United States: Nothing Shady Where State Statutory Language Restricting Class Actions Is Clear

Six years ago, the U.S. Supreme Court stated in a plurality opinion that "Rule 23 unambiguously authorizes any plaintiff, in any federal proceeding, to maintain a class action if the Rule's requirements are met" — even if the same case could not be brought as a class action under state law. Shady Grove Orthopedic Accos., P.A. v. Allstate Ins. Co., 559 U.S. 393, 406 (2010). While the Shady Grove ruling may seem clear when the conflicting state law is purely procedural, what happens when a state statute creates a substantive right of action for specified unlawful conduct but prohibits individuals from seeking relief for such conduct in a class action?

This was precisely the issue before the District Court in South Carolina, where plaintiffs filed a putative class action against Sam's Club for alleged breaches of its Membership Agreement under South Carolina's Unfair Trade Practices Act (SCUTPA). The catch? SCUTPA expressly limits claims to individuals, noting that actions may be brought "individually, but not in a representative capacity." S.C. Code § 39-5-140(a).

Plaintiffs argued that no meaningful difference existed between SCUTPA and the New York statute at issue in Shady Grove or the Alabama consumer protection statute at issue in Lisk v. Lumber One Wood Preserving, LLC., 792 F.3d 1331 (11th Cir. 2015), where the Eleventh Circuit found Rule 23 allowed class actions despite a similar prohibition as found in SCUTPA. (We blogged on the Lisk case on July 29, 2015). The district court disagreed.

First, the court reasoned that the New York statute in conflict with Rule 23 in Shady Grove was purely procedural and thus entirely distinguishable from SCUTPA, which also created substantive rights. The court described the Alabama statute at issue in Lisk, however, as "a closer analogue" to SCUTPA. Nevertheless, the court disagreed with Lisk to the extent that the Eleventh Circuit found the location of the class prohibition in the statute has no impact on the scope of the underlying substantive right. Observing that the class prohibition in SCUTPA is part of the same sentence that conveys the substantive right, the court concluded that the class prohibition in SCUTPA is "so intertwined with the substantive right conveyed" as to render any preemption by Rule 23 a violation of the Rules Enabling Act.

Accordingly, the court granted defendants' motion to dismiss plaintiffs' SCUTPA claim to the extent it was brought in a representative capacity.

Fejzulai v. Sam's West, Inc., Case No. 6:14-cv-03601-BHH (D.S.C., Sept. 7, 2016)

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