.
Finally, in Part II-C, Justice Stevens distinguished the judgment of the court. First noting that under §2072(b), a federal rule cannot govern when the application of that rule would "abridge, enlarge or modify any substantive right," Justice Stevens argued that there could be rare cases of state law so "bound up" or "intertwined" with substantive rights and remedies that the state law could effectively define the scope of the state-created right and that application of a federal rule in such a case could violate the Rules Enabling Act. The plurality disagreed, concluding that the correct analysis was established in Sibback's single test of "whether a Federal Rule regulates substance or procedure" and that Justice Stevens' approach would be unworkable, as it "would allow States to force a wide array of parochial procedures on federal courts so long as they are 'sufficiently intertwined' with a state right or remedy."
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com
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