Class action activist asks SCOTUS to review charity-only settlements

July 29, 2013

The doctrine of cy pres – from the French for ‘cy pres comme possible,’ or ‘as near as possible’ – may have originated in trust law, but it has had its full flowering in class actions. Both defendants and plaintiffs lawyers have good reasons to resolve cases involving potentially large numbers of claimants with minuscule damages by directing money to charity instead of tracking down class members. Cy pres settlements wipe cases off the docket, which is good for defendants. And they generate fee awards, which is good for the class action bar. Class actions are, of course, overseen by federal judges, and the practice of naming a particular judge’s favorite charity as the recipient of cy pres funds in order to boost the odds of court approval has fallen into disrepute. Nevertheless, it’s the rare cy pres settlement that is rejected. Judges may ask for money to go to a different charity or may restrict attorneys’ fees, but courts usually conclude that there’s a benefit to class members in supporting charity rather than risking a trial of their claims.

Ted Frank of the Center for Class Action Fairness is not so sure. On Friday, Frank and lawyers from Baker Hostetler filed a petition for a writ of certiorari at the U.S. Supreme Court, asking the justices to review the 9th Circuit Court of Appeals’ approval of a $9.5 million settlement of class action allegations that Facebook’s now-dismantled “Beacon” program violated users’ privacy by revealing their online purchases. More than $6 million of that money was directed to the establishment of a new Internet privacy foundation with an advisory board that includes a Facebook representative and a plaintiffs’ lawyer from the case. Class counsel were also awarded $2.3 million in fees. Class members, meanwhile, received no direct compensation at all from the settlement. The new cert petition contends that the 9th Circuit’s split ruling in the case conflicts with cy pres decisions from the 2nd, 3rd, 5th, 7th and 8th Circuits.

“If allowed to stand, the circuit split created by the 9th Circuit’s decision creates an enormous incentive for forum-shopping by plaintiffs’ attorneys seeking to sue and settle nationwide class actions like this one,” the petition said. “Bringing suit within the 9th Circuit’s footprint now guarantees that minor things like compensating class members for their injuries, holding defendants liable to the extent the law allows, and preventing defendants from injuring class members in the exact same manner will not stand in the way of reaching a quick settlement to the mutual benefit of defendants and class counsel, at the expense of class counsel’s putative clients. The court should grant certiorari to resolve this circuit conflict, provide guidance to the lower courts on the use of cy pres awards, and correct a serious abuse of the class action mechanism that puts the interests of those it is intended to benefit, class members, dead last.”

There’s a heavy dose of polemic in that paragraph, but it’s indisputable that other federal circuits have recently expressed doubts about the cy pres mechanism. In Klier v. Elf Atochem, the 5th Circuit ruled in 2011 that unclaimed funds from a toxic exposure class action should have been disbursed to members of a subclass rather than given to charity. In April 2012, the 1st Circuit held in In re Lupron that cy pres distributions must “reasonably approximate the interests of class members,” though it found that the giveaway of unclaimed funds from the Lupron sales and marketing case met that standard. A few months after the Lupron ruling, the 3rd Circuit found in In re Baby Products Antitrust Litigation that cy pres distributions are constitutional but present a potential conflict of interest between class counsel and their clients because the lawyers get paid regardless of where the money goes. Courts, according to the 3rd Circuit, must evaluate “whether the settlement provides sufficient direct benefit to the class.”

Even in the Facebook Beacon case (which is different from the similar “Sponsored Stories” class action, in which a $10 million cy pres settlement was rejected by U.S. District Judge Richard Seeborg, who had previously approved the Beacon deal), 9th Circuit Judge Andrew Kleinfeld said in a dissenting opinion that his colleagues in the majority had failed to exercise adequate judicial oversight. “The majority approves ratification of a class action settlement in which class members get no compensation at all,” Kleinfeld wrote. “They do not get one cent. They do not get even an injunction against Facebook doing exactly the same thing to them again. Their purported lawyers get millions of dollars. Facebook gets a bar against any claims any of them might make for breach of their privacy rights. The most we could say for the cy pres award is that in exchange for giving up any claims they may have, the exposed Facebook users get the satisfaction of contributing to a charity to be funded by Facebook, partially controlled by Facebook, and advised by a legal team consisting of Facebook’s counsel and their own purported counsel whom they did not hire and have never met.”

Kleinfeld’s strong dissent helped persuade Frank and the Center for Class Action Fairness that the Facebook Beacon case was a good candidate for Supreme Court review of cy pres. Frank, who litigated the In re Baby Products case at the 3rd Circuit and has written and spoken for years about what he considers the dangerous conflicts inherent in cy pres settlements, wasn’t involved in the Facebook Beacon appeal at the 9th Circuit. According to Frank, after the entire appellate court declined to take the Beacon objectors’ case en banc, he asked objectors’ counsel from Public Citizen if they were going to file a cert petition and, if so, if he could help. “They didn’t get back to us with interest,” he said. So Frank spoke to John W. Davis of the Law Office of John W. Davis, who represented a second group of objectors. Davis’s clients agreed to proceed.

“This issue has been percolating, and we’ve been looking for an opportunity to clarify the law,” Frank said, “This was such a delicious case – so obviously a bad settlement.”

Frank said he’s actively seeking amicus support for his Supreme Court bid from public interest groups along the political spectrum. He’d still like Public Citizen to get involved, and he’s hoping the U.S. Chamber of Commerce won’t feel conflicted because corporate defendants benefit from settling cases through cy pres deals. The Cato Institute, Frank said, has already expressed interest in the Supreme Court appeal.

“This is not an ideological split,” he said. “We’re just saying class actions were not intended to be a free-floating, private AG thing.”

I left a message for Scott Nelson of Public Citizen but didn’t hear back. Class counsel Scott Kamber of Kamber Law and David Parisi of Parisi & Havens also didn’t return my calls. Facebook counsel Michael Rhodes of Cooley referred my call to a company representative who declined to comment.

(This post has been corrected. A previous version incorrectly reported that the Internet privacy foundation established in the settlement is overseen by Facebook.)

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