Class Action Settlement Must Include Opt-Out Rights

On May 5, 2016, the Court of Appeals issued a decision in Jiannaras v. Alfant, 2016 NY Slip Op. 03548, upholding Supreme Court and Second Department rulings that refused to approve a class-action settlement on the grounds that it did not permit out-of-state class members to opt out.

The plaintiffs had brought actions in New York and Delaware against the directors of a publicly-held corporation that merged with Google in 2009, seeking "mostly equitable relief." The various plaintiffs and defendants agreed to a settlement, which was filed in Supreme Court. The settlement included a release of "any and all merger-related claims," and did not provide for opt-out rights. Although Supreme Court found that the settlement was "fair, adequate, reasonable, and in the best interest of the class members," it refused to approve the settlement because it did not permit out-of-state class members to opt out. The Appellate Division, relying on Matter of Colt Industries Shareholder Litigation, 77 N.Y.2d 185 (1991), affirmed.

In Phillips Petroleum v. Shutts, 472 U.S. 797 (1985), the United States Supreme Court held that "due process requires opt-out rights in actions wholly or predominately for money damages." (Emphasis by Court of Appeals). In Matter of Colt, the Court of Appeals extended the rule, holding that although there is no opt-out right for class actions seeking relief largely equitable in nature, "once the parties presented the court with a settlement that required the class members to give up all claims in damages, the nature of the adjudication changed dramatically," and that the New York court could not "bind class members with no ties to New York State to a settlement that purported to extinguish [their] rights to bring an action in damages in another jurisdiction."

The Court of Appeals held that Jiannaras was not distinguishable from Matter of Colt. Although the complaint primarily sought equitable relief, the "broad release" in the settlement would also bar any claims for damages arising from the merger. The Court of Appeals refused to overrule Matter of Colt, and also refused to distinguish it on the grounds that the damages claims in Jiannaras were merely "incidental" to the equitable relief—the settlement covered all claims for damages from the merger, not just "incidental" claims. The Court of Appeals therefore affirmed the lower courts' decisions not to approve the settlement.