If an attorney raids a client’s settlement money, he’ll get disbarred and could go to prison for embezzlement. But if the same attorney raids settlement money from a class-action suit, charities may laud him and courts award him millions of dollars. My colleagues and I are asking the Supreme Court to put an end to the abuse of a trust-law doctrine known as cy pres, under which class-action lawyers have funneled millions of dollars of settlement money to select charities.
In French, cy pres (pronounced see-PRAY) means, roughly, “as near as possible.” As a legal doctrine it typically applies to charitable trusts that have outlived the cause or issue they were originally established to address. Under cy pres, for instance, the March of Dimes could turn its focus to other childhood diseases once polio was eradicated. While appropriate in the trust context, cy pres’s application to class-action suits enables attorneys to bilk their clients by claiming it would be too difficult to distribute the money to class members.
Right away there is a conflict of interest. Any attorney with a choice between sending out a million $5 checks to clients he’s never met or being part of a ceremony to hand over oversize $1 million novelty checks to five of his favorite charities—and receiving a full fee either way—will have a strong incentive to leave the clients with nothing. That’s exactly what happened in the case we’re asking the justices to take up.
Paloma Gaos filed a class action in 2010 in the Northern District of California over Google’s practice of divulging consumers’ search queries to third-party websites. The plaintiffs’ lawyers alleged that because this search data could be traced back to the individual, Google had violated federal privacy laws that provide statutory damages of $1,000 per violation. If the plaintiffs had a real case, the damages would be in the trillions of dollars. But the lawyers must not have thought much of their claims—they settled for a paltry $8.5 million.
Because of cy pres, however, that number is entirely imaginary. Under the settlement, class members get nothing and Google makes no material change to its practices—but the attorneys collect more than $2 million. The rest of the money is going to a variety of charities affiliated with Google and the plaintiffs’ attorneys, essentially allowing the lawyers to double-dip in the settlement fund. Class counsels Michael Aschenbrener and Kassra Powell Nassiri graduated, respectively, from Chicago-Kent and Harvard Law. Both institutions happened to receive funds in the settlement.
Tech companies that settle class actions often tacitly collude with plaintiffs’ attorneys to funnel money to the defendants’ preferred charities. In such cases the “relief” to the class can be entirely illusory, because the money would likely have gone to those charities even without a settlement. Worse, a judge might have designs on what has become essentially a slush fund, and encourage the parties to steer money to his own particular favorite charity—as happened in yet another Google case, in which now-retired federal district judge James Ware rewrote the settlement to direct $500,000 to Santa Clara Law School, where he taught. The money went to fund a center for ethics.
The Ninth U.S. Circuit Court of Appeals approved the Google settlement my firm challenged because it thought actually distributing the money to such a large class would be too difficult. But under the new standard they created, almost any class-action lawyer can claim the same thing. When other appellate courts have applied the correct standard and agreed that attorneys shouldn’t get paid unless their clients do, lawyers have magically discovered ways to get money to class members, even when the payment per class member was as small as it is in our current case. Incentives work.
A bipartisan coalition of 16 state attorneys general is also urging the Supreme Court to hear Frank v. Gaos. They agree that the Ninth Circuit has created a standard that will make it far too easy for attorneys to siphon millions of dollars of consumers’ money into their own slush funds. Chief Justice John Roberts has previously expressed concern about cy pres abuses. We hope the Supreme Court will protect consumers who take part in class actions from being preyed upon by their attorneys.