DESCRIPTION OF THE CY PRES PROBLEM
Imagine the settlement of a case involving the refund by Jefferson County, Alabama of employee occupation taxes that the Court finds to be illegal. There are 350,000 claimants and about $30M or about $100 a head. In paying claims, you followed a Cadillac distribution plan, first asking the employers, who kept the payroll records for occupation taxes, to provide the information to pay the employees. Then, for the employees whose employers did not participate, you gave them time to file their own claims. Throughout the process, you provided notice in the newspapers and news media and used employer name and address data provided by Jefferson County.
The dust has settled and you have paid claims to about 85% of the people, with there being about $2.5M left.
If you were to pay the remainder to the 85% of the claimants that you located, they would each get $8. And it would cost about $5 to prepare and send each check.
Where should the money go?
Courts around the country have looked at four alternative solutions:
1. Pay the excess money to the claimants who appeared, no matter how expensive.
2. Give the money back to the defendant.
3. Give it to the state or federal government, depending on what Court you are in.
4. Apply the cy pres doctrine, which would result in the money going to charity.
What seems to be the most fair?
HISTORY AND DEVELOPMENT OF THE CY PRES CONCEPT
The cy pres problem arose in 1966, when the Supreme Court of the United States adopted the “book of the month club” approach to class actions, so that those named as claimants in a class who did not object were automatically in the class.
Claimants who had made no choice to participate in the proceeding were included by default. Lawyers and courts then encountered the serious problem of paying a judgment or settlement award from the defendants to all of the claimants, many of whom did not appear and can’t be located.
At the end of the day, there are therefore surpluses in settlement funds. This led to the development of the cy pres doctrine.
It first arose for trusts for charities. In Jackson v. Philips, a will of a Bostonian bequeathed to trustees monies to be used to create a public sentiment that will put an end to negro slavery in the United States. After slavery was abolished by the 13th Amendment, the funds were applied to help poor blacks in Boston. Under the cy pres doctrine of charitable trusts, when the trust purpose fails, the money is applied as nearly as possible to the original intent, with cy pres meaning “as near as possible” in French.
The earliest use of cy pres for class action surpluses was in Miller v. Steinbach, a 1974 Southern District of New York Federal Court case. Owners of 4M shares in a company that had merged with another, claimed that the terms of the merger were unfair. The relatively modest settlement fund, of, say, $4M, could not be realistically distributed to the shareholders at a $1 a head. The settlement therefore paid the fund to the company’s retirement plan, calling it a variant of the cy pres doctrine of trusts at common law.
Presumably, the logic of the decision was that many stockholders were retirement plan participants and vice versa. However, there is no analysis in the decision to that effect.
In the Miller case, at least, there is some arguable overlap between the class members and those that got the surplus money, fulfilling cy pres’ definition. This is not always the case, though, and sometimes the class members get nothing, with all of the money going to cy pres.
Does this sound like a Court acting the legislature and not resolving disputes between plaintiffs and defendants?
Here are some examples to think about.
Vasqez v. Abco Financial, in California with the proceeds from a credit fraud settlement going not to class members but to a charity that educates consumers on credit transactions.
Compact Disc Antitrust Litigation in Maine, where the settlement of a compact disc price antitrust case was paid to a school of arts.
How big a problem is this cy pres distribution to charities and not class members?
Here are some tables from a famous 2010 Florida Law Review article on the topic.
The first is a survey of federal class action settlements with cy pres awards over the years. As you can see, comparing 1991 to 2000 with 2001 to 2008, the number has tripled.
If none of the settlement money goes directly to class members but to charities, instead, it is sometimes called a false or faux class action.
Before 2001, 11 of 30 with cy pres cases were faux class actions, and after 2000, 24 of 65 were. Is this a fair resolution of a case between plaintiffs and defendants? Clearly, cy pres monies go to good uses, such as defending poor people in litigation through legal defense funds. But isn’t the money, in equity and fairness, meant to go to the class members who are hurt and whose injuries generated the money?
The money we are talking about here is large. Over to the left on the linked table is the total settlement fund amount that you normally see. As you can see, the average is $51M. As you can see, $5.8M is the average cy pres amount of a settlement fund and it is usually about 30% of the overall settlement fund, so only 70% of the money actually goes to class members on average.
The Florida Law Review Article also states that there were 10 cases where cy pres awards were 75% or more of the total damages. All 10 of these were faux class actions, where almost all of the settlement money was earmarked up front to go to charity and not class members.
Let’s look at this issue more closely and see if we can suggest some reforms.
ALTERNATIVE SURPLUS DISTRIBUTION BUCKETS
A. Pay The Surplus To Class Members
This alternative is advocated strongly by Adam Liptak a legal issues writer for the New York Times, in his famous article, Doling Out Other People’s Money. Of course, the other people are the class members. He looked at a case where there was $6M in unclaimed money for the settlement of an antitrust case brought by fashion models. The judge awarded a half million dollars of the surplus to a substance abuse program, a million dollars for an eating disorder program, and so on.
Mr. Liptak lamented that it allows judges to choose how to spend other people’s money, which is not a true judicial function and can lead to abuse.
Doesn’t the legislature decide how to spend our money and not the Courts?
The American Law Institute weighed in in 2008 to try to solve the crisis by proposing a simple solution: Unless the plaintiffs cannot be found or the sums involved are too trivial to bother with, class actions settlement money must go to actual plaintiffs.
The argument against this in the fashion model settlement described by Adam Liptak is that they would have received a windfall, maybe multiples of the amount by which they were hurt. But, at least the money would be going to the victims and not to third parties that had nothing to do with the case.
B. Why Not Give The Money Back To The Defendant?
This is an unpopular suggestion with many, because a lot of use prefer to talk about plaintiffs, who have been hurt. The money was paid by the defendant based upon claimed injury to plaintiffs. If you give it back to the defendant, isn’t that a windfall to the defendant?
The defendant might say that, if you don’t return the excess money, you are forcing him to pay it to an uninjured charity, violating his right to procedural due process, in which you are only required to pay someone you’ve hurt.
Under this approach, unclaimed funds would go to the defendant on the theory that the defendant’s money remains his unless it is awarded as damages and claimed by a plaintiff. Can we really say that damage awards are made in the air and not awarded to a specific plaintiff? Unless a plaintiff recovers the money, this argument goes, doesn’t the money remain the property of the defendant?
If you don’t give it back to the defendant, can you really say it is damages, because it didn’t go to a plaintiff. Does it look more like a fine or penalty, which has to be pursuant to a statute or regulation? What statute or regulation? The creative mind of the Court or of the lawyers?
C. Why Not Let The State Have It?
See, West Virginia v. Pfizer, were consumer class members were notified that, if they fail to make a claim to a settlement fund in 90 days, the money would go to the Attorney General as the representative for the benefit of the citizens of West Virginia. The underlying case was an antitrust suit involving the drug, tetracycline, but the resulting projects using the money were drug abuse programs, community health clinics, lead poisoning and sickle cell anemia research, and other areas of need designated by the Attorney General.
Kind of like putting the money in the general fund for a state. At least this approach prohibits Courts from doing whatever they want with the funds, and the money would go for the general public, unguided by the preferences of the Judge or attorneys. But it certainly doesn’t go for the purpose intended in the lawsuit, paying claimants.
In summary, none of these three classic alternatives to cy pres is completely appealing. Below are some more creative and perhaps radical ideas.
ALTERNATIVE SOLUTIONS AND USES FOR SETTLEMENT FUND SURPLUSES
A. Fluid Recovery
In contrast to cy pres, this concept has had a difficult time in the courts, such as in Daar v. Yellow Cab where it was disallowed.
Fluid recovery is a three step process: you still calculate the total damages, then pay it out to those class members who appear and file claims, and you distribute the remainder to the class as a whole or to an entity that will benefit the class as a whole to provide future relief that approximately addresses the injury that occurred in the past. The assumption is that the class of future users will likely overlap with the injured class of past users.
In Yellow Cab, a California case, even though it was disapproved, there seems to be an exquisite fluid recovery remedy: to compensate for taxi cabs overcharging, the settlement would have lowered cab fares in the future, based upon the assumption that the same people who used cabs in the past and were overcharged would use them in the future and enjoy a refund.
The Court ruled: “Even if amended Rule 23 could be read so as to permit any such fantastic procedure, the courts would have to reject it as an unconstitutional violation of the requirement of due process of law. But as it now reads amended Rule 23 contemplates and provides for no such procedure. Doesn’t that sound like a description of cy pres?”
So much for logic and the law.
Fortunately, the hard line against fluid recovery is melting, with Courts beginning to see that it is a creative effort to provide compensation to class of victims which would otherwise be impossible.
Eisen v. Carlisle, a Second Circuit case, allowed what seems to be a sound fluid recovery remedy: odd lot stock traders (purchasing 100 shares or less), whose damages averaged $70 due to commission overcharging, were to be compensated by having commission reductions in the future.
In Eisen, the fluid recovery was roughly enjoyed by the class members, much as it would have been in Yellow Cab.
Democratic Central Committee of the District of Columbia v. Washington Metropolitan Area Transit Commission recognizes fluid class recover as very effective for remedying overcharges on items which are repeatedly purchased by the same people.
See, also, Agent Orange, where a portion of the settlement fund to provide program benefits (such as PTSD counseling) for the class as a whole was approved because the recipients were found to be equivalent to the class that claimed injury from agent orange.
B. A More Radical Suggestion: Deny Class Certification If You Can’t Find The Claimants Or Pay Them?
This alternative was raised with the Supreme Court recently in the Facebook Beacon case, which you may have heard about, with the decision coming out in November 2013.
Facebook was sued over its Beacon feature, under which, when you bought an item from a participating store, the information was shared with all your friends. The plaintiff bought a surprise ring for his spouse, and she and his other 700 fellow friends found out about it ahead of time, spoiling the surprise.
A lawsuit was filed for 300M class members, and the settlement was for about $10M, 30 cents each.
The class members didn’t get any of the money, it went to a charity to protect consumer rights, run by Facebook and the plaintiff lawyer, and the plaintiff lawyer got $3M in a fee. This appears to be a faux class action settlement.
Although the Supreme Court failed to take the case, what we lawyers call denying cert, Chief Justice Roberts issued this stern warning:
“I agree with the Court’s decision to deny the petition for certiorari. Marek’s (the plaintiff) challenge is focused on the particular features of the specific cy pres settlement at issue. Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on. This Court has not previously addressed any of these issues. Cy pres remedies, however, are a growing feature of class action settlements. See Redish, Julian, & Zyontz, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 653-656 (2010). In a suitable case, this Court may need to clarify the limits on the use of such remedies [Emphasis added].”
The cited law review article is the famous Florida one I have mentioned earlier.
There are some important conclusions to draw from the current status of cy pres.
First, our class action structure is in jeopardy. If the Supreme Court gets the right case, it might challenge the validity of any settlement involving cy pres unless it is managed better. The worst downside is to risk the reversal of the 1966 Supreme Court decision to have class action settlements on a book of the month basis, which would jeopardize class action practice.
When a Court decides whether a class action can be brought, which is called certifying the class, it should look at the unclaimed fund issue right then. If meaningful relief can’t be provided to the large majority of class members, it may not be a good class action in the first place.
For example, look at the Facebook case we just talked about.
For case settlements that are substantially paid to claimants, with a residue of only say 10, 15 or 20 percent, the classic approach to cy pres could be followed, in which, first, you pay the recovery to the class members who appear, to the extent it is not a windfall to them. Then, you might consider a fluid recovery or other approximate payment for the total benefit of the class. Finally, and only then, would you invite charities to apply for the monies, with there being an attempt to have the charities’ purposes approximate the theory of the case or at least the geography of the class members who were in the case.
For example, in the Jefferson County Occupation Tax case we started out with tonight, what we did with the $2.5M is, first, look at whether we could pay it as a refund to the class members. It was decided that $7 a head is not practicable, when it costs $5 to prepare checks. We then looked at the closest possible alternative relief, with this being a tax case.
The Court and we thought a sales tax holiday in the cities of Jefferson County for school books might be a good idea. However, the Alabama Legislature is required to approve sales tax holidays, making it inviable.
We then looked at charities serving Jefferson County, and prepared a request for proposals, in which each applicant would describe how many persons it serves in the county and the purpose of the cy pres award.
We then interviewed all the charities who applied, and made the awards. All charities participating pretty much received a ratable award.
This is not a perfect solution to cy pres in the Occupation Tax Settlement but the Occupation Tax Case is the opposite of a faux class settlement. 85% of the claimants were paid, a large percentage for these types of cases. We also tried to tailor the cy pres award in accordance with its French definition, as nearly as possible. Finally, in each proposed class action settlement, the Court should consider the other alternative uses of the surplus, paying the money to the defendant or the state, depending on the circumstances.
Due to these new developments in the law, we may expect a new group of lawyers to challenge all class action settlements with a cy pres component as going beyond judicial procedure and evolving into unconstitutional legislation.
The only way to preserve the class action system under this crisis is to develop and apply some concrete rules of due process for cy pres distributions, as described here.