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New York Court of Appeals Bars Treble Damages in Donnelly Act Class Actions

February 22, 2007

Robert Grass

On February 22, 2007, the New York Court of Appeals issued an important decision concerning class actions under New York’s Donnelly Act. See Sperry v. Crompton Corp., 2007 N.Y. LEXIS 189 (N.Y. Feb. 22, 2007). The case involved a purported class action on behalf of consumers who had purchased tires that had been manufactured with the defendants’ rubber processing chemicals. The plaintiff alleged that defendants had engaged in a price fixing conspiracy that resulted in overcharges to tire manufacturers, which were passed through the chain of distribution to consumers.

Under New York CPLR 901(b), class actions to recover a penalty are prohibited unless such class actions are specifically authorized by statute. The Court of Appeals held that the treble damages provision of the Donnelly Act constituted a penalty and, therefore, that class actions seeking treble damages under the Donnelly Act are prohibited. The Court of Appeals reached this conclusion “[a]lthough one third of the award unquestionably compensates a plaintiff for actual damages,” because “the remainder necessarily punishes antitrust violations, deters such behavior (the traditional purpose of penalties) or encourages plaintiffs to commence litigation -- or some combination of the three.”

The Court of Appeals noted that the Legislature previously had and currently is considering amending the Donnelly Act to expressly authorize class actions for treble damages, and stated that “it lies with the Legislature to decide whether class action suits are an appropriate vehicle for the award of antitrust treble damages.” The Court left open the issue of whether a plaintiff “may maintain a class action under the Donnelly Act by foregoing treble damages in favor of actual damages.”

Finally, the Court of Appeals also affirmed the dismissal of plaintiff’s unjust enrichment claim because the “the connection between the purchaser of tires and the producers of chemicals used in the rubber-making process is simply too attenuated to support such a claim” and because “in this situation it is not appropriate to substitute unjust enrichment to avoid the statutory limitations on the cause of action created by the Legislature.”

This is a significant decision because, barring legislative action, it will bar antitrust plaintiffs from bringing class actions for treble damages under the Donnelly Act, and, may bar entirely class actions under the Donnelly Act. This is particularly significant in actions commenced by and on behalf of indirect purchasers, which are not cognizable under federal antitrust law.

Copyright ©2007 by Kaye Scholer LLP. All Rights Reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide in structuring individual transactions but that professional advice be sought in connection with individual transactions. References herein to “Kaye Scholer LLP & Affiliates,” “Kaye Scholer,” “Kaye Scholer LLP,” “the firm” and terms of similar import refer to Kaye Scholer LLP and its affiliates operating in various jurisdictions.

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