United States: More Cy Pres Abuse In California Class Action Litigation

Last Updated: February 20 2017
Article by James Beck

We can't stand "cy pres" distributions of class action settlement funds to non-litigants.  We've blogged about this benighted doctrine many times.  We fought against cy pres at in the ALI, and we've been fighting against it through Lawyers for Civil Justice in the context of federal rules amendments.

Sure, cy pres can be useful in resolving this or that class action once our clients are unfortunate enough to have become embroiled.  But we firmly believe in the "build it and they will come" theory – that making class actions easier to settle make them easier to bring, because 99% of all class actions (at least those seeking $$$) are brought as strike suits to settle, rather than to litigate.  A cy pres award is a sure-fire indicator of litigation that should never have been brought – because even after settlement, without any opposition from the defendant(s), a cy pres request is an admission that the plaintiffs still can't prove damages and causation with respect to the absent class members.  They can't even win a walkover.  Outside the class action area, that would mean "case dismissed" (and maybe sanctions).  As a class action, it means "write a check."

There is no basis for cy pres in substantive law (outside of a couple oddball statutes), and there's nothing more "substantive" than taking money supposedly owed to absent class members and giving it to non-litigant charities. Since it's substantive, there's also no possible basis for it in Fed. R. Civ. P. 23, since court rules can't change substantive law.  Cy pres a racket – designed primarily to inflate attorney fee awards − and while the charities might do good work, call us the Grinch, because we don't think the litigation industry should be funding charities with other people's money extorted through litigation threats.

Here's the latest example of cy pres abuse occurring in the context of bogus litigation that should never have been brought, Koby v. ARS National Services, Inc., ___ F.3d ___, 2017 WL 359670 (9th Cir. Jan. 25, 2017).  This isn't a drug/device case.  Thankfully, between the FDCA no private right of action rule (which, regrettably has a food loophole) and the rejection of personal injury class actions, we don't encounter all that many of them anymore against drug/device clients.  Instead, Koby is a Fair Debt Collection Practices ("FDCP") action, and as you might expect from the introduction, a bottom-feeding FDCP action at that.

Supposedly the defendant violated the FDCP at some point a decade or so ago when its employees left messages that did not fully identify themselves. This issue was later fixed, but the class action supposedly includes "some four million people nationwide."  Koby, 2017 WL 359670, at *1.  Predictably, nobody in the class was actually harmed by what appears to have been a technical FDCP violation (quickly fixed), so only statutory damages were sought.  Theoretically that could have been a lot (4M x $1000), but because ARS was a small company, the 1% of net worth statutory cap limited recovery to $35,000. Id. at *1-2.

You do the math.

No, the court did.  That's 3,500,000 in pennies, to be shared between 4 million or so class members – none of whom were actually injured.  Id. at *2 ("less than a penny to each member of the class").  No actual damages.  Less than a penny in statutory damages per person.  Koby was [insert barnyard expletive of your choice] litigation in every sense of the word.

But lawyers cost money, and litigation consumes time and effort that could be better directed to business pursuits, so the plaintiff class was able to extort a settlement.  Here's what they got:

[Defendant] agreed to pay each of the three named plaintiffs $1,000, the maximum they could hope to recover under the FDCPA as none of them had suffered any actual damages. . . .  Given the impossibility of distributing less than a penny to each member of the class, [defendant] agreed to make a $35,000 cy pres award to a local San Diego charity instead. . . .  The four million unnamed class members receive no monetary compensation under the settlement.

Koby, 2017 WL 359670, at *2. And of course, the most important thing, "[defendant] also agreed to pay class counsel the negotiated sum of $67,500 in attorney's fees."  Id.

Before getting to the merits, the Ninth Circuit had to sort through a procedural dispute about whether the case could properly be assigned to a magistrate (what district judges often do with [insert same expletive] cases).  Koby upheld the assignment.  Id. at *3-5 (ruling that all 4 million absent class members don't have to consent to assignment to a magistrate).

The Ninth Circuit then hammered the cy pres settlement.  The purported "injunctive relief" was meaningless, since:  (1) it was a "mismatch" with the class definition, which looked backward, and (2) it did "not obligate [defendant] to do anything it was not already doing" (as already mentioned, the violation had been corrected).  Id. at *5-6.

Thus the only supposed "value to the class" was the $35,000 in statutory damages that the settlement took from the class and gave to a charity.  That didn't pass muster either.

[The settling parties] likewise presented no evidence that the absent class members would derive any benefit from the settlement's cy pres award.  Indeed, it is doubtful that the award could be approved under our precedents, which require that cy pres awards be tethered to the objectives of the underlying statutes or the interests of the class members.  Here, the award consists of a $35,000 donation to a San Diego veterans' organization.  The San Diego location of the chosen charity has no geographic nexus to the class, which includes four million individuals scattered throughout the United States.  Nor was there any evidence that the settlement class is disproportionately composed of veterans.  And there was no showing that the work performed by the designated charity would protect consumers from unfair debt collection practices, the objective of the FDCPA.  Thus, even putting aside the relatively small size of the cy pres award, we cannot say that this aspect of the settlement provided any material benefit to the class members.

Id. at *6 (emphasis added) (citation omitted).  But the named plaintiffs would get $1000 each and class counsel would get fees almost twice the settlement amount.

So the fig leaf cy pres award was rejected.  Reversed and remanded. Id. at *7.  What next?  With total FDCP damages capped at an amount that the defendant was already willing to pay, this sounds like a good candidate for interpleader.  Pay the $35,000 into the court and let plaintiffs' counsel – who claim to be "adequate representatives" for this [same expletive] litigation sort out distribution on their own dime.

If one wants to stop class action abuse, it has to become uneconomic for the lawyers to bring them. There is no other way.  Getting rid of cy pres would do that in the Koby case and hundreds of similarly meritless strike suits.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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