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

As previously discussed in Part I, the Supreme Court of the United States (“SCOTUS”) recently announced that it would take up the issue of cy pres awards in Frank v. Gaos. How SCOTUS rules in the Frank case could have tremendous impact on class action settlements. While Part I examined the cy pres doctrine generally, Part II addresses the issues with cy pres awards and offers recommendations for their use.

The issues with cy pres awards

In Frank, class counsel was awarded $2.125 million from a $8.5 million settlement. The settlement also included a $5.3 million cy pres award to the plaintiffs’ attorneys’ alma maters and organizations already supported by the defendant. “Professional objectors” like Ted Frank, the named plaintiff in Frank, objected to the settlement, citing cy pres misconduct.

As outlined extensively in the Frank certiorari petition, there are inherent issues with class counsel-and defendants-knowing that cy pres awards will be granted in a class action settlement. First, Frank and others believe that the real winners in these settlements are the attorneys who are granted large fees and the charitable organizations who are recipients of even larger cy pres awards. Frank perceives that “tacit or explicit collusion between defendants” could lead to “back room” deals between defendants and class counsel. Exchanging small settlement amounts for large attorneys’ fees would become prevalent and would drive a stake between class counsel and their clients, the class members.

Second, Frank fears the recent decision in his case, if affirmed by SCOTUS, would diminish fairness by not “compensating class members for their injuries, holding defendants liable to the extent the law allows, and preventing defendants from injuring class members in the exact same manner.”

Third, all too often, cy pres recipients are connected to class counsel or the defendants. Instead of representing the interests of absent class members, the cy pres recipient becomes an easy avenue for tax write-offs to an organization the defendant already supports, or becomes a sizeable donation to the alma mater of class counsel. In either case, a conflict of interest effectively precludes redress of the defendant’s wrongdoing to absent class members. “An appropriate cy pres recipient,” rather, “must be dedicated to protecting consumers from the precise wrongful conduct about which plaintiffs complain.”

Recommendations for cy pres reform

So, what are the parties and the courts to do with left over funds from class action settlements? There are four recognized options, three of which are as unpalatable as the next: (i) giving more money to the absent class members, which provides them with an unjust windfall; (ii) returning money to the defendants, which reduces any misconduct deterrent the class action device provides; and (iii) giving the funds to the state government, known as “escheatment,” that is already disfavored in nearly every other respect. The fourth option, of course, is a cy pres award.

Ultimately, there are no easy answers for reform. But increased judicial oversight, coupled with intense adversarial proceedings by the parties, should be at the top of the list for reform recommendations.

Before a class action settlement becomes final, a court must determine whether it is “fair, reasonable, and adequate.” This same determination should be required for all cy pres awards.

To dismiss any claims of impropriety, the cy pres recipient should not be directly connected in any way to class counsel, the defendants, or the court. Under this level of minimal review, the cy pres award in the Lane v. Facebook matter would have been rejected because a direct connection existed between Facebook (the defendant) and the Digital Trust Foundation (the cy pres recipient), as Facebook staff and class counsel served on the Foundation’s board of directors.

The cy pres award proceedings should also be adversarial to afford opportunities for the parties to articulate and refine potential cy pres award recipients. Judicial efficacy should not be abandoned for judicial efficiency.

Finally, the cy pres review process requires more transparency to “maximize class recovery” and to “tailor the cy pres remedy.” In this regard, legal scholars have suggested (a) communicating the potential cy pres charitable recipients; (b) documenting the service record of such recipients; (c) ensuring that the recipients’ charitable vision and focus aligns with the cause advanced by the class members; and (d) identifying the propriety of the geographical area of the cy pres recipient with the geographical area of the class members.

There are a variety of options for reform out there, and much work remains to be done. Hopefully the outcome in Frank leads the way for effective reform.

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.


FindLaw Network

Serving Client Throughout