Looking for trouble: Finding direct conflicts between Federal Rules of Civil Procedure and state

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1 Looking for trouble: Finding direct conflicts between Federal Rules of Civil Procedure and state substantive law Introduction In this essay I argue that the decision in Shady Grove v. Allstate is untenable and necessitates a reexamination of the Supreme Court s holding in Hanna v. Plumer that in diversity cases Federal Rules of Civil Procedure are always valid and trump state law if they are arguably procedural. Instead, in cases where application of a Federal Rule would preempt a substantive state law, thereby modifying a substantive right, a court should either read the Federal Rule narrowly to allow the state law to control the case, or hold that the Rule exceeds the bounds of authority in the Rules Enabling Act. Shady Grove is a perfect example of the danger inherent in a murky definition of the limits of Congress power to regulate court procedure. The prima facie validity of the Federal Rules of Civil Procedure deserves reconsideration when they threaten to overwhelm substantive state law. Federal district courts sitting in diversity follow two independent choice-of-law principles. They apply the substantive law of the state in which they sit when failure to do so would lead to forum shopping and disparate litigation outcomes, as required by Erie. 1 On the other hand, procedure in diversity cases is governed by the Federal Rules of Civil Procedure. The court applies the relevant Federal Rules as long as they both cover the issue and are valid under the Rules Enabling Act. 2 The Supreme Court, in Hanna v. Plumer, held that a Federal Rule that is arguably substantive or procedural is likewise controlling as long as it does not 1 Shady Grove, (Ginsburg, dissenting), at 9, col Id. 1

2 exceed the scope of the Rules Enabling Act. 3 That Act provides that a Federal Rule cannot abridge, enlarge or modify any substantive right. 4 Hanna should be reexamined because application of Federal Rules to matters that are arguably procedural or substantive has too much potential for modifying substantive state rights. While Hanna laid down the principle that a Federal Rule of Civil Procedure preempts state law when the former can be rationally classified as either procedural or substantive, expanding the possibility for finding a direct conflict between the two areas, the wisdom of that broad grant of federal power deserves another look in light of the Supreme Court s recent decision in Shady Grove. Instead, when a rule is arguably substantive or procedural, a court should inquire whether application of the Federal Rule would abridge, enlarge, or modify a substantive right. If it does, then the Federal Rule should either be read narrowly or should no longer enjoy its presumptive validity. The Rules Supreme: Sibbach and Hanna The Supreme Court first addressed the proper role of the Federal Rules in diversity cases in Sibbach v. Wilson 5. The Court began by upholding the constitutionality of the Federal Rules, authorized by the Rules Enabling Act, as a valid exercise of congressional power to regulate federal courts. 6 A Federal Rule is valid under that Act, and therefore obligates a court to follow it rather than a contrary state practice, if it really regulates procedure the judicial process for enforcing rights and duties recognized by substantive law, and for justly administering remedy 3 Hanna, at 3, col Shady Grove, at 8, col Sibbach, at 9, col Id.; See U.S. CONST. art. III. 2

3 and redress. 7 However, a Rule cannot abridge, enlarge, nor modify the substantive rights in the guise of regulating procedure. 8 The Rule at issue in that case was upheld despite its effect on substantive rights because it really did regulate procedure, any side effects on substantive rights notwithstanding. 9 The Supreme Court reaffirmed and expanded the really regulates procedure test in Hanna v. Plumer. 10 The Court, in upholding Federal Rule 4(d)(1), a rule that prescribed the manner in which a defendant is to be notified that a suit has been instituted against him, 11 emphasized that unlike in Erie cases, a court evaluating a Federal Rule for validity should be mindful that certain housekeeping functions inherent in Congress power to regulate the judiciary will naturally produce variations in the forms and mode of enforcing the right because the two judicial systems are not identic. 12 Hanna expanded the scope of the REA in holding that it covered matters which, though falling within the uncertain area between substance and procedure, are rationally capable of classification as either. 13 Hanna was also the first case in which the Supreme Court found a direct conflict between a Federal Rule of Civil Procedure and a state law. 14 The Federal Rule won. 15 Shady Grove v. Allstate: The exception swallowed by the Federal Rule 7 Sibbach, at 10, col Sibbach, at 9, col Sibbach, at 10, col See Hanna, at 2, col. 2-3, col Hanna, at 2, col Sibbach, quoting Guaranty Trust Co. of New York v. York, at 3, col Hanna, at 3, col See Hanna, at 3, col Hanna, at 3, col. 2. 3

4 The Supreme Court found another direct conflict between a Federal Rule and a state law forty-five years later in Shady Grove v. Allstate. 16 Federal Rule of Civil Procedure 23 allows a plaintiff to maintain a class action if certain requirements were met 17, while a New York statute prohibits a plaintiff from maintaining a class action seeking statutory penalties. 18 Justice Scalia, writing for the Court, held that two laws were in direct conflict because they answered the same question in opposite ways. 19 Accordingly, the Federal Rule controlled and the class action was maintained despite the fact that it sought relief unavailable in state court. 20 Justice Ginsburg s dissent argues that there is no direct conflict between the two rules at issue because the Federal Rule defines the method of enforcing a claim for relief, while the New York statute only limits the remedy available. 21 However, this distinction is not supported by the text of the New York statute, which discusses not the availability of the remedy but the ability of the plaintiffs to maintain the cause of action. Justice Scalia s argument relies heavily on the New York statute s language that a cause of action may not be maintained to find that it is procedural rather than substantive, and therefore that the Federal Rule controls. 22 However, his textual argument does not address the ambiguity in the text itself: whether the New York statute is intended to be procedural or substantive (as the Court of Appeals found 23 ). Consider a hypothetical state statute providing that A cause of action for negligence may not be maintained if the plaintiff was trespassing upon the defendant s land at the time of the injury. The relevant language is essentially the 16 Shady Grove at 7, col Id. 18 New York Civil Practice Law 901, at 6, col Shady Grove, at 7, col See Shady Grove, at 7, col. 1-8, col Shady Grove, (Ginsburg, dissenting), at 9, col Shady Grove, at 7, col Shady Grove, at 7, col. 1. 4

5 same as the New York statute, but this statute would undeniably be a substantive law. 24 In New York, a class action is not a procedural device but a statutory cause of action with statutory restrictions. If the ability to maintain a statutory cause of action is a state-created substantive right, and if the ability to maintain a class action is another state-created substantive right, as both seem to be in this case, then the proper reading of Rule 23 is that it governs the application of the underlying state law claim just as all of the Federal Rules do. Without the underlying state law cause of action, there is no diversity case, and Rule 23 does not cover the point. Allowing the application of the Rule solely because it is arguably procedural wipes out the substantive state law. Justice Scalia s textual argument also omits consideration of other important text not in the New York statute: the Rules Enabling Act. The Federal Rules are not to abridge, enlarge or modify any substantive right. 25 While the text of Rule 23(a) does not seem to modify any substantive rights because it only prescribes a form by which an action may be maintained in court, in this case (and others in which state legislatures, mindful of the costs of litigation and the potential for abusive class counsel, have placed restrictions on state law class actions) a substantive right is being created because the plaintiffs would have no right to pursue the class actions under state law. 26 The Rule also abridges a substantive right because it removes the immunity from statutory penalties that class-action defendants previously enjoyed in New York. 24 See Hanna, at 7, col Shady Grove, (Ginsburg, dissenting), at 8, col Cf. Justice Scalia in Shady Grove, at 7, col. 2: By its terms this creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action. (emphasis added) 5

6 Rule 23 in this application goes beyond the judicial process for enforcing rights and duties recognized by substantive law, 27 because it essentially creates a previously unavailable cause of action. Were the Federal Rules created for the first time today, Rule 23 would of course create a new right for New York class plaintiffs. This isn t a case of the same law being applied in different procedural ways in different courts; Rule 23 created a right to seek class certification for statutory penalties in New York that is not available in that state s courts. Justice Scalia argues that a rule like the one proposed in this essay would lead to various forms of confusion and inconsistency as district courts try to figure out which state laws are substantive and which are procedural. 28 However, district courts sitting in diversity already spend their time interpreting state law. Statutes like New York s also make the issue abundantly clear by simply stating whether or not a cause of action exists. Laws regarding pleading standards and other procedural issues have policy motivations behind them 29, but involve enforcement of the right rather than the existence of the right itself. A Federal Rule that creates a right, rather than determining the mode of enforcing it, is a brightline standard for one that should not trump state law. Rule 23 s creation of the class action right is not supported by either Sibbach or Hanna. Sibbach upheld the Rules Enabling Act precisely because it was confined so sharply to matters of pleading and court practice and procedure. 30 The Court emphasized that the restriction on modifying rights highlighted the Rules Enabling Act s narrow field of authority. 31 For example, 27 Sibbach, at 10, col Shady Grove, at 8, col Id. 30 Sibbach, at 9, col Id. 6

7 a Federal Rule could not be used to modify the jurisdiction granted to a court by statute. 32 However, a Federal Rule s effect on substantive rights is immaterial if it really procedural. 33 Rule 23 goes beyond the kind of purely procedural rules contemplated in Sibbach. It is not enforcing rights and duties recognized by substantive law. 34 Application of Rule 23 in this case leads to enforcement of a right that is expressly not recognized by substantive law. Shady Grove also goes beyond the kind of rules contemplated in Hanna. That case spoke of housekeeping rules, 35 that are allowed to alter the mode of enforcing state-created rights. 36 Because Rule 23 in this case does not alter the mode of enforcing a state-created right, but creates a right that does not exist at state law, it goes well beyond the housekeeping rules contemplated in Hanna. Shady Grove also threatens the federalist separation of state and federal law, as manifested in state legislatures ability to control their substantive state law. Justice Ginsburg is correctly concerned with the state interests at stake. 37 The New York legislature found it necessary to limit class action recovery for statutory penalties by statute, at least partially out of a concern that such recovery was unfair to defendants. 38 However, Federal Rule 23 essentially nullifies this statutory provision and alters the landscape of class action litigation in New York by providing for an alternative forum where an additional cause of action exists. As long as plaintiffs meet the requirements for diversity cases, for which the availability of statutory penalties will undoubtedly be useful, they will always have the option to file in federal court no 32 Id. 33 Sibbach, at 10, col Id. 35 Hanna, at 3, col Hanna, at 3, col Shady Grove, (Ginsburg, dissenting), at 9, col Shady Grove, at 8, col. 1. 7

8 matter what the state legislature does because of the arguably procedural Federal Rule. Erie was not decided to allow the federal government to rewrite the several states substantive law in this manner. Conclusion Shady Grove should be seen as a warning that Hanna s broad grant of federal authority over both procedural and substantive law in diversity cases is beginning to spill over into substantive state law. The Rules of Civil Procedure, though they exist to provide uniformity among federal courts and derive their authority from a congressional statute, risk interfering with state substantive law when they purport to authorize certain causes of action. While there will always be a tension between horizontal uniformity between federal courts and vertical uniformity between state courts and their corresponding federal courts, the Hanna rationally capable of classification as either standard draws too wide of a net in favor of federal authority, contrary to the reasoning behind the original cases upholding the Rules Enabling Act and the policy considerations behind Erie. New York s statute is an indication that states still believe it is necessary to retain control over the remedies available to their citizens. Foreclosing any such control with a blanket Federal Rule authorizing class actions is too inflexible in our federal system. When state legislatures put restrictions on the prosecution of class actions, Rule 23 should either be read narrowly so as not to interfere with state substantive law or should be held to transgress the Rules Enabling Act. 8

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