By restricting charity deals, appeals courts improve class actions

January 12, 2015

I am sure that Legal Services of Eastern Missouri, which provides free help to low-income and elderly folks in and around St. Louis, could have done a lot of good with the $2.3 or so million it was designated to receive from the settlement fund in a long-running securities class action over the 1998 merger that created Bank of America. But if you believe in the long-term future of class actions, you should welcome an 8th U.S. Circuit Court of Appeals decision last week that said that Legal Services isn’t entitled to the money.

The $2.3 million was left over after onetime BankAmerica and NationsBank shareholders received two rounds of distributions from a $490 million settlement fund in the securities class action. In 2013, U.S. District Judge Carol Jackson ruled that the remaining money should go to a charity under the doctrine of “cy pres comme possible,” or, in translation from French, “as near as possible.” A cy pres award to Legal Services was more appropriate than a third round of payments to class members, the judge said, since all of the shareholders who had submitted claims had been paid in full and it would be too hard, after more than a decade of litigation, to identify onetime shareholders who hadn’t already asked for payments from the settlement fund.

A divided 8th Circuit panel disagreed. Cy pres payments are only permissible, wrote Judge James Loken for the majority, when additional payments to class members are infeasible and when their claims have been completely liquidated. (Judge Roger Wollman joined Loken in the majority; Judge Diana Murphy dissented.) The BofA merger case met neither condition, according to the 8th Circuit: Even class members who received all they were supposed to under the terms of the settlement haven’t been fully compensated for all of their conceivable injuries, and it’s clearly possible to run the claims process again. That may result in disproportionate payments to institutional investors willing to endure the annoyance of filing a third round of claims, the appeals court said. Nevertheless, the majority said, trial courts engage in “judicially impermissible misappropriation” when they conclude that sophisticated class members are less deserving than a charity.

The 8th Circuit, which also said that judges who approve cy pres arrangements have to pick charities that truly reflect the concerns of the class, joined several other federal appellate courts that have recently cracked down on payments to charities from class action settlement funds. As recently as five years ago, you’d often see judges approve settlements that directed money only to charities, not to individual class members, when defendants and plaintiffs’ lawyers said it would be economically infeasible to locate and compensate claimants. (Usually, these charity-only settlements came in class actions involving low-cost consumer purchases or small statutory penalties.) But since 2011, the 1st, 3rd, 5th, 7th and 9th Circuits have all restricted the practice of structuring settlements to give money to charities without exhausting every possibility of delivering the funds to class members.

Skepticism about cy pres deals reached the U.S. Supreme Court in 2013, when Chief Justice John Roberts wrote a rare statement accompanying the court’s decision not to review a Facebook class action settlement. The Supreme Court denied cert, Roberts said, because the Facebook settlement was too idiosyncratic to get at the court’s “fundamental concerns” about the use of cy pres payments to settle class actions. But Roberts warned that the Supreme Court still believes it “may need to clarify the limits on the use of such remedies … including when, if ever, such relief should be considered.” Roberts’ statement, according to Ted Frank of the Center for Class Action Fairness – which had asked for Supreme Court review of the Facebook case – put trial judges on notice that if they approve cy pres settlements, their decisions may end up under Supreme Court scrutiny.

The recent appellate distaste for cy pres settlements, especially in combination with tough new class certification precedent on determining class membership, has the obvious consequence of discouraging plaintiffs’ lawyers from bringing consumer class actions. So why do I believe the 8th Circuit and its fellow cy pres skeptics have actually been good for class actions?

Because their rulings have forced plaintiffs’ lawyers to come up with ways to identify who actually qualifies for damages in their cases. And ultimately, class actions are supposed to be vehicles for compensating people whose injuries aren’t big enough to prosecute individually. It will be a lot harder for class action critics to complain about abuses if plaintiffs’ lawyers and claims administrators deliver cash directly to class members without a cumbersome claims process in which few consumers even bother to participate.

As a case in point, consider what happened in In re Baby Products Antitrust Litigation, a class action over alleged price-fixing by Toys R Us, Babies R Us and several manufacturers of baby products. The suit settled in 2011 for $35.5 million. About $13 million was slated for attorneys’ fees and costs for class counsel from Hagens Berman Sobol Shapiro, Spector Roseman Kodroff & Willis and Wolf Haldenstein Adler Freeman & Herz. The rest was available to consumers who filed claims, but, as it turned out, those claims totaled less than $3 million. According to the final approval of the settlement, the remaining millions were to be awarded to an unspecified charity.

An objector represented by Ted Frank appealed to the 3rd Circuit, which held in 2013 that the trial judge hadn’t had a full picture of who would make claims and for how much. The appeals court vacated the settlement approval and fee award and remanded the case.

In the subsequent settlement agreement, plaintiffs’ lawyers used records from Babies R Us to identify consumers who bought the products at issue in the case. Rather than demanding that those purchasers take the trouble of filing a claim form (for which most of them would have received a grand total of $5 each), the amended deal delivers consumers a direct payment – no claim form required.

The total cash distribution to class members under the new settlement will be nearly $18 million, $15 million more than class members claimed in the original deal. (Frank’s Center for Class Action Fairness contends that it should be paid $1.4 million in fees for this startling improvement in the class’s direct benefit; class counsel dispute Frank’s fee request, in part because the total size of the settlement fund hasn’t changed.)

Frank told me that skepticism about cy pres deals, including resistance to lawyers’ fees based on payments to charities, is already prompting plaintiffs’ lawyers to look harder at records from shopper loyalty card programs and other retailer purchasing data to solve the mystery of class membership in low-dollar consumer cases. Those records don’t reveal everyone who bought products targeted in consumer class actions, as Frank has acknowledged. But delivering direct payments to consumers identified in purchase records, he said, leads to a much higher rate of compensation for class members than a claims process that relies on purchasers to file claims.

Even Steve Berman, one of the lead lawyers in the Baby Products case, agreed with that thesis. “More should be done in consumer cases to try to reach class members,” he told me in an email. His firm, he said, has tried to come up with creative ways to do it, including the use of Toyota sales records in litigation over their cars’ sudden acceleration and Medicare records to obtain class members’ addresses in litigation over the Average Wholesale Price index for pharmaceuticals. Berman said, however, that he continues to believe it’s better to give leftover money to charity instead of returning it to defendants. He also believes that class action lawyers should be paid based on how much the defendants pay out rather than how much class members receive.

(Reporting by Alison Frankel)

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