Fri, May 7, 2021

Trends in Class Action Settlements: Developments in the Application of the Cy Pres Doctrine

Cy Pres Trends in Class Action Settlements

The legal doctrine of cy pres is a French term meaning "as close as possible." Having roots in trust law, the doctrine allows for a gift in circumstances where the recipient no longer exists, so the donor's wishes are fulfilled as nearly as possible. In the class action context, the cy pres doctrine allows for the distribution of unclaimed settlement funds to charitable causes, which causes indirectly benefit the injured class. Such charitable donations are a common component of settlement agreements to resolve class action lawsuits in cases where distribution to the entire class may not be possible.

A number of recent appellate opinions concerning cy pres distributions have changed the class settlement landscape. Increasingly, cy pres provisions are receiving closer judicial scrutiny. As such, parties need to think carefully about utilizing the doctrine and the designation of unclaimed settlement funds.

In November 2011, the Ninth Circuit rejected a settlement in Nachshin v. AOL for not comporting with the Ninth Circuit’s cy pres standards. Nachshin involved a nationwide class of 66 million (mn) AOL subscribers who alleged AOL wrongfully inserted footers containing promotional messages into emails sent by AOL subscribers. As part of the settlement, AOL agreed to make cy pres donations totaling $110,000 to several charities. Objectors to the settlement claimed that the charitable cy pres awards did not meet the standard for cy pres, because the charities selected did not relate to the issues in the case and were not as geographically diverse as the class.

The Ninth Circuit sided with the objectors and found the proposed cy pres awards failed to address the objectives of the underlying statutes. Specifically, plaintiffs had settled claims for alleged breach of electronic communications privacy, unjust enrichment and breach of contract. The cy pres recipients, which included the Legal Aid Foundation of Los Angeles and the Boys and Girls Club of America, had little to do with the objectives of the underlying statutes on which plaintiffs based their claims, according to the Ninth Circuit.

The following year, the Ninth Circuit rejected a $10.6 mn settlement in Dennis v. Kellogg Company. The lawsuit alleged Kellogg falsely marketed its Frosted Mini-Wheats by claiming that the cereal improved children's cognitive functions. The settlement agreement had generally identified the cy pres recipients as charities that feed the indigent. The Ninth Circuit ruled that while charities that feed the indigent are a “noble goal” the selected charities had little or nothing to do with the underlying lawsuit. Thus, the Court held that appropriate cy pres recipients were not charities that feed the needy, but rather they would be organizations dedicated to protecting consumers from injuries caused by false advertising. The Court also questioned how Kellogg valued the $5.5 mn worth of food it agreed to donate, whether this sum would be in addition to sums Kellogg had already budgeted for charitable donations, and whether Kellogg would take a tax deduction for its $5.5 mn in charitable donations. The Court wanted answers to these questions that were not found in the settlement agreement. Accordingly, the approval of the settlement by the district court was reversed and remanded.

Notwithstanding these reversals of settlement approval, later that same year, in September 2012, the Ninth Circuit affirmed the District Court’s approval of a $9.5 mn settlement in Lane v Facebook. In Lane, the Circuit approved a settlement wherein the class members received no monetary benefits, but a $6.5 mn cy pres donation was to be paid by Facebook to a new charity organization established to promote online privacy. Objectors complained that the charitable entity was “new” and therefore had no track record. Further that it was an improper recipient of funding, as it would be partially controlled by Facebook. The Ninth Circuit rejected these objections and affirmed the District Court’s holding that the settlement was fundamentally fair.

The Lane objectors filed a petition for a writ of certiorari to the U.S. Supreme Court. Although the application was denied in Nov. 2013, in the statement of decision Chief Justice Roberts agreed with the Court’s decision to deny the petition for certiorari because:

 “Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered.”

The propriety of cy pres awards in class actions is clearly of interest to Justice Roberts, who concluded his denial note stating:

“In a suitable case, this Court may need to clarify the limits on the use of such remedies.”

In February 2013, the Third Circuit addressed the cy pres issue similarly as it considered and reversed the approval of a $35.5 million settlement in In Re: Baby Products Antitrust Litigation. The Third Circuit stated that the inclusion of a cy pres provision does not render a settlement unfair, unreasonable or inadequate as a matter of course. However, direct distributions to the class are preferred over cy pres distributions. Rule 23 was created to allow plaintiffs to directly recover damages for their injuries. Cy pres distributions substitute direct distributions to the injured in favor of an indirect benefit that is at best attenuated and at worst illusory.

The message to counsel is to make every effort to increase the number of claims filed, thereby increasing the dollars paid directly to plaintiffs and decreasing the dollars paid to the indirect cy pres beneficiary.

To emphasize the point, the Third Circuit added an additional inquiry for the District Court to consider before approving a settlement, namely the degree of direct benefit to the class.

More specifically the Third Circuit said, “Barring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds.”

The Court further concluded that the District Court may, in its discretion, reduce the attorney’s fees based on the level of the direct benefit as opposed to the indirect benefit to the plaintiff class.

In 2018, the Northern District of California United States District Court released updated Procedural Guidance for Class Action Settlements, including updated guidance concerning cy pres recipients. If a settlement contemplates a cy pres award, the Northern District adds a step to preliminary approval requiring counsel to identify the chosen cy pres recipients, how those recipients are related to the subject matter of the lawsuit and the class members and any relationship the parties or counsel may have with the proposed cy pres recipients. This move toward transparency is further evidence of closer judicial scrutiny. In general, the Northern District’s guidelines state that unused settlement funds that had been allocated to attorneys’ fees, incentive awards, settlement administration or class member payments should be distributed either to the class pro rata or awarded to cy pres recipients.

As mentioned above, Chief Justice Roberts expressed the Court’s interest in a suitable future case to clarify the limits cy pres remedies. In 2018 in Frank v Gaos, the U.S. Supreme Court was presented with the question of  whether, or in what circumstances, a cy pres award of class action proceeds that provides for no direct relief to class members supports class certification and comports with the requirement that a settlement binding class members must be “fair, reasonable and adequate.”

In Frank v Gaos, class counsel and Google settled a claimed internet privacy violation case for $8.5 million. The District Court approved $2.1 million in attorneys’ fees. Further, since there were approximately 100 million class members, the remainder would have provided approximately 6.5 cents to each class member. Concluding that the distribution would cost more than 6.5 cents to each class member, the District Court distributed the entire settlement fund to cy pres entities studying internet privacy and involuntary information sharing.

Some expected the Supreme Court to decide the appropriateness of cy pres only class action settlements, but it didn’t. On March 20, 2019, the Supreme Court vacated and remanded Frank v Gaos to the lower court for further proceedings to address the plaintiffs’ standing in light of Spokeo, Inc. v Robins. Therefore, the cy pres question presented in Frank v Gaos was left unanswered.

In 2019, the Third Circuit considered the appropriateness of a cy pres only settlement in In Re: Google Inc. Cookie Placement Consumer Privacy Litigation. The settlement agreement provided Google would pay $5.5 mn toward class counsel’s fees and costs, service awards for the class representatives and to data privacy organizations. There were no payments made directly to absent class members. While the Third Circuit found that cy pres only settlements are not unfair per se, the Third Circuit also found the District Court failed to carefully scrutinize the settlement agreement, and was troubled by the District Court’s cursory analysis of the pre-existing relationship between Google, class counsel and the cy pres recipients.

The Third Circuit then set forth what a district court must do when a cy pres settlement is challenged on the basis of a pre-existing relationship. A district court must consider whether cy pres recipients have any significant prior affiliations with any party, class counsel or the court, and whether any affiliation will raise substantial questions about whether the cy pres recipient selection was made on the merits. Prior relationships are not automatically disqualifying, but a failure to explain and scrutinize them can be disqualifying.

In March 2020, a federal judge in the Northern District of California approved a class action settlement over Google Street View vehicles accessing homes’ unencrypted Wi-Fi networks. In Re: Google LLC Street View Electronic Communications Litigation’s settlement agreement provided for $13 mn to be paid to class counsel for fees and costs, service awards for the class representatives and to eight different cy pres recipients with a history of addressing online consumer privacy issues. The District Court concluded that the settlement fund was non-distributable and that a cy pres only award was adequate. Objectors have filed a Notice of Appeal, and this case is currently pending in the Ninth Circuit.

To maximize the likelihood of a settlement agreement gaining final approval from a court, practitioners should heed the cautionary tales in the cases discussed herein.

What recent cy pres decisions teach us is that charitable organizations should be selected carefully, with particular attention to the relationship between the organization’s purpose and the allegations framing the class’ chief complaints, and the relationship between the parties, class counsel and the court. Just because an institution supports a worthy cause, does not mean the institution is an appropriate cy pres recipient in a given case.

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