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Editors' Note:  This article originally appeared as a "Client Alert" from Baker's Class Action Defense team.

Pointing out pitfalls in structuring enforceable class settlements, the Second Circuit Court of Appeals recently found that an absent class member's claims were not barred by a prior settlement in a Rule 23(b)(2) class where monetary relief was not incidental, and the publication notice was ineffective.

In Hecht v. United Collection Bur., Inc., No. 11-1327, 2012 U.S. App. LEXIS 17374 (2d Cir. Aug. 17, 2012), a plaintiff asserted claims identical to those in a settled class action against the same defendant certified under Rule 23(b)(2). Gravina v. United Collection Bur., Inc., No. 09-cv-4816, 2010 U.S. Dist. LEXIS 142718 (E.D.N.Y. Nov. 29, 2010). The Hecht plaintiff acknowledged that her claims were covered by the settlement class, but argued that binding her to the settlement would violate her due process rights because the publication notice (the only notice given) was constitutionally inadequate. The Second Circuit agreed and found that the settlement class certified in Gravina did not preclude, under principles of res judicata, the plaintiff's lawsuit in Hecht.

Citing the seminal case on class notice, Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985), the Hecht court stated that "[a]bsent class members have a due process right to notice and an opportunity to opt out of class litigation when the action is 'predominately' for money damages." The court also noted that "notice and an opportunity to opt out under Rule 23 now applies not only when a class action is predominately for money damages, but when a claim for money damages is more than 'incidental.'" Hecht, 2012 U.S. App. LEXIS 17374, at *9, citing Wal-Mart Stores, Inc. v. Dukes, 131 U.S. S.Ct. 2541, 2557 (2011).

The Court found that the monetary relief provided in the Rule 23(b)(2) settlement class was not "incidental," as Dukes requires, mainly because the injunctive relief was retrospective and there was "no showing of any real or immediate threat or that the plaintiff will be wronged again." Id. at *12. For example, in Gravina the complaint requested damages but did not mention injunctive relief. Moreover, the settlement class was defined as "victims of a completed harm with no reference to ongoing injury or risk of future injury . . . ", with no "forward looking" aspect of the injunctive relief Id. at *11-12. While the court signaled that Rule 23(b)(2) certification was inappropriate in this collateral attack on class certification, that issue was not before the court.

Given that damages predominated over injunctive relief, the Hecht plaintiff was entitled to notice that must be "the best practicable, reasonably calculated under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Id. at *15, citing Shutts, 472 U.S. at 812. Because the plaintiff had not received such notice she could not be bound by the settlement. Without defining what constitutes sufficient notice, the Court determined that a single notice published in a Monday edition of a national daily newspaper was definitively insufficient and cited examples of publication notice that was found to be adequate. Id. at *15. The Court noted that while notice through publication may be sufficient for absent class members who cannot be identified (id. at *15), the Gravina court did not determine whether the class members were ascertainable. Moreover, even if they were not ascertainable, the Court labeled the Gravina publication notice a "mere gesture," and noted that it was unaware of any case in the Second Circuit holding that a "single notice published in a single publication satisfied either due process or Rule 23(b)(3)." Id. at *16.

Hecht is instructional in two respects. First, the Second Circuit interprets Dukes as requiring individual notice when damages predominate in a certified class, instead of reading Dukes as an admonition regarding attempts to shoehorn a Rule 23(b)(3) damages class into Rule 23(b)(2). Class settlements under Rule 23(b)(2), particularly those with a monetary component, should emphasize the nature and importance of the prospective injunctive relief, and the parties should consider whether individual notice, to the extent that absent class members are ascertainable, is necessary to ensure subsequent suits are barred by res judicata. Second, the admonitions of Hecht about identifying class members for direct notice and the effectiveness of publication notice should be heeded to ensure that any class settlement has preclusive effect.

Second Circuit: Notice Required When Damages Not “Incidental” in a Rule 23(b)(2) Class