(Reuters) - Ted Frank of the Competitive Enterprise Institute’s Center for Class Action Fairness believes cy pres – the practice of distributing class action settlement money to court-approved charities instead of class members – perverts the intention of the federal rules enabling class actions.
In a petition for U.S. Supreme Court review of a case in which Frank is, himself, an objecting class member, his lawyers at Baker & Hostetler argued that cy pres provisions in class action settlements highlight the “pathologies of the class action procedure by facilitating settlements that provide substantial benefits to defendants and class counsel, at the expense of class members.” According to Frank’s brief, class action lawyers like to use cy pres because they can claim a portion of the funds as fees without going to the work and expense of finding class members. Defendants can steer money to favored nonprofits. Judges may like doling out money to worthy causes. Everyone is happy, according to the Frank brief, except for the class members who should be getting settlement proceeds.
So it would seem to be little wonder, according to the Frank petition, that cy pres is an increasingly common tactic in class action settlements. The petition cited a 2017 Law360 analysis that found more settlements included cy pres provisions in 2015 and 2016 than in any previous year.
As you may recall, Chief Justice John Roberts also has serious questions about the use of cy pres in class actions. In 2013, the Supreme Court denied review in Marek v. Lane, but the chief justice suggested in a statement accompanying the denial that the justices might need to clarify “when, if ever,” cy pres payments are warranted, citing “fundamental concerns surrounding the use of such remedies in class action litigation.”
The chief justice’s statement in Marek (in which, I should note, Ted Frank represented the class action objector seeking Supreme Court review) might seem to bode well for Frank’s new petition, which stems from Google’s agreement to pay $8.5 million to resolve a class action claiming it violated users’ privacy by sharing search data with other websites. The settlement called for all of the money, aside from a $2.25 million fee award for class counsel and token payments to class representatives, to be disbursed to six groups that study or advocate for internet privacy.
But in Google’s brief opposing Supreme Court review, filed Friday, the company’s lawyers at Mayer Brown and O’Melveny & Myers contend that Frank has picked the wrong case for a policy argument over the appropriate use of cy pres.
According to the company, Frank and his lawyers failed to acknowledge adequately that there are different kinds of cy pres provisions – those that distribute whatever remains in a settlement fund after class members have made claims and those in which charities get all of the money because it’s not feasible to distribute tiny amounts to class members. The Google settlement falls into the second category: If the money had been meted out to all 129 million Google users in the class, each would have been entitled to four cents.
Google said there’s no need for the Supreme Court to review settlements comprised entirely of cy pres funds because they’ve dried up after the chief justice’s statement in Marek. “There is a complete mismatch between petitioners’ assertion that ‘cy pres settlements are increasingly prevalent’ and the question presented, which asks this court to review cy pres-only settlements,” the Google brief said. Citing the same Law360 analysis as the Frank brief, Google argued that between Roberts’ comments in Marek and 2016, 97 percent of the cy pres provisions in class action settlements address leftover money. Only 3 percent direct all settlement money to charities.
Google posited that these all-cy pres settlements are likely to become ever rarer because the Supreme Court’s ruling in Spokeo v. Robins will restrict class actions alleging only statutory damages. “Spokeo clarifies that Article III requires lower federal courts to weed out putative class actions seeking statutory damages in the absence of actual harm,” the Google brief said. “These are the cases that are most likely to result in proposed cy pres-only settlements if they make it past the pleadings stage; settlements are naturally smaller when the presence of any injury is unlikely.” (Google’s faith in the power of Spokeo may stem from the law firm affiliation of its counsel of record: Donald Falk is a partner at Mayer Brown, which represented Spokeo at the Supreme Court.)
Since all-cy pres settlements are going extinct – and since the federal circuits agree that cy pres can be an appropriate way to mop up what remains of settlement funds after class members’ claims – the Supreme Court need not get involved. For what it’s worth, I did a Westlaw search for decisions approving settlements with cy pres provisions and quickly reviewed the most recent 80 cases, dating back to June 2017. None involved an all-cy pres settlement, though I did find a January 2017 decision from the 9th Circuit in an all-cy pres case. In Koby v. ARS National, the appeals court overturned approval of a $35,000 settlement in a class action against a small debt collector, holding that the cy pres award provided no benefit to 4 million class members.
I asked Frank to respond to Google’s argument. In an email, he agreed that Chief Justice Roberts’ 2013 statement did put a damper on cy pres settlements, but said the 9th U.S. Circuit Court of Appeals’ approval of the Google settlement could revive all-cy pres deals because it enables defendants and class counsel to claim even large settlements are non-disbursable to classes containing millions of people. (Data breach cases are a prime example.) Frank said he’s already seen the 9th Circuit’s Google ruling cited in two cases directing all or most of the settlement money to charity. He also said he doubts Spokeo will have much impact.
“If cert is denied, we will see a lot of forum shopping of cy pres settlements to the 9th Circuit, because class counsel will always prefer the glory of a big charitable contribution to a million anonymous small-dollar checks to ungrateful class members,” Frank said.
The Supreme Court has not yet scheduled a conference date in the Google case. Google counsel Falk did not respond to my email requesting comment.