Cy Pres: Is It the Land Mine Waiting to Blow Up Your Settlement
A cy pres award or distribution is derived from the French saying of “cy pres comme possible” (meaning “as near as possible”). Cy pres awards are utilized, albeit less often these days, in connection with class action settlements to provide for the distribution of unclaimed settlement funds or where the amount of the individual class benefit is too small to justify a direct distribution to each member of the class. By way of example, in cases where the settlement benefit to the class is comprised primarily of injunctive relief (i.e., changes to a product’s labeling), the settlement fund may not be large enough (despite it being a million dollars) to justify distributing 25 cents to four million class members across the country. Or, when a portion of the settlement fund is unclaimed, it may make sense to distribute the unclaimed portion to a charity or other organization, chosen by the parties, or the court, that is supposed to reasonably further the interests of injured class members – “as near as possible.”
But a cy pres award is inherently problematic in practice, although admirable in theory. Cy pres awards often stray far from the “as near as possible” concept and often indirectly benefit class counsel, the defendant, or the court more than the aggrieved class members. Class counsel have less of a financial incentive in maximizing direct payments to class members because their fee is the same regardless of whether the settlement funds are distributed to the class or a charity. And, in cases where selecting the charitable recipient is left to the discretion of the court, the judge may select an alma mater or another favored charity, thereby creating the appearance of impropriety even if none exists.
While the cy pres doctrine is well-recognized and has been in use many years, academics, judges, and professional objectors have recently mounted a comprehensive attack on various cy pres distribution schemes by raising constitutional and ethical concerns through objections and appeals challenging specific awards.
Their criticisms highlight two main issues: (1) the due process concerns in disposing of legal claims without actual recovery to absent class members; and (2) frequent impropriety between the parties to the action and the cy pres beneficiaries. Neither the Federal Rules of Civil Procedure nor the Supreme Court has offered much guidance on cy pres distributions. As such, it is important for defendants’ counsel, general counsel, and class counsel to understand all they can about the risks posed by these often-times suboptimal settlement arrangements.
How a Cy Pres Distribution Works
Courts often order a cy pres award when distribution of proceeds to class members would be infeasible. If, for example, Google’s 100 million users suffered a total privacy harm of $1 million dollars, no court would order Google to send a check to each class member for one cent. Instead, the court might first order Google to compensate the class representatives and their attorneys, and award the remainder to a charity or other organization that advances privacy rights. When compensating every injured class member is unlikely, a payment to an organization aimed at redressing the specific harm made the basis of the class action is likely the next best thing, and it may even prevent future injuries to the same class. But over time, conflicts between class counsel, the court, and defendants have permeated the application of cy pres awards in class action settlements, causing substantial uncertainty regarding reaching a final, non-appealable judgment.
Current State of Cy Pres in Class Action Settlements
The only significant black-letter law related to cy pres awards is Federal Rule of Civil Procedure 23, which mandates “fair, adequate, and reasonable” class settlements. Notably, in 2018, the Supreme Court skirted an opportunity to rule on cy pres distributions in Frank v. Gaos, a case against Google in which the cy pres recipients included the attorneys’ alma maters. Briefs from both sides made it abundantly clear that no federal rule or statute was on point. Although a perfect opportunity for review, the Court remanded the case on jurisdictional grounds. In doing so, Chief Justice Roberts expressed “fundamental concerns surrounding the use of cy pres remedies in class action litigation.” Further, writing in dissent of the remand, Justice Thomas stated that a cy pres award without actual recovery to class members “strongly suggests that the interests of the class were not adequately represented.” Most commentators have interpreted this judicial exchange as a clear signal of the high Court’s skepticism surrounding cy pres awards in class settlements. Given the likely addition of Justice Amy Coney Barrett, the right case could present the Supreme Court with an opportunity to disavow cy pres awards outright, or at least, significantly limit their application.
Circuit courts, however, routinely uphold cy pres awards based on their own patchwork of guidelines, and the issues regarding collusion remain unclear from circuit to circuit. For example, while the Third Circuit requires district courts to “scrutinize very closely” any relationship between the parties and cy pres recipients, the Ninth Circuit has upheld a cy pres award to a charity for which the defendant’s director served as board member, finding a “direct and substantial nexus to the interests of absent class members.” See In re: Google Inc. Cookie Placement Consumer Privacy Litig., 934 F.3d 316, 330 (3d Cir. 2019); Lane v. Facebook, Inc., 696 F.3d 811, 816 (9th Cir. 2012). Ultimately, until the Supreme Court weighs in, the eligibility of cy pres beneficiaries remains largely at the discretion of district court judges but provides fertile ground for an objector.
While this uncertainty complicates any estimate of risk exposure, certain basic guidelines for cy pres settlements have been established. In 2010, the American Law Institute (“ALI”) published three guiding principles, which courts have attempted to follow: (1) class members must come first; (2) any cy pres award should align with the interests of the class and the purpose of the law at issue; and (3) distributions should reflect the geographic breadth of the class. Based on these ALI principles, a cy pres settlement requires, first and foremost, that the recovery to class members be either wholly infeasible or thoroughly exhausted. Second, the cy pres recipients must adequately, fairly, and reasonably represent the interests of injured class members and/or provide redress for the very harms that precipitate the substantive law of the case. Finally, distributions must comport with the geographic diversity of the class. For example, courts will not uphold a cy pres award to a local charity when class members reside in all fifty states. See, e.g., Nachshin v. AOL, LLC, 663 F.3d 1034, 1037 (9th Cir. 2011) (cy pres distribution to local charity chapters struck down when class comprised of 66 million AOL subscribers). Straying from these three guiding principles will subject the cy pres award to increased scrutiny by the courts and provide objectors with an objection that would not otherwise exist.
While cy pres settlements are still utilized, they present thorny issues that could jeopardize the final approval of the settlement and routinely invite unnecessary objections to the fairness of the settlement, providing the basis for a prolonged legal challenge. The Supreme Court has signaled that “fundamental concerns surrounding the use of cy pres remedies in class action litigation” exists and it is poised to take up the issue. Until it does so, which could be sooner rather than later, litigants face the almost impossible task of estimating if a proposed settlement with a cy pres award will reach finality. Ultimately, the uncertainty surrounding cy pres settlements only adds to the complexity and expense of class action litigation. One way to alleviate this uncertainty is by foregoing the use of cy pres awards all together, thereby eliminating the risks they pose to a class action settlement.