Increased Scrutiny for <i>Cy Pres</i> Provisions in Class Action Settlements

The Percentage of Funds Distributed to Class Members

As the U.S. Court of Appeals for the Eighth Circuit has noted, cy pres distributions “have been controversial in the courts of appeals … . Indeed, many of our sister circuits have criticized and severely restricted the practice.” In re BankAmerica Corp. Securities Litigation, 775 F.3d 1060, 1063 (8th Cir. 2015) (citations omitted). The court went on to “agree” with the U.S. Court of Appeals for the Fifth Circuit that '”[b]ecause the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible 'only when it is not feasible to make further distributions to class members' … except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.”' Id. at 1064.

Thus, the trial court “erred in finding that further distributions would be so 'costly and difficult' as to preclude a further distribution; that inquiry must be based primarily on whether 'the amounts involved are too small to make individual distributions economically viable.'” Id. at 1065. The court then provided an analysis on the appropriateness of the cy pres distribution with a level of analysis that may not have been seen in years past.

The Southern District of New York also acknowledged the usual necessity for most settlement funds to be distributed to class members in Graff v. United Collection Bureau, Inc., 132 F.Supp.3d 470, 485 (S.D.N.Y. 2016). The Graff court denied a motion to certify a nationwide class where those class members would receive no compensation, but rather the entirety of the those class members' portion of the settlement fund would go to cy pres payments. The court concluded that “the limitation of the settlement to a cy pres payment representing no measurable benefit to class members renders the settlement fundamentally unfair, unreasonable and inadequate.” Id. at 485-86. In reaching that conclusion, the court noted that the case law was “less clear” as to when a court may “approve the kind of settlement proposed here — an agreement in which, other than a payment to the named plaintiff, none of the funds are awarded to any class members, but rather are entirely supplanted by payment to a cy pres recipient.” Id. 484.

The court explained that while some courts have allowed such a complete cy pres distribution, the defendant in Graff was “attempting to repeatedly settle class action litigation by crafting cy pres remedies providing virtually no relief to class members,” highlighting the inappropriateness of a complete cy pres distribution in that situation. Id. at 485.

In a similar vein, the U.S. Court of Appeals for the Third Circuit vacated a district court's approval of a settlement in which the cy pres distribution was more than six times the size of the direct class payment, explaining that although cy pres distributions are permissible, they “only imperfectly serve the purpose of the underlying causes of action — to compensate class members.” In re Baby Products Antitrust Litigation, 708 F.3d 163, 169 (3d Cir. 2013). The Third Circuit explained that “[b]arring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds.” Id. at 179.

This requirement may necessitate “withhold[ing] final approval of a settlement until the actual distribution of funds can be estimated with reasonable accuracy” or “urg[ing] the parties to implement a settlement structure that attempts to maintain an appropriate balance between payments to the class and cy pres awards.” Id.

In recent years, other courts have recognized these principles as well. See, e.g., Pearson v. NBTY, Inc., 772 F.3d 778, 784 (7th Cir. 2014) (“But there is no validity to the $1.13 million cy pres award in this case. A cy pres award is supposed to be limited to money that can't feasibly be awarded to the intended beneficiaries … which has not been demonstrated.”); see also In re Google Inc. Cookie Placement Consumer Privacy Litigation, 2017 WL 446121, at *4 (D. Del. Feb. 2, 2017) (allowing distribution of funds under the cy pres doctrine where “direct monetary payments to absent class members would be logistically burdensome, impractical, and economically infeasible, resulting (at best) with direct compensation of a de minimus amount.”).

The Nexus Between the Cy Pres Recipient and the Underlying Litigation

As for the sufficiency of the nexus between the cy pres recipient and the underlying litigation, the court in Hofmann v. Dutch LLC explained that “a reviewing court that approves a cy pres distribution that has no relation to the class or the underlying claims is applying the incorrect legal standard and abusing its discretion.” 2017 WL 840646, at * 4 (S.D. Cal. Mar. 2 2017). There, the plaintiffs brought claims under California's false advertising and consumer protection statutes based on allegations that the defendant's jeans bore a “Made in the USA” label, but “contained foreign-made buttons, rivets, zipper assembly, thread, and/or fabric.” Id. at *3. Plaintiffs attempted to provide $50,000 to Step Up Women's Network because class members were women who purchased jeans and that the defendant's “consumer demographic is mostly women.” Id. at *5.

The court rejected that cy pres distribution, finding that “[d]onating to a charity that 'focus[es] on helping and meeting the needs of women in our society' does not meet the underlying objectives of the consumer protection statutes, no matter how many times Plaintiff emphasizes the point.” Id. Specifically, “a cy pres award meets the objectives of the underlying statute when the cy pres recipient's mission and the statute's goals have a non-tenuous connection,” which was not the case with the cy pres payment to Step Up Women's Network. Id.

Similarly, the U.S. Court of Appeals for the Ninth Circuit vacated the approval of a class settlement in a false advertising case that would have distributed cy pres funds to feed the indigent because “[t]his noble goal … has 'little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved.'” Dennis v. Kellogg Co., 697 F.3d 858, 866 (9th Cir. 2012). Instead, “appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.” Id. at 867. The court also noted that leaving the specific charitable organization to be identified at a later date and approved by the court did not solve the problem. Indeed, failing to identify the cy pres recipients in the settlement “restricted [the court's] ability to undertake the searching inquiry that [Ninth Circuit] precedent requires.” Id.

Other courts similarly scrutinize the nexus between the cy pres recipient and the underlying litigation. See, e.g., Koby v. ARS National Services, Inc., 846 F.3d 1071, 1080 (9th Cir. 2017) (“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.”); Willcox v. Lloyds TSB Bank, PLC, 2017 WL 487018, at *3 (D. Haw. Feb. 6, 2017) (“Although both [the cy pres recipient] and the contracts at issue here relate to housing, the core of this case is about [the defendant's] lending practices, not low-income housing development,” the purpose of the cy pres recipient. Accordingly, the court rejected the request to distribute unclaimed funds to the cy pres recipient.); see also In re Google Inc. Cookie Placement Consumer Privacy Litigation, 2017 WL 446121 at *4 (approving a settlement agreement when the “proposed cy pres contributions to the proposed recipients [was] an effective and beneficial remedy that bears a substantial nexus to the interests of the Settlement Class.”).

Conclusion

Courts continue to apply greater scrutiny to cy pres provisions. In particular, courts are paying close attention to the percentage of settlement funds paid to class members and the nexus between any cy pres recipient and the underlying litigation. With those focuses in mind, there are a few practices that should be considered in this area.

First, if the agreement specifies a cy pres recipient, then litigants should be prepared to explain to the court the nexus between the cy pres recipient and the lawsuit, and should include such an explanation in the motion for class certification. And, in general, try to find a charity with a goal that focuses on the issue in the class action, rather than a broader charitable goal.

Second, avoid cy pres distributions that will be too large, or that may grow as claims administration proceeds. To the extent direct payments are impractical or infeasible, be prepared to outline the steps taken to attempt to pay the class members and why nonpayment could not be avoided. At the end of the day, help the court conduct the analysis it is now likely to perform when considering any cy pres provision included in a class action settlement agreement.

*****
Joshua L. Becker is a partner in Alston & Bird's Atlanta office and Brad Strickland is an associate in the firm's Washington, DC, office. They focus their practices on the defense of class action and mass tort litigation.