The Fourth Circuit Advises Class Action Plaintiffs that Shady Grove Does Not Provide a License to Bypass All State Procedural Rules

   In March, 2010, the U.S. Supreme Court issued an important ruling in Shady Grove Orthopedic Associates v. Allstate Insurance Co., 130 S. Ct. 1431 (2010) that opened the federal courts to plaintiffs as a forum for class actions. However, the Fourth Circuit Court of Appeals recently advised putative class action plaintiffs that the door opened by Shady Grove is not as wide as they may have hoped.

   The Shady Grove plaintiff filed a class action in federal court based on diversity jurisdiction and sought state statutory penalties in spite of a New York state statute that prohibited class actions in cases where penalties or statutory minimum damages were sought. The Supreme Court permitted the plaintiff to pursue the federal class action, holding that the state law was procedural and did not trump Federal Rule of Civil Procedure 23 which provides the requirements for bringing a class action in federal court. Shady Grove was viewed as an important, albeit not exciting, ruling that may negatively affect corporate defendants and lead to forum shopping by plaintiffs. See discussion on Shady Grove by the Wall Street Journal here and Forbes here.

   Putative class action plaintiffs have attempted to rely on Shady Grove as authority to abandon all state procedural rules for the safe harbor of the federal class action. The Fourth Circuit admonished such putative class action plaintiffs in its recent unpublished decision, Mitchell-Tracey v. United General Title Insurance Co., No. 10-2387 (4th Cir. Aug. 2, 2011). The plaintiffs in Mitchell-Tracey had failed to exhaust all state administrative remedies required under the state insurance code prior to filing a federal class action, arguing that Shady Grove permitted them to proceed. The Fourth Circuit countered:

Plaintiffs read Shady Grove at a level of generality that is simply unsupported by its text. Shady Grove addressed an explicit state-law prohibition on class-action suits that expressly contradicted Fed. R. Civ. P. 23. [citation omitted]. The Supreme Court did not consider exhaustion or similar state-mandated intermediate procedures. Nor can we discern any basis on which to read it as excusing named class-action plaintiffs from the threshold procedural requirements that they would face as individual litigants.

   Mitchell-Tracey, No. 10-2387 at *9. Shady Grove may have opened the door to federal class actions where a state class action could not persist, but it does not appear that the Fourth Circuit will treat it as a free pass to putative class action plaintiffs to bypass all state procedural barriers.

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