No circuit split on charity-only settlements: Facebook, Public Citizen

August 29, 2013

In 2011, after U.S. District Judge Richard Seeborg approved the $9.5 million settlement of a class action accusing Facebook of violating its users’ privacy through a since-dismantled program that disclosed their online purchases to their friends, the public interest group Public Citizen appealed Seeborg’s ruling to the 9th Circuit Court of Appeals. On behalf of an objecting class member, Public Citizen told the 9th Circuit that Facebook users were not slated to receive a penny in exchange for releasing claims that Facebook’s Beacon program violated their privacy rights. Instead, all of the money in the settlement that didn’t go to class counsel’s legal fees and expenses was to be directed to a new charity, the Digital Trust Foundation, with a two-person advisory board consisting of a Facebook representative and a plaintiffs lawyer from the case. Public Citizen took the position that charity-only payouts, otherwise known as cy pres settlements, are sometimes appropriate, but not when the lucky recipient of class members’ money doesn’t have the same interests as the class.

Public Citizen lost the appeal in September 2012. So you might think the public interest group would hop aboard a petition for Supreme Court review of the 9th Circuit ruling by class action watchdog Ted Frank of the Center for Class Action Fairness, who represents another objector. If so, you’d be wrong.

In a brief filed Thursday with the Supreme Court, Public Citizen said it was taking no position on whether the court should grant cert, though it said it agreed with the Center for Class Action Fairness that the Facebook Beacon settlement is fatally flawed. But the brief also undermined CCAF’s argument that there’s a split among the federal circuit on the standard for cy pres settlements. Public Citizen actually agreed with its former opponent Facebook, which filed its brief opposing cert on Tuesday: There is no meaningful difference, they both said, amongst the federal appeals courts that have issued recent rulings establishing standards for cy pres awards. So there is no reason for the Supreme Court to take up the issue.

“Recent decisions have moved strongly toward a consensus that settlements involving cy pres payments may be approved, but only when distributions to individual class members are impracticable or when class members to whom distributions are practicable have been fully compensated for their losses,” the Public Citizen brief said. “The (Beacon) decision below is an incorrect application of the law, including the precedents of the 9th Circuit itself, to the particular facts of this settlement. Ordinarily, however, this court does not review cases involving the erroneous application of law to specific facts or the failure of a court of appeals to follow its own precedents.”

CCAF had said cy pres rulings by the 1st, 3rd and 5th Circuits were at odds with the 9th Circuit’s decision in the Beacon case, as I previously reported. Facebook and Public Citizen said those ruling aren’t in conflict. Both the 1st and 3rd Circuits, they said, actually cited 9th Circuit precedent in their decisions. And all of the circuits have agreed that cy pres awards should only be permitted to charities that advance the causes at issue in the case and only when it’s impractical to make miniscule payments to class members or when there’s money left over after class members have had a chance to claim payouts. This widespread agreement, Facebook said, obviates any need for the Supreme Court to review charity-only settlements. (Even if the justices feel the need to weigh in on the broad question of cy pres and class actions, Facebook’s lawyers at Cooley and Munger, Tolles & Olson also said, this case is not the right vehicle for various procedural reasons, including objectors’ failure to challenge the use of cy pres in the lower courts.)

Frank told me in an email that it would be great if Facebook and Public Citizen were right and all of the federal circuits had a uniformly high bar for cy pres settlements. But that’s not reality, Frank said. “I’d sure have a much more leisurely Labor Day weekend if that claim were true,” he told me. “I’m busy working on an 8th Circuit brief due Tuesday where a St. Louis federal court awarded $2.7 million of a national security fraud settlement to a St. Louis charity as cy pres because the St. Louis judge and St. Louis class counsel thought they could use it more than ‘institutional investors’ in the class.”

Facebook and Public Citizen (and Frank’s co-counsel at Baker Hostetler, for that matter) make the kind of arguments you expect from sophisticated Supreme Court advocates who know how to pique or cool the justices’ curiosity. But the most tangible, real-world discussion of the risks and rewards of cy pres settlements actually comes from the cert opposition brief submitted by the plaintiffs lawyers who reached the Beacon settlement with Facebook. Scott Kamber of KamberLaw, Joseph Malley of the Office of Joseph H. Malley and David Parisi of Parisi & Havens, said that arguments against charity-only settlements presume there’s an inherent conflict between the interests of class members, who won’t receive any money, and class counsel, who are typically awarded fees even when the only payout is to a charity. (Plaintiffs lawyers in the Beacon case, for instance, were awarded $2.3 million.) That’s not true, according to class counsel’s brief. Plaintiffs lawyers get paid a share of the class recovery, so their interests are aligned with their clients’. They also have professional obligations to represent the class zealously, which they say they did in this case.

They also say that as a practical matter, if there were no cy pres device, some class actions would be “impossible” to settle, “especially where, as here, a direct monetary payment to the class is infeasible.”

Hmmm. Doesn’t the “impossibility” of settling cases worth so little to individual class members that it’s not even worth trying to distribute their payouts beg the question of whether such cases deserve to be litigated in the first place? I wrote earlier this week about the shortsightedness of class action defendants that agree not to police fee requests by class counsel. Charity-only settlements – even if they’re reached in good faith and without collusion – offer the same tacit invitation to more litigation against you. (I’m talking here about cy pres awards made instead of payouts to class members, not those involving leftover funds after class members have made their claims.) If defendants really want to end supposedly baseless litigation, maybe they should stop making cy pres deals, regardless of what the Supreme Court thinks of them.

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