mediator in new york city

Two recent decisions, Cyan, Inc. v. Beaver County Employees Retirement Fund, 583 U.S. __ (2018), and Desrosiers v. Perry Ellis Menswear, LLC, 2017 NY Slip Op 08620 (2017), hold important ramifications for class action litigation in New York state courts.

In Cyan, a unanimous Supreme Court ruled that under the Securities Litigation Uniform Standards Act, class actions alleging only violations of the 1933 Securities Act may be brought in state court, and are not removable to federal court.  This decision enables plaintiffs to avoid some of the procedural strictures of the Private Securities Litigation Reform Act governing federal class actions, as long as they file their federal 1933 Securities Act claims in state court, and do not also assert in their complaint any class action claim arising under state law.  Most commentators predict Cyan will result in a substantial increase in state court class action filings under the 1933 Act.  Indeed, state courts may become the primary venue for such 1933 Securities Act claims.

Desrosiers, a 4-3 decision by the New York Court of Appeals, made it much more difficult, and expensive, to settle any class action pending in state court.  The Court held, over a strong dissent by Judge Stein, that CPLR 908 requires the parties to give notice to putative class members of a proposed dismissal, discontinuance or settlement, even when no class has yet been certified, even when the time to certify a class has already expired, and even though the proposed settlement would not be binding on anyone other than the named plaintiff.  Desrosiers will undoubtedly discourage pre-certification class action settlements in New York state court, complicating their negotiation, as well making their implementation more expensive.

For example, since a class has not yet been certified, to whom must notice be sent?  This is a threshold issue that will warrant extended negotiation. Because the settlement will have no preclusive effect other than on the named plaintiffs, there is no advantage for defendants to agree on an expansive class definition.   Moreover, the larger the class, the more expensive the notice requirement becomes. Defendants may also be concerned that plaintiffs’ counsel will favor providing notice to a larger class in order to generate future plaintiffs. These considerations also affect the type of notice to be required, as well as the attendant expense (e.g., two mailings or one, mail forwarding, research on new addresses, plus press advertisements, their frequency, and placement).  Finally, the Desrosiers decision raises the ultimate question of why settle a putative class action at all?  If class notice is required, there may be little downside for some defendants to litigate the class certification issue in lieu of settling on an individual basis.   If class certification is defeated, the need for class notice disappears.

The settlement landscape has been further complicated by the Desrosiers Court’s suggestion that plaintiff’s counsel has a fiduciary obligation to putative class members prior to certification of any class.  Moreover, as the dissent noted, under New York law, the cost of providing class notice — which can easily dwarf an individual settlement – is presumptively borne by the plaintiff.  Which party will ultimately bear the cost of notice will become an important element in any negotiated settlement of a putative class action.

It remains to be seen how these conflicting currents play out over time.  However, some conclusions are ineluctable: 1) expect more 1933 Securities Act class actions to be filed in state court; and 2) it just became much more difficult and expensive to achieve a pre-certification class action settlement in New York.

Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com