United States: Cy Pres Settlements Update: Giving Back Getting Increasing Scrutiny

Last Updated: March 17 2013
Article by Thomas E. Gilbertsen

Two recent appellate decisions demonstrate opposing ends of the discretionary spectrum on which class settlements are approved or rejected.  In one case – In re Baby Products Antitrust Litigation – the Third Circuit overturned an antitrust class action settlement, ruling that the trial court abused its discretion by pre-approving a charitable donation of undistributed settlement funds before determining the total value of settlement funds claimed by class members.  Many of my fellow class action practitioners are expressing concern that the decision renders claim form settlements impossible in the Third Circuit, because it appears to require that the proposed settlement be administered before it can be approved.  In a claim form settlement, a fund is set aside to pay a defined benefit to qualified applicants who submit claims establishing that they are class members.  In the past, disputes arose over what happens to undistributed funds after all the claim forms have been paid.  A common solution has been the so-called cy pres award, which is essentially a donation of left-over settlement funds to a designated charitable organization.  In the Baby Products Antitrust Litigation, somehow the claim form process kicked off, ran and concluded before the district court finally approved the parties' proposed settlement.  So while the settlement was still pending approval, counsel allegedly already knew – but did not tell the court – that relatively few class members submitted claim forms and therefore most of the settlement fund would end up being donated to the cy pres beneficiary.  The district court approved the settlement, and objectors appealed on grounds that the large cy pres award was not in the best interests of class members.  In an opinion giving a rather short leash to the "abuse of discretion" standard, the Third Circuit vacated the approval order, ruling that the trial court did not have the necessary facts to determine whether the settlement provided sufficient direct benefits to the class before making a cy pres award.

At the other end of the spectrum was McCall v. Facebook, Inc., wherein the Ninth Circuit let stand a privacy class settlement that awards no direct benefits to class members while directing $6.5 million to a charitable foundation created and operated by defendant Facebook and the parties' counsel.  The outcome drew strong dissent from several Ninth Circuit judges who wanted to review an appellate panel's decision upholding the settlement, but not enough to secure rehearing en banc sought by objectors who claimed that the cy pres deal was rife with irreconcilable conflicts for the parties and their counsel.  Anybody promoting the limits of judicial discretion for class settlement approval will want to cite the original panel's decision, Lane v. Facebook, Inc., (citing a number of settlement approval judgment calls that the Ninth Circuit will not second-guess in most circumstances).

Much of what happens in class action world is subject to a discretionary standard of review on appeal – including class certification and settlement decisions.  But as these decisions illustrate, a discretionary standard of review still leaves plenty of room for a second opinion.  Other "close calls" of note include Dennis v. Kellogg Co., (vacating settlement approval for failure to specify a cy pres recipient with sufficiently germane focus on class members and underlying claims); Larson v. AT&T Mobility LLC, (vacating and remanding approved class settlement on grounds that parties had not sufficiently exhausted search for class member contact information). 

These cases also point up the difficulty of settling small claims on an aggregate basis.  The class action mechanism encourages aggregation of small claims that no single plaintiff would be incentivized to pursue, and promotes consumer protection by changing the cost-benefit analysis of pursuing these cases, so that unlawful practices do not go unchallenged.  But when it comes time to settle these picayune claims in a class-wide settlement, the cost-benefit realities often complicate a resolution.  We've all seen the fifty-cent settlement check which costs more to produce and distribute than it is worth – the same can often be said for five-dollar or ten-dollar settlement checks.  One solution to the inefficient distribution of small settlement payments is making one big payment to a bona fide charitable foundation.  A meaningfully large payment to a legal aid society or advocacy group has more impact than sprinkling class members with nominal checks that often go unredeemed.  Courts are increasingly wary about the use of cy pres awards in lieu of cash benefits paid directly to class members, so more needs to be said and done in support of these settlements when submitted for court approval.  At one end of the spectrum, a large cy pres award is justified where a class settlement aggregates statutory penalties and there is no social utility in distributing small individual awards to a massive population of class members.  Somewhere down the spectrum is the case where class members claim economic injury, and a meaningful settlement benefit is extended to them in a readily-accessible claim form process.  This is the Baby Products antitrust case, which courts can and should judge prospectively based on the fairness of the settlement amounts and processes adopted.  Class members dissatisfied with benefit levels and claim form processes are free to object or vote with their feet by opting out before the settlement goes live.  But absent a challenge about the sufficiency of notice or claim form administration, objectors should not be allowed to challenge the sufficiency of benefits in hindsight.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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