In this third installment of our ongoing analysis of class actions brought pursuant to CPLR article 9 (1) we discuss the following developments.
First, in 2014 the Court of Appeals rendered a decision in Borden v. 400 East 55th Street Associates, L.P. (2) which clarified its strong commitment to enforcing the broad, liberal goals set forth in the legislative history of CPLR article 9. (3) In doing so, the Court of Appeals encouraged the appellate division and trial courts to take a more aggressive role in certifying a variety of class actions, particularly, those brought by tenants, consumers and employees. (4) As we shall see, the appellate division and the trial courts have responded accordingly.
Second, while the Court of Appeals was expanding the usefulness of CPLR article 9, the U.S. Supreme Court was closing the door on state court consumer class actions (5) with its decisions in AT&T v. Conception, (6) American Express Co. v. Italian Colors Restaurant, (7) and related cases which, relying on the Federal Arbitration Act (FAA), enforced mandatory arbitration clauses, class action waivers, and class arbitration waivers in consumer contracts. (8) To the extent the directives set forth by the U.S. Supreme Court may be circumvented (9) or ameliorated in state courts, (10) the First Department's bold decision in Gold v. New York Insurance Co. (11) expands that circumvention or amelioration to mandatory arbitration clauses in employment contracts. (12) Unfortunately, the U.S. Supreme Court recently decided to enforce mandatory arbitration clauses and class action waivers in employee contracts in Epic Systems Corp. v. Lewis (13) thus rendering the ruling in Gold v. New York Insurance problematic, at best.
Third, disclosure-only settlements, typically entered into pre-class certification, in mergers and acquisitions (M&A) and corporate governance class actions have been widely criticized. (14) In response the Appellate Division, First Department, in Gordon v. Verizon Communications (15) set forth two new factors, in addition to the five factors set forth in Matter of Colt Industries Shareholders Litigation, (16) which serve to guide trial courts in evaluating whether a proposed disclosure-only settlement is beneficial to shareholders and the corporations. (17)
Fourth, the Court of Appeals in Desrosiers v. Perry Ellis Menswear, LLC (18) addressed the issue of whether and to what extent notice should be given to purported class members pursuant to CPLR 908 when a purported class action is settled with court approval prior to class certification. (19)
Fifth, the Fourth Department in DeLuca v. Tonawanda Coke Corp. (20) and the First Department in Roberts v. Ocean Prime, LLC (21) have dramatically changed course and certified mass tort class actions alleging property damage and personal injuries. (22)
Sixth, indirect tax payer class actions have been approved by the Third Department in Matter of New Cingular Wireless PCS, LLC u. Tax Appeals Tribunal. (23)
I. WE ASKED THE COURT OF APPEALS FOR GUIDANCE
In our 2010 article, New York State Class Actions: Make It Work-Fulfill The Promise, (24) we asked the Court of Appeals to take a more active role in providing necessary guidance to the appellate division and the trial courts regarding the use of CPLR article 9: "[a]nd, lastly, the article encourages the New York State Court of Appeals to continue to take a more active role in choosing to hear appeals in class action cases involving a variety of issues, including the granting and denial of class certification (CPLR 901, 902)." (25)
The Beginning of Change
In Koch v. Acker, Merrall & Condit Co., (26) an individual consumer fraud action involving the sale of counterfeit wine, the Court of Appeals determined that both General Business Law ("GBL") section 349 (deceptive and misleading business practices prohibited) and GBL 350 (false advertising prohibited) are certifiable in consumer class actions. (27) In Corsello v. Verizon New York, (28) an inverse condemnation class action, the Court of Appeals held that the case "seems on its face well-suited to class action treatment" because "it would be reasonable to infer that the case will be dominated by class-wide issues  whether Verizon's practice is lawful, and if not what the remedy should be" and that expert testimony could be used to "support an inference" of typicality. (29)
II. BORDEN: SEA CHANGE
In Borden v. 400 East 55th Street Assocs., the Court of Appeals affirmed the certification of three class action lawsuits seeking rent overcharges. (30) The court cited violations of the Rent Stabilization Law of 1969 and made a strong policy statement noting:
[P]ermitting plaintiffs to bring these claims as a class accomplishes the purpose of CPLR 901(b).... [T]he State Consumer Protection Board emphasized the importance of class actions: "The class action device responds to the problem of inadequate information as well as to the need for economies of scale" for "a person contemplating illegal action will not be able to rely on the fact that most people will be unaware of their rights--if even one typical person files a class action, the suit will go forward and the other members of the class will be notified of the action." (31) A. Borden and CPLR 901(b)
In Borden, the Court of Appeals clarified the scope of CPLR 901(b) which provides, in part, that "an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action" unless authorized by the statute creating the penalty. (32) The Court of Appeals held that in many class actions the penalty provisions of a statute may be waived as long as class members have an opportunity to opt out of the class and seek individual relief. (33) CPLR section 901(b) is no longer followed by the federal courts (34) and should be repealed. (35)
III. DISCLOSURE-ONLY SETTLEMENTS
Disclosure-only settlements have been strongly criticized. (36) In City Trading Fund v. Nye the trial court noted,
In sum, when the original alleged omissions and supplemental disclosures are closely scrutinized, it is clear that they are not only immaterial, they are grossly immaterial. None of the supplemental disclosures "significantly altered the 'total mix' of information made available." .... [T]he ubiquity and multiplicity of merger lawsuits, colloquially known as a "merger tax", has caused many to view such lawsuits with a certain degree of skepticism. The lawsuits are filed only a relatively short time before the shareholder vote, and all it takes is a remote threat of injunction or delay to rationally incentivize settlement, even if defendants firmly and rightfully believe the lawsuit has no merit.... .... The defendant corporation's cost-benefit calculus almost always leads the company to settle. Even a slight [chance] of an adverse outcome will induce a company to rationally settle given the costs.... Yet, notwithstanding the current climate of merger litigation, this case still stands out. It stands out for its downright frivolity. (37) A. Enhanced Standard
In Gordon v. Verizon Communications, Inc., the First Department, after noting that "[m]ore than two decades of mergers and acquisitions litigation... have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel," (38) reviewed the proposed settlement applying the five factors in Matter of Colt Industries Shareholders Litigation (likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith and the nature of the issues of law and fact) and added two more factors (class benefit and corporate benefit). (39) After reviewing the benefits of each of the four proposed disclosures in Gordon, the First Department noted that "[t]he most beneficial aspect of the proposed settlement to the shareholders... was [the] inclusion of a fairness opinion requirement.... This prospective corporate governance reform provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination." (40) In addition, the First Department held that the proposed settlement would reflect Verizon's "direct input into the nature and breadth of the additional disclosures... and the corporate governance reform" and Verizon would not "hav[e] to incur additional legal fees and expenses of a trial." (41) "[W]e find that the proposed settlement meets the enhanced standard we announce here." (42)
IV. MANDATORY ARBITRATION CLAUSES
As the Court of Appeals and the appellate division were opening the door for consumers, tenants and employees to file class actions, (43) the U.S. Supreme Court was closing the same door for consumers (44) and, perhaps, for employees. (45) One need only read Justice Ginsburg's dissent in Direct TV, Inc. and the New York Times article cited therein (46) to understand that meaningful consumer remedies have nearly been extinguished. Justice Ginsburg stated that "[t]hese decisions have predictably resulting in the deprivation of consumers' rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws." (47)
As noted by the California Supreme Court in Sanchez v. Valencia Holding Company, (48) Concepcion "reaffirmed that the FAA does not preempt 'generally applicable contract defenses, such as fraud, duress, or unconscionability.' Under the FAA, these defenses may provide grounds for invalidating an arbitration agreement if they are enforced evenhandedly and do not 'interfere with fundamental attributes of arbitration.'" (49) And, indeed, there are ways in which to circumvent Concepcion depending upon the facts of each case. (50)