New York state law imposes a 2% monthly interest penalty on overdue payments of insurance benefits. In this case, plaintiffs filed a class action lawsuit in federal court based on diversity of citizenship claiming that Allstate failed to pay this penalty on overdue payments. Under the well-known Erie Doctrine, federal courts exercising diversity jurisdiction (as in this case) apply state substantive law and federal procedural law. If the source of the federal procedure is the Federal Rules of Civil Procedure (FRCP), federal rules trump state law if they conflict with one another.
Allstate moved to dismiss, arguing that the federal class action was barred by Section 901(b) of the New York Civil Practice Law and Rules (CPLR), which prohibits a class action for recovery of a New York statutory penalty. The trial court granted Allstate’s motion.
The Second Circuit affirmed after applying the Erie Doctrine. It held that the New York rule is substantive and does not conflict with the federal rule governing class actions. Additionally, allowing this case to proceed as a class action in federal court would circumvent state policy and lead to forum shopping, both of which go against the aims of the Erie Doctrine.
On 3/31/10, the Supreme Court reversed, holding that Federal Rule 23 allows class actions like this. The splintered decision can be expected to generate additional litigation. The ruling provides an incentive to plaintiffs to bring class actions in federal court where state procedures limit such suits.