United States: Class Actions In New York – Pre-Certification Settlement Just Got A Lot Harder

Last Updated: February 14 2018
Article by Jamie Haar and Diane Krebs

On December 12, 2017, in a surprising move, the New York State Court of Appeals, in a 4-3 decision, held that CPLR 908 requires the parties to a potential class action to give notice to putative class members of a proposed dismissal, discontinuance, or compromise. Put more plainly, the court held that, where a complaint containing class allegations – a relatively simple thing to do – is settled or dismissed before a class has been certified by a court, a notice of the impending settlement must nevertheless be sent out to potential class members, even though the settlement is not binding on them. As explained further below, this decision is going to create great confusion and difficulty for both plaintiffs and defendants.

The case, Desrosiers v. Perry Ellis Menswear, LLC, 2017 NY Slip Op 08620, is a combined decision based on two different and unrelated appeals.  In the first case, the plaintiff Geoffrey Desrosiers worked as an unpaid intern for Perry Ellis Menswear, LLC.  He commenced a class action to recover wages on behalf of himself "and similarly-situated individuals."  In the second lower court case, the plaintiff Christopher Vasquez was employed by National Securities Corporation as a financial products salesperson and filed a class action on behalf of himself and "all similarly-situated individuals" for alleged minimum wage and overtime violations. In both cases, each defendant sent its plaintiff an offer of compromise or settlement, which both plaintiffs accepted before any class was certified. Indeed, in the Desrosiers case, the time to move for class certification had expired.

Both defendants moved to dismiss their respective complaints, and both plaintiffs filed a cross-motion seeking leave to provide notice of the proposed dismissal to putative class members pursuant to CPLR 908.  CPLR 908 states that "a class action shall not be dismissed, discontinued, or compromised without the approval of the court," and "notice of the proposed dismissal, discontinuance or compromise shall be given to all members of the class in such manner as the court directs."  Both defendants in essence argued that Section 908 was inapplicable because without a certified class, there was no "class action," only a potential class.

In both cases, on appeal, the First Department held that the notice requirement of CPLR 908 applied despite the absence of a certified class.  In Desrosiers, the court held the notice requirement "is not rendered inoperable simply because the time for the individual plaintiff to move for class certification has expired," and notice to putative class members is "particularly important ... where the limitations period could run on the putative class members' cases following discontinuance of the individual plaintiff's action."  In Vasquez, the First Department followed the ruling in Avena v. Ford Motor Co., 85 A.D.2d 149 (1st Dep't 1982).  In Avena, the trial court refused to approve a settlement between the parties before providing notice to the putative class members.  The court in Vasquez reasoned that "the legislature, presumably aware of the law as stated in Avena, had not amended CPLR 908." The First Department further opined that "potential for abuse by private settlement at this stage is  ... obvious and recognized" and characterized a named plaintiff as fiduciary to putative class members (even though a pre-certification settlement has no binding effect on anyone other than the named plaintiff).

The Court of Appeals majority affirmed both decisions. First, on the issue of statutory interpretation, it strangely found the language in CPLR 908 to be ambiguous, because the phrase "class action" in the statute does not have any modifier such as "certified" or "putative." The Court next turned to multiple sources outside the statutory text, including the old Rule 23 of the Federal Rules of Civil Procedure, on which CPLR Article 9 was modeled, in an attempt to interpret the language in the statute.  It determined that these sources could support the requirement of a pre-certification class notice of settlement/dismissal. The Court also considered the decision in Avena, the only appellate-level decision to address this issue. It put a lot of emphasis and weight on the fact that Avena has not been overruled since it was decided in 1982, nor has the legislature amended CPLR 908 since then.  The majority found that the legislature's refusal to amend CPLR 908 since Avena indicates that the Avena decision correctly ascertained the legislature's intent. Finally, the majority pointed to policy considerations, including ensuring that settlements are free from collusion and that absent putative class members are not prejudiced. The majority brushed off any concerns about practical difficulties that could arise from this decision, claiming that they were best addressed by the legislature, not the courts.

With this holding, there are several important practical considerations and questions left unanswered, and the majority refused to even touch upon how those difficulties should be addressed. Some of those include the following:

  • First and foremost, who is a member of the class to whom notice must be sent? As Judge Stein stated in his scathing dissent, "because no class had been certified under CPLR 902, it is unclear to whom notice was purportedly required. Not only would this uncertainty create administrative difficulties that would entail the expenditure of time and resources ..., the ultimate purpose of the notice appears, at most, to be to allow plaintiffs' counsel to identify more clients at the expense of the court and defendants."  There is no guidance as to how the "notice class" should be decided, but that is certainly going to generate more litigation and increase the cost of settling a case pre-certification.
  • Following this reasoning, the dissent identified a second problem, which triggers ethical concerns: isn't mandating notice pre-certification a form of solicitation?  Certainly, defendants need to be concerned that requiring this notice defeats part of the purpose of settling pre-certification, because it will give plaintiff's counsel access to data regarding other employees (or, as plaintiff's law firms like to call them, "future clients").
  • What is proper notice?  Again, this will likely require additional litigation within a matter to have the court approve a proposed notice.  Moreover, the language will need to make clear to the recipients that the settlement described in the notice has no practical impact on them, as they are not bound by it and will receive no funds as a result of it.
  • Why even have an early settlement any more? As the dissent noted, the majority's rule discourages settlement, because notices (and thus class data) are required even if the parties settle on an individual basis.  It thus may make more sense for defendants not to settle but to instead fight the certification process.
  • That brings up a more fundamental problem:  is notice required to putative members if a court denies class certification?  Presumably, if the court denies class certification, the case is no longer even a potential class action, but the dissent noted that the majority's decision is unclear regarding this issue.

While we cannot predict how the lower courts will interpret and decide these questions, nor can we predict if the New York legislature will weigh in now that it has been called out by the Court, members of both the plaintiff and defense bars need to prepare their clients for a long road ahead.  Moreover, a critical tool for keeping costs down has now been removed from the defense arsenal. And this decision has immediate impact, including on currently-pending cases, so companies will need to immediately rethink their strategies.

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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