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: FREDERICK LIU (Admitted Pro Hac Vice) Time Requested: 30 Minutes APL-2015-00135 Queens County Clerk’s Index No. 21262/09 Court of Appeals STATE OF NEW YORK MICHAEL JIANNARAS, Plaintiff, —against— MIKE ALFANT, MIKE KOPETSKI, J. ALLEN KOSOWSKY, JAMES MEYER, AFSANEH NAIMOLLAH, THOMAS WEIGMAN, and ON2 TECHNOLOGIES, INC., Defendants-Appellants, —and— GOOGLE INC., Defendant, KATHLEEN M. ACKERMAN, et al., Non-Party Respondents. REPLY BRIEF FOR DEFENDANTS-APPELLANTS d DAVID WERTHEIMER HOGAN LOVELLS US LLP 875 Third Avenue New York, New York 10022 Telephone: (212) 918-3000 Facsimile: (212) 918-3100 NEAL KUMAR KATYAL FREDERICK LIU (Admitted Pro Hac Vice) MATTHEW A. SHAPIRO* HOGAN LOVELLS US LLP Columbia Square 555 Thirteenth Street, NW Washington, D.C. 20004 Telephone: (202) 637-5600 Facsimile: (202) 637-5910 *Admitted only in New York; *supervised by firm members Counsel for Defendants-Appellants Mike Alfant, Mike Kopetski, J. Allen Kosowsky, James Meyer, Afsaneh Naimollah, Thomas Weigman, and On2 Technologies, Inc. October 19, 2015 i CORPORATE DISLCOSURE STATEMENT Pursuant to Rule 500.1 (f) of the Rules of Practice of the Court of Appeals, Defendant-Appellant On2 Technologies, Inc. (now know as On2 Technologies, LLC), states that the following are its parents, subsidiaries, and affiliates: 1. Alphabet Inc. 2. Google Inc. 3. Google Finland Oy. ii STATEMENT OF RELATED LITIGATION Shortly after this action was commenced in New York State Supreme Court, parallel actions were filed in the Delaware Court of Chancery (see In re On2 Technologies, Inc. Shareholder Litig. [Del Ch, Cons. C.A. No. 4793-VCG]). The plaintiffs in the Delaware actions joined the global settlement agreement that was submitted to the Supreme Court for approval in this ca e. The Delaware court stayed the Delaware actions pending approval of the settlement agreement and has continued to stay those actions pending the outcome of this appeal. iii TABLE OF CONTENTS Page CORPORATE DISLCOSURE STATEMENT .................................................. i STATEMENT OF RELATED LITIGATION ........................................................ ii TABLE OF AUTHORITIES .............................................................................iv INTRODUCTION ......................................................................................... 1 ARGUMENT..................................................................................................... 2 I. COLT HOLDS THAT OPT-OUT RIGHTS ARE NOT REQUIRED IN CLASS ACTIONS INVOLVING EQUITABLE RELIEF AND INCIDENTAL DAMAGES ........................... 2 II. DUE PROCESS DOES NOT REQUIRE OPT-OUT RIGHTS IN CLASS ACTIONS INVOLVING EQUITABLE RELIEF AND INCIDENTAL DAMAGES .............................................................. 10 CONCLUSION .......................................................................................... 14 iv TABLE OF AUTHORITIES Page(s) CASES: Allison v Citgo Petroleum Corp., 151 F.3d 402 (5th Cir 1998) ................................................................... 6, 11 Amchem Prods., Inc. v Windsor, 521 US 591 (1997) .................................................................................. 5 Dukes v Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir 2010, en banc) .......................................................... 9 In re Colt Indus. Shareholder Litig., 77 NY2d 185 (1991) ................................................................................. passim Klein v Robert’s Am. Gourmet Food, Inc., 808 NYS2d 766 (2d Dept 2006)................................................................... 5 People v Peque, 22 NY3d 168 (2013) ................................................................................... 11 People v Silva, 24 NY3d 294 (2014) ................................................................................... 11 People v Anderson, 66 NY2d 529 (1985) ..................................................................................... 6 Phillips Petroleum Co. vShutts, 472 US 797 (1985) .............................................................................. 4, 5 Wal-Mart Stores, Inc. v Dukes, 564 US —, 131 S Ct 2541 (2011) ............................................................. passim STATUTES : CPLR 901 .......................................................................................................... 5 CPLR Article 9 .................................................................................................. 8 TABLE OF AUTHORITIES—Continued Page(s) v RULES: Fed Rules Civ Pro rule 23 ...................................................................... 5, 7, 8 Fed Rules Civ Pro rule 23 (b) (3) ............................................................... 14 OTHER AUTHORITY : Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 NYU L Rev 97 (2009) .......................................................................... 6 1 INTRODUCTION This Court’s decision in In re Colt Industries Shareholder Litigation (77 NY2d 185 [1991]) addressed the requirements of the Du Process Clause in the class action context. It held that the “exact nature of the relief sought by the class” determines the procedural protections to be afforded out-of-state class members and that “there is no due process right to opt out of a class that seeks predominantly equitable relief” (id. at 193, 195). The objectors in this case, however, eschew that nuanced analysis in favor of a sweeping rule: In any case involving any type of damages claim, non-resident class members must be granted the right to opt out. Such a broad categorical rule cannot be reconciled with this Court’s opinion in Colt or that case’s facts, and the objectors make no seri us attempt to do so. As On2 explained in its opening brief, Colt stands for the much more limited proposition that due process requires opt-out rights for out-of-state class members only when the suit resolves their claims for individualized damages—that is, damages that require individualized calculations for each class member. Opt-out rights are not required, by contrast, when the suit resolves only claims for equitable relief and incidental damages—that is, damages that flow to the class as a whole on a non-individualized basis. The objectors do not dispute that the only damages involved in this case are incidental under that definition. 2 It is thus the objectors, not On2, who seek to turn his appeal into a referendum on Colt’s continued validity, by advocating an untenable reading of this Court’s opinion in that case. But if Colt must be read as the objectors urge it should be, then that aspect of the decision should be overruled. All three factors of a traditional due process analysis—the class members’ interests, the risk of an erroneous deprivation, and the interests of other aff cted parties and the State itself—weigh in favor of permitting claims for equitable relief and only incidental damages to proceed on behalf of a non-opt-out class. The objectors do not contest this analysis. Nor do they seriously address the decisions of other state and federal courts holding that due process does not require opt-out rights in cases involving incidental damages and routinely certifying non-optu classes in cases materially indistinguishable from this one. Eliminating the conflict of authority created by the decisions below provides a compelling justification for overruling any erroneous interpretation of the Due Process Clause Colt may have rendered. The Appellate Division’s decision should be reversed. ARGUMENT I. COLT HOLDS THAT OPT-OUT RIGHTS ARE NOT REQUIRED IN CLASS ACTIONS INVOLVING EQUITABLE RELIEF AND INCIDENTAL DAMAGES The objectors read Colt as establishing the categorical rule that due process requires opt-out rights for out-of-state class membrs in any class action “where 3 settlement of [the] class action . . . would result in extinguishment (whether by release or otherwise) of the property right that inheres in a legal claim for damages” (brief for non-party respondents at 14). But this Court’s opinion in Colt forecloses that reading. To be sure, Colt ultimately held that the out-of-state objector in that case, the James S. Merritt Co., was entitled to opt out of the class settlement, which purported to release claims for damages as well as claims for equitable relief (Colt, 77 NY2d at 197). Before rendering that holding, however, this Court also held that “there is no due process right to opt out of a class that seeks predominantly equitable relief,” and it affirmed the trial court’s initial decision to certify a non-opt-out class seeking damages as well as equitable relief (id. at 195 [emphasis added]). The objectors do not merely ignore this first holding; they distort it, asserting that “Colt unequivocally answered . . . in the affirmative” the question “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” (brief for nn-party respondents at 13 [emphasis added]). And the reason they do so is pla n: It cannot simultaneously be the case (1) that due process requires opt-out rights w enever “settlement of a class action . . . would result in extinguishment . . . of . . a legal claim for damages” (id. at 14), and (2) that due process does not require opt-out rights for “a class that seeks predominantly equitable relief,” which by definition also seeks some 4 damages (Colt, 77 NY2d at 195 [emphasis added]). This Court should adhere to its decision in Colt and reject the objectors’ attempt to impose a categorical rule requiring opt-out rights whenever a class action involves any damages whatsoever. The objectors’ main attempt to reconcile their categorical rule with Colt’s first holding is to contend that Colt’s two holdings “arose in distinctly different procedural settings,” with this Court approving certification of a non-opt-out class at the complaint stage but requiring opt-out rights at the settlement stage (brief for non-party respondents at 15). But the objectors cite not a single case suggesting that this distinction makes any difference as a matter of due process. For good reason. In deciding what process is due in a class action case, courts have focused on the kind of relief involved, not the case’s procedural posture. Thus, the U.S. Supreme Court’s decision in Phillips Petroleum Co. vShutts—on which the objectors heavily rely1—held that due process requires opt-out rights in class actions involving claims “wholly or predominately for money judgments” (472 US 797, 811 n 3 [1985]; see id. at 811-812). And though the class in that case had been certified for trial, the Court never suggested that the result would have been 1 The objectors contend that Shutts supports a categorical rule requiring opt- out rights in any class action involving any form of monetary relief (see brief for non-party respondents at 11-14). But Shutts expressly reserved judgment on that very question, “limit[ing]” its analysis of due process requirements to “those class actions which seek to bind known plaintiffs concerning claims wholly or predominantly for money judgments” (472 US at 811 n 3 [emphases dded]). It “intimate[d] no view concerning other types of class actions” (id.), including class actions, such as this one, involving equitable relief and only incidental damages. 5 any different had it been certified for settlement instead (id. at 801). This Court similarly made clear in Colt that its decision turned on “the exact nature of the relief sought” (77 NY2d at 193), not the stage of the litigation. Whether a class is being certified at the outset of a case for purposes of trial or at the end only for purposes of settlement, the due process question remains the same: whether absent class members have been afforded sufficient process such that it is fair to hold them to be bound by the classwide judgment and to thereby preclude their individual claims. That is why the same class-certification prerequisites apply to non-settlement and settlement-only classes under both CPLR 901 and Federal Rule of Civil Procedure 23 (see Amchem Prods., Inc. v Windsor, 521 US 591 [1997]; Klein v Robert’s Am. Gourmet Food, Inc., 808 NYS2d 766, 772 [2d Dept 2006]). As a matter of due process, the objectors’ proposed lin between Colt’s two holdings is a distinction without a difference. As explained in On2’s opening brief, the only way to give independent effect to each of Colt’s two holdings is to recognize that each concerns cla ses involving different kinds of damages (see brief for defendants-appellants at 12-17). In particular, under Colt’s first holding, “there is no due process right to opt out of a class that seeks predominantly equitable relief” (77 NY2d at 195). And a class seeks predominantly equitable relief so long as the only damages at issue are incidental to the equitable relief, in that they “ ‘flow directly from liability to the 6 class as a whole on the claims forming the basis of the injunctive or declaratory relief’ ” and therefore do not “ ‘entail complex individualized determinations’ ” or “ ‘require additional hearings to resolve the disparate merits of each individual’s case’ ” (Wal-Mart Stores, Inc. v Dukes, 564 US —, —, 131 S Ct 2541, 2560 [2011], quoting Allison v Citgo Petroleum Corp., 151 F3d 402, 415 [5th Cir 1998]). Under Colt’s second holding, by contrast, due process requires opt-out rights only when a class action involves individualized damages—that is, damages that require inquiry into the “ ‘disparate merits of each individual’s case’ ” and thus disrupt the “ ‘indivisible nature’ ” of the class remedy (id. at —, —, 131 S Ct at 2557, 2560, quoting Allison, 151 F3d at 415, and Richard A. Nagareda, Cl ss Certification in the Age of Aggregate Proof, 84 NYU L Rev 97, 132 [2009]). The distinction between incidental and individualized damages not only gives each of Colt’s two holdings independent effect, but also makes sense of the case’s facts (see brief for defendants-appellants at 15-16). The obj ctors essentially ask this Court to ignore Colt’s facts and to instead focus on the decision’s second holding in isolation (see brief for non-party respondents at 17). But an opinion’s holding must be understood in—and confined to—its factual context (see People v Anderson, 66 NY2d 529, 535 [1985]). The factual context of Colt’s second holding was Merritt’s damages claims arising from Colt’s prior recapitalization—claims that turned on facts “unique” to Merritt and that were 7 “separate and distinct” from the damages claims advanced in the class complaint, which arose from Colt’s subsequent merger (brief for respondents in Colt, 77 NY2d 185 [No. 5148/88], at 2, 35). Such individualized damages claims were not at issue when the plaintiffs sought class certification based on the claims in the complaint, and this Court accordingly held that dueprocess did not require opt-out rights at that point. Only when the parties proposed a settlement agreement that swept more broadly than the complaint—and thus encompassed Merritt’s individualized damages claims based on the recapitaliza ion—did this Court deem opt-out rights to be necessary.2 The objectors offer a number of arguments for why the distinction between incidental and individualized damages claims is supposedly inconsistent with Colt, but none withstand scrutiny. First, the objectors point out that the case in which the Supreme Court of the United States embraced the istinction, Wal-Mart Stores, Inc. v Dukes, formally concerned the prerequisites for class certification under Federal Rule of Civil Procedure 23, not the requirements of due process (brief for non-party respondents at 20, 22). That has no bearing, however, on whether the 2 The objectors are incorrect that the trial court in Colt “den[ied] Merritt’s application to exclude itself from the class ‘when it was first certified’ ” (brief for non-party respondents at 10, quoting Colt, 77 NY2d at 195). Merritt never filed such an application because it did not even “learn[] of the pendency of the class action” until it “read[] the notice contained in the May 17[, 1988] edition of the Wall Street Journal”—more than a month after the initial class certification decision (Colt, 77 NY2d at 190). 8 distinction is also relevant to the due process question—and, in particular, whether it makes sense of Colt’s two holdings. In any event, the Court in Wal-Mart explicitly acknowledged that, in holding that a class action involving individualized damages claims cannot be certified un er the provision of Rule 23 governing class actions seeking equitable relief, it was partly motivated by due process concerns (ee Wal-Mart, 564 US at —, 131 S Ct at 2559). The Court thus attached constitutional significance to the distinction between incidental and individualized damages claims. Second, the objectors contend that, in contrast to Rule 23, CPLR Article 9 has “distinct flexibility,” in that it “ ‘contemplates . . . that a Judge may choose to exercise discretion to permit a class member to opt out of a class’ ” (brief for non- party respondents at 20, quoting Colt, 77 NY2d at 194). But that is wholly beside the point. As in Colt itself, the question in this case is not whether t trial court had discretion, under Article 9 or otherwise, to afford out-of-state class members opt-out rights; the trial court clearly felt itself bound, as a matter of due process, to grant them (see A791-792). Indeed, the trial court suggested that discretionary considerations counseled against certifying an opt-out class, and declined to grant opt-out rights to class members who were New York residents (see A792). The question in this case is instead whether the trial court correctly concluded that the federal Due Process Clause, as construed in Colt, requires opt-out rights even 9 where the only damages claims at issue are incidental to he equitable relief sought. Colt’s first holding, read in light of Wal-Mart’s distinction between incidental and individualized damages, makes clear that the answer to that question is no. Third, the objectors emphasize the fact that the Supreme Court in Wal-Mart rejected the plaintiffs’ and Ninth Circuit’s preferr d test for determining when damages claims “predominate” over a request for equitable relief (brief for non- party respondents at 21-22). That test, however, was very different from the distinction between incidental and individualized damages that the Court ended up applying in Wal-Mart and that many other courts have adopted. As explained, the distinction between incidental and individualized damages claims turns on a claim’s tendency to undermine class cohesion, not the claim’s relative importance to the plaintiffs. Under the Ninth Circuit’s and Wal-Mart plaintiffs’ “predominance” test, by contrast, damages claims “predominate” when they are “ ‘superior in strength, influence, or authority’ to the nonmonetary claims” (Wal- Mart, 564 US at —, 131 S Ct at 2550, quoting 603 F3d 571, 616 [9th Cir 2010, en banc]). The Supreme Court’s rejection of that testin no way impugns the distinction between incidental and individualized damages, which best makes sense of this Court’s decision in Colt. 10 * * * In sum, the objectors’ categorical rule requiring opt-out rights in class actions involving damages of any kind cannot be squared with either this Court’s opinion in Colt or that case’s facts. Colt instead stands for the more limited proposition that due process requires opt-out rights only in class actions that do not involve “predominantly” equitable relief. And after the Supreme Court’s decision in Wal-Mart, it is clear that a class action involves “predominantly” equitable relief so long as the only damages claims at issue are “incide tal” to the equitable relief sought, meaning that they do not require individualized determinations for each class member. Because the objectors do not dispute that the only damages claims at issue here are incidental under Wal-Mart, the trial court and Appellate Division erred in reading Colt to require opt-out rights in this case. II. DUE PROCESS DOES NOT REQUIRE OPT-OUT RIGHTS IN CLASS ACTIONS INVOLVING EQUITABLE RELIEF AND INCIDENTAL DAMAGES Despite the objectors’ protestations to the contrary, this Court need not overrule Colt in order to reverse the lower courts’ determinations that the objectors were entitled to opt out of the class settlement. But to the extent this Court concludes that language in Colt must be read to require opt-out rights in this case, that language should be overruled. Tellingly, the objectors never dispute On2’s argument in its opening brief that traditional due process principles do not require 11 opt-out rights when the only damages at issue are incidental to the equitable relief sought. And there is indeed a “ ‘compelling justification’ ” for overruling any contrary interpretation of the Due Process Clause that Colt may have rendered (People v Silva, 24 NY3d 294, 300 [2014], quoting People v Peque, 22 NY3d 168, 194 [2013]): Even if that contrary interpretation were “once thought defensible,” it “no longer serves the ends of justice or withstands the cold light of logic and experience” (Peque, 22 NY3d at 194 [internal quotation marks omitted]), as evidenced by the fact that every other state and federal court to have considered th question has held that due process does not require opt-out rights in cases involving only equitable relief and incidental damages (see brief for defendants- appellants at 36-40). The decisions below create a conflict of authority that threatens to subject defendants to varying legal obligations and to chill the use of the class action device in New York—“compelling” reasons to overturn Colt, if that decision must be read as the trial court and Appellate Division read it. In its opening brief, On2 explained at length why a traditional due process analysis compels the conclusion that opt-out rights are not required when damages are merely incidental (see brief for defendants-appellants at 27-35). To summarize: Because incidental damages “ ‘flow directly . . . to the class as a whole’ ” (Wal-Mart, 564 US at —, 131 S Ct at 2560 [emphasis omitted], quoting Allison, 141 F3d at 415), individual class members’ interest in pursuing their 12 claims for such damages on their own is minimal; there is little risk of an erroneous deprivation of class members’ claims for such damages if no opt-out rights are provided; and requiring opt-out rights in cases involving claims for such damages would threaten to create varying legal obligations for defendants and undermine the State’s interests in efficiency, finality, and the resolution of cases through settlement. The objectors do not so much as mention, let alone dispute, any of this analysis, effectively conceding that their reading of Colt conflicts with due process first principles. Nor do the objectors dispute that the federal and state courts that have considered the due process question have agreed that opt-out rights are not required in suits involving incidental damages, or that federal and state courts routinely certify class claims for incidental damages—including those challenging corporate mergers factually indistinguishable from this one—without affording out-of-state class members opt-out rights (see brief for defendants-appellants at 36- 40). The objectors attempt to distinguish these decisions (see brief for non-party respondents at 21 n 12, 25), but to no avail. For one thing, a number of the cited decisions did squarely address the due process question and explicitly held that due process does not require opt-out rights in suits involving incidental d mages (see brief for defendants-appellants at 36). And the other decisions certified non-opt- out classes in cases involving incidental damages, without seeing any due process 13 problem in eschewing opt-out rights in such circumstances (see id. at 36-39). That is precisely the opposite of what the trial court and Appellate Division held here. The objectors are notably silent on the deleterious consequences such a conflict of authority portends for class action practice in New York. Rather, the objectors deny that the damages at issue here are “incidental,” as they prefer to define the term. They do not, to be clear, deny that the damages at issue here are “incidental” as that term has been us d by other state and federal courts, including the Supreme Court in Wal-Mart (see id. at 18-22). They instead posit an alternative definition of the term according to which damages are incidental whenever they are somehow less “important” than the equitable relief they accompany (brief for non-party respondents at 24). But the objectors cite not a single court decision—not one—espousing that definition, which appears to be indistinguishable from the definition that the Supreme Court rejected in Wal-Mart (see supra at 9). Nor do they explain how their preferred definition follows from due process principles. There is simply no dispute that the damages at issue here are incidental according to the only definition that courts have found relevant to a due process analysis.3 3 In passing, the objectors assert that any holding that due process does not require opt-out rights in cases involving equitable relief and incidental damages would seem to entail an anomaly: If such damages ar ought alongside equitable relief, then opt-out rights are not required; but if such damages are sought on their own, absent any request for equitable relief, then opt-out rights are required (see CONCLUSION For all of the foregoing reasons and those stated in defendants-appellants' opening brief, the Appellate Division's order affirming the trial court's refusal to approve the settlement on behalf of a non-opt-out class should be reversed. October 19, 2015 Respectfully submitted, HOGAN LOVELLS US LLP By: 1lAA1~ Neal Kumar Katyal Frederick Liu (Admitted Pro Hae Vice) Matthew A. Shapiro* 5 5 5 Thirteenth Street, NW Washington, DC 20004 (202) 637-5600 David Wertheimer 875 Third Avenue New York, NY 10022 (212) 918-3000 *Admitted only in New York; supervised by firm members Counsel for Defendants-Appellants brief for non-party respondents at 24-25). This supposed anomaly, however, is purely academic-for two reasons. First, it is hard to imagine (and the objectors do not identify) a claim for incidental damages that would not also involve a claim for equitable relief-at the very least, a declaratory judgment of liability. Second, rules governing class certification, including Federal Rule of Civil Procedure 23 (b) (3 ), typically require notice and opt-out rights in all class actions seeking only damages, of whatever kind. Thus, in practice, any supposed anomaly is a product of sub-constitutional rules and statutes, irrespective of the Due Process Clause. 14
