United States: New York's Highest Court: Pre-Certification Settlements Require Classwide Notice

Last Updated: December 14 2017
Article by Robert S. Whitman

Seyfarth Synopsis: The New York Court of Appeals holds that the state's class action rules require notice of settlements to be sent to putative class members – even though no class has been certified.

In a decision sure to send shivers up the spines of wage and hour practitioners in New York, the State's highest court has held that notice of a class action settlement must be distributed to all members of the putative class, even when the settlement comes before a class has been certified.  Together with Cheeks v. Freeport Pancake House, a Second Circuit ruling that pertains to FLSA settlements, the decision erects some very high hurdles for parties seeking early settlements in wage and hour cases in New York.

The case involved appeals in two separate wage and hour cases:  Desrosiers v. Perry Ellis Menswear, brought by an unpaid intern seeking wages, and Vasquez v. National Securities Corporation, in which a financial products salesperson alleged that his pay fell below minimum wage.  Both cases were brought in state court as putative class actions under the New York Labor Law.  Both were settled early – before class certification – but the plaintiffs filed motions seeking leave to send notice of the settlement to members of the putative classes.

In a 4-3 decision, the Court of Appeals (New York's highest court) held that notice is required, even though the classes had not been certified in either case.

At issue was the language of CPLR 908, which states that a class action "shall not be dismissed, discontinued, or compromised without the approval of the court," and that "[n]otice of the proposed dismissal, discontinuance, or compromise shall be given to all members of the class in such manner as the court directs."  The defendants argued that the statute's reference to a "class action" means a certified class action, while the plaintiffs contended "that an action is a 'class action' within the meaning of the statute from the moment the complaint containing class allegations is filed."

Finding ambiguity in the statutory text, the majority looked to the legislative history and other interpretive guidance.  It placed particular weight on the State legislature's failure to amend CPLR 908 in the decades since a 1982 decision from an intermediate appellate court holding that it does apply to pre-certification settlements.  The court held that this failure, in the face of the "sole appellate judicial interpretation of whether notice to putative class members before certification is required," amounts to legislative acceptance of that decision's construction of the rule.

The majority also drew a distinction between CPLR 908 and Federal Rule of Civil Procedure 23(e), on which it was modeled.  Rule 23 was amended in 2003 to provide that a district court is required to approve settlements only in cases where there is a "certified class" and that notice must be given only to class members "who would be bound" by the settlement.  In contrast, CPLR 908 has not be so amended, despite proposals by the New York City Bar Association and scholarly criticisms of the rule.

Thus persuaded that the text of the rule requires notice before certification, the court declined to consider the practical implications of its decision on the desirability of early settlements in class actions:

Any practical difficulties and policy concerns that may arise from [the court's] interpretation of CPLR 908 are best addressed by the legislature, especially considering that there are also policy reasons in favor of applying CPLR 908 in the pre-certification context, such as ensuring that the settlement between the named plaintiff and the defendant is free from collusion and that absent putative class members will not be prejudiced. The balancing of these concerns is for the legislature, not this Court, to resolve.

In dissent, three judges took the majority to task for what they described as an unwarranted reading of the rule in light of the overall context of the class action provisions in CPLR Article 9.  In their view, the fact that the plaintiffs had never moved for, let alone received, a ruling granting class certification meant that the case was not a class action at all.  "In each of the actions here," they said, "plaintiffs did not comply with the requirements under article 9 of the CPLR that are necessary to transform the purported class action into an actual class action, with members of a class bound by the disposition of the litigation."

Responding in particular to the plaintiffs contention that a case becomes a "class action" from the moment it is filed putatively as such, the dissent said:

There is nothing talismanic about styling a complaint as a class action. Indeed, any plaintiff may merely allege that a claim is being brought "on behalf of all others similarly situated." However, under article 9 of the CPLR, the court, not a would-be class representative, has the power to determine whether an action "brought as a class action" may be maintained as such, and may do so only upon a showing that the prerequisites set forth in CPLR 901 have been satisfied.

As we have observed repeatedly in this blog, the Second Circuit's holding in Cheeks, which requires court approval of FLSA settlements and tends to preclude various customary settlement provisions like confidentiality clauses, poses obstacles that may lessen the desirability of settlements in wage and hour cases.  And in Yu v. Hasaki Restaurant, the Second Circuit is now being asked to decide whether court approval is required even for a settlement achieved through an Offer of Judgment under FRCP 68.  Now, with Desrosiers on the books, the challenges for early settlements have been extended to wage hour settlements brought in state court under New York law.  (The case will presumably not apply to New York Labor Law claims brought in federal court, where Rule 23 rather than CPLR Article 9 would apply.)

The lesson for New York practitioners is as simple as it is daunting: if you want to settle a wage and hour case early, be prepared to jump through some significant procedural hoops.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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