Michael Jiannaras, Plaintiff,v.Mike Alfant, et al., Appellants, et al., Defendant; Kathleen M. Ackerman, et al., Non-Party Respondents.BriefN.Y.March 30, 2016To be Argued by: MARTIN E. KARLINSKY (Time Requested: 30 Minutes) APL 2015-00135 Queens County Clerk’s Index No. 21262/09 Appellate Division-Second Department Docket No. 2012-10477 Court of Appeals of the State of New York MICHAEL JIANNARAS, Plaintiff, - against - MIKE ALFANT, MIKE KOPETSKI, J. ALLEN KOSOWSKY, JAMES MEYER, AFSANEH NAIMOLLAH, THOMAS WEIGMAN, ON2 TECHNOLOGIES, INC., Defendants-Appellants, - and - GOOGLE INC., Defendant. ------------------------------ KATHLEEN M. ACKERMAN, et. al., Non-Party Respondents. BRIEF FOR NON-PARTY RESPONDENTS MARTIN E. KARLINSKY AMY A. LEHMAN KARLINSKY LLC Attorneys for Non-Party Respondents 1500 Broadway, 8th Floor New York, New York 10036 Tel.: (646) 437-1430 Fax: (646) 437-1433 Date Completed: September 18, 2015 TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 COUNTERSTATEMENT OF QUESTIONS INVOLVED ...................................... 1 NATURE OF THE CASE AND STATEMENT OF FACTS ................................... 2 SUMMARY OF ARGUMENT ................................................................................. 5 ARGUMENT ............................................................................................................. 7 I. Colt Is Controlling and Constitutionally Required. .............................. 7 A. Colt is on all fours with this case. ............................................... 8 B. The rationale of Colt is binding here. ....................................... 10 C. There is neither precedent nor logic for eliminating opt-out rights because damages may be awarded on a class-wide basis. ..................................................................... 16 II. Colt Should Not Be Overturned. ......................................................... 22 A. Appellants have advanced no justification for overruling Colt .......................................................................... 23 CONCLUSION ........................................................................................................ 26 ii TABLE OF AUTHORITIES PAGE Federal Cases Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998) .............................25 Helvering v. Hallock, 309 U.S. 106 (1940) .............................................................23 Philips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) .................................... passim Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011) ..................................................... passim State Cases E. Consol. Props. v. Adelaide Realty Corp., 95 N.Y.2d 785 (2000) .......................22 In re Colt Shareholder Litigation, 77 N.Y.2d 185 (1991) ............................... passim People v. Hobson, 39 N.Y.2d 479 (1976) ................................................................23 People v. Lopez, 16 N.Y.3d 375 (2011) ...............................................................7, 22 People v. Peque, 22 N.Y.3d 168 (2013) ..............................................................7, 22 People v. Silva, 24 N.Y.3d 294 (2014) ................................................................7, 22 People v. Taylor, 9 N.Y.3d 129 (2007) ...................................................................22 Policano v. Herbert, 7 N.Y.3d 588 (2006) ..............................................................23 Statutes 42 U.S.C. § 1981 ......................................................................................................25 42 U.S.C. § 2000e et seq. .........................................................................................25 Fed. R. Civ. P. 23 .......................................................................................... 6, 20, 25 Fed. R. Civ. P. 23(b)(2) .................................................................................... passim N.Y. CPLR 901 .......................................................................................................... 9 N.Y. CPLR Article 9 ................................................................................... 10, 20, 25 Miscellaneous Authorities Civil Rights Act of 1964, Title VII ................................................................... 18, 19 WEBSTER’S NEW WORLD COLLEGE DICTIONARY 721 (2004) ..................................24 PRELIMINARY STATEMENT At the heart of this appeal is the question whether a long-standing precedent of this Court, In re Colt Shareholder Litigation, 77 N.Y.2d 185 (1991), should be overturned. Non-party respondents submit this brief to urge that it should not. Colt’s holding was not only correct and controls this case, but was required by the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution and by the Supreme Court’s decision in Philips Petroleum Co. v. Shutts, 472 U.S. 797 (1985). COUNTERSTATEMENT OF QUESTIONS INVOLVED 1. Whether (a), under Colt, the lower courts properly refused to approve settlement of this class action where, although the action initially sought only equitable relief, the settlement stipulation failed to provide opt-out rights to, and released damage claims of, absent class members, or (b) alternatively, whether Colt was wrongly decided and should be overturned? We say Colt is settled law properly applied here, that no exception to Colt is presented, and that appellants fail to advance compelling justification to overturn Colt. The answer to sub-question (a) is YES; that to (b) is NO. 2. Whether the rule of Colt was required by Shutts, interpreting the Due Process Clause? We say the answer to the question is YES. 2 NATURE OF THE CASE AND STATEMENT OF FACTS These questions arise from the settlement and compromise of fiduciary breach class litigation resulting from the corporate merger of defendants Google Inc. and On2 Technologies, Inc. The parties structured and sought court approval of a settlement that released and extinguished legal damage claims of class members without affording those class members an opt-out right. Because such a settlement would deprive class members of a protectable property interest, this implicated the due process concerns of Shutts, brought the case squarely within the core holding of Colt, and mandated that the trial court refuse to approve the settlement. On2 was a small, publicly-held Delaware corporation domiciled in New York State. (A20; A335)1 It designed and developed video “codec” technology that enabled high-quality web-streaming of video content. As a result of the merger with Google, its most advanced codec technology, known as VP8, became the core of Google’s WebM video file format used throughout the world. After the merger announcement, Michael Jiannaras, a stockholder of On2, brought a class action in Queens County Supreme Court. (A19, A49)2 Jiannaras alleged that defendants had breached or aided and abetted breach of fiduciary 1 Citations commencing with “A” are to the Appendix filed in this Court. 2 Other plaintiffs brought actions, now stayed, in Delaware Chancery Court. (A564-98; 789) 3 duties of disclosure (failing to make adequate disclosure as to material facts about the merger) and of loyalty (failing to obtain the best price for On2). He sought only equitable relief.3 Following preliminary class action approval for settlement only, the parties presented a proposed settlement stipulation to the trial court. (A160-86) The proposed settlement provided for injunctive relief and attorneys’ fees. Id. Releases contained in the stipulation purported to release any damage claim possessed by class members.4 The settlement did not provide for opt-out rights. Notice of the proposed settlement was thereafter given to the class, and the trial court scheduled a fairness hearing to determine whether to approve the proposed stipulation and grant final class certification. (A188-95) 3 Jiannaras sought (a) a declaration the action was maintainable in class form, (b) certification as class representative (and of counsel as class counsel), (c) a declaration that the merger agreement was entered into in breach of fiduciary duties and was unlawful and unenforceable, (d) rescission of the merger agreement, (e) an injunction against consummation of the merger unless Google and On2 implemented a procedure to obtain the highest price and made full disclosure of material facts, (f) a constructive trust over consideration improperly received, and (g) the costs and attorneys’ fees of the action. (A101) 4 “Released Claims” identified in the settlement stipulation include “any and all claims, demands, rights, actions, causes of action, liabilities, damages, [etc.], . . .in law or equity, that have been, could have been, or in the future can or might be asserted in the New York Action, the Delaware Action or in any court, tribunal or proceeding . . . whether individual, direct, class, derivative, representative, legal, equitable, or any other type or in any other capacity against the [settling defendants], . . . which have arisen, could have arisen, arise now, or hereafter may arise out of or relate in any manner to the acts, events, facts, matters, transactions, occurrences, statements, representatives, misrepresentations or omissions or any other matter whatsoever set forth in or otherwise related, directly or indirectly, to the allegations in the New York Action, the Delaware Action, the Merger, the Merger Agreement, [or] the consideration offered in connection with the Merger . . . .” (A168-69) 4 Two hundred twenty-six (226) objectors (the non-party respondents in this Court) filed a written objection to the proposed settlement. (A196-215) The principal basis for that objection was the omission of an opt-out right to non-New York residents in view of the sweeping releases included in the proposed stipulation. Objectors urged that this improperly deprived out-of-state shareholders of On2 of their property right to pursue claims for damages arising from the merger. (Id.)5 The trial court refused to approve the proposed settlement as a non-opt-out settlement, following Colt. (A791) The court held: The proposed certification of the Settlement Class as a non-opt out class, which is a condition of the Settlement Stipulation, is not appropriate because those proposed class members who are non-residents of New York State must be afforded the opportunity to opt out of the Settlement Class and the settlement proposed in the Settlement Stipulation so that they can preserve their right to assert claims for damages, if any such claims exist. (A812) The Appellate Division, Second Department affirmed, with one justice dissenting. (A3-16) This appeal followed by permission of that court. (A2) The Appellate Division certified the question “Was the decision and order of this Court dated January 14, 2015, properly made?” (A2) 5 The non-party respondents in this Court are these 226 class members. They are the only class members with an interest adverse to the settlement proponents, and with standing on this appeal. 5 SUMMARY OF ARGUMENT 1. It has been settled law in this State for the quarter-century since this Court decided Colt that the settlement and compromise of a class action resulting in extinguishment and release of absent class members’ claims for legal damages must provide for opt out rights in favor of out-of-state class members. Colt, 77 N.Y.2d 196. 2. Colt rests on the foundation set down by the Supreme Court in Shutts. Recognizing in that case that absent class-members’ legal damage claims are “constitutionally recognized property interest(s)” protected by the Due Process Clause, the Supreme Court held that “[i]f [a] forum State wishes to bind an absent plaintiff concerning a claim for money damages or similar relief at law,” due process “requires at a minimum that an absent [class member] be provided with an opportunity to [opt out]” of the class. Shutts at 807, 811-12. 3. Colt also held that “there is no due process right to opt out of a class that seeks predominantly equitable relief.” Id. at 195. But it does not follow, as appellants contend here, that “when [a] suit resolves [out-of-state class members’] claims for equitable relief as well as their claims for incidental monetary relief- that is, relief that flows to the class as a whole on a non-individualized basis” (Brief for Defendants-Appellants (“App. Br.”) at 1), no opt-out right need be afforded. 6 4. Colt simply did not say this and cannot, no matter how its holdings are twisted, be read to say this. Colt’s holding directed to class action cases seeking “predominantly equitable relief” did not carve out a category of legal damage claims (“incidental” ones) that are somehow exempted from the due process concern with which Shutts was concerned, and that dictated the principal holding in Colt. 5. It cannot be said that the legal damages claims that here triggered the opt-out right were “incidental” to equitable relief in the sense Colt intended when it referred to “predominantly equitable relief.” If Colt had intended such a meaning, then this Court would have said so. It did not. And such a holding would essentially nullify Colt’s primary holding as to mandatory opt-out rights when legal relief is sought. 6. Nor will appellants’ argument that “determining whether opt-out rights are necessary hinges on whether monetary damages are individualized or incidental” withstand scrutiny. App. Br. at 1. Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011), on which appellants rely for their distinction between “incidental” damages claims and those that are not, will not bear the weight they seek to place on it. 7. For starters, Wal-Mart arises under Federal Rule of Civil Procedure 23 (not the CPLR), and is concerned not with preservation of property rights in 7 the context of releases in class action settlements, but rather with typicality and manageability, two of the central elements that must be addressed in judicial administration of class action litigation. The case neither establishes any rule of due process nor suggests a test that is even remotely applicable here. 8. Finally, Appellants fail to bear the heavy burden of demonstrating a “compelling justification” for this Court to disregard Colt as precedent. There is nothing to suggest that it has led to an “unworkable rule,” People v. Silva, 24 N.Y.3d 294, 300 (2014), “create[d] more questions than it resolve[d],” People v. Taylor, 9 N.Y.3d 129, 148-49 (2007), or “no longer serves the ends of justice or withstands the cold light of logic and experience.” Policano v. Herbert, 7 N.Y.3d 588, 604 (2006). Stare decisis should be respected. ARGUMENT I. Colt Is Controlling and Constitutionally Required. The two holdings of Colt are (a) that out-of-state class members must be afforded an opt-out right where the court-approved settlement of a New York State class action would deprive those absent class members of a claim for damages, a recognized property right under the Due Process Clause, Colt, 77 N.Y.2d at 197, 8 and (b) that such an opt-out right is not constitutionally required where a class action seeks “predominantly equitable relief.” Id. at 195.6 It is not the holding of Colt, as appellants contend, that where damages claims are merely “incidental”-as appellants put it, where “monetary relief would flow to the class as a whole on a non-individualized basis”-to “predominantly equitable relief,” such opt-out rights are not required. (App. Br. at 10) Contrary to appellants’ contentions, a plain, commonsense reading of Colt required the results below, and requires affirmance here. We proceed first with an examination of Colt. A. Colt is on all fours with this case. Like this case, Colt was a class action stemming from a corporate merger between two public companies, Morgan Stanley Group, Inc. and Colt Industries, Inc. (“Colt”). Id. at 187-88. Morgan Stanley tendered for Colt shares. The “proposed merger ignited 15 separate shareholder suits” against Colt and its officers and directors in state courts alleging breach of fiduciary duties for agreeing to accept an inadequate price for Colt stock, and seeking “predominantly equitable relief” in the form of an injunction against the merger, rescission if the merger were approved, and disgorgement of ill-gotten gains, together with “any damages 6 Appellants attempt to seize upon the two holdings of Colt as irreconcilable in view of the lower courts’ holdings in the instant case. We address this point below at 11. 9 that may have been sustained.” Id. at 188-89. The suits were consolidated in New York.7 The parties eventually agreed on settlement terms and the trial court, noting that the prerequisites of a class action were satisfied under CPLR 901, entered an order (that of April 12, 1988) certifying a class for notice and settlement purposes, ordering that class members be given notice, and enjoining class members from filing lawsuits in other jurisdictions based on the facts giving rise to the New York action. Id. at 189. As in this case, the parties then prepared a stipulation of settlement and compromise that was based on an earlier memorandum of understanding. Insofar as directly relevant to this case, the resulting stipulation of settlement would have dismissed the action with prejudice and released all claims that were or could be asserted by class members regarding the tender offer and merger. Id. at 190. While the relief initially sought in the class action complaint was “predominantly equitable” in nature, the settlement released both equitable claims and legal claims for damages. By a second order (that of May 10, 1988), the trial court redefined the class to include all Colt common shareholders as of March 1, 1988, scheduled a fairness 7 The Colt decision refers to a prior recapitalization, also involving Morgan Stanley. Id. at 188. There is no indication in the opinion that litigation had arisen from that recapitalization. 10 hearing, and approved the stipulation of settlement and compromise. Id. at 189-90. Merritt Corp., a Colt shareholder and Missouri corporation with no jurisdictional ties to New York, requested exclusion from the class. Merritt also brought a separate damages action in Missouri federal court. Id. at 190. The trial judge denied Merritt’s application for exclusion. Colt shareholders approved the merger, and the trial court gave final approval of the settlement. Id. Merritt appealed. The Appellate Division, First Department reversed, citing Shutts and holding that the existence of a claim for fees and expenses was sufficient to require an opt- out right. This Court, however, found that ground unpersuasive, and granted Colt’s motion for leave to appeal. It affirmed on a different ground, however, holding that although the claim for fees and expenses did not trigger a due process opt-out right, the release of legal damage claims did. B. The rationale of Colt is binding here. The Court began its analysis by recognizing that Article 9 of the CPLR “clearly contemplates . . . that a Judge may choose to exercise discretion to permit a class member to opt out of a class.” Id. at 194. It nonetheless held that the trial court committed no error in denying Merritt’s application to exclude itself from the class “when it was first certified” (the preliminary certification), although Merritt had no jurisdictional ties to New York, “because there is no due process right to opt out of a class that seeks predominantly equitable relief.” Id. at 195. 11 As the Court explained, it reached that conclusion by looking “to the reasons for treating equitable relief differently from damage relief in this context.” Id. Where conduct is sought to be enjoined, the Court noted the interest in consolidating the action in one forum to avoid the possibility of conflicting judgments from different jurisdictions which would subject the defendants to varying and possibly inconsistent obligations. Id. In that context, it observed that “the due process rights of the class members, whatever their ties to the forum State, are protected,” because “a judgment benefits the class as a whole, and any interest in promoting individual control of litigation is outweighed by the importance of obtaining a single, binding determination.” Id. But, the Court reasoned, it does not follow that the trial court’s final and unconditional approval of the settlement was proper. Id. at 196. Instead, the Court held, “the trial court [erred] as a matter of law by seeking to bind an absent [class member] to a settlement that purported to extinguish its rights to bring an action in damages in another jurisdiction.” Id. at 197. This was necessarily the case under due process principles because “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.” Id. at 199. At that point, the Court recognized, “the Supreme Court’s analysis in Shutts and the due process concerns discussed in the body of 12 that opinion [became] relevant.” Id. at 197. Finally, the Court observed “that the settlement arose out of a class action seeking equitable relief does not change the fact that property rights entitled to due process protection were implicated by the settlement’s terms.” The Court noted that the Supreme Court intended Shutts “to afford substantial protections to out-of-State plaintiffs in State class action suits.” Id. The Court stated “we believe that the Supreme Court’s holding in Shutts controls our analysis of the damage aspects of this case and that the due process concerns that motivated the [Supreme] Court in that case also have a place in the disposition of this one.” Id. at 198. Shutts is the leading case on due process requirements as they relate to opt-out rights for absent class members, and it is the foundation upon which Colt rests. Shutts was a class action brought in Kansas state court seeking money damages for a class comprised of royalty holders from all fifty states who received royalty payments from defendant for the right to extract natural gas from their land. Shutts, 472 U.S. at 799. The Kansas court certified the class but provided absent, out-of-state class members an opt-out right. Id. at 799, 800. Following trial, the court granted judgment in favor of the class and on Phillips’s appeal the Kansas Supreme Court affirmed. Id. Phillips sought certiorari from the Supreme Court, arguing that out-of-state class members lacked minimum contacts with 13 Kansas for the exercise of personal jurisdiction, and that the courts of Kansas therefore lacked power to bind them. Id. at 802-03. The Supreme Court granted the writ. The Supreme Court held that absent class-members’ claims are “constitutionally recognized property interest(s)” protected by the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, and that “[i]f [a] forum State wishes to bind an absent plaintiff concerning a claim for money damages or similar relief at law, it must provide minimal procedural due process protection,” including notice and an opportunity to be heard. Id. at 807, 811-12. Where a class action seeks to bind both identified class plaintiffs and unidentified and absent class members concerning claims wholly or predominantly at law for a money judgment, due process further “requires at a minimum that an absent [class member] be provided with an opportunity to [‘opt- out’].” Id. at 812. While making it crystal clear that an absent class member whose money damages claims will be extinguished by a class action settlement must be afforded an opt-out right, Shutts, however, left open whether an out-of-state member of a class that seeks predominantly equitable relief has a due process right to opt out of the class. Colt unequivocally answered that question in the affirmative. The Court explained in Colt: Our recognition that the class complaint here sought predominantly equitable relief in no way alters our conclusion that it was erroneous 14 for the trial court to approve a settlement that purported to extinguish Merritt’s damages claims. By precluding out-of-State class members from litigating damage claims without giving them a chance to opt out of the class, the settlement negated the long-standing practice of distinguishing between class actions for monetary and equitable relief and granting varying degrees of procedural protection depending upon the relief sought. Colt, at 198. That “the relief initially demanded [in the complaint] was largely equitable” was not a fact that would “permit the [trial] court to circumvent the Supreme Court’s holding in Shutts and bind Merritt to a settlement that eliminates constitutionally protected property interests without due process.” Id. This would give class counsel the right to dictate the “degree of due process accorded plaintiffs and the binding effect consequently accorded settlements” through the way in “which class counsel styles an action through the mechanism of the class complaint.” As the Court put it, “[l]itigants should not be able to subvert substantial constitutional rights by sleight of hand and artful pleading.” Id. at 199. * * * To this point, Colt and the instant case are for due process purposes indistinguishable, and the relevant rule that emerges from Colt is simple: where settlement of a class action litigation would result in extinguishment (whether by release or otherwise) of the property right that inheres in a legal claim for damages, an out-of-state class member may be bound, but in order to do so, that class member must be afforded notice and the opportunity to opt out of the class. Id. at 15 196-97. Nothing less, according to Colt, will suffice. In contrast, as the Court also held, “there is no due process right to opt out of a class that seeks predominantly equitable relief.” Id. at 195. Yet appellants argue that the lower courts here misread Colt. App. Br. at 11- 12. They attempt to seize upon the two holdings in Colt as irreconcilable with the lower courts’ holdings in the instant case, arguing that since “predominantly equitable relief” necessarily implies some quantum of legal relief, the lower courts’ reading of Colt as requiring an opt-out right for “all” damages claims cannot be correct. App. Br. at 12. But the reason these appear irreconcilable is because the Court was addressing holdings of the lower courts in Colt that arose in distinctly different procedural settings, the first focusing on the effect of the approved merger and the releases in the stipulation of settlement and the second on the prayer for relief in the complaint-and what due process rights they triggered at those points in the case. Their reconciliation was unnecessary in order to arrive at the proper rule to apply in this case. This puts a full stop to appellants’ arguments that the result they seek can somehow be squared with Colt, if only Colt is read as they contend it should. It cannot. There then remain two possibilities for appellants to prevail: either there is some additional or subsidiary rule that would permit the proposed Google/On2 16 merger settlement without an opt-out right (there is not), or Colt must be overruled (it should not). We proceed to examine each of appellants’ arguments on these contentions in order. C. There is neither precedent nor logic for eliminating opt-out rights because damages may be awarded on a class-wide basis. Notwithstanding the applicability and the clarity of Colt’s holding, appellants devote most of their brief to arguing for the existence of a rule that is nowhere to be found in either Shutts or Colt, and that will not withstand scrutiny in any event. What they say, stripped of its dressing, is that in the case of damage claims where individualized proof of damages is unnecessary (or at least unnecessary beyond a simple calculation), opt-out rights need not be afforded. App. Br. at 3, 35-40. This not only stands Colt on its head, but simply ignores its due process rationale as well as the Supreme Court’s holding in Shutts.8 Appellants endeavor to distinguish the property rights that the objectors sought to preserve here by relying not on this Court’s decision in Colt, but rather on the respondents’ brief in that case, which they say emphasized what appellants 8 Appellants frame their suggested test in various ways, sometimes characterizing the legal relief sought as merely “incidental” to equitable relief, at other times characterizing the legal remedy as one that is “indivisible” as to the class, and sometimes referring to such legal claims as those yielding damages that do not require individualized inquiry as to each class member. However they frame it, it comes down to the same thing: appellants contend that there is a category of damage claim as to which no opt-out right is required by due process where a class member has no jurisdictional ties to New York. 17 characterize as “something special or unique about Merritt’s particular claim.” App. Br. at 15. Appellants further suggest that because Merritt allegedly possessed damage claims that were based on the earlier recapitalization and not only on the merger, these supposedly “distinct” claims were the linchpin of this Court’s due process holding. App. Br. at 16. Needless to say, however, it is this Court’s decision itself, not respondents’ appellate brief in the underlying case, that governs, and there is no indication in the Court’s decision that its holding is limited to damage claims concerning the recapitalization. Rather, each of the Court’s references to Merritt’s claims for monetary relief is couched in broad language concerning “damage remedies” relating to “the offer and the merger.”9 Likewise here, the settlement stipulation would not only have released claims for equitable relief, but also purported to extinguish a host of discrete damage claims relating to the merger in any future suit. The agreement therefore affects (by barring) the “entirely separate and distinct right” of class members to pursue damages claims which, under Shutts and Colt, are constitutionally protected property rights of out-of-state members. As in Colt, because the settlement stipulation here would extinguish all claims for damages against defendants, 9 See Colt, 77 N.Y.2d at 197 (“The settlement in this case gave class members relief that was essentially equitable in nature, but exacted as a price for that relief a concession that the class members could not pursue damage claims based on the merger.”) (Emphasis added.) See fn. 4, supra at 3 (describing releases in Colt). 18 including independent causes of action seeking monetary relief, the trial court was correct in refusing to approve the settlement without an opt-out provision. Appellants further contend, however, that there are different classes of legal claims for monetary relief, and they suggest that where such legal claims are merely “incidental” to “predominantly equitable relief” this somehow affects the due process inquiry, rendering it proper to bind absent, out-of-state class members in the instance of such “incidental” claims. In this connection, they contend that the Supreme Court’s holding in Wal- Mart v. Dukes, 131 S.Ct. 2541 (2011)-that claims for monetary relief that are not incidental to injunctive or declaratory relief may not be certified under Federal Rule 23(b)(2)’s mandatory class certification provision-is dispositive here.10 The Wal-Mart decision, however, is inapposite to the issue on appeal here, and especially so given the starkly divergent (and pivotal) factual and procedural postures of the class actions underlying both. Wal-Mart originated as a purported nationwide class action brought on behalf of all current and former female Wal-Mart employees. Plaintiffs alleged that Wal-Mart had discriminated against them and the class on the basis of gender in violation of Title VII of the Civil Rights Act of 1964. Wal-Mart, 131 S.Ct. at 10 Fed. R. Civ. P. 23(b)(2) provides, “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” Fed. R. Civ. P. 23(b)(2). 19 2547. The complaint sought injunctive and declaratory relief, punitive damages, and backpay. Id. Plaintiffs did not seek damages at law other than punitive damages. Because backpay is considered to be equitable, id. at 2560, the Supreme Court viewed that remedy as separate from any damage claim for purposes of determining class certification. Id. at 2549. Wal-Mart opposed the motion for class certification on the backpay claims under Federal Rule of Civil Procedure 23(b)(2), arguing that the rule provides for certification of class actions seeking only injunctive and declaratory relief, and that backpay was not within those categories. Id. The Court agreed with Wal-Mart in holding that backpay claims for money were not certifiable under Rule 23(b)(2). The holding was limited to the construction of Rule 23(b)(2) within the specific statutory framework of Title VII.11 The Court recognized that claims for “incidental” monetary relief cannot be certified under that rule, and found that the specific backpay claims were not “incidental” to plaintiffs’ claims for injunctive 11 See Wal-Mart¸131 S.Ct. at 2560 (“We need not decide in this case whether there are any forms of ‘incidental’ monetary relief that are consistent with the interpretation of Rule 23(b)(2) we have announced and that comply with the Due Process Clause.”); id. at 2557 (“One possible reading of [Rule 23(b)(2)] is that it applies only to requests for such injunctive or declaratory relief and does not authorize the class certification of monetary claims at all. We need not reach that broader question in this case, because we think that, at a minimum, claims for individualized relief (like the backpay at issue here) do not satisfy the Rule.”) The Court further circumscribed its holding in noting: “In the context of a class action predominantly for money damages we have held that absence of notice and opt out violates due process. While we have never held that to be so where the monetary claims do not predominate, the serious possibility that it may be so provides an additional reason not to read Rule 23(b)(2) to include the monetary claims here.” Id. at 2559 (citations omitted). 20 and declaratory relief under Title VII’s detailed remedial scheme and procedures for trying pattern-or-practice cases, under which Wal-Mart would litigate statutory defenses to claims of eligibility for backpay employee-by-employee. Id. at 2560- 61. “[T]the necessity of that litigation,” the Court held, “prevent[ed] backpay from being ‘incidental’ to the classwide injunction.” Id. at 2561. Wal-Mart dealt only with federal civil procedure and the mandatory certification provision of Rule 23(b)(2), but this case is a state court class action authorized by the Civil Practice Law and Rules and subject to Article 9 thereof. That fact alone is sufficient basis for this Court to disregard Wal-Mart. But even if it were not, there are striking differences between the federal Rule 23(b)(2) and Article 9 that also make the case inapplicable here. Here the representative plaintiff sought class certification regarding causes of action sounding in tort and approval of the settlement under Article 9 of the CPLR. As this Court has recognized, “[u]nlike Rule 23,” which defines three types of class actions and only requires notice and opt-out rights as to one type, the New York statute “contemplates [ ] that a Judge may choose to exercise discretion to permit a class member to opt out of a class.” Colt, 77 N.Y.2d 194 (citing CPLR §§ 903, 904). While Article 9 has much in common with its federal counterpart, its distinct flexibility differentiates it from Rule 23 in at least one respect that is critical to the outcome here-the CPLR authorizes trial courts to expand due 21 process rights where a class settlement would extinguish out-of-state class members’ damages claims separate from class-wide equitable relief. Appellants’ reliance on Wal-Mart under the facts simply cannot be squared with New York law.12 Moreover, if Wal-Mart is germane to broader notions of due process, it is in line with the due process protections emphasized by Shutts and Colt, and only reinforces the soundness of the trial court’s refusal here to approve the proposed settlement without an opt-out provision. The rationale adopted by the Supreme Court in rejecting the “predominance test” advocated by plaintiffs in Wal-Mart is a useful illustration of this. Plaintiffs there argued that their claims for backpay were appropriately certified as part of a class under Federal Rule 23(b)(2) because those claims did not “predominate” over their requests for injunctive and declaratory relief. Wal-Mart, 131 S.Ct. at 2559. The Court recognized that such a “predominance” test would create “perverse incentives for class representatives to place at risk potentially valid claims for monetary relief,” such as employees’ claims for compensatory damages that the named representative plaintiffs declined to include in their complaint there, and threatened “the possibility [ ] that individual class members’ 12 The same is true of appellants’ extensive reliance on other federal court cases and on Delaware case law, which are of equally little precedential value to the determination of the pertinent issues here. 22 compensatory damages claims would be precluded by litigation they had no power to hold themselves apart from.” Id. That possibility, the Court held, “underscores the need for plaintiffs with individual monetary claims to decide for themselves whether to tie their fates to the class representatives’ or go it alone-a choice Rule 23(b)(2) does not ensure that they have.” Id. So too here. Here, as in Wal-Mart, objectors chose to “go it alone,” and the trial court’s refusal to approve a settlement without an opt-out right was necessary to preserve that choice. Finally, Wal-Mart is essentially a case about class certification and manageability. It is not a case about due process rights. In choosing to rely on its analysis, appellants use the wrong measure. Class certification and manageability may require, as they did in Wal-Mart, one result; due process requires another entirely. II. Colt Should Not Be Overturned. A “‘compelling justification’ is required to cast aside precedent.” People v. Silva, 24 N.Y.3d 294, 300 (2014), citing and quoting People v. Peque, 22 N.Y.3d 168, 194 (2013). See People v. Lopez, 16 N.Y.3d 375, 384 n. 5 (2011); People v. Taylor, 9 N.Y.3d 129, 148-49 (2007); E. Consol. Props. v. Adelaide Realty Corp., 95 N.Y.2d 785, 787 (2000). 23 Such a compelling justification may exist when the court’s prior decision “leads to an unworkable rule, or ... creates more questions than it resolves.” Taylor, 9 N.Y.3d at 149. It may arise where adherence to a recent precedent “involves collision with a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience,” People v. Hobson, 39 N.Y.2d 479, 487 (1976), quoting Helvering v. Hallock, 309 U.S. 106, 119 (1940), or where “a preexisting rule, once thought defensible, no longer serves the ends of justice or withstands the cold light of logic and experience.” Policano v. Herbert, 7 N.Y.3d 588, 604 (2006) (internal quotation marks and citation omitted). A. Appellants have advanced no justification for overruling Colt Recognizing that they bear a heavy burden in persuading this Court to overrule Colt and disregard stare decisis, appellants would instead have this Court “overrule [the] language” of Colt “to the extent . . . [it] must be read to require opt- out rights in this case.” App. Br. 22. If this is not sophistry, we do not know what it is. In fact, appellants actually ask this Court to overrule Colt. They must meet the foregoing standards. All of appellants’ arguments turn on one proposition-that the damages claims objectors sought to preserve here by insisting on an opt-out right were 24 “incidental” to the predominantly equitable relief plaintiff sought in his complaint. But as that proposition falls, so falls its corollary. It simply cannot be said here that these legal damages claims were “incidental” to equitable relief. Stockholder cases challenging mergers of course have many attributes in common. One is that parties-plaintiff often seek equitable relief to compel a corporation and its officers and directors to carry out their fiduciary duties. Another is that damages in most such cases are quite similar- they typically flow from inadequate disclosure or from an inadequately designed sales process, in breach of such fiduciary duties. And a third is that such equitable claims and such damages claims often occur together, sometimes even asserted in the same complaint. That damage claims arising from corporate mergers are often coincident does not, however, render them “incidental.” “Incidental” means “happening as a result of or in connection with something more important; casual.” WEBSTER’S NEW WORLD COLLEGE DICTIONARY 721 (2004). The equitable and legal claims that often arise from mergers may well be concomitants, but that does not render the latter less important for due process purposes than the former, and surely does not relegate the latter to a category undeserving of due process protection. Appellants’ argument to the contrary is wrong and illogical. If followed to its natural end, it would mean that when such legal damage claims are asserted 25 standing alone, they are entitled to the due process protection of notice and opt-out, but when joined with equitable claims (as pleading rules allow), they are not. It is simply not tenable to argue that such claims lose their character for due process purposes when joined with equitable claims.13 Appellants point to Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998), in support of their argument that Colt’s language should be overruled. But whatever may be said for the definition of “incidental” damages given by the court of appeals in that case, the case itself is inapposite. 14 As in Wal-Mart, the court there was examining Federal Rule of Civil Procedure Rule 23, not CPLR Article 9. The question before the court was unique to Rule 23 and subdivision (b)(2) of that rule: whether claims for money damages suffered by a putative class of African- American persons allegedly discriminated against in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., and 42 U.S.C. § 1981 were “sufficiently incidental to injunctive and declaratory relief being sought to permit them to be joined with claims for equitable relief under Rule 23(b)(2).” No such distinction can arise under CPLR Article 9. In sum, no meritorious argument for overruling Colt has been advanced. 13 As the Appellate Division here held, “[a]s in Colt, the settlement agreement at issue here impinges upon a distinct right, namely the right to pursue a claim for damages.” (A5) 14 Incidental damages are those which “flow directly from liability to the class as a whole on the claims forming the basis of the injunctive or declaratory relief.” Id. at 415. CONCLUSION The decision and order of the Appellate Division, Second Department should be affirmed in its entirety. Dated: New York, New York September 18, 2015 Of Counsel: Martin E. Karlinsky, Esq. Amy A. Lehman, Esq. KARLINSKY LLC By: 1500 Broadway, 8th Floor New York, New York 10036 (646) 437-1430 Attorneys for Non-Party Respondents 26