<strong><em>Gordon v. Google, Inc.</em>, 26 N.Y.3d 350 (2015)</em></strong>

A class action settlement that releases out-of-state class members’ individual damage claims related to a merger requires an opt-out provision, even if the primary relief sought was equitable, to protect due process rights.

<strong>Summary</strong>

In this case, On2 Technologies, Inc. shareholders initiated a class action in New York State after Google acquired On2. The plaintiffs sought mainly equitable relief related to the merger. The parties reached a settlement that, without an opt-out provision, would release all merger-related claims. The New York Court of Appeals held that the settlement could not extinguish the rights of out-of-state class members to pursue individual damage claims because due process requires an opt-out option when a settlement involves the release of individual damage claims, regardless of the primary nature of the original complaint. This decision reaffirmed the precedent set in <em>Matter of Colt Indus. Shareholder Litig.</em>, emphasizing the protection of out-of-state class members’ rights.

<strong>Facts</strong>

Google and On2 Technologies, Inc. merged. A shareholder filed a class action in New York, alleging breach of fiduciary duty and seeking primarily equitable relief. Other similar actions were filed in Delaware. The plaintiffs in the New York and Delaware actions agreed to settle all claims related to the merger, which included dismissing the actions and releasing all claims with prejudice, but without providing an opt-out right for class members. Over 200 shareholders filed objections to the settlement, arguing that the lack of an opt-out right deprived out-of-state shareholders of their ability to pursue claims. The trial court found the settlement to be fair but refused to approve it because it did not afford out-of-state class members the opportunity to opt out.

<strong>Procedural History</strong>

A shareholder initiated a class action in New York State Supreme Court. The Supreme Court preliminarily certified the proposed settlement class but refused to approve the settlement due to the lack of an opt-out provision. The Appellate Division affirmed, with one justice dissenting. The New York Court of Appeals then affirmed the Appellate Division, answering the certified question in the affirmative.

<strong>Issue(s)</strong>

1. Whether a class action settlement that releases all merger-related claims, including potential damage claims, without providing an opt-out right, is permissible when the class includes out-of-state members?

<strong>Holding</strong>

1. No, because the settlement would deprive out-of-state class members of a cognizable property interest. The court held that the settlement could not extinguish the rights of out-of-state class members to pursue individual damage claims without an opt-out provision.

<strong>Court’s Reasoning</strong>

The court relied on the precedent set in <em>Matter of Colt Indus. Shareholder Litig.</em> and <em>Phillips Petroleum Co. v Shutts</em>. The court emphasized that, even if the original complaint sought primarily equitable relief, the proposed settlement’s broad release of all claims, including potential damage claims, triggered the need for an opt-out provision for out-of-state class members. The court reasoned that such a release would extinguish constitutionally protected property rights. The Court of Appeals distinguished <em>Wal-Mart Stores, Inc. v. Dukes</em>, which focused on federal class action rules, because this case was brought under New York law which allows the court discretion to permit a class member to opt out of a class.

<strong>Practical Implications</strong>

This decision reinforces the importance of opt-out provisions in class action settlements that affect out-of-state class members and release potential damage claims, regardless of the primary nature of the initial claims. This ruling necessitates careful drafting of settlement agreements in cases involving a mix of equitable and monetary relief, specifically ensuring compliance with due process and protecting the rights of non-resident class members to pursue their own actions. This case illustrates how courts will scrutinize the effects of settlements and will prioritize due process to ensure that class members have the option to pursue individual claims. Attorneys should assess settlements for the potential impact on out-of-state class members and make sure that the settlement provides for an opt-out option if any release of individual damage claims is included.