Court of Appeals: When a Court Dismisses an Uncertified Class Action, Notice to Class Members is Mandatory

Today, I’m happy to present a guest post by Jared Cook (@jkimballcook on Twitter), an attorney with the Rochester firm Adams Bell Adams, PC. Jared’s practice focuses on civil appeals, construction contract disputes, employment law, civil rights, and class actions. Contact him at jcook@abalawpc.com.

A plaintiff files a complaint with class action allegations, but before he files a motion for class action certification, the parties settle and agree to dismiss the case. New York’s class action rules say that the court can’t dismiss a class action without sending notice to the class members. Does the court have to send notice to the class members, even though a class was never certified? In a four-to-three decision in Desrosiers v Perry Ellis Menswear, LLC (Nos. 121 and 122), the Court of Appeals says yes.

The debate between the majority and the dissent is sort of a classic statutory interpretation debate, pitting textual and policy arguments against arguments that infer legislative intent from legislative inaction in the face of contrary case law. But this case is perhaps unusual because it is the “textualist” dissent that argues policy, while the majority opinion tells the parties to address policy concerns to the legislature, not the courts.

The Majority Opinion

Judge Fahey’s opinion for the majority starts with the statutory text. CPLR 908 says that “[a] class action shall not be dismissed, discontinued, or compromised without the approval of the court.” But because the text neither explicitly limits itself to certified class actions nor explicitly states that it applies to uncertified class actions, the majority finds the text inconclusive. It therefore looks to extra-textual sources to find evidence that the legislature understands CPLR 908 to apply to uncertified class actions.

First, it looks to legislative history. It notes in particular that ABA committees opposed the legislation that would become CPLR 908, and suggested an amendment that would have required notice to the class only after certification, but that the legislature declined to adopt that suggestion.

Second, it looks to federal class action law, noting that CPLR 908 was modeled on then-current federal rule 23(e). Most federal courts of appeal that had addressed the issue at the time that article 9 was enacted held that the notice provisions applied before certification as well as after certification.

Third, the majority looks to legislative inaction. It notes that even though the legislature did amend article 9 on other issues, the legislature made no effort to correct the First Department’s 1982 decision in Avena v Ford Motor Co. (85 AD2d 149 [1st Dept 1982]), which held that notice was mandatory before certification. Nor did it act to bring CPLR 908 into conformity with federal class action law after Congress amended Rule 23(e) in 2003 to require notice only for post-certification dismissals. Based on all this, the majority concludes that the legislature’s understanding of CPLR 908 is that it applies to uncertified class actions as well as certified class actions.

Finally, the majority dismisses policy-based arguments against applying CPLR 908 to uncertified classes, stating that such issues should be addressed to the legislature.

The Dissent

But while the majority sees it as a question of whether uncertified classes are an exception from CPLR 908, the dissent sees it as a question of whether an uncertified class action is even really class action at all. The dissent argues that the term “class action” can only mean “certified class action,” because a “class action” cannot exist until the court adjudges it to satisfy the class action prerequisites set out in article 9. The dissent thus finds fault with the majority’s conclusion that the statutory text is ambiguous in the first place.

The dissent then makes a doctrinal argument that it is a basic principle of class action law that no court can order relief for class members without an order certifying a class and giving notice to class members, and that an order giving notice to members of an uncertified class violates this principle because it provides them with a form of relief. It then makes three related practical policy arguments: first, that a pre-certification notice is meaningless because all it does it tell class members that another person’s claim is being settled by a private agreement that they are not party to and that does not affect their rights; second, that without a class certification order, it will be difficult to even know who the class members are; and third the effect of notice is to essentially identify more clients for the plaintiff’s attorneys at the expense of the court and the defendants.

Finally, the dissent attacks the Avena decision itself. It notes that Avena rests on the idea that class representatives and class counsel have fiduciary duties to absent class members, but the dissent questions whether those fiduciary duties do in fact exist before certification, and notes that Avena cited nothing to support that point. It also attacks the majority’s reliance on federal law, because even under the former Rule 23(e), federal courts held that pre-certification notice was discretionary, not mandatory.

Commentary

Personally, I think the dissent’s reading is more natural in the context of article 9, but I’m not convinced that it’s entirely free from ambiguity—even Judge Stein has to add words to the statute to make his reading unambiguous: he draws a distinction between “purported class actions” (i.e. uncertified classes) and “actual class actions”(i.e. certified class actions). I’m also not entirely convinced by the dissent’s doctrinal/policy arguments. Sure, courts don’t normally order relief for members of classes that don’t get certified, but that doesn’t mean that members of uncertified classes get no relief from class actions. The statute of limitations is normally tolled on the claims of members of a class from the moment the complaint is filed, and putative class members get the benefit of that toll even though the class isn’t yet certified. It isn’t “meaningless” to be informed that you may have a claim on which the statute of limitations is now running. And the concern about identifying class members is always an issue—even in certified classes. A class definition doesn’t become self-executing just because it’s in a class certification order rather than in a complaint. My gut says that the dissent’s third policy argument is what’s really driving the decision: it finds the idea of class action attorneys being able to find new clients from the class notice to just be unseemly.

So what are the practical implications of this decision?

Well, requiring notice to class members even before certification makes pre-certification settlements more expensive and slower. It also makes them more risky: even if the parties do settle the class representative’s claims, an employer or other class action defendant is more likely to face the same class action rebooted a new class representative recruited from the other putative class members who have been notified of the dismissal. This could discourage class action defendants from early settlement with class representatives, but at the same time it may actually encourage class-wide settlement by making it less attractive to simply pick off the lead plaintiff, based on a gamble that the plaintiffs’ attorneys won’t be able to find another class member to pick up the fallen spear and continue the fight. If the employer has to go through notice to class members anyway—and thus risk provoking another class member to become a new class representative, the employer might as well get a release of the class-members’ claims.

On the other hand, this decision might encourage plaintiffs to accept early individual settlements. A class representative and her counsel may often have to choose between a good individual settlement offer and pursuing classwide relief. If the attorneys are serious about pursuing a class action, this can create tension between the interests of the class and the interests of the class representative. Requiring notice to class members buys the class a measure of insurance by making it more likely that the attorneys may be able to find a new class representative. This rule may thus free class action attorneys and plaintiffs to accept attractive individual settlements without entirely giving up forever on classwide relief.

But if plaintiff’s attorneys are not serious about pursuing a class action, this rule should make them think carefully about the decision to include class action allegations in the first place. It may sometimes be tempting for plaintiffs’ attorneys to include class action allegations as a bargaining chip to leverage settlement of an individual plaintiff’s claims. After all, it usually costs nothing to include allegations that you can agree to dismiss later. But with this rule, class action allegations cannot simply be dismissed to sweeten the deal, and the extra cost, time, and publicity of mandatory notice may actually make quick individual settlement harder, not easier. So this decision may discourage class action complaints in borderline cases.

One unanswered question this decision leaves is whether there are other ways to get around CPLR 908. Could attorneys trying to craft a settlement without notice avoid CPLR 908 by jointly moving to strike the class action allegations from a complaint, or to file an amended complaint without class action allegations? My gut says probably not, but from a strict textualist point of view, there’s at least an argument that striking class action allegations or removing them by amending the complaint is not “dismiss[ing], discontinue[ing], or compromise[ing]” a class action, but simply rendering it not a class action, thus leaving it free to be “dismissed, discontinued, or compromised” without class notice. Of course, if this decision stands for the principle, contrary to the dissent’s intuition, that class action attorneys have fiduciary duties to absent class members from the moment they file the complaint, rather than from the moment of class certification, a court could view that kind of creative tactic as a violation of that fiduciary duty.

The Court of Appeals’ opinion can be found here.

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