Sperry v. Crompton Corp.

OPINION OF THE COURT

Because we conclude that the treble damages provision in General Business Law § 340 serves as a penalty for purposes of CPLR 901 (b), such damages are not recoverable in a class action. We therefore affirm the order of the Appellate Division so holding.

Defendants Crompton Corporation, Uniroyal Chemical Company, Inc., Uniroyal Chemical Company, Ltd., Flexsys NV, Flexsys America LI] Bayer AG, Bayer Corporation, Rhein Chemie Rheinau GmbH and Rhein Chemie Corporation produce and sell rubber-processing chemicals that improve the durability, color control and heat resistance of rubber products, including tires, belts, hoses and footwear.^[1] Defendants do not manufacture or sell these end products.

In 2002, plaintiff Paul Sperry commenced this purported class action against defendants seeking damages on behalf of himself and all other consumers “who purchased tires, other than for resale, that were manufactured using rubber-processing chemicals sold by defendants since 1994. ”^[2] Sperry alleged that defendants entered into a price-fixing agreement, overcharging tire manufacturers for the chemicals, and that the overcharges trickled down the distribution chain to consumers.

The complaint set forth three causes of action. First, Sperry claimed, that defendants violated New York’s antitrust statute (General Business Law § 340 et seq.) — commonly known as the Donnelly Act — by engaging in an arrangement that restrained “[Competition or the free exercise of any activity in the conduct of any business, trade or commerce” (General Business Law § 340 ^[1]). Relying on the indirect purchaser provision of the Donnelly Act (General Business Law § 340 [6]), Sperry sought “three-fold the actual damages,” costs and attorneys’ fees pursuant to General Business Law § 340 (5). Second, Sperry asserted that defendants’ arrangement constituted a deceptive practice in violation of General Business Law § 349. Third, Sperry requested recovery on an unjust enrichment theory. Defendants moved to dismiss the complaint under CPLR 3211.

Supreme Court granted the motion and dismissed the complaint in its entirety. The court held that CPLR 901 (b), which precludes a class action to collect a penalty unless specifically authorized by statute, barred the Donnelly Act claim. The court determined that the General Business Law § 349 cause of action failed to state a claim because the allegations in the complaint did not come within the scope of that statute.^[3] It also dismissed the unjust enrichment claim because the parties lacked a sufficient relationship. The Appellate Division affirmed and we granted Sperry leave to appeal.

Relying on our decisions in Cox v Lykes Bros. ( 237 NY 376 [1924]), Bogartz v Astor ( 293 NY 563 [1944]) and Sicolo v Prudential Sav. Bank of Brooklyn, N.Y. ( 5 NY2d 254 [1959]), Sperry argues that the Donnelly Act’s treble damages provision is not a penalty under CPLR 901 (b). He also cites to federal precedents indicating that federal antitrust treble damages are primarily remedial in nature. Defendants counter that the courts below properly concluded that state antitrust treble damages are a penalty within the meaning of CPLR 901 (b).

General Business Law § 340 (5) provides that a successful antitrust plaintiff “shall recover three-fold the actual damages sustained thereby, as well as costs not exceeding ten thousand dollars, and reasonable attorneys’ fees.” The Donnelly Act, however, does not address private class actions. The main issue here is whether treble damages relief is available to class action plaintiffs or is barred by the application of CPLR 901 (b).

The Legislature enacted CPLR article 9 (§§ 901-909) in 1975 to replace CPLR 1005, the former class action statute. The prior class action provision, which remained largely unchanged through its various incarnations dating back to the Field Code of Procedure (see L 1849, ch 438, § 119), had been judicially restricted over the years and was subject to inconsistent results (see generally Moore v Metropolitan Life Ins. Co., 33 NY2d 304 , 313 [1973] [noting “the general and judicial dissatisfaction with the existing restrictions on class action”]). Consequently, in 1975, the Judicial Conference proposed a new class action statute that was designed “to set up a flexible, functional scheme whereby class actions could qualify without the present undesirable and socially detrimental restrictions” (13th Ann Report of Jud Conf on CPLR, reprinted in 1975 McKinney’s Session Laws of NY, at 1493). To that end, the Judicial Conference recom

Within weeks of passage of the class action statute, the Legislature undertook to amend the Donnelly Act. Before 1975, General Business Law § 340 (5) permitted only the recovery of actual damages. After a report was issued by a special grand jury investigating the anticompetitive practices of the petroleum industry in the early 1970’s, the Attorney General recommended a bill increasing penalties for violations of the Donnelly Act (see Mem of Dept of Law, Bill Jacket, L 1975, ch 333). Specifically, the bill added the treble damages provision and provided for costs and attorneys’ fees in General Business Law § 340 (5), while increasing the fines and criminal punishment measures contained in General Business Law § 341.^[4] According to the Attorney General:

“The provision for the recovery of treble damages in civil actions will not only serve as an additional deterrent to violations, and increase recoveries by public agencies, but will also eliminate the additional expense and cumbersome duplication of effort involved in bringing separate actions under the federal antitrust laws after a violation of the Donnelly Antitrust Act has been established (for example, by a criminal conviction)” (id.).^[5]

The legislation amending section 340 (5) and section 341 was enacted on July 1, 1975.

Although we have never construed the term “penalty” within the meaning of CPLR 901 (b), nor have we had occasion to characterize the treble damages provision of the Donnelly Act, we have articulated various rules regarding the identification of penalties in other contexts. For example, this Court has stated that, where a statute expressly denominates an enhanced dam

ages provision to be compensatory in nature, it will not be deemed a penalty (see Bogartz v Astor, 293 NY 563 , 565 [1944] [double payment recoverable under Workmen’s Compensation Law § 14-a not a penalty because the statute referred to “double compensation”]; Cox v Lykes Bros., 237 NY 376 , 379 [1924] [double payment available to seamen for late wages under federal statute not a penalty because the statute expressly provided that such compensation “shall be recoverable as wages”]). Furthermore, we have found that when used in a statute of limitations, “[t]he words ‘penalty or forfeiture’ . . . refer to something imposed in a punitive way for an infraction of a public law and do not include a liability created for the purpose of redressing a private injury, even though the wrongful act be a public wrong and punishable as such” (Sicolo v Prudential Sav. Bank of Brooklyn, N.Y., 5 NY2d 254 , 258 [1959]).^[6]

We have also indicated that the determination of whether a certain provision constitutes a penalty may vary depending on the context. In Cox, then-Judge Cardozo wrote: “We are to remember that the same provision may be penal as to the offender and remedial as to the sufferer. The nature of the problem will determine whether we are to take one viewpoint or the other” (Cox, 237 NY at 380 [citations omitted]; see also Life & Casualty Ins. Co. of Tenn. v McCray, 291 US 566 , 574 [1934, Cardozo, J.] [“ ‘Penalty’ is a term of varying and uncertain meaning”]).

Judge Cardozo’s observations in Cox are particularly relevant to this case. It is evident that by including the penalty exception in CPLR 901 (b), the Legislature declined to make class actions available where individual plaintiffs were afforded sufficient economic encouragement to institute actions (through statutory provisions awarding something beyond or unrelated to actual damages), unless a statute expressly authorized the option of class action status. This makes sense, given that class actions are designed in large part to incentivize plaintiffs to sue when the economic benefit would otherwise be too small, particularly when taking into account the court costs and attorneys’ fees typically incurred. Therefore, the term “penalty,” as used for purposes of the class action scheme, has broader application than that given in Sicolo for statute of limitations purposes.

The antitrust treble damages statute also does not state that such damages are compensatory (compare Bogartz, 293 NY at 565 ). Nor does its legislative history clearly indicate a compensatory purpose. Read together, we conclude that Donnelly Act threefold damages should be regarded as a penalty insofar as class actions are concerned. Although one third of the award unquestionably compensates a plaintiff for actual damages, the remainder necessarily punishes antitrust violations, deters such behavior (the traditional purposes of penalties) or encourages plaintiffs to commence litigation — or some combination of the three. But we need not break down the remaining damages into specific categories for purposes of determining whether it is a penalty under CPLR 901 (b). Where a statute is already designed to foster litigation through an enhanced award, CPLR 901 (b) acts to restrict recoveries in class actions absent statutory authorization.

It is notable that the Legislature added the treble damages provision to the Donnelly Act shortly after having adopted CPLR 901 (b). Clearly, the Legislature was aware of the requirement of making express provision for a class action when drafting penalty statutes, and could have included such authorization in General Business Law § 340.^[7] In sum, it lies with the Legislature to decide whether class action suits are an appropriate vehicle for the award of antitrust treble damages. Indeed, the Legislature has contemplated adding such authorization on a number of occasions.^[8]

We are not persuaded that the outcome of this case is controlled by statements in United States Supreme Court decisions