Class Action Settlements and Cy Pres Awards: Part 1 of 2

[In this two-part series, we explore the origins and present-day use of cy pres awards in class-action settlements and the Supreme Court’s recent decision to address the use of cy pres awards.]

You’re a member of a class action. The case has settled. You received your postcard or email notifying you of the settlement. You follow the instructions and, shortly thereafter, you received compensation. In many class actions, there are thousands if not tens of thousands of others in your position, but some or many of them ignored or didn’t follow the claim procedures to receive their compensation. As a result, a lot of money is left over. What happens to that money?

The Supreme Court of the United States (“SCOTUS”) recently agreed to hear the case of Frank v. Gaos, announcing that it would address the use of cy pres (pronounced see-PRAY) awards in class action settlements, awards of money from these left over settlement proceeds. Hopefully SCOTUS will provide guidance to class counsel, defendants, and the lower courts on how to administer these awards. (For answers to common questions about class actions, check out our previous blog post here.)

What are cy pres awards?

A cy pres award is the “distribution of money from a class action settlement to a charitable organization.” It’s not a new phenomenon. Originating from the legal traditions of sixth-century Rome, cy pres is an abbreviation of the longer French phrase cy près comme possible (translation: “as near as possible”). Until the late nineteenth century, the doctrine was applied exclusively to trusts and estates, whereby the court would grant a monetary award to a third party when the administration of the trust or will was impossible or infeasible. In other words, if a person’s will bequeathed money to a beneficiary, and that individual was no longer alive, the court would designate a third party “as near as possible” to the donor’s original wishes.

Judicial application of cy pres awards in class action settlements, however, is relatively new. Around the mid-twentieth century, courts began to exercise their authority to resolve impossible or infeasible distributions of money to class members by awarding settlement funds to charitable organizations. In Lane v. Facebook, for example, the class action lawsuit arising from Facebook’s alleged breach of privacy, not one dollar from the $9.5 million settlement was distributed to the plaintiffs; rather, due to the “speculative nature” of damages for the voluminous class, the court granted a cy pres award to a charitable organization, the Digital Trust Foundation.

The growth of cy pres awards

In earlier class-action times, absent class members-those represented by the named plaintiffs-were required to opt-in to the class action in order to receive any redress for their injuries. Then and only then would a class member receive any monetary compensation. With the 1966 adoption of Rule of 23(b)(3) of the Federal Rules of Civil Procedure, which provided for “class actions for damages designed to secure judgments binding all class members save those who affirmatively elected to be excluded,” the game was afoot. That is, class action attorneys could “file actions on behalf of large and difficult classes, aggregating members’ paltry claims into litigation well worth an attorney’s time” without waiting for class action members to opt-in. Large and difficult classes became the new normal.

Administration of settlements proved just as difficult. Distributing settlement proceeds can often be arduous-sometimes impossible-and the settlement process, in general, can be difficult to supervise for settlement administrators and attorneys alike. Additionally, because some settlements provide for such small amounts to be distributed to the class members and/or because of the cumbersome claim-in procedures, response rates for class actions are typically in the single digits. As a result, unclaimed settlement proceeds are left over, and the courts have increasingly approved cy pres awards to charities that align with the goals or causes of the class action.

The trouble with cy pres awards

So, what’s the big deal over cy pres awards? Well, such awards have been connected to misconduct by class counsel and defendants. In Lane v. Facebook, the court directed all the cy pres funds to one organization-the Digital Trust Foundation. The Foundation, however, selected Facebook’s Director of Public Policy and class counsel as several of its directors. Scholars immediately noted the conflict of interest, but the settlement was approved nevertheless. The plaintiffs, those who were allegedly injured by the breach of their privacy? They received nothing.

Join us for Part 2 of our cy pres award analysis, where we’ll discuss recommendations for the reform process.

Do you have questions about class actions? Have you been harmed or injured in a way that you think has similarly affected others? Give us a call today. We can help.


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