We posted not too long ago about a Seventh Circuit decision by Chief Judge Posner that we thought had favorable implications for reining in the steadily metastasizing concept of “cy pres” in class action litigation. That opinion, Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014), prohibited any sum that did not “benefit the class” from being included in the calculation of attorneys’ fees in a class action settlement. Although a cy pres award was not at issue in Redman, the implications (to us at least) seemed obvious. Funds not paid to class members do not benefit the class.
Judge Posner made that explicit last week in Pearson v. NBTY, Inc., ___ F.3d ___, 2014 WL 6466128 (7th Cir. Nov. 19, 2014). Indeed, he thought it was “obvious,” just like we did:
The [trial] judge excluded, however, both the cy pres award of $1.13 million in calculating the benefit to the class, for the obvious reason that the recipient of that award was not a member of the class, and the injunction, which he valued at zero, which was proper too.
Id. at *2. So, in the Seventh Circuit at least, it’s improper to use funds paid to non-class members via cy pres to calculate the fee that class action plaintiff lawyers are allowed to receive under the “common fund” doctrine.
And there’s more.
The cy pres award itself was overturned. Not only was the relationship of the would-be recipient to the class “hopelessly speculative,” but it was hardly “infeasible” to send that money to the members of the class, to whom it (supposedly) belonged. Instead of making the 4.72 million class members jump through all sorts of hoops to file a claim, each member could simply have been sent a chunk of that money:
The $1.13 million cy pres award to the [recipient] did not benefit the class, except insofar as armed with this additional money the foundation may contribute to the discovery of new treatments for [the underlying medical problem that the product in question purported to treat] − a hopelessly speculative proposition. . . . [T]here 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, here consisting of the class members. . . . [T]he claims process could have been simplified . . , [and the defendant] could have mailed  checks to all 4.72 million postcard recipients.
Pearson, 2014 WL 6466128, at *6. Cy pres can exist “only if it’s infeasible to provide that compensation to the victims − which has not been demonstrated” where numerous class members have been identified. Id.
Judge Posner’s reasoning in Pearson (1) reduces the incentive to use cy pres in the first place, because such awards can’t inflate attorneys’ fees, and (2) restricts when cy pres can be used to situations where its infeasible even to identify class members. If class members can be identified, then ipso facto, cy pres isn’t available, since the money can be divided among those members.
Of course, if it is actually infeasible even to identify the persons who are allegedly wronged by a defendant’s conduct, then the action should be dismissed at the outset.
While we would prefer to abolish cy pres altogether as ultra vires − and are supporting efforts to do just that − Pearson is a big step in the right direction.
We thank Ted Frank of the Center for Class Action Fairness, who won Pearson, for passing it along to us.