Legal Alert

N.Y. Decision May Hinder Early Class Action Settlements

January 4, 2018

The decision of the New York Court of Appeals, in Desrosiers v. Perry Ellis Menswear, LLC., and in Vasquez v. Nat'l Sec. Corp., has created a potential obstacle to early class action settlements in cases filed in New York state courts. Resolving an ambiguity in New York law, the court held that Rule 908 of the New York Civil Practice Law and Rules requires all members of a putative, uncertified class action to be notified of a proposed settlement, discontinuance, or dismissal. In contrast, Federal Rule of Civil Procedure Rule 23 only requires notice of a proposed settlement to members of a certified class.

Rule 908 provides 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."

In Desrosiers, the plaintiff brought a putative class action alleging that the defendant improperly classified employees as interns, and sought wages on his own behalf and on behalf of similarly situated individuals. After the parties agreed to a settlement on an individual, non-class basis, the defendant moved to dismiss the case. The plaintiff then filed a motion seeking leave to provide notice of the proposed dismissal to all putative class members. The motion was opposed by the defendant based on the argument that the plaintiff had not moved for class certification within the required time. The trial court denied the motion and dismissed the case.

In reversing the lower court's denial of the motion, the Appellate Division ruled that Rule 908 was "not rendered inoperable simply because the time for the plaintiff to move for class certification [had] expired." The Appellate Division observed that notice to putative class members was particularly important where the statute of limitations could run on the putative class members' cases following discontinuance of the individual plaintiff's action.

In Vasquez, an employee of the defendant brought a putative class action claiming that the compensation paid by the defendant fell below the required minimum wage and sought unpaid wages and overtime on behalf of himself and all similarly situated individuals. As in Desrosiers, after the defendant made an individual settlement offer that was accepted by the plaintiff, the defendant moved to dismiss and the plaintiff moved for leave to provide notice of the proposed dismissal to all putative class members. However, unlike Desrosiers, the trial court granted the plaintiff's motion but directed that the case not be marked dismissed until notice was given. The Appellate Division unanimously affirmed.

Ruling on the appeals in both cases, the Court of Appeals held that because Rule 908 does not distinguish between certified and uncertified class actions, the notice requirement applies to both. The court observed that only one 1982 appellate-level decision, Avena v. Ford Motor Co., had addressed this issue. In Avena, the Appellate Division affirmed a trial court decision that refused to approve an individual settlement in a putative class action without first providing notice to the putative class members, even though the class was uncertified. The Court of Appeals found that the absence of any legislative action since Avena (e.g., clarifying that such notice is not required) was "persuasive evidence" that the legislature intended Rule 908 to require such notice.

The Court of Appeals' decision means that all putative class members in a case filed in a New York state court must receive notice of proposed dismissals, discontinuances, and compromises, whether or not a class has been certified. Such notice may not increase the cost of an individual settlement, but may increase the likelihood that an absent class member will seek to pursue an individual claim and/or the class claims that had been initiated by the settling named plaintiff. On the other hand, as the dissent indicates, because the plaintiff presumptively would bear the cost of providing notice, plaintiffs' attorneys may be less likely to bring some class claims in the first place.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance, including pioneering work in pre-dispute arbitration programs. Ballard Spahr's Bankruptcy, Reorganization and Capital Recovery Group advises on all facets of financial distress, including restructurings, workouts, refinancing of debt, creditor-debtor litigation, asset dispositions and recapitalizations, reorganizations, and liquidations.

Copyright © 2018 by Ballard Spahr LLP.
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