Under Federal Rule of Civil Procedure 23(e)(1), claims, issues, or defenses of a certified classmay be settled, voluntarily dismissed, or compromised with the court’s approval. While many states look to the Federal Rules for guidance, there can be notable distinctions between Federal Rule 23 and its state counterparts.

One such example is Vasquez v. National Securities Corporation, 2015 N.Y. Misc. LEXIS 1457, at *2 (N.Y. Sup. May 1, 2015), where the New York trial court held that § 908 of Article 9 of the New York Civil Practice Law and Rules (“CPLR § 908”) requires notice to a putative class when an individual settlement is reached prior to a decision on the merits of a motion to dismiss or a class certification motion. The Vasquez court followed Avena v. Ford Motor Co., 85 AD2d 149, 152-53, 447 N.Y.S.2d 278 (1st Dept. 1982), which it saw as binding precedent, despite acknowledging that the defendants and respected commentators had persuasively argued that Avena and its progeny are outdated. 

In Vasquez, the plaintiff worked as a broker for the defendant, National Securities Corporation (“NSC”). Almost six years after his employment ended, the plaintiff brought a putative class action against NSC for its alleged failure to pay minimum wage and overtime, in violation of New York Labor Law. NSC ultimately made a tender offer to the named plaintiff in satisfaction of his individual claim, plus attorneys’ fees and costs. Several weeks later, the plaintiff accepted the tender. The following day, NSC filed a motion to dismiss the case based on the plaintiff’s lack of injury. The plaintiff did not oppose the motion. Rather, the plaintiff moved for CPLR § 908 notice to the putative class prior to dismissal of the action.

New York CPLR § 908 provides that “[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 commented that the wisdom of requiring notice to a putative class upon settlement of the named plaintiff’s claims is debatable. Notice, it stated, can be expensive, and the plaintiff’s settlements have no res judicata impact on the potential class members. Moreover, a court’s screening of settlement terms may be enough to insure protection for all. Alternatively, the court recognized that CPLR § 908 may put interested parties on notice who may object to the settlement and protects potential class members against the running of a statute of limitations. The court looked to Avena, which likened the class representative and his counsel to a “fiduciary” who owed obligations of loyalty to the party he represented and held that court approval and notice under CPLR § 908 were mandatory when a precertification agreement settled only the named plaintiff’s claims.

NSC took the position that any ambiguity in CPLR § 908 should be resolved by reading it in pari materia with Federal Rule 23(e)(1), which the court agreed informs New York’s class action law. NSC argued the court should follow Rule 23 and modern federal case law, which no longer require notice prior to class certification, contrary to Avena and its progeny. While the Vasquez court found NSC’s argument persuasive, it stated that it was bound by Avena, and it therefore granted NSC’s motion to dismiss the action and granted the plaintiff’s motion to compel notice to the class.

The issue raised in Vasquez – the need for class notice prior to class certification – is of particular interest in New York, where the New York City Bar Association has lobbied for CPLR § 908’s amendment. Report By the State Courts of Superior Jurisdiction Committee, Council on Judicial Administration, and Litigation Committee on Class Actions in the New York Courts, Proposed Amendments to Article 9 of the Civil Practice Law and Rules, The Association of the Bar of the City of New York (November 5, 2015). The general purpose of CPLR § 908 notice is to protect the interests of absent class members from a plaintiff using class allegations as a coercive device in a private settlement. New York authority suggests, however, that this fear has been exaggerated. The New York City Bar Association proposes an amendment to CPLR § 908 that would require court approval of precertification dismissals of the named plaintiff and notice to the putative class only upon a finding that notice is necessary to protect the interests of the represented parties and if the cost of notice would not prevent resolution of the action. Note, however, that the proposed amendment to CPLR § 908 would not bring the rule into alignment with Federal Rule 23.

The Vasquez decision is on appeal – oral argument was heard on March 2, 2016.