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U.S. Government Weighs in on 'Cy Pres' Abuse in Frank v. Gaos

On October 31, 2018, the Supreme Court will hear oral argument in Frank v. Gaos. The petitioners are class members challenging a class action settlement resulting from alleged privacy violations by Google’s search engine. Out of the $8.5 million fund created by the settlement, it paid nothing to class members. Instead, it paid $2.1 million to the lawyers, $1.1 to named plaintiffs and administrative costs, and $5.3 million in cy pres payments to a handful of unaffiliated third-party organizations, including class counsel’s alma maters and groups Google already supported through donations.

The Court will hear argument not only from the parties, but also from the United States through the Office of the Solicitor General, which submitted a brief of amicus curiae. As legal columnist Alison Frankel noted in Reuters, it is not unusual for the United States to take a position when the Court hears an important class action issue. And while dozens of amicus briefs were filed in the case, the Solicitor General’s Office has a track record stronger-than-most of making an impact on the Court’s opinions.

That’s largely good news for petitioners and Competitive Enterprise Institute attorneys Ted Frank and Melissa Holyoak because the government’s brief supports their position that the use of cy pres relief in class action settlements should be strictly curtailed. In fact, the Solicitor General advocates for the use of cy pres payments in class action settlements “only in rare circumstances” and only following judicial scrutiny more rigorous than the lower courts applied here.

Underlying the United States’ position are many of the same fundamental concerns with cy pres that animate CEI’s position. As the Solicitor General points out:

  • Cy pres relief tends to be a “red flag” of settlement unfairness because class members, whose claimed injuries are the basis for the lawsuit, are “‘presumptively’ entitled to a share of the funds” generated by the aggregate settlement of their claims. “But in a cy pres-only settlement like the one at issue here, injured class members receive no funds in exchange for the release of their claims.”
  • Cy pres exacerbates the risk of collusion by class counsel and the defendants. Class counsel often recover attorneys’ fees based on a percentage of the overall settlement fund, and courts typically count cy pres distributions as part of the fund even though they provide the class with no direct relief. Meanwhile, defendants may prefer cy pres relief because they may obtain a “reputational boost” from the charitable contributions and when they already contribute to the cy pres recipients, as here, they “may view the cy pres payment as little more than a change in accounting.”
  • Cy pres relief also creates a risk of self-dealing (or at least the appearance thereof) by the parties and even the court. “By allowing the parties or the court to select the recipients of charitable contributions, cy pres relief opens the door to apparent favoritism toward entities with which the parties or the court have prior affiliations, such as an alma mater or favorite local charity,” as evidenced in this case.
  • And, last but not least, cy pres relief may conflict with the remedies specified by Congress in the underlying statutes, such as here, where the statute allows plaintiffs to recover monetary damages for their injuries.

Recognizing the potential for abuse inherent in cy pres settlements, the United States asks the Court to place at least three specific limitations on the use of cy pres relief:

  1. The relief must “redress” the class members’ injuries, meaning that class members are subject to an ongoing violation or imminent future violation that inflicts injury and the cy pres recipient will use the funds to help deter those specific violations.
  2. Before a court allows redistribution of the settlement funds to non-injured third parties as cy pres relief, it first must conduct a “vigilant and realistic” analysis to determine whether the funds can be distributed directly to class members.
  3. At a minimum, cy pres payments should be discounted, in full or at least in part, when a court calculates a reasonable attorneys’ fee award. Such discounting better aligns the interests of class counsel and the class by creating a financial incentive for counsel to maximize the direct benefit to the class.

The government’s interest in Frank v. Gaos dovetails with the Justice Department’s increased attention on abusive class action settlements more broadly. In February the Department filed a statement of interest opposing settlement approval in a consumer class action brought against Wines ‘Til Sold Out, a case in which CEI also objected to the disproportionate allocation that allowed class counsel—rather than class members—to capture the majority of the concrete settlement benefit. This filing followed remarks by then-Associate Attorney General Rachael Brand suggesting that DOJ would increase its scrutiny of class action settlements and may file a statement of interest where its review showed that a settlement was not fair or reasonable.

In line with this renewed focus on class action abuse, the Solicitor General’s brief in Frank v. Gaos reflects another concern about whether it and similar suits address any real harm to consumers. The brief argues that the plaintiffs “do not appear to identify any particular injury that actually resulted” from Google’s allegedly unlawful conduct and therefore may not have standing to bring a claim. Paul Clement, who served as Solicitor General under President George W. Bush, described this argument as having a “skunk at the garden party flavor to it,” because, if the Court agrees, it would prevent the Court from deciding the substantive cy pres issue at all.