| Jiannaras v Alfant |
| 2015 NY Slip Op 00335 [124 AD3d 582] |
| January 14, 2015 |
| Appellate Division, Second Department |
[*1]
| Michael Jiannaras, Plaintiff, v Mike Alfant etal., Appellants, et al., Defendant. Kathleen M. Ackerman et al., NonpartyRespondents. |
Hogan Lovells US LLP, New York, N.Y. (David Wertheimer, Neal K. Katyal, prohac vice, Elizabeth B. Prelogar, pro hac vice, and Frederick Liu, pro hac vice, ofcounsel), for appellants.
Karlinsky LLC, New York, N.Y. (Martin E. Karlinsky and Alexis L. Cirel ofcounsel; Emily A. Seiderman on the memorandum), for nonparty respondents.
In an action, inter alia, for declaratory and injunctive relief, the defendants MikeAlfant, Mike Kopetski, J. Allen Kosowski, James Meyer, Afsaneh Naimollah, ThomasWeigman, and On2 Technologies appeal from an order of the Supreme Court, QueensCounty (Grays, J.), entered July 25, 2012, which, upon a decision of the same court datedJanuary 10, 2012, made after a hearing, denied their motion, made jointly with theplaintiff, to approve a settlement of a proposed non-opt-out class action.
Ordered that the order is affirmed, with costs.
The instant appeal arises from a merger between the defendant On2 Technologies,Inc. (hereinafter On2), a publicly held Delaware corporation that developed videocompression technology, and Google, Inc. (hereinafter Google), the global technologyconglomerate specializing in Internet-related services. On August 4, 2009, On2 enteredinto a merger agreement with Google and Oxide, Inc., a subsidiary of Google, pursuantto which Google agreed to acquire each share of On2 common stock in exchange for 60cents worth of Google Class A common stock. At that time, the proposed transaction wasvalued at approximately $106.5 million.
On August 7, 2009, the plaintiff, on behalf of himself and other similarly situatedshareholders of On2, commenced the instant action, alleging that On2's board ofdirectors breached its fiduciary duties to the shareholders by, inter alia, failing to ensurethat the shareholders would receive maximum value for their shares. Among other things,the plaintiff sought certification of a class to prosecute the matter as a class action, adeclaration that the merger agreement was unlawful and unenforceable, rescission of themerger agreement, and injunctive relief. In August 2009, other shareholders of On2(hereinafter collectively the Delaware plaintiffs) commenced similar actions in theDelaware Court of Chancery.
[*2] On February22, 2010, the parties to this action, as well as the Delaware plaintiffs, proposed asettlement, pursuant to which they agreed that "solely for the purpose of effectuating the[s]ettlement," the instant action "may be maintained . . . as a non-opt outclass action." The settlement provided, inter alia, for dismissal of the New York andDelaware actions in their entirety, with prejudice, and a release of "any and all"merger-related claims. The proposed settlement class encompassed "all persons andentities who held shares of the common stock of On2 . . . at any timebetween August 4, 2009 and February 19, 2010."
Upon notice of the proposed settlement to all record holders of On2 common stock,226 of those shareholders filed objections to the proposed settlement. The objectorscontested the proposed settlement, claiming that it contained "an astonishingly broad"release that would "unlawfully restrict" and "unduly burden" the rights of shareholders topursue their own individual claims for damages. Following a fairness hearing, theSupreme Court denied approval of the settlement because it did not afford nonresidentclass members the opportunity to opt out of the settlement in order to preserve their rightto assert claims for damages. We affirm.
The determination of whether a lawsuit warrants certification as a class action underthe relevant statutory criteria rests within the sound discretion of the trial court (see City of New York v Maul,14 NY3d 499, 509 [2010]; Small v Lorillard Tobacco Co., 94 NY2d 43, 52[1999]), and must be grounded upon a consideration of the factors set forth in CPLR 901(a) and 902. The five factors enumerated in CPLR 901 (a) are: (1) the class is sonumerous that joinder of all members is impractical, (2) the existence of commonquestions of fact or law that predominate over questions affecting individual members,(3) typicality of the class representative's claims or defenses with that of the class, (4)adequacy of protecting the class by the representative, and (5) superiority of the classaction to other available methods of adjudicating the controversy. If the prerequisites ofCPLR 901 are satisfied, CPLR 902 requires consideration of: (1) whether class membershave an individual interest in controlling the litigation, (2) the impracticality orinefficiency of prosecuting or defending separate actions, (3) the extent and nature ofexisting litigation, (4) the desirability or undesirability of concentrating the claim in aparticular forum, and (5) difficulties likely to be encountered in managing the class.
As recognized by the Court of Appeals more than two decades ago in Matter ofColt Indus. Shareholder Litig. (77 NY2d 185 [1991]), the New York statutes alsolook to the relief sought by the class in determining what process is due the classmembers (see id. at 194). In Matter of Colt, the Court of Appealsconsidered whether a class-action complaint demanding predominantly equitable reliefrequired the court to give class members an opportunity to opt out. Therein, the Courtheld that class members have no constitutional due process right to opt out of a class thatseeks predominately equitable relief, as long as the prerequisites for the certification of aclass action, i.e., numerosity, predominance, typicality, adequacy of representation, andsuperiority of a class action over other forms of action are satisfied (see id. at195-196). However, the Court of Appeals recognized that " '[o]ne of thestrengths of CPLR article 9 is its flexibility. A decision granting class action status is notimmutable and if later events indicate that the decision should be reversed, altered oramended, requisite relief is authorized' " (id. at 196, quoting Friar vVanguard Holding Corp., 78 AD2d 83, 100 [1980]). Moreover, unlike class actionsrooted in rule 23 of the Federal Rules of Civil Procedure, CPLR article 9 does notspecifically enumerate or identify any particular category of case in which an opportunityfor a class member to opt out is mandated (see Matter of Colt Indus. ShareholderLitig., 77 NY2d at 194-195). Instead, the New York statute clearly contemplates thata trial court may choose to exercise discretion to permit a class member to opt out of aclass "[w]hen appropriate" (CPLR 903). From a practical standpoint, Matter of Coltrecognizes the flexibility, discretion, and wide-ranging authority available to theSupreme Court in fashioning an appropriate remedy to fit the myriad of scenariospresented in the context of class-action/opt-out litigation.
In Matter of Colt, the Court of Appeals stated that, while the settlement atissue there afforded class members relief that was essentially equitable in nature, it"exacted as a price" for that relief a concession that the class members could not pursuedamage claims based on the corporate merger that was the subject of that proceeding(Matter of Colt Indus. Shareholder Litig., 77 NY2d at 197). To the extent that theterms of the settlement in Colt had an impact upon the entirely [*3]separate and distinct right of the class members to pursuedamages claims, due process concerns became particularly relevant (see id.).Thus, the Court of Appeals held that the Supreme Court erred in approving a settlementthat purported to extinguish the rights of out-of-state class members to litigate damagesclaims, without giving them a chance to opt out of the class. The Court of Appealsemphasized that the mere fact that the relief initially demanded was largely equitableshould not permit a court to bind litigants to a settlement that eliminated constitutionallyprotected property interests without due process.
We conclude that Matter of Colt is analogous to the instant case, and iscontrolling. Our dissenting colleague acknowledges that the pertinent circumstancespresented in Colt are also implicated here. Indeed, as in Colt, thesettlement agreement at issue here impinges upon a distinct right, namely the right topursue a claim for damages. Nevertheless, the dissent concludes that, here, any claim formoney damages is "incidental" to the equitable relief sought and, thus, that classmembers should not be excluded. In his dissent, our colleague primarily relies upon casesthat apply rule 23 of the Federal Rules of Civil Procedure (see Wal-Mart Stores, Inc.v Dukes, 564 US &mdash, 131 S Ct 2541 [2011]; Allison v Citgo PetroleumCorp., 151 F3d 402 [5th Cir 1998]). He also states that he does not "endorse grantingopt-out rights only to out-of-state class members."
Under the doctrine of stare decisis, "once a court has decided a legal issue,subsequent appeals presenting similar facts should be decided in conformity with theearlier decision" (People v Bing, 76 NY2d 331, 337-338 [1990]). Notably, thisCourt is a court of precedent and is bound to follow the holding of the Court of Appeals(see People v Turner, 5NY3d 476, 482 [2005]; People v Rivera, 5 NY3d 61, 65 n 2 [2005]; MountainView Coach Lines v Storms, 102 AD2d 663, 664 [1984]). In Matter of Colt,the Court of Appeals spoke on the precise issue before us on this appeal. Although it iswithin the province of the Court of Appeals to reexamine its earlier precedent anddetermine whether a compelling justification exists to overrule that precedent (see People v Peque, 22 NY3d168, 194 [2013]), that right of reexamination is not within our province. Simplystated, this Court cannot discount or disregard the Court of Appeals' determination inMatter of Colt and, if there is to be any shift in that precedent, the change in thelaw is for the Court of Appeals to pronounce.
The appellants' remaining contention is without merit.
Accordingly, based on the Court of Appeals' holding in Matter of Colt, theSupreme Court providently exercised its discretion in declining to approve the subjectproposed settlement that would have extinguished the right of out-of-state class membersto litigate damage claims without giving them the opportunity to opt out of the class.Rivera, J.P., Balkin and Cohen, JJ., concur.
Dickerson, J., dissents, and votes to reverse the order and grant the appellants'motion, made jointly with the plaintiff, to approve a settlement of a proposed non-opt-outclass action, with the following memorandum: The defendant On2 Technologies, Inc.(hereinafter On2), is a Delaware corporation that develops video compression and othertechnologies which enable the creation, transmission, and playback of multimedia on"resource-limited environments," such as cellular networks and the Internet. Accordingto the plaintiff, on or about August 4, 2009, On2 and the defendant Google, Inc.(hereinafter Google), entered into a proposed merger agreement, pursuant to whichGoogle was to acquire each share of On2 common stock in exchange for 60 cents worthof Google Class A common stock.
In August 2009, the plaintiff, who owned shares of On2 common stock, commencedthis class action, on behalf of himself and other similarly situated shareholders of On2stock, against Google, as well as On2 and certain former members of On2's board ofdirectors (hereinafter collectively the On2 defendants). The plaintiff alleged that the On2board of directors breached its fiduciary duty to shareholders by "(i) failing to ensure thatthey will receive maximum value for their shares; (ii) failing to conduct an appropriatesale process; (iii) implementing preclusive deal protections that will inhibit an alternatetransaction; (iv) favoring the interests of certain 'insider' shareholders over the interestsof other shareholders; (v) falsely portraying the Proposed Transaction as one in which theOn2 shareholders will receive Google stock in exchange for their shares; and (vi)attempting to extinguish shareholder derivative standing to evade liability for admittedaccounting improprieties that resulted in the generation of false financialstatements."
The plaintiff sought, among other things, a judgment declaring that the individualdefendants breached their fiduciary duty to shareholders in entering into the mergeragreement, which, as a result of that breach, was rendered unenforceable; the rescissionof the merger agreement; a permanent injunction prohibiting the defendants fromconsummating the merger in the absence of a process by which the highest price could beobtained for the shares of On2; and the imposition of a constructive trust in favor of theplaintiff and the class on any benefits improperly received by the defendants as a result oftheir wrongful conduct.
Based on a memorandum of understanding, the parties entered into a stipulation andagreement of settlement dated February 22, 2010. Pursuant to this stipulation, the partiessought certification of a non-opt-out class, consisting of all persons and entities who heldshares of On2 common stock at any time between August 4, 2009, and February 19,2010. Pursuant to the settlement agreement, the parties agreed to the dismissal of thisaction, the dismissal of a similar action commenced in Delaware, and the release of allclaims arising out of or related to the merger or either of the two actions.
In an order dated May 27, 2010, the Supreme Court, Queens County (Grays, J.),preliminarily certified the action as a non-opt-out class action, for purposes of settlementonly, on behalf of a class consisting of all persons and entities who held shares of On2common stock at any time between August 4, 2009, and February 19, 2010. The court setthe matter down for a "fairness hearing" to be held on October 13, 2010, to determine,among other things, whether the settlement agreement should be approved by the court asfair, whether final judgment should be entered pursuant to the stipulation dismissing theNew York action in its entirety, with prejudice, and releasing all merger-related claims,and whether final certification should be granted to the settlement class.
On or about September 28, 2010, 226 shareholders of On2 common stock filedobjections to the proposed settlement agreement. The objectors also provided writtennotice of their intention to appear at the fairness hearing. The objectors asserted, amongother things, that the settlement imposed substantial costs on shareholders, that thesettlement offered few benefits to shareholders, and that, at the least, the court shouldensure that the settlement did not bar class members' individual claims against On2, itsofficers and board members, and Google. The objectors noted that courts have grantedopt-out requests at the time of approval of class-action settlements. The objectors alsosuggested that the court either revise the settlement agreement so that it could not be readto bar claims of On2 shareholders for damages "or other forms of particularized relief,"or, in the alternative, so that it directed the dismissal of the action but not the release ofall claims.
In support of the settlement agreement, and in opposition to the objections, the On2defendants filed a memorandum dated October 8, 2010, in which they asserted that thesettlement agreement should be approved because the On2 board of directors did notbreach its fiduciary duties in negotiating the merger. The On2 defendants asserted thatthe certification of a non-opt-out class was proper since the relief sought in this actionwas primarily equitable, and there was no demonstration of the need for particular classmembers to manage individual claims. The On2 defendants asserted that the "due processconcerns for the protection of individual class members' unique interests raised in"Matter of Colt Indus. Shareholder Litig. (77 NY2d 185 [1991]) were not presenthere.
[*4] The Supreme Court conducted itsfairness hearing on October 13, 2010. Several objectors testified with regard to theirobjections concerning the merger and settlement agreement. The objectors' testimonyaddressed, among other things, objections to the proposed merger purchase price.
In the order appealed from, entered July 25, 2012, which was made upon a decisionof the same court dated January 10, 2012, the Supreme Court declined to approve theproposed settlement of the action as a non-opt-out class action.
The Supreme Court did find that the proposed class was properly defined, and thatthe class met the requirements of CPLR 901 (a). The court also concluded that the actionshould proceed as a class action, based on the considerations set forth in CPLR 902. Thecourt concluded that the proposed settlement agreement itself was fair, adequate,reasonable, and in the best interests of the proposed class.
Nevertheless, the Supreme Court concluded that the certification of the settlementclass as a non-opt-out class was not appropriate because out-of-state class members"must be afforded the opportunity to opt-out of the Settlement Class and the settlement. . . so that they can preserve their right to assert claims for damages, if anysuch claims exist." However, the court specified that class members who were New Yorkresidents would not be afforded the opportunity to opt out. The court afforded the partiesthe opportunity, at their discretion, to submit a revised settlement agreement containingthe same terms and conditions as the proposed settlement agreement, but providing forcertification of a settlement class that granted proposed class members who were notresidents of New York State the right to opt out.
My colleagues in the majority agree with the Supreme Court's denial of the parties'motion to approve the proposed settlement. Since I conclude that the damages at issuehere are merely incidental to the equitable relief sought, I conclude that the court was notrequired to afford any class members the opportunity to opt out. Accordingly, Irespectfully dissent, and I would grant the appellants' motion. Moreover, I disagree withthe practice of affording only out-of-state class members the opportunity to opt out, whiledenying that opportunity to in-state class members.
CPLR 901 (a) sets forth the prerequisites which must be satisfied in order for a classto be certified. That section provides,
"One or more members of a class may sue or be sued as representative parties onbehalf of all if:
"1. the class is so numerous that joinder of all members, whether otherwise requiredor permitted, is impracticable;
"2. there are questions of law or fact common to the class which predominate overany questions affecting only individual members;
"3. the claims or defenses of the representative parties are typical of the claims ordefenses of the class;
"4. the representative parties will fairly and adequately protect the interests of theclass; and
"5. a class action is superior to other available methods for the fair and efficientadjudication of the controversy" (CPLR 901 [a]).
"These factors are commonly referred to as the requirements of numerosity,commonality, typicality, adequacy of representation and superiority" (City of New York v Maul, 14NY3d 499, 508 [2010]). "Where, as here, a class is certified for settlement purposesonly, these prerequisites—and particularly those designed to protect absentee classmembers—must still be met and, indeed, 'demand undiluted, even [*5]heightened, attention' " (Klein v Robert's Am. GourmetFood, Inc., 28 AD3d 63, 70 [2006], quoting Amchem Products, Inc. vWindsor, 521 US 591, 620 [1997]; see In re General Motors Corp. Pick-UpTruck Fuel Tank Prods. Liab. Litig., 55 F3d 768, 785 [3d Cir 1995]).
"The determination of whether a lawsuit qualifies as a class action under the statutorycriteria 'ordinarily rests within the sound discretion of the trial court' " (Cityof New York v Maul, 14 NY3d at 509, quoting Small v Lorillard TobaccoCo., 94 NY2d 43, 52 [1999]). This Court " 'is vested with the samediscretionary power and may exercise that power, even when there has been no abuse ofdiscretion as a matter of law by the nisi prius court' " (City of New York vMaul, 14 NY3d at 509, quoting Small v Lorillard Tobacco Co., 94 NY2d at52-53; see also Matter of State of New York v Ford Motor Co., 74 NY2d 495,501 [1989]).
With regard to the statutory requirements for notice in class actions, CPLR 904 (a)provides that, in class actions which seek primarily injunctive or declaratory relief, noticeof the action to the class is not required "unless the court finds that notice is necessary toprotect the interests of the represented parties and that the cost of notice will not preventthe action from going forward" (CPLR 904 [a]). In all other class actions, reasonablenotice is required (see CPLR 904 [b]). New York's statutory schemecontemplates courts exercising their discretion where appropriate in permitting classmembers to request exclusion from the class, i.e., to "opt out" (see CPLR 903)."[B]ecause the disposition of a class action binds class members who do not directlyparticipate in the action, the trial court must act as 'the protector of the rights of theabsent class members' (Polar Intl. Brokerage Corp. v Reeve, 187 FRD 108, 112[SD NY 1999]) in deciding whether certification as a class action is appropriate and, ifso, whether any proposed settlement 'is fair, reasonable and adequate' " (Kleinv Robert's Am. Gourmet Food, Inc., 28 AD3d at 70, quoting Weinberger vKendrick, 698 F2d 61, 73 [2d Cir 1982]; see CPLR 908).
"A class action is an exception to the rule 'that one is not bound by a judgment inpersonam in a litigation in which he is not designated as a party or to which he has notbeen made a party by service of process' " (Wyly v Milberg Weiss Bershad & Schulman, LLP, 12NY3d 400, 409 [2009] [emphasis omitted], quoting Hansberry v Lee, 311US 32, 40 [1940]). Absent individuals are bound by the decree in the class action" 'so long as the named parties adequately represented the absent class and theprosecution of the litigation was within the common interest' " (Wyly vMilberg Weiss Bershad & Schulman, LLP, 12 NY3d at 409, quotingPhillips Petroleum Co. v Shutts, 472 US 797, 808 [1985]).
The parties to this appeal discuss at length their divergent interpretations of the Courtof Appeals' 1991 decision in Matter of Colt Indus. Shareholder Litig. (77 NY2d185 [1991]). In Colt, the Court of Appeals held, in part, "when a class actioncomplaint demands predominantly equitable relief that will necessarily benefit the classas a whole if granted, the Trial Judge is not required to give class members theopportunity to opt out of the class" (id. at 187). In Colt, the Court ofAppeals was, in part, interpreting the United States Supreme Court's decision inPhillips Petroleum Co. v Shutts (472 US 797 [1985]). In Shutts, amajority of the Supreme Court held, inter alia, that "due process requires at a minimumthat an absent plaintiff be provided with an opportunity to remove himself from the classby executing and returning an 'opt out' or 'request for exclusion' form to the court"(Phillips Petroleum Co. v Shutts, 472 US at 812). However, the majority inShutts expressly limited its holding to "those class actions which seek to bindknown plaintiffs concerning claims wholly or predominately for money judgments"(id. at 811 n 3).
In its analysis in Colt, the Court of Appeals noted that, unlike its federalcounterpart, CPLR article 9 does not expressly require an opt-out option in certain typesof cases (see Matter of Colt Indus. Shareholder Litig., 77 NY2d at 194). TheCourt of Appeals stated that the "question left open by the Supreme Court's holding inShutts, then, is whether the jurisdictional and due process concerns addressed by[*6]that decision effectively eliminate the mandatoryclass action as a matter of constitutional law, despite the fact that both State and Federalgovernments have for years recognized the need for mandatory classes where certaintypes of relief are sought" (id. at 194-195). The Court of Appeals concluded that,where a class seeks predominantly equitable relief, it will not be error for a trial court torefuse to grant an out-of-state class member the opportunity to opt out of the class whenfirst certified "because there is no due process right to opt out of a class that seekspredominantly equitable relief" (id. at 195). Among other reasons supporting thisdetermination, the Court relied on its conclusion that, where a class action seekspredominantly equitable relief, the due process rights of the class members, regardless ofthe nature and extent of their contacts with the forum state, will be adequately protected(see id.). In such a scenario, "a judgment benefits the class as a whole, and anyinterest in promoting individual control of litigation is outweighed by the importance ofobtaining a single, binding determination" (id.), a hallmark of class actions.
Thus, since the class in Colt was seeking predominantly injunctive relief atthe time the class action in Colt was certified, the trial court had no statutory dutyto afford class members the opportunity to opt out of the class, and class members wouldhave had no due process right to opt out (see id. at 196).
However, the particular factual circumstances in Colt complicated the matterfurther. A particular class member at issue, James S. Merritt Company (hereinafterMerritt) was a Missouri corporation which, upon learning of the action, requested to beexcluded from the class. Additionally, Merritt commenced a separate action in the UnitedStates District Court for the Western District of Missouri (see id. at 190). Merrittsought to be excluded from the class in New York since it claimed to have a cause ofaction to recover damages, and the settlement agreement required class members torelease all claims against Colt.
The Court of Appeals was particularly troubled by Merritt's lack of contacts withNew York in light of the fact that the proposed settlement agreement purported toextinguish the rights of class members to pursue claims for damages (see id. at196). The Court of Appeals thus determined that, while it was permissible for the trialcourt initially to decline to afford class members the opportunity to opt out when theclass complaint demanded predominantly equitable relief, the trial court erred "byseeking to bind an absent plaintiff with no ties to New York State to a settlement thatpurported to extinguish its rights to bring an action in damages in another jurisdiction"(id. at 197). In addition to relying on the flexibility of CPLR article 9 (see id.at 196; see generally City of New York v Maul, 14 NY3d at 508-509; Sperry v Crompton Corp., 8NY3d 204, 210 [2007]), the Court of Appeals considered the terms of the settlementagreement at issue, which, while affording relief essentially equitable in nature, "exactedas a price for that relief a concession that the class members could not pursue damageclaims based on the merger" (Matter of Colt Indus. Shareholder Litig., 77 NY2dat 197).
Further, the Court expressed its belief that the United States Supreme Court, inShutts, "intended to afford substantial protections to out-of-State plaintiffs inState class action suits" (Matter of Colt Indus. Shareholder Litig., 77 NY2d at197). "Although the [United States Supreme] Court held that an absent class memberneed not possess minimum contacts with the forum State to be bound by a judgment indamages obtained by the class, the Court also required that certain proceduralprerequisites be satisfied before the class member could be bound, including anopportunity to be excluded from the class" (id.).
The Court of Appeals continued, "By precluding out-of-State class members fromlitigating damage claims without giving them a chance to opt out of the class, thesettlement negated the long-standing practice of distinguishing between class actions formonetary and equitable relief and granting [*7]varyingdegrees of procedural protection depending upon the relief sought. If the class complainthad sought only monetary relief or both substantial monetary relief and equitable relief,Shutts would have required that Merritt be given an opportunity to opt out of theclass once it was certified. The mere fact that the relief initially demanded was largelyequitable should not permit the court to circumvent the Supreme Court's holding inShutts and bind Merritt to a settlement that eliminates constitutionally protectedproperty interests without due process" (id. at 198).
The Court of Appeals concluded, "[T]he Trial Judge was not required to give Merrittan opportunity to opt out of the class at the time that the class was certified, because atthat juncture, the relief sought was predominately equitable. Given the class complaint asfiled, the court properly considered the value of consolidating the action in a singleforum and reaching one binding determination. However, once the parties presented thecourt with a settlement that accorded equitable relief and in turn required the classmembers to give up all claims in damages, the nature of the adjudication changeddramatically. We conclude that the trial court erred when it approved a settlement of thiskind without affording Merritt the due process protections outlined in Shutts"(id. at 199).
The On2 defendants rely on Colt for the proposition that opt-out rights arenot required in class actions involving predominantly equitable relief. Further, the On2defendants assert that due process only requires a court to afford class members theopportunity to opt out when seeking to assert a claim for damages where that claim is for"individualized monetary relief," as opposed to money damages that are incidental to theequitable relief sought or to the relief awarded to the class as a whole.
Conversely, the objectors assert that the claims for damages that they seek topreserve are of the same nature as those at issue in Colt, separate and distinctfrom the predominantly equitable relief sought in the class complaint. The objectorsobserve that, in Colt, the Court of Appeals did not differentiate between"incidental" and "individualized" damages upon which the On2 defendants rely. Rather,they emphasize the Court's holdings addressing the right of certain class members to optout in order to pursue damages claims. Additionally, the objectors observe that, as inColt, the proposed settlement here purports to grant a release as to allmerger-related damages claims in exchange for the relief sought.
It is beyond dispute here that the objectors include a number of out-of-stateshareholders of On2 common stock. It is also undisputed that a component of theproposed settlement agreement requires class members to agree to the extinguishmentand release of all claims against, among others, On2, arising out of or related to themerger, this action, or the Delaware action.
As was the case in Colt, the complaint here seeks primarily equitable relief.As such, because of the "distinct concerns that come into play when a class seeksprimarily equitable relief," at the outset, potential class members would not have had anydue process right to opt out of the action (see Matter of Colt Indus. ShareholderLitig., 77 NY2d at 195-196).
As was also the case in Colt, the settlement agreement here purports torequire all class members to release their rights to pursue merger-related damagesremedies. Thus, the settlement agreement "impinges upon a distinct right—theright to pursue a claim in damages" (id. at 197).
However, a distinction that has arisen in the years since Colt was decidedleads me [*8]to conclude that, in cases such as this, whereany claim for money damages is incidental to the equitable relief sought, and requires noindividualized adjudications, class members, whether in-state or out-of-state, do not havea due process right to exclusion from the class.
This conclusion is consistent with the United State Supreme Court's opinion inWal-Mart Stores, Inc. v Dukes (564 US &mdash, 131 S Ct 2541 [2011]). InDukes, the United States Supreme Court addressed, inter alia, whether claims formonetary relief may be certified under rule 23 (b) (2) of the Federal Rules of CivilProcedure. That provision of the federal class action rule applies to actions for equitableand declaratory relief. As the Court of Appeals noted in Colt, that subsectiondoes not contain a right to notice or to opt out of class actions commenced pursuantthereto (see Matter of Colt Indus. Shareholder Litig., 77 NY2d at 193). InDukes, the United States Supreme Court held that claims for monetary relief maynot be certified under Federal Rules of Civil Procedure rule 23 (b) (2) "at least where. . . the monetary relief is not incidental to the injunctive or declaratoryrelief" (Wal-Mart Stores, Inc. v Dukes, 564 US at &mdash, 131 S Ct at 2557).The United States Supreme Court concluded that "claims for individualized relief. . . do not satisfy" the requirements of that subsection (id.). In thisregard, the Court observed that the "key to the (b) (2) class is the indivisible nature of theinjunctive or declaratory remedy warranted—the notion that the conduct is suchthat it can be enjoined or declared unlawful only as to all of the class members or as tonone of them. In other words, rule 23 (b) (2) applies only when a single injunction ordeclaratory judgment would provide relief to each member of the class. It does notauthorize class certification when each individual class member would be entitled to adifferent injunction or declaratory judgment against the defendant. Similarly, itdoes not authorize class certification when each class member would be entitled to anindividualized award of monetary damages" (id. [citation and internal quotationmarks omitted]). The United States Supreme Court concluded that "individualizedmonetary claims belong in Rule 23 (b) (3)," the subsection of the federal class action rulewhich does expressly furnish the opportunity for class members to opt out (Wal-MartStores, Inc. v Dukes, 564 US at &mdash, 131 S Ct at 2558).
Additionally, the United States Supreme Court explained that, in Allison v CitgoPetroleum Corp. (151 F3d 402, 415 [5th Cir 1998]), the United States Court ofAppeals for the Fifth Circuit held that a rule 23 (b) (2) class "would permit thecertification of monetary relief that is 'incidental to requested injunctive or declaratoryrelief,' " which the Fifth Circuit defined as " 'damages that flow directlyfrom liability to the class as a whole on the claims forming the basis of the injunctive ordeclaratory relief' " (Wal-Mart Stores, Inc. v Dukes, 564 US at &mdash,131 S Ct at 2560, quoting Allison v Citgo Petroleum Corp., 151 F3d at 415).However, based on the circumstances of the case before it, the United States SupremeCourt ultimately did not decide "whether there are any forms of 'incidental' monetaryrelief that are consistent with the interpretation of Rule 23 (b) (2) we have announcedand that comply with the Due Process Clause" (Wal-Mart Stores, Inc. v Dukes,564 US at &mdash, 131 S Ct at 2560).
While the United States Supreme Court did not pass on the Fifth Circuit's analysis, Ifind it persuasive. Such an interpretation promotes several of the fundamental purposesof class actions, including efficiency and the avoidance of inconsistent adjudications(see generally 1 Newberg on Class Actions § 1:9 [2014];Weinstein-Korn-Miller, NY Civ Prac ¶ 901.01 [2d ed 2004]). Further, where anymoney damages are merely incidental to the injunctive or declaratory relief sought, andthe class action seeks predominantly equitable relief, the due process rights of the classmembers, regardless of the nature and extent of their contacts with the forum state, willbe adequately protected (see Matter of Colt Indus. Shareholder Litig., 77 NY2d at195). In such a scenario, "a judgment benefits the class as a whole, and any interest inpromoting individual control of litigation is outweighed by the importance of obtaining asingle, binding determination" (id.).
I note again that, in Colt, the Court of Appeals observed that, "at the time thisclass [*9]action was certified, the class was primarilyseeking injunctive relief. . . . [T]he court was under no statutory duty togrant Merritt the opportunity to opt out of the class. Because of the distinct concerns thatcome into play when a class seeks primarily equitable relief, we conclude that there wassimilarly no due process constitutional right to opt out of the class at the time the classwas certified" (id. at 196). Here, too, the class action complaint seeks primarilyequitable relief.
The circumstances in Colt "changed dramatically" once the parties tenderedthe proposed settlement agreement, which accorded equitable relief and, in exchange,required class members to release all related claims in damages (id. at 199).Based on this development, the Court of Appeals concluded that the Supreme Courterred in approving the settlement without affording Merritt certain due processprotections, including the right to opt out.
Nonetheless, the only damages at issue here are those that are "incidental torequested injunctive or declaratory relief," in that they are "damages that flow directlyfrom liability to the class as a whole on the claims forming the basis of the injunctive ordeclaratory relief" (Allison v Citgo Petroleum Corp., 151 F3d at 415). I concludethat, based on this distinction, which only became the subject of appellate-court andscholarly scrutiny after Colt was decided, due process does not require the courtto afford class members, out-of-state or otherwise, the opportunity to opt out (seeRobert H. Klonoff, Class Actions for Monetary Relief Under Rule 23 [b] [1] [A]and [b] [1] [B]: Does Due Process Require Notice and Opt-Out Rights?, 82 GeoWash L Rev 798, 822 [2014] ["reasonable notice should be required in all (b) (1) (A) and(b) (1) (B) suits seeking money, but . . . opt-out rights are not required bydue process—and indeed, would defeat the purpose of (b) (1) suits"]).
I would also analogize this rule—that incidental money damages are availablewhere primarily equitable relief is sought without the need to afford class members theopportunity to opt out—to a class action prosecuted pursuant to rule 23 (b) (2) ofthe Federal Rules of Civil Procedure, and possibly rule 23 (b) (1) (see Robert H.Klonoff, Class Actions for Monetary Relief Under Rule 23 [b] [1] [A] and [b] [1][B]: Does Due Process Require Notice and Opt-Out Rights?, 82 Geo Wash L Rev798, 815 [2014] ["Finally, some courts have held that a (b) (1) (A) class can be certifiedfor damages as long as claims for declaratory or injunctive relief predominate"]). Again,that subsection applies to actions for equitable or declaratory relief, and does not providefor opt-out rights (see Matter of Colt Indus. Shareholder Litig., 77 NY2d at193).
Finally, I would note that, even were I to conclude that the monetary damages atissue here required individualized determinations, and were therefore not merelyincidental to the injunctive or declaratory relief sought, I would not endorse grantingopt-out rights only to out-of-state class members. There appears to be no authority fortreating residents and nonresidents differently in relation to opt-out rights (seeWeinstein-Korn-Miller, NY Civ Prac ¶ 904.05 [2d ed 2004]), and doing socertainly raises concerns of possible due process violations. Indeed, "The concernexpressed in Shutts goes beyond mere minimum contacts of unnamed classmembers. At bottom, the concern in Shutts is about depriving absent classmembers of property without due process. That concern is not limited to absent classmembers who lack minimum contacts with the forum, but applies equally to all absentclass members" (Robert H. Klonoff, Class Actions for Monetary Relief Under Rule23 [b] [1] [A] and [b] [1] [B]: Does Due Process Require Notice and Opt-OutRights?, 82 Geo Wash L Rev 798, 826 [2014] [footnote omitted]).
In circumstances such as those presented here, options available instead of grantingopt-out rights to select, but not all, class members, would include declining to certify anationwide class, or granting the entire class the right to opt out. I do not agree with thedisparate treatment of in-state and out-of-state class members implemented by thehearing court here.
In this regard, I fully acknowledge the concern with regard to exercising personaljurisdiction over out-of-state residents in a class action, in the absence of minimumcontacts with [*10]the forum state, and, as a result,extinguishing that class member's right to pursue a damages remedy (see e.g. Matterof Colt Indus. Shareholder Litig., 77 NY2d at 197). However, once again, I wouldemphasize the flexibility of CPLR article 9, and the options available to the courts inoverseeing a class action (seegenerally City of New York v Maul, 14 NY3d 499 [2010]). I disagree with thetack approved by the majority here of granting the right to exclusion to some classmembers while denying it to others.
Since I conclude that the money damages at issue here are merely incidental to theequitable relief sought, I conclude that the Supreme Court was not required to afford anyclass members the opportunity to be excluded from the class. Accordingly, I respectfullydissent, as I would grant the appellants' motion, made jointly with the plaintiff, forapproval of the non-opt-out class. Moreover, I disagree with the practice of affordingonly out-of-state class members the opportunity to opt out, while denying thatopportunity to in-state class members.