Dealing a significant setback to employers, New York’s highest court ruled that any individual settlement in a purported class action requires notice to all potential class members.

The decision was prompted by appeals in two separate wage and hour cases: Desrosiers v. Perry Ellis Menswear, and Vasquez v. National Sec. Corp., each of which involved wage and hour claims asserted by an individual plaintiff on behalf of a purported class of all similarly situated individuals. In both cases, the plaintiff accepted an individual settlement offer prior to moving for class certification, after which the defendants moved to dismiss the complaint. Notably, in both cases, the plaintiff did not oppose the motion to dismiss or otherwise make any effort to obtain class certification. In fact, in Desrosier the deadline by which plaintiff was required to make a motion for class certification expired, so he could not even have made such a motion in the future had he not accepted an individualized settlement offer. Nevertheless, in both cases, the plaintiffs responded to the defendant’s motion to dismiss by cross moving for leave to provide notice of their respective individual settlements to all “putative class members” pursuant to CPLR 908. Ultimately, after the lower courts in these two cases gave conflicting rulings (with one denying the plaintiff’s motion to send the notices and the other granting it), the Appellate Division ruled in favor of the plaintiffs, but granted the defendants leave to appeal to the Court of Appeals.

In a contentious 4-3 decision, the Court of Appeals ultimately held that, notwithstanding the fact that no class had been certified, and the settlements therefore had no impact on the individuals who would fall within the scope of the purported “class” identified in the complaint, a plaintiff who pleads a class action has a “fiduciary obligation” to notify the members of the purported class when he/she reaches an individual settlement with the defendant and seeks to terminate the case. The majority ultimately based its ruling on the language of CPLR 908, which provides that court approval is required in order to dismiss or discontinue a “class action,” 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.” The defendants argued that the statute’s reference to a “class action” obviously meant certified class action, while plaintiffs argued that a case falls within the meaning of the phrase “class action” the moment a complaint containing class-based allegations is filed.

Siding with the plaintiffs, the majority first noted that CPLR 908 was based upon the federal analog, Rule 23, and while the federal rule was amended in 2003 to make clear that its notice requirements only apply to cases that have been certified as a class action, the State Legislature took no such action. Additionally, the majority pointed to a relatively obscure 1982 decision by an intermediate appellate court, which held CPLR 908′s notice requirements apply to pre- class certification settlements, as evidence of the fact that the Legislature was aware of how the language of CPLR 908 would be interpreted, and therefore, its failure to act amounted to a passive endorsement of that decision’s interpretation.

In a blistering dissent, three judges noted that the majority’s interpretation of CPLR 908 not only required courts to treat cases as class actions even though no class has been certified or requested and the parameters of the class have not been established, but also that “[t]here is nothing talismanic about styling a complaint as a class action. Indeed, any plaintiff may merely allege that a claim is being brought ‘on behalf of all others similarly situated.’ However, under article 9 of the CPLR, the court, not a would-be class representative, has the power to determine whether an action ‘brought as a class action’ may be maintained as such…” In addition, the dissent noted that the majority’s decision essentially creates a perverse rule that permits plaintiffs’ attorneys to send targeted solicitations to all of the former and current employees of the defendant, advising them of the fact that their co-worker just received a settlement based on certain allegations and provide them with their contact information. Specifically, the dissent observed that, under the majority’s rule, “the notice would essentially inform putative class members that an individual claim — of which they received no prior notice — was being resolved by an agreement that was not binding on them. [T]he ultimate purpose of the notice appears, at most, to be to allow plaintiffs’ counsel to identify more clients at the expense of the court and defendants.”

The consequences of this decision cannot be understated, as it will dramatically alter the calculus for employers sued with wage and hour or other employment claims in state court, in which the plaintiff merely asserts that the claims asserted in the complaint are pled on behalf of a class of similarly situated individuals – an unfortunate event that is now bound to occur far more often in light of the new incentives for plaintiff’s counsel to simply tack on boilerplate class-based allegations to any type of employment-centered complaint. Indeed, in light of the majority’s decision, it is now clear that, in such cases, employers who would otherwise elect to settle with the plaintiff on an individual basis to avoid costly litigation will now run the risk that doing so will result in giving plaintiff’s counsel the right to notify its entire workforce that one of their co-workers just received a settlement, along with his/her contact information.

Unfortunately, absent legislative action, this is the situation in which New York employers may now find themselves in light of the decision by the Court of Appeals.