Guest Blog Post: David Sugerman, "Shady Grove, the Class Action Fairness Act and Laughter: Unintended Consequences of Tort Reform"

I am pleased to present a guest post by Portland, Oregon trial attorney, David F. Sugerman (Twitter: @DavidSug). David is a solo practitioner representing consumers in class action, injury and employment cases. He graduated from the University of Texas (Austin) in 1981 and received his J.D. from Lewis and Clark in 1986.  David was admitted to practice in Oregon in 1986 and tries cases and handles appeals in state and federal courts in Oregon. David serves on the Board of Governors of the Oregon Trial Lawyers Association and co-chairs its consumer law section. For more information or to find his law blog on civil justice issues, go to http://www.davidsugerman.com/.

Shady Grove, the Class Action Fairness Act and Laughter: 
Unintended Consequences of Tort Reform

In the 2005, the second Bush Administration was on a roll in its second term, steamrolling its opponents. They had a strong pro-business majority in Congress, and they ran with it. Congress passed the Class Action Fairness Act, a bill that was part of the Bush administration’s agenda of easing restrictions on corporate actors. They wanted tort reform. That’s what they got.

A digression: That happens in politics. You win a majority, and you pass legislation that favors your interests. It’s odd to hear how the Obama administration is somehow doing horribly undemocratic things by pushing health care reform. It’s a mirror of what happened during the Bush years. (Yes, I’m off the soapbox. Thanks for your patience.)

According to the Chamber of Commerce—one of the Class Action Fairness Act’s proponents—the legislation would help protect large corporations in class action litigation because state courts treated big businesses unfairly in consumer class actions. Tort reformers believed that the federal court system would be much more sympathetic to corporate interests.

The Class Action Fairness Act created a new form of federal jurisdiction that swallows most consumer class actions. The Chamber and its friends got their tort reform wish granted.

Turns out that the Chamber and its friends should have wished more carefully. This week, the U.S. Supreme Court issued its much anticipated ruling in Shady Grove Orthopedic Associates v. Allstate Ins Co., No. 08-1008 2010 U.S. Lexis 2929 (March 31, 2010).  The Court ruled that state procedural rules relating to class actions do not apply when a party files a class action in federal court.

It’s technical and long opinion. Unless you’re a student of procedure, a consumer lawyer or a class action litigator, I probably wouldn’t delve into it. On the surface, the ruling isn’t remarkable. But in fact it’s a profoundly important case for consumers.

I’m going to give away part of the ending right here to help explain why it matters. The Chamber’s push for federal jurisdiction just bit it and big business real hard in the proverbial rear end. The upshot is that federal court isn’t such a friendly place after all.

More background helps explain why that is and the irony that abounds. Many states have enacted consumer protection laws that limit abusive collections practices or deceptive trade practices. In many of the states that provide consumers with rights to pursue claims when a business violates consumer laws. Interestingly, many state rules prohibit or restrict consumer cases in class actions. In New York, where Shady Grove arose, consumers could not bring a class action for statutory damages or interest.

So when Shady Grove filed a consumer class action seeking statutory damages in federal court, Allstate Insurance argued that New York law prohibited consumer class actions for statutory damages. The lower courts agreed. But not the Supreme Court.

In short, the U.S. Supreme Court ruled that when a class action is brought in federal court, the federal rules of procedure apply. So state rules that ban or limit consumer class actions are not enforceable in federal court. How the Court got there is interesting, but this is already long enough.

As a result of the Shady Grove ruling, the various rules limiting class actions that operate in the various states’ courts no longer apply in federal class actions. The ironic result is that federal courts will become a haven for consumer class actions and consumers will be able to pursue all damages—including statutory damages—in federal court class actions. My guess is that the U.S. Chamber of Commerce and its friends is having serious buyers remorse over the Class Action Fairness Act because thanks to them, consumer lawyers may now file class actions in federal court.

So why does this matter?

Some, like Mark W. Bennett , suggest that those of us who are “merely” civil lawyers fight over money and don’t do meaningful legal work. I suppose that’s true of some civil lawyers. But by no means all.

Consumer class actions often take two forms. In the first, consumer lawyers fight off corporate fraud, which often creates lifetime debts. In the second, we take on the “nickel and diming” of illegal charges that multiply into millions. True, the device can be abused. But that’s true of all tools.

So what the U.S. Chamber and its friends unwittingly gave to those of us who toil in the trenches is a lovely tool to fight corporate greed and abuse. And that is where we get the laughter. Not a bad week for consumers, I would say.

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