July 19, 2018 / 8:01 PM / a month ago

DOJ’s amicus brief in SCOTUS cy pres case contains ominous hint for class action bar

(Reuters) - It’s not unprecedented for the Justice Department to want a say when an important class action issue comes to the U.S. Supreme Court. During the Obama administration, DOJ filed at least three amicus briefs in class action cases before the justices. In Amgen v. Connecticut Retirement Plans, the solicitor general urged the court not to raise the bar for class certification in securities fraud litigation. In Campbell-Ewald v. Gomez, Justice argued that class action defendants shouldn’t be permitted to pick off named plaintiffs by offering full settlements. And in Tyson Foods v. Bouaphakeo, the department said the justices should uphold certification of a class of chicken processing plant employees claiming wage-and-hour violations.

In that regard, we shouldn’t be surprised that the Trump Justice Department filed an amicus brief this week in Frank v. Gaos, the Supreme Court case challenging cy pres class action settlements, which distribute money only to charities, not to class members. DOJ’s brief is in a way a perfect complement to the July 9 merits brief filed by Ted Frank of the Competitive Enterprise Institute, the legendary class action watchdog representing himself in the Gaos case, adding a legal gloss to Frank’s arguments about the inherently conflicted cy pres settlement process.

But in the context of the Justice Department’s recently announced pledge to police class action settlements more rigorously than in the past, DOJ’s cy pres amicus brief is also an ominous harbinger. The Justice Department isn’t just challenging the particulars of the settlement at issue in Frank’s case, an $8.5 million deal to resolve a privacy class action against Google. DOJ is raising an aggressive constitutional standing argument that even Frank did not assert in his objection to the settlement.

If the Justice Department is really committed to challenging more class action settlements during the approval process in trial courts, the Article III standing argument in its cy pres amicus brief ought to worry the class action bar.

The Google settlement at issue in the cy pres Supreme Court case involved allegations that the search engine’s disclosure of users’ search terms after they click on a link is a violation of the Stored Communications Act. Google agreed to an $8.5 million settlement, of which $2.1 was designated as fees for class counsel. Another $1.1 million would go to named plaintiffs and administration. The remaining $5.3 million was designated to go to universities and nonprofits. Google and the class said it chose cy pres recipients that would promote awareness and understanding of Internet privacy issues. Individual class members were to receive nothing; Google and class counsel said it would not be feasible to distribute a few pennies to the millions of people with claims.

Ted Frank’s merits brief argues that the Google settlement embodies the inherent conflict between class members and class counsel who agree to settlements that consist only of payments to charities. The deals, Frank argues, are great for lawyers on both sides, who get to buy goodwill from their favorite non-profits. They’re especially attractive for class counsel, he says, because they lead to inflated, percentage-based fees. But cy pres settlements punish class members, Frank argues. He wants the Supreme Court to prohibit such settlements and hold that class actions can’t be certified unless payments can be distributed to class members. At the very least, Frank told the Supreme Court, it should instruct trial judges to discount cy pres awards in setting fees for class counsel.

Frank has been objecting to cy pres settlements for years, and his brief is full of examples of dubious settlements he and his colleagues have opposed, including several that have prompted appellate courts to restrict cy pres in class actions. The Justice Department amicus brief steps back from the fray to argue that cy pres-only settlements are problematic under both the Federal Rules of Civil Procedure and Article III of the Constitution.

“In a class action, the parties involved do not include cy pres recipients who were not injured and did not join the lawsuit,” the DOJ brief said. “A court has no Article III authority over such entities, which are ‘not parties to the case.’ Accordingly, cy pres relief complies with Article III only if it has ‘direct consequences on’ the plaintiffs themselves.” Charitable payouts in lieu of payments to class members, the Justice Department said, do not comport with Article III unless they redress the injury that established plaintiffs’ right to sue.

A settlement cannot be approved under Rule 23 of the Federal Rules, DOJ said, if it delivers only “speculative relief” to class members. “A class action is not ‘superior to other available methods for fairly and efficiently adjudicating the controversy’ if it results in no relief whatsoever,” the brief said. “Even if the alternative to a class action is that the plaintiff would not bring a lawsuit at all, a class action that yields no relief is still not ‘superior’ to that alternative.” (To that end, the brief said, DOJ has itself ended the practice of previous administrations that made payouts to nonprofits a condition of government settlements.)

DOJ, like Frank, wants the Supreme Court to impose new restrictions on cy pres-only settlements and, as a minimum, to instruct lower courts to discount the payments in considering attorneys’ fees. In the Google case, it suggests vacating approval of the deal and remanding the settlement for reconsideration under a more stringent test.

But – and here’s where things could get a bit scary for plaintiffs' lawyers – DOJ said the Supreme Court ought to reconsider its jurisdiction to hear the cy pres case at all! According to the Justice Department, there is “considerable doubt” that the plaintiffs who sued Google meet constitutional standing requirements under the Supreme Court’s 2016 ruling in Spokeo v. Robins. It’s not clear, DOJ said, that Google users suffered a “particular” injury other than the violation of their statutory rights under the Stored Communications Act. That’s not enough under Spokeo, according to the Justice Department.

DOJ’s Article III standing argument came as a surprise to Frank, he said in an email. He said Justice seems to be at odds with appellate courts that have upheld standing for plaintiffs who have rooted statutory privacy claims in common law. Frank said he doesn’t think the case should be remanded on standing grounds and is hoping Google or the plaintiffs address DOJ’s point in their briefs so he doesn’t have to “blow 500 words on my reply brief on it.”

I asked Frank if he thought DOJ’s Article III argument suggested the government plans to challenge proposed class action settlements on standing grounds. “Your guess is as good as mine,” he said in an email. “Kicking such settlements to state courts where DOJ and (the Class Action Fairness Act) can’t protect consumers doesn’t seem like a good use of government resources.”

Maybe Frank is right and the Justice Department doesn’t want to drive class actions to state court. But if DOJ sincerely believes lower courts have been misreading Spokeo – and is willing to advance its aggressive Spokeo interpretation to oppose proposed settlements – things are going to get really interesting.

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