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Center for Class Action Fairness Changes Landscape of 'Cy Pres' Settlements

The Competitive Enterprise Institute’s Center for Class Action Fairness (CCAF) has long opposed abusive “cy pres” settlements that benefit third-party beneficiaries instead of compensating class members; Ted Frank wrote about the issue in 2008 before founding CCAF, and has testified about the problem before Congress. As Reuters reporter Alison Frankel wrote after CCAF’s win in the Eighth Circuit BankAmerica case, CCAF “continues to reshape federal judicial policy on giving class money to charity.” Thanks to CCAF’s efforts, settlements that cut out class members entirely are considerably more rare. The effect is not just in cases that CCAF has won, but in dozens of settlements responding to those precedents.

A recent Law360 article is the first to empirically document the sea change that has occurred thanks to CCAF’s efforts, especially after 2013, when CCAF petitioned the Supreme Court concerning an all-cy pres settlement. While the Supreme Court denied review, Justice Roberts wrote an unusual statement “respecting” the denial, opining that “this Court may need to clarify the limits on the use of such remedies.” An empirical study by Law360 found that settling parties in class-action settlements responded to the warning, and that cy pres settlements after 2013 almost always attempt to compensate class members before paying unrelated beneficiaries.

Cy Pres Relief in Practice and Theory

Gaos v. Google, a case CCAF recently argued in the Ninth Circuit on behalf of an objector, exemplifies the misuse of cy pres settlements. Law360 explains:

If you typed a query into Google anytime between Oct. 26, 2006, and April 25, 2014, chances are you're entitled to a cut of a multimillion-dollar class action settlement in California. Under the deal, however, you'll get nothing. Instead, a research lab at Carnegie-Mellon University and five other charities will get about $5 million on your behalf.

Is this fair?

That's the question facing the Ninth Circuit as it considers an appeal of the 2014 deal in privacy litigation accusing Google of selling user search terms containing personally identifiable information to advertisers.

Characteristic of such settlements, the agreement in Gaos does not even attempt to compensate absent class members, but instead diverts essentially all recovery to third parties—including the alma maters of the attorneys who negotiated the settlement.

In March 13 oral arguments on the matter, [CCAF Founder Theodore] Frank railed against the attorneys' decision not to even try distributing money to the class through some form of claims process. Allowing class counsel to invoke cy pres — the doctrine allowing settlement funds to be paid to charities rather than class members — just because of the massive size of the potential class would set a dangerous precedent in the age of mega-class actions, he said.

"The standard they are asking for would effectively turn every class action in the circuit into an all-cy pres settlement," Frank told the three-judge appellate panel.

Underlying Frank's objections is the question of whether cases resolved with cy pres distributions like the one in the Google case should really be class actions in the first place if class members don't receive any direct benefits.

Pre-negotiated cy pres settlements stray from the historical use of the doctrine.

Cy pres — pronounced “sigh pray” — wasn’t originally meant to be included in class actions. The term, which is derived from a French phrase for “as near as possible,” has its roots in trusts law, where it was used to move funds when the intent of a trust was no longer possible to fulfill. For example, if someone left behind a significant amount of money for a veterans charity that shut down, cy pres would allow the funds to go to a comparable veterans charity. As noted in Edwin Newman's “Law of Philanthropy” in 1955, cy pres was always meant to be a remedy of “last resort.”

In class action settlements, cy pres ceased acting as a remedy of last resort. After the Class Action Fairness Act of 2005 curtailed coupon settlements, which were previously employed by plaintiffs’ attorneys to justify their fees, Law360 found that cy pres settlement became increasingly common. Pre-negotiated cy pres recovery served much the same purpose as coupons did: procuring attorneys’ fees while creating the illusion of relief for class members.

CCAF finds such settlements inherently unfair because they compensate attorneys without compensating their purported clients, and may allow plaintiffs’ attorneys to effectively collect fees on charitable donations the defendant would make anyway.

Worse, plaintiffs’ attorneys can manipulatively designate cy pres beneficiaries to effectively double-dip in the settlement: the class’s money goes to the attorneys’ favorite charities, and then the attorneys get fees for the donations that were designed to benefit themselves rather than the class. For example, plaintiffs can name local charities or the judge’s alma mater, which may make the settlement more likely to be approved. Plaintiffs can alternatively select a charity where the judge sits as a board member, which can force the recusal of an especially rigorous judge.

If cy pres donations are treated as equivalent to cash payments to class members, then class counsel has no incentive to fulfill their fiduciary duty to the class; indeed, class counsel will always prefer the psychic benefits of a ceremony with a single $2.7 million check rather than mailing 100,000 $27 checks to class members who probably won’t even respond with a Christmas card.

Too, because class members need not be identified in all-cy pres settlements, the settling parties are better able to win approval of settlements with overbroad and incoherent class definitions, which would not pass muster under the rules. As Martin Redish, a Northwestern University School of Law professor, told Law360 “I see cy pres as a cover, a camouflage for the faux class action. It looks like a class action, but it’s really just a cardboard cutout of a class action.”

CCAF’s Successful Cy Pres Litigation

CCAF has opposed abusive cy pres settlements since its founding in 2009. Law360 discusses the impact of three cases where CCAF represented the objectors—Bluetooth, Nachshin, and Marek v. Lane.

One of CCAF’s first appellate victories, In re: Bluetooth Product Liability Litigation concerned a settlement providing $100,000 worth of cy pres donations and no direct class member relief, while providing favorable treatment for $800,000 in attorneys’ fees. The Ninth Circuit vacated approval of the settlement, citing several features that only benefited the attorneys.

Nachshin v. AOL addressed the propriety of cy pres relief directly. There, plaintiffs purported to represent a nationwide class of 66 million email users, but the settlement instead funneled cy pres money to a handful of local charities (one of which employed one of the named plaintiffs). The Ninth Circuit again vacated approval because the cy pres beneficiaries did not target the class. This opinion was influential, and quickly followed by the Third and Fifth Circuits.

Law360 identified Marek v. Lane as the “biggest shot across the bow” for questionable cy pres settlements. CCAF filed a cert petition over approval of the underlying settlement, which provided $3.5 million to attorneys and $6.5 million to a charity founded by Facebook. Absent class members, millions of Facebook users, received nothing under the deal. 

While the Supreme Court decided not to take the case — affirming the Ninth Circuit’s decision not to meddle with the parties’ private deliberations — Chief Justice John Roberts issued a statement that seemed to contain a warning, saying the court would be willing to take on a future case that provided the “opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation.”

This seemed to mark a turning point for cy pres. Many lawyers say they saw fewer examples of it being abused after that — and that its use overall as a tool for settling class actions seemed to dwindle.

“Between that decision and [the fact] that settling parties knew we were out there looking to raise these issues, I think the safer thing to do was to avoid the controversy and avoid anything that might smack of problematic cy pres,” said Frank, the objector in the Google case.

CCAF’s cert petition in Marek v. Lane turned out to have a profound effect on future settlements. Law360 analyzed 179 class action settlements in federal district courts and determined that from 2000 to 2012, cy pres was commonly employed to earmark money for third-party beneficiaries. Before Marek v. Lane, 29% of settlements employing cy pres provisions designated third-party beneficiaries to bypass class recovery. For the period from 2013 to 2016, this rate plummeted to 3%.

Nowadays, thanks to precedents litigated by the Center for Class Action Fairness, 97% of cy pres class action settlements appropriately pay cy pres recipients only after paying the class. For example, last year, the Center successfully persuaded a district court to send $2.3 million to class members in an antitrust settlement instead of to proposed questionable cy pres recipients like the Geena Davis Institute on Women in Media; in another case, a Second Circuit appeal prompted class counsel to reverse course and agree to distribute $405,000 to the class through the SEC Fair Fund instead of to third-party charities. That said, as the Gaos appeal illustrates, more work needs to be done to eliminate abusive cy pres settlements. CCAF has three federal appeals pending on the issue in the Third and Ninth Circuits: Gaos, EasySaver, and Google Cookie.