In recent years, distribution of class settlement funds to various charitable groups has become commonplace. For distributions to class members that are unclaimed, impractical to distribute, or de minimis, courts will often bless a distribution of settlement funds to a charitable organization under the “cy pres” doctrine. The doctrine takes its name from the French Norman term “cy pres comme possible,” which is perhaps best rendered in English as “as close as possible.” Widely used in situations where charitable trust funds can no longer be used precisely as the benefactor originally intended, the cy pres doctrine was adopted for use in class actions as well.
“The cy pres doctrine allows a court to distribute unclaimed or non-distributable portions of a class action settlement fund to the ‘next best’ class of beneficiaries.” Nachshin v. AOL, LLC, 663 F.3d 1034, 1036 (9th Cir. 2011). “Non-distributable” does not mean impossible to distribute—it simply means that “proof of individual claims would be burdensome or distribution of damages costly.” Id. at 1038. Litigants should be somewhat careful in using the device and should also be aware that, if the use of the doctrine in class action settlements is ever up for Supreme Court review, it may face a chilly reception.
The Ninth Circuit has clarified when a cy pres device can and cannot be used. The entity receiving cy pres funds should have, as its mission, a goal closely related to the facts of the plaintiff’s claims. As the Ninth Circuit has put it, the cy pres remedy must “account for the nature of the plaintiffs’ lawsuit, the objectives of the underlying statutes, and the interests of the silent class members.” Id. at 1036. The Ninth Circuit has not been shy about finding that the recipients of settlement funds did not meet these requirements. In 2011, for example, it rejected a cy pres distribution to a Los Angeles Legal Aid Foundation and Los Angeles Boys and Girls Clubs because the missions of these groups were different in subject matter and geographical scope from the underlying plaintiffs’ case, which involved allegations against AOL for breach of communication privacy statutes in every state in the country. Id. at 1040-41. The Ninth Circuit also rejected a charitable group’s mission as too general to be a proper recipient of class action settlement funds in a case involving labor law violations. Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1308-09 (9th Cir. 1990).
The Ninth Circuit has also recently stated, however, that nothing prohibits the settling parties from setting up an entirely new charity to receive cy pres funds (as long as the organization meets the other requirements for use of the cy pres device). See Lane v. Facebook, Inc., 696 F.3d 811, 820-21 (9th Cir. 2012). This is true even if the settling defendant receives a seat on the board of directors of the new entity. Id. at 821-22.
Given that class members may have the right to object that the cy pres recipient chosen by the parties does not satisfy these tests, counsel for settling defendants in class actions should take care that class members are notified of the possibility of the use of settlement funds for a cy pres fund—the class members should also be told of the identity of the specific recipients. Cf. In re Baby Products Antitrust Litig., 708 F.3d 163, 180-81 (3d Cir. 2013). Not doing so may open up the settlement to attack on appeal.
As long as litigants play by the rules of the road, nothing prohibits the use of the cy pres device in federal class action settlements—for now. There are some clouds on the horizon, however. In 2013, the U.S. Supreme Court refused to grant certiorari to review a class action settlement that involved the use of funds for a charitable organization. See Marek v. Lane, 134 S. Ct. 8, 9 (2013). Chief Justice Roberts took the occasion to issue a note of caution, going so far as to cite a recent law review article that called the entire practice of using cy pres in class actions unconstitutional. As he put it, “[g]ranting 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; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.” Id. (Roberts, C.J., concurring in denial of certiorari) (emphasis added). “This Court has not previously addressed any of these issues. Cy pres remedies, however, are a growing feature of class action settlements. See Redish, Julian, & Zyontz, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 653-56 (2010). In a suitable case, this Court may need to clarify the limits on the use of such remedies.” Marek, 134 S. Ct. at 9. The Chief Justice was clearly inviting attorneys to bring the issue to the Supreme Court, so that the use of cy pres can be examined in full.
In short, litigants should be careful to follow basic rules when using the cy pres device, especially when determining which entity will receive any settlement funds. Litigants should also be preparing, however, for the possible limitation of the cy pres device in class actions by the Supreme Court.
For more information about the use of the cy pres device in class action settlements, contact Michael J. Steiner at mjs@severson.com or Philip Barilovits at pb@severson.com.