In a first-of-its-kind opinion that could open the class action flood gates, the Eleventh Circuit has held that state consumer fraud class actions may proceed in federal court even if the state consumer fraud statute expressly forbids class actions. If other courts follow suit, plaintiffs in at least eight other states that currently prohibit consumer fraud class actions (Georgia, Iowa, Louisiana, Mississippi, Montana, South Carolina, Tennessee, and Virginia) can circumvent these prohibitions simply by filing in federal court.

In Lisk v. Lumber One Wood Preserving LLC, No. 14-11714, — F.3d —, 2015 WL 4139740 (11th Cir. July 10, 2015), the plaintiff, Robert Lisk, installed a wooden fence at his home in Alabama. The wood for the fence originated with defendant Lumber One Wood Preserving LLC (“Lumber One”) and passed through several intermediaries before being purchased by Mr. Lisk. On its website and in its product literature and labeling, Lumber One warranted that the wood was treated to prevent rot, fungal decay, and termites for at least 15 years. According to Mr. Lisk, these representations were false and the wood had not been treated at all. As a result, his fence experienced significant rot after just three years. After he began to experience problems, Mr. Lisk learned that other customers had had similar experiences.

Mr. Lisk filed a putative nationwide class action against Lumber One in the District Court for the Northern District of Alabama. The basis for federal jurisdiction was the Class Action Fairness Act (“CAFA”). Lumber One moved to dismiss the class allegations under the ADTPA, arguing that the Alabama statute expressly forbids private class actions. Specifically, Lumber One pointed to Ala. Code § 8-19-10(f), which states “a consumer or other person bringing an action under [the ADTPA] may not bring an action on behalf of a class.” The district court agreed that the ADTPA bars class actions by private consumers and dismissed the class allegations. After dismissing other claims, the district court concluded that it lacked subject matter jurisdiction under CAFA for Mr. Lisk’s individual ADTPA claim and dismissed that claim as well.

The Eleventh Circuit reversed. It concluded that Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559 U.S. 393 (2010) was directly on point. In that case, the plaintiff brought a New York state-law claim for a statutory penalty in federal court. A New York statute, which applied generally to all class actions, prohibited any class action for a statutory penalty. Thus, if the case had been in New York state court, it would have been barred as a matter of law. A majority of the Supreme Court agreed that the New York statute conflicted with Rule 23, which, it said, established a categorical rule allowing claims that meet certain requirements to proceed as a class action. Five justices also concluded that applying Rule 23 in Shady Grove would not abridge, enlarge, or modify any rights created by New York’ substantive law, though the reasons for their conclusions differed. Thus, Rule 23 trumped New York’s class-action prohibition.

The Lisk court held there was no meaningful distinction between New York’s procedural rule and the ADTPA’s class action prohibition. This conclusion is questionable because the statute in Shady Grove applied generally to all class actions whereas the ADTPA’s class-action prohibition is incorporated into the same statutory provision allowing consumers to bring suit. See Ala. Code § 8-19-10(a) & (f). Indeed, the Lisk district court cited twelve district court opinions concluding that “if the [class action prohibition was] found within the text of a state statute that confers a substantive right and applies only to cases brought under the statute, it is so intertwined with a state’s substantive remedies that applying Rule 23 in its stead would abridge, enlarge, or modify a substantive state-created right.” 993 F. Supp. 2d 1376, 1383-84 (N.D. Ala. 2014). The Eleventh Circuit addressed this concern, saying “[s]urely the New York legislature could not change the Shady Grove holding simply by reenacting the same provision as part of the [statute creating the substantive claim].” The Court then concluded that the substantive rule of decision was whether Lumber One had violated the ADTPA. This substantive obligation, it said, would not be abridged, enlarged, or modified by allowing a class action to proceed under Rule 23.

If Lisk is allowed to stand, federal courts around the country can expect class action filings to increase as plaintiffs look to sidestep state-law class-action prohibitions. Ironically, these plaintiffs may find it easier to get into federal court under CAFA, a statute that Congress enacted to rein in class action litigation.

Balch & Bingham LLP has substantial experience defending class actions in both state and federal court. For more information, please contact Greg Cook at gcook@balch.com or (205) 226-3426.