By Robert B. FitzpatrickCy pres is a legal doctrine under which courts, when unable to effectuate a direct monetary payment to plaintiffs, undertake to distribute moneys to provide an indirect benefit to plaintiffs. The term cy pres originally comes from French. Literally, the phrase means "so near/close" though a more figurative translation would be "as near as possible" or "as near as may be". Black's Law Dictionary, p. 349 (5th Ed. 1979). Cy pres remedies are important to plaintiffs both because they may be in the position of negotiating such remedies in appropriate cases, and because certain charitable or legal organizations which serve low-income populations may find themselves eligible to receive cy pres moneys. E.g. Public Justice, "Cy Pres Donations: Serving the Class and the Public Interest" (available at: http://publicjustice.net/support-us/cy-pres-donations-serving-class-public-interest). The ALI's Principles of the Law of Aggregate Litigation, which are discussed in more detail below, provide that cy pres awards should be made to organizations "whose interests reasonably approximate those being pursued by the class." § 3.07(c); See also In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24 (1st Cir. 2009) (cy presdistribution to cancer or patient related charities was appropriate where defendant was accused of price inflation for a cancer drug).
The Supreme Court recently declined to review the class action settlement inMarek v. Lane, 134 S. Ct. 8 (Nov. 4, 2013) (denying petition for certiorari). However, the Chief Justice issued a statement, concurring in the denial of certiorari indicating that cy pres provisions of settlements raise "fundamental concerns." The Chief Justice also noted that cy pres remedies are a "growing feature of class action settlements."
The original complaint, which originated as a challenge to a Facebook program known as "Beacon", which automatically shared purchase and other personal information with both Facebook and the users' friends lists, sought both monetary and injunctive relief. Marek, 134 S. Ct. at 8. The settlement eventually agreed to between the parties, and which gave rise to the challenge which is the subject ofMarek, provided the vast majority of class members with neither remedy. Id. The underlying settlement at issue in Marek provided no monetary damages to the class at large. Id. The named plaintiffs received "modest incentive payments", and class counsel received approximately $2.5 million. Id. at 8-9. Instead of providing monetary relief to the class, the settlement created a grant-making organization, the Digital Trust Foundation (the "DTF"), the mission of which would be to educate the public about online privacy. Id. at 9; see also Mike Keefe-Feldman, "The Digital Trust Foundation: Facebook's Unwanted Child", Nonprofit Quarterly (June 2, 2014) (available at: https://nonprofitquarterly.org/policysocial-context/21895-the-digital-trust-foundation-facebook-s-unwanted-child.html). The Foundation would be run by a three-member board, including Facebook's public policy director. Marek, 134 S. Ct. at 9. In addition, the settlement provided for the creation of a "Board of Legal Advisors", consisting of counsel for the plaintiff class and Facebook, to "advise and monitor the DTF". See Lane v. Facebook, 696 F.3d 811, 818 (9th Cir. 2012). Further complicating the settlement, the class of those barred from future litigation included not just individuals injured by the specific program during the time period cited in the original complaint, but also all individuals injured by subsequent iterations of the program at time periods not covered by the original complaint. Id. As the Chief Justice notes, "Facebook thus insulated itself from all class claims arising from the Beacon episode by paying plaintiffs' counsel and the named plaintiffs some $3 million and spending $6.5 million to set up a foundation in which it would play a major role." Id.
The Chief Justice notes dryly that, when this settlement was challenged by class members, the District Court, Judge Richard Seeborg, found it to be "fair, reasonable, and adequate." Id., citing Fed. R. Civ. P. 23(e)(2); Lane v. Facebook, Inc., Civ. No. C 08-3845, 2010 U.S. Dist. LEXIS 24762, 2010 WL 9013059 (N.D. Cal. Mar. 17, 2010). On appeal, a panel of the Ninth Circuit affirmed the District Court's determination by a vote of 2-1.
In that decision, authored by Circuit Judge Hug, with a dissent by Judge Kleinfeld, the Ninth Circuit indicated that its responsibility was to "evaluate the fairness of a settlement as a whole, rather than assessing its individual components." Lane, 696 F.3d at 818. As to the adequacy of cy pres remedies, the Ninth Circuit indicated that the Court must ensure that the remedy "account[s] for the nature of the plaintiffs' lawsuit, the objectives of the underlying statutes, and the interests of the silent class members." Id. at 819-20 (internal quotations omitted). Plaintiffs raised two principal challenges to the settlement – the amount and the use of a cy pres remedy. Id. at 820. Here, we focus only on the latter, which the Ninth Circuit characterized as the strongest objection to the settlement. Id.
First, the Court turned to plaintiff's argument that the cy pres remedy was inappropriate because the presence of Facebook executives on DTF's board would "create an unacceptable conflict of interest that will prevent DTF from acting in the interests of the class." Id. Finding that the cy pres remedy here was proper, the court explained that "we do not require…that settling parties select a cy pres recipient that the court or class members would find ideal."Id. at 820-21. The only requirement was that the cy pres remedy should account for the interests of the lawsuit, the statute, and silent plaintiffs. Id.Finding the notion "[t]hat Facebook retained and will use its say in how cy presfunds will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is…unremarkable" and declining to "undermine those negotiations by second-guessing the parties' decision", the Court upheld the arrangement. Id. at 822.
The dissent, noting the potential for embarrassment created by the "Beacon" program, also pointed out that mediation and settlement occurred prior to any class certification. The class was only certified for settlement purposes.Id. at 828. Other details contained in the dissent cast further doubt on the utility, if not the validity, of the settlement. For instance, while Facebook agreed never to relaunch the "Beacon Program", this term was defined to include only programs "bearing the 'Beacon' name" – in other words, the same program under a different name would not be a "Beacon Program". Judge Kleinfeld's dissenting opinion notes that "[t]he injunctive relief the class received was no relief at all, not even a restriction on future identical conduct." Id. Regarding the monetary relief, Judge Kleinfeld explained "Facebook users…got no money, not a nickel, from the defendants. Even those who…were arguably entitled to statutory damages…got nothing. Class counsel, on the other ha[n]d, got millions." As to the "incentive payments", only $39,000.00 of the $9 million settlement was allocated to those payments. Id. at 829.
Judge Kleinfeld's spirited dissent is worth reading in its entirety for its detailed exposition of the numerous conflicts to which class actions are susceptible – and which arose in this case. A flavor, however, can be gleaned from this excerpt:
Defendant and class counsel, in any class action, have incentives to collude in an agreement to bar victims' claims for little or no compensation to the victims, in exchange for a big enough attorneys' fee to induce betrayal of the interests of the purported "clients." The defendant's agreement not to oppose some amount for the fee creates the same incentive as a payment to a prizefighter to throw a fight. A real client may refuse a settlement that is bad for him but benefits his lawyer, but a large class of unknown individuals lacks the knowledge or authority to say no. It is hard to imagine a real client saying to his lawyer, "I have no objection to the defendant paying you a lot of money in exchange for agreement to seek nothing for me." "The absence of individual clients controlling the litigation for their own benefit creates opportunities for collusive arrangements in which defendants can pay the attorneys for the plaintiff class enough money to induce them to settle the class action for too little benefit to the class (or too much benefit to the attorneys, if the claim is weak but the risks to the defendants high).
Over a dissent written by Judge Milan D. Smith, and joined by five of her colleagues, including Chief Judge Kozinski, the Ninth Circuit denied rehearingen banc. The dissent focused what, in its view, constituted several major departures from the Ninth Circuit's prior case law on the subject of cy pres remedies. Among the problems identified by the dissenters are the lack of any track record on the part of the DTF, and the divorce between the DTF's goals and the objectives of the underlying statutes. Lane, 709 F.3d at 793-794. As to the former, the dissenters explained that the DTF "has no record of service" and that, given this lack, there is simply no way of knowing how the settlement funds will be used in the level of detail required by the Court's prior cy pres precedent. Id. at 793. The dissenters argue that there is no assurance that the class members will "actually benefit" from DTF's activities, and that DTF's mission statement amounts to little more than promising that "DTF will do some 'stuff' regarding some more 'critical stuff.'" Id. at 794. Regarding the latter, the dissenters explain that the statutes cited by the original plaintiffs all, with one exception, have the goal of preventing "unauthorized access or disclosure of private information." Id. (emphasis in original) (citing the Electronic Communications Privacy Act, 18 U.S.C. § 2510; the Computer Fraud and Abuse Act, 18 U.S.C. § 1030; the Video Privacy Protection Act, 18 U.S.C. § 2710; the California Legal Remedies Act, Cal. Civ. Code § 1750, and the California Computer Crime Law, Cal. Penal Code § 502). The dissenters note that DTF's stated goals focus on educating users on controlling their private information, but not in the issue central to this case – controlling the unauthorized use of personal information which even educated users cannot anticipate, prevent, or direct. Id. at 794.
Returning to Chief Justice Roberts' statement concerning the denial of certiorari, we can glean several insights into the concerns about cy pres settlements. Although the Chief Justice joined the Court's decision to deny certiorari, his rationale is telling:
Marek's challenge is focused on the particular features of the specific cy pres settlement at issue. 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[.]
Marek, 134 S. Ct. at 9. Among the Chief Justice's concerns are: 1) When, if ever, cy pres remedies should be considered; 2) How to assess the fairness of cy pres remedies; 3) Whether new entities may be established as part of cy pres relief; 4) How existing entities should be selected; 5) What role is to be played by both the Judge and the parties in shaping a cy pres remedy; and 6) How closely the goals of any organization selected must correspond to the interests of the class. Id. It may be of note that the Chief Justice referenced Redish, Julian, & Zyontz's article in the Florida Law Review, entitled "Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis". 62 Fla. L. Rev. 617, 653-56 (2010) (available at:http://www.floridalawreview.com/wp-content/uploads/2010/01/Redish_BOOK.pdf). The Chief Justice concluded with an open invitation to further challenges, noting that "[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies." Id.
Another vivid example of the potential problems in using cy pres remedies in the class action context is provided by In re Baby Prods. Antitrust Litig., 708 F.3d 163 (3d Cir. 2013). See Wasserman, Rhonda, Cy Pres in Class Action Settlements (March 24, 2014). Southern California Law Review, Vol. 88, 2014, Forthcoming; U. of Pittsburgh Legal Studies Research Paper No. 2014-14. Available at SSRN:http://ssrn.com/abstract=2413951 ("Wasserman"). InBaby Products, the plaintiffs alleged that defendants had conspired to set a "floor price" on select products. Wasserman at 32. Unlike in Lane, the district court certified a class of purchasers, and various subclasses, well in advance of settlement. Id. While the formula for distributing the funds was somewhat complex, assuming adequate moneys were available, plaintiffs would be eligible to receive up to treble damages, with any remainder to be donated to a charitable organization selected by the Court from among those proposed by the parties. Baby Products, 708 F.3d at 171. However, because most class members were unable to provide proof that they purchased a qualifying product, only roughly ten percent of the $35.5 million settlement fund was used to compensate class members.
As an initial matter, the court held that "[w]e join other courts of appeals in holding that a district court does not abuse its discretion by approving a class action settlement agreement that includes a cy prescomponent." Id. at 173. However, the Court immediately cautioned that "direct distributions to the class are preferred over cy pres" remedies. Id. The Court noted that the ALI has published recommendations limiting the use of cy pres awards:
If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.
American Law Institute Principles of the Law of Aggregate Litig. § 3.07, comment b (2010) (the "Principles"). The Principles provide that the cy pres doctrine should be used as a last resort only when other methods of distribution are not practicable, whether due to the unknown composition of the plaintiff class or due to the impracticability of cost-effectively distributing numerous small awards. See Karen Shanley, The Institute in the Courts: Principles of the Law of Aggregate Litigation, The ALI Reporter (available at:http://www.ali.org/_news/reporter/summer2012/07-institute-courts-aggregate-litigation.html). The Principles indicate that cy pres is an inappropriate remedy where there was still a possibility of compensating plaintiffs. Id.; see also Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468 (5th Cir. 2011) (use of cy pres remedy denied. Court, citing section 3.07 of the Principles, reasoned that "a cy pres distribution to a third party…is permissible 'only when it is not feasible to make further distributions to class members."). The Principles provide guidance as to when distribution of settlement proceeds to class members is viable. Principles § 3.07(a); Shanley at 1. Factors courts should consider include whether class members can be "identified through reasonable effort" and whether "the amounts involved are too small to make individual distributions economically viable" as well as "other specific reasons that would make such further distributions impossible or unfair." Principles at § 3.07(b); Shanley at 2.
To assess whether a settlement containing a cy pres provision is "fair, reasonable, and adequate" the Third Circuit indicated that courts should consider "the number of individual awards compared to both the number of claims and the estimated number of class members, the size of the individual awards compared to claimants' estimated damages, and the claims process used to determine individual awards." Baby Products, 708 F.3d at 174. More particularly, the Court advised that, in general, "cy pres awards should generally represent a small percentage of total settlement funds." Finally, the Court opined that if Defendants refused to alter the claims process to result in a higher payout to the class, "the Court will need to determine whether the class received sufficient direct benefit to justify the settlement as fair, reasonable, and adequate." Id. at 176. As part of its order remanding the matter, the Court vacated the $14 million attorneys' fee award, as the settlement was no longer in effect. Id.
The Baby Products opinion is part of a line of cases that have expressed concern about the implications of the cy pres doctrine. Joshua Dunlap, Closer Scrutiny for Cy Pres Distributions?, FirstClassDefense Blog (March 8, 2013) (available at:http://pierceatwood.typepad.com/first_class_defense/2013/03/closer-scrutiny-for-cy-pres-distributions.html). In In re Compact Disc Minimum Advertised Price Litig., the district court for the Federal District of Maine expressed skepticism of the benefit of a cy pres award to the class plaintiffs. No. 2:00-MD-1361, 2005 U.S. Dist. LEXIS 11332 (D. Me. June 10, 2005). InCompact Disc, the Court actually reduced the fee award to class counsel "in light of the modest benefit" received as a result of the cy pres award. Id.
Of course, despite criticism, courts continued to employ cy pres awards out of a belief that they are superior to the alternatives. In general, if a cy pres award is not available, then the settlement funds would revert to either the Defendant or the government. Wasserman at 10-12. In the former case, courts have expressed concern that that such a remedy would risk "undermining the deterrent effect of class actions by rewarding defendants for the failure of class members to collect their share of the settlement." Baby Products, 708 F.3d at 172. This is especially true where statutory objectives include deterrence or disgorgement. Wasserman at 11; Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1308 (9th Cir. 1990). Of course, where compete distribution is impossible, the preference is to increase the award to class members before engaging in cy pres distribution. See In re Lupron Mktg. & Sales Practices Litig., 677 F.3d 21 (3d Cir. 2012). Commentators have long complained of the use of cy pres awards for numerous reasons, including the due process and First Amendment rights of class members. See Ilya Shapiro, "Curbing Class Action Settlement Abuses", Cato at Liberty Blog (Aug. 28, 2013) (available at:http://www.cato.org/blog/curbing-class-action-settlement-abuses). Chief Justice Roberts' concurrence to the denial of certiorari in Marek raises the possibility that these arguments may soon receive a hearing before the Court.