Class actions have dual natures. They start out as only individual cases, but they can become massive, collective cases where the rights of absent parties are adjudicated all at once. In most respects, class certification provides the clearest dividing line between when a case is a just a case and when it is a full-blown class action. When that line gets blurred, however, strange results follow.

New York Court of Appeal Decision Requires Needless Notice of Individual Settlements in Putative Class ActionsConsider the New York Court of Appeals’ recent decision in Desrosiers v. Perry Ellis Menswear, LLC. This decision came from consolidated appeals that both raised this question: Under CPLR 908, must notice of an individual settlement be given to the class even if no class is certified? In both cases, the plaintiffs styled their complaints as class actions, but both cases were settled on an individual basis. Even though neither case had a class certified and even though neither settlement purported to affect the rights of absent class members, the cases came to the Court of Appeals from orders requiring that notice be given to class members before the cases could be closed.

The Court of Appeals affirmed, holding that CPLR 908 requires in such circumstances that notice go out to all members of an uncertified class. In other words, in New York, once a case has been styled as a class action, the defendant cannot enter into an individual settlement with the named plaintiff without providing notice to the entire class.

The court reached this conclusion by finding a textual ambiguity. CPLR 908 states:

A class action shall not be dismissed, discontinued, or compromised without the approval of the court. Notice of the proposed dismissal, discontinuance, or compromise shall be given to all members of the class in such manner as the court directs.

The court found the terms “class action” and “the class” to be ambiguous because the terms could mean “a certified class action” or something else such as “a case whose complaint contains class allegations.” It opted to adopt the second meaning, drawing on two sources: federal cases interpreting a previous version of a federal rule and a previous New York lower-court appellate decision from 1982. Neither compelled this conclusion—in particular, even the previous version of Federal Rule 23 was interpreted by most courts to make notice optional in the district court’s discretion.

This case creates serious practical problems for individual settlements.

  • First, who gets notice? Even when drafted by excellent counsel, initial class definitions in complaints are seldom clear enough to specifically identify an exact group of actual people. Some definitions are fail-safe, such as “all persons injured by defendant’s defective product.” Others define unascertainable classes, such as “all persons who relied on defendant’s television advertisements to purchase a product.” In a certified class action, the class definition receives judicial scrutiny and narrowing, which almost always results in changes to the class definition that make it narrower, clearer, and more workable. A major reason for individual settlement in many putative class actions is that the actual members of the class are unknown, impossible to identify in a feasible, cost-effective and efficient way, or not reasonably locatable for purposes of notice.
  • Second, notice costs money. Mailers and advertisements impose real costs that raise the price of litigation, and imposing these costs on individual settlements either raises the cost of settlement (to the defendant’s detriment) or reduces the amount available to the named plaintiff (to the plaintiff’s detriment).
  • Third, what is notice supposed to accomplish? The putative class members’ rights are not affected by an individual settlement, and they would have no standing to object to an individual settlement.
  • Fourth, and most troubling, sending notice of a settlement invites copycats. This ruling basically requires the defendant to run an advertisement that says to any list of people a plaintiff may name as a class “here is how much I paid someone like you for suing me.” That is not a public policy that promotes settlement.

It is not clear that this needless notice rule benefits any party in litigation. We expect that defendants will now refuse to settle putative class actions on an individual basis under this rule.  Why would they settle? The costs of notice and the burden of identifying every class member are incentives to settle putative class actions individually. If a defendant cannot get those benefits, it is has a much stronger incentive to fight. The court may have been thinking that by imposing requirements traditionally reserved for class settlements and litigation of certified classes on purely individual settlements, it has given defendants a stronger incentive to settle on a class-wide basis in order to get class-wide peace, since notice is going to have to be given to the class anyways. But that policy would only make sense if class settlement were a proper judicial or legislative goal in and of itself, which it is not.

The defendant also has all the more reason to remove cases in light of this decision. Desrosiers is limited to New York state court. While the language of CPLR 908 is based on the old federal Rule 23(e), the federal rule was clarified in 2003 to make doubly clear that notice is only required in a certified class or where the proposed settlement would bind class members.