United States: Sunset for Cy Pres, Or Standing In Cyber-Privacy Litigation – Take Your Pick

Last Updated: November 22 2018
Article by James Beck

We've always hated the concept of cy pres class action settlements. A cy pres distribution is an admission that, even without opposition, the plaintiffs cannot prove who was injured and by how much. Cy pres also takes money supposedly belonging to the injured class and give it to charities not injured by anyone, so the charities can use the money to encourage more litigation. To us, cy pres not only encourages abusive class action litigations, but violates all kinds of basic legal rules, such as Due Process, the Rules Enabling Act, and the First Amendment (not all absent class members necessarily agree with the views of the charities being allowed to take their money).

We won't prolong this post with any detailed discussion of what "cy pres" means in this context. Basically it's a misapplication of an estates doctrine (legal French beginning with the words "cy pres") invoked to allow class action settlement funds not to be given to the class at all, because it's supposedly "too hard" to figure out damages, and the money purportedly owned by the class is given to charities instead. It's a gimmick to facilitate class actions that otherwise would fall of their own weight.

We lambasted the cy pres settlement at issue in the pending Supreme Court case, Frank v. Gaos, No. 17-961, as a "poster child" for class action abuse well before the Supreme Court granted certiorari. It had everything going against it: class members getting zero, and cy pres charities taking everything (after a huge chunk of attorney fees were removed, of course), the charities were not selected by any set criteria and had connections to the parties or counsel (such as being class counsel's law schools), use of cy pres money to "increase awareness" of cyber security issues – a euphemism for soliciting more litigation, cy pres being used to bloat the settlement numbers for purposes of calculating attorney fees.

Thus, we thought Frank was the perfect case to cause the Supreme Court to recoil in disgust from a process with no foundation in statute, common law, or rule.

Now Franks has been argued, and we think we were half right. From their statements, and how they formed their questions, it's pretty clear that none of the justices liked cy pres – certainly not the 100% version at issue here. See Transcript at:

  • "[T]here may be a question about whether the trial court adequately determined feasibility." Tr. at 5-6 (Sotomayor, J.).
  • "[T]his is a full cy pres award, meaning there's no direct benefit to the class." Id. at 10 (Sotomayor, again).
  • "[I]s any effort made — and would it even be possible — to determine whether every absent class member or even most of the absent class members regard the beneficiaries of the cy pres award as entities to which they would like to make a contribution?" Id. at 13 (Alito, J.).
  • "So the parties and the lawyers get together and they choose beneficiaries that they personally would like to subsidize?" Id. at 14 (Alito, again).
  • "I think you either decide the cy pres award provides relief or it doesn't provide relief. If it doesn't provide relief, you don't get a fee for it." Id. at 26 (Roberts, C.J.).
  • "[D]o you think that problem is going to be meaningfully redressed by giving money to AARP?" Id. at 42 (Roberts, again).
  • "Including a group that engages in — engages in political activity, having nothing to do with the inability of elderly people to conduct searches?" Id. at 43 (Roberts, again).
  • "[W]here they [the absent class members] get nothing, under those circumstances, . . . what's happening in reality is the lawyers are getting paid and they're making sometimes quite a lot of money for really transferring money from the defendant to people who have nothing to do with it." Id. at 46-47 (Breyer, J.).
  • "Isn't it always better to at least have a lottery system, then, that one of the plaintiffs, one of the injured parties gets it [the settlement funds], rather than someone who's not injured?" Id. at 51 (Kavanaugh, J.).
  • "But there is the appearance, as the district court said in the hearing, the appearance of favoritism and alma maters of — of counsel." Id. at 55 (Kavanaugh, again).
  • "[D]on't you think it's just a little bit fishy that the money goes to a charity or a 501(c)(3) organization that [defendant] had contributed to in the past?" Id. at 56 (Roberts, again).
  • "The appearance problem here . . . is symptomatic of a broader question, which is why is it not always reasonable . . . to try to get the money to injured parties." Id. at 58-59 (Kavanaugh, again).
  • "[T]he appearance of favoritism and collusion . . . is rife in these cases." Id. at 61 (Kavanaugh, yet again).
  • "And at the end of the day, what happens? The attorneys get money, and a lot of it. The class members get no money whatsoever. And money is given to organizations that they may or may not like and that may or may not ever do anything that is of even indirect benefit to them." Id. at 63 (Alito, again).

Ouch. Those are scathing comments from five justices (Thomas, J. rarely says a word) on both sides of the political spectrum, and most of them commented more than once. So we're reasonably confident that, if the Court addresses the so-called "cy pres doctrine," it will not fare well.

But that's the other half of the problem – standing is a major issue. Two justices, Gorsuch and Kagan, did not ask any questions about cy pres at all. They were totally focused on standing. Standing, in this context, means that none of the plaintiffs, even assuming the privacy of their Internet searches was violated, had established that they had suffered any concrete or distinct harm from the claimed breach. That may well be a good argument, leading to a standing decision that seriously clips the wings of class actions focused on various breaches of cybersecurity. During the oral argument, more than half of the Justices were also interested in the standing question. Indeed, at one point they talked over each other in their eagerness to refocus the argument on that issue:

JUSTICE KAGAN: Mr. Frank –

JUSTICE GORSUCH: We – I'm sorry.

JUSTICE KAGAN: Sorry. No, go ahead.

JUSTICE GORSUCH: Oh, please go ahead.

JUSTICE KAGAN: No.

CHIEF JUSTICE ROBERTS: Justice Kagan.

JUSTICE KAGAN: I was going to change the subject.

(Laughter.)

JUSTICE GORSUCH: So was I.

(Laughter.)

JUSTICE GORSUCH: Jurisdiction?

JUSTICE KAGAN: Yes.

JUSTICE GORSUCH: Go for it.

Tr. at 14-15. Lack of standing, of course, would mean that "the whole class action is thrown out." Id. at 17 (Roberts, C.J.). We're not going into detail, but from the discussion, it appears that the trial judge's standing ruling was required by a Ninth Circuit decision that has since been reversed by the Supreme Court, Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). See Tr. at 70 (the district court "believed its hands were tied by the Ninth Circuit precedent"). We also note that, shortly after the oral argument, the Court issued an order requiring supplemental briefing on the standing issue, with such briefing to be completed by December 21, 2018. Merry Christmas.

A decision dismissing the entire class for lack of standing would be good for privacy class action defendants – and bad for their opponents – but it would leave the doctrine of cy pres free to continue its reign of error in the lower courts.

Or maybe not.

While a decision that the entire class action fails for lack of standing would moot the original question that the Court accepted about cy pres distributions as a settlement tool, there is an exception to mootness where an issue is "capable of repetition yet evading review." E.g., Spencer v. Kemna, 523 U. S. 1, 17 (1998). Since lousy, no-injury class actions and cy pres settlements go together like . . . death and taxes, perhaps, the mootness doctrine might apply here, as invocation of cy pres is indicative of class actions that should never have been brought in the first place because no individualized injury can be proven.

The Court's request for supplemental briefing is a sign that, rather than remanding, the Court is inclined to address the standing question itself – and if it does that, it could also smack down cy pres even if it concludes standing is absent. At least we can hope.

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

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