Nothing emphasizes the impermanence of just about everything as Hawaii – where Bexis is right now on vacation. On Kauai, Bexis had a boat drop scheduled to Kalalalu Beach, for three days on the Kalalau Trail, all permits obtained. But several months ago, the heavens opened, and the Na Pali Coast received over an inch of rain an hour for more than a day. A large number of avalanches, floods, and sinkholes ensued. The road washed out in numerous places, as (more importantly) did people’s homes – so the best trail in Kauai is closed indefinitely.
That’s not even the worst of it. At least there are plans (on Hawaiian time) to reopen both the road and the trail. But our favorite resort on the Big Island has been closed for several years. The Kona Village Resort was damaged by the same 2011 tsunami caused all that horrible destruction in Japan. For almost a decade, it has been abandoned on the shore at Kaupulehu tied up in layers of debt and litigation. Although now there’s a rumor that it might reopen in 2019 – we’ve seen those before, so we’ll believe it when we see it.
But even that’s not the worst of it. Our last trip to the Big Island, we swam in some lovely naturally heated tide pools. We won’t be able to do that again. They’re now covered by hundreds of feet of lava from the “Fissure 8” eruption that started on May 2, 2018. In a geologically active area such as Hawaii, even the land itself is impermanent.
Impermanence is also a legal phenomenon. Long-time readers of the blog may recall a series of posts from the Mark Herrmann era describing how the two of us fought an ultimately losing battle during the American Law Institute’s Aggregate Litigation Principles Project to keep the ALI from endorsing the practice of “cy pres.” Not-so-long-time readers might be wondering, “what the heck is that?” Here’s our description of cy pres from an earlier post:
For those of you new to all this, “cy pres” is the name given to schemes – virtually exclusively in class actions – whereby courts take money supposedly belonging to class members that class counsel can’t or won’t (due to expense) identify and give it to non-class members (mostly charities) who were not damaged in any way by the claimed conduct of the defendants. We know of no legal power invested in the judiciary to take money away from supposedly injured litigants and give it to persons who are essentially bystanders. There are methods of doing this. When done privately, it’s called “theft.” Publicly, it would involve the powers to tax, appropriate, and levy fines, which belong to branches of government other than the judiciary. We further believe that use of cy pres to facilitate class actions violates the Rules Enabling Act, since procedural rules (such as Rule 23) can’t change the substantive law. There’s not much more “substantive” than taking money supposedly belonging to injured litigants and giving it to non-parties.
The result was Principles of Aggregate Litigation §3.07 (ALI 2010), entitled “Cy Pres Settlements,” which seemed to enshrine into black-letter law the doctrine that it’s OK to give away purported class members’ money to whatever charity the judge and the lawyers decide to favor.
We kept up a rear-guard battle against cy pres, however, helping draft a proposal for Lawyers for Civil Justice to amend Fed. R. Civ. P. 23 to abolish cy pres. That was a long shot, since the very judges whose power cy pres augmented would have to approve such a change. Also, were heartened by Chief Justice Roberts’ concurring opinion in Marek v. Lane, 134 S.Ct. 8 (2013), suggesting that the Supreme Court might also have concerns about this peculiar institution.
Then, last May, the Supreme Court granted certiorari in a case we had previously described as a “poster child” for cy pres abuse. In re Google Referrer Header Privacy Litigation, 869 F.3d 737 (9th Cir. 2017). This appeal, now called Frank v. Gaos, No. 17-961, 138 S. Ct. 169 (April 30, 2018), features just about everything we don’t like about cy pres:
- Excessive counsel fees – class counsel stands to walk away with fully 38% of the settlement as fees. 869 F.3d at 747.
- Lack of classwide recovery – the court declared the entire settlement “non-distributable” because, even without opposition, neither the class members nor their damages could be determined. Id. at 742.
- Excessive cy pres – nothing is more excessive than 100% − six uninjured charities took 100% of what class counsel left behind, and the 129 million supposedly injured class members took nothing. Id. at 743.
- Rampant conflict of interest − Three of the charities were law schools – and they all had ties to counsel in the case.
- Litigation industry self-perpetuation – cy pres recipients were expected solicit more lawsuits by “educat[ing]” the public and “publiciz[ing]” privacy issues. Id. at 746-47.
By now, with briefing completed, we thought we’d take a look at the arguments that are being made to the Supreme Court in opposition to the use of cy pres class action settlements.
First and foremost is the petitioner’s brief, filed by friend-of-the-blog Ted Frank. As we expected, he pulls no punches about the impropriety of a procedure that we’ve said amounts to judicially sanctioned theft. The brief starts off by describing cy pres as “one of the most notorious devices used to create the illusion of compensation.” Id. at 2. “All the money went to class counsel and to favored nonprofit organizations affiliated with class counsel and the defendant.” Id. Petitioner seeks (pp. 15-16) five cy pres-related holdings from the Court:
A settlement that compromises a class’s claims, but seeks to pay class counsel an amount disproportionate with the actual and direct benefit to the class, is not fair or reasonable under Rule 23(e).
Here, the fundamental fact of Due Process is, that “settlement-fund proceeds, having been generated by the value of the class members’ claims, belong solely to the class members.” Neither courts nor counsel can “divert that property to third parties.” Id. at 17.
All that courts need to accomplish this result is to apply a simple principle to the Rule 23 fairness hearing: regardless of whether a settlement is “adequate,” it is not fair or reasonable if the settlement pays attorneys’ fees that are disproportionate to the actual and direct benefit realized by the class compromising its claims.
Id. at 21. Cy pres provisions are a means to “structure the deal to obfuscate the true [a]llocation . . . by larding the [settlement] analysis with hypothetical class recoveries and amorphous ‘benefits’ that ultimately have little value to the class.” Id. at 23.
First, basing a fee award solely on the “size of the cy pres fund” allows “class attorneys . . . to reap exorbitant fees regardless of whether the absent class members are adequately compensated.” Id. at 28. Second, cy pres is “an enticing settlement feature for lawyers interested in promoting their own personal political or charitable preferences.” Id. at 29. The brief contains several examples of such conduct. Id. at 29-30. Second, with “no resistance from class attorneys,” defendants can even use cy to “benefit themselves” by directing funds to their preferred charities. Id. at 30. Again, several concrete examples are discussed. Id. at 30-33. Third, cy pres awards to non-parties “fail to redress class members’ alleged injuries for which they are waiving their rights.” Id. at 33. Here, another of our primary gripes comes into play. “Rule 23 cannot operate to ‘abridge, enlarge or modify any substantive right,’” id., but altering who owns what is as “substantive” an application as we can think of. More examples. Id. at 33-35. Fourth, cy pres “permit[s] otherwise unthinkable class certifications” and “induce[s] plaintiffs to pursue doubtful class claims” because they can settle without proving causation or damages. Id. at 35.
[C]y pres incentivizes both the bringing of otherwise unprofitable “strike suits” that would be infeasible to litigate due to unmanageability or questionable merit and their settlement on terms mutually agreeable to class counsel and the defendant.
Id. A “class action that yields fees for class counsel and nothing for the class − is no better than a racket.” Id. at 36 (quoting In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 724 (7th Cir. 2016)). Fifth, cy pres results in subsidizing the “political . . . preferences of class counsel or the defendant without regard to the views of “a substantial proportion, or even a majority, of class members.
Requiring class members to surrender their rights to subsidize speech by a third party that he or she does not wish to support raises serious First Amendment concerns.
Id. at 36. If a union can’t even collect dues from its own members because of their First Amendment rights, see Janus v. AFSME, Council 31, 138 S. Ct. 2448, 2478 (2018) (“draw[ing] the line at . . .requir[ing] all employees to support the union irrespective of whether they share its views”), how can a court impose a charitable donation on unknown class members? Sixth, cy pres “often create the appearance or reality of judicial conflicts of interest.” Id. at 37. “[A]n open-ended cy pres doctrine is fundamentally incompatible with the judicial role” of “providing relief to claimants . . . who have suffered, or will imminently suffer, actual harm.” Id. at 38.
Petitioner also argues that all-cy-pres settlements simply cannot be approved under Rule 23:
Any settlement, like this one, that provides no direct benefit to the class, cannot be approved. “Because the settlement yields fees for class counsel and zero benefits for the class, the class should not have been certified and the settlement should not have been approved.”
Id. at 39 (quoting In re Subway Footlong Sandwich Marketing Litigation, 869 F.3d 551, 557 (7th Cir. 2017)). We would go further, since we don’t think any cy pres settlements should be approved. Indeed, the existence of a cy pres component is an admission that, even with no legal opposition, plaintiffs are unable to prove causation or damages. Such suits should not be brought. We have criminal prosecutors and other governmental entities to handle such cases. “[N]early every consumer class-action settlement leaves over 90%, and often over 99%, of the class uncompensated.” Id. at 45. We don’t need civil lawyers who are perversely incentivized through cy pres to do as little work as they can possibly get away with.
Cy pres awards are inappropriate in class-action settlements where it is feasible to distribute settlement proceeds to class members. Whether it is feasible to distribute settlement proceeds is determined by whether such relief can be distributed to some identifiable class members . . . and not whether the proceeds could be distributed to every potential class member.
Plaintiffs, who have resolutely opposed any ascertainability prerequisite to class certification, do a backflip when it comes to cy pres and settlement. “Under the standard set by the Ninth Circuit, it is not considered ‘feasible’ to provide any compensation to class members when it would be infeasible to compensate all of them.” Petitioner’s br. at 49 (emphasis original). This is using ascertainability to prevent compensation of class members. “[I]t is nearly always feasible to distribute settlement funds to some class members.” Id. at 50 (emphasis original). “[C]y pres distribution when distribution to some of the class is possible is ‘contrary to the interests’ of the class.” Id. at 51 (quoting In re BankAmerica Corp. Securities Litigation, 775 F.3d 1060, 1068 (8th Cir. 2015)). Using cy pres to take money from any class members when some are identifiable thus violates class counsel’s “fiduciary duty to class members.” Id. at 50-51.
If a class-action settlement cannot provide direct relief to the class, the settlement class cannot be certified.
Again, we agree, even though we might go further. If “it is somehow impossible to make any distribution to the class, that simply suggests that it was error to certify this settlement class.” Petitioner’s br. at 52.
In short, the class action is not “superior to other available methods for fairly and efficiently adjudicating the controversy” because every single class member is worse off than if they opted out and reserved their claims to litigate individually.
Id. at 53. That’s what a zero-dollar settlement like this one means. Class members are giving up something and not getting anything.
If cy pres is to be permitted at all, there should be strict restrictions against the payment of money to recipients with any significant current or prior relationship with the parties, attorneys, or judge.
In particular, this argument rejects “distribution of cy pres funds to class counsel’s alma mater instead of the class.” Petitioner’s br. at 54. This is just another questionable practice enabled by the creation of a “remedy” that is outside of both the law and the rules, and thus essentially ungoverned.
The better rule is to require settling parties to have the burden to demonstrate that neither the court nor any “party has any significant prior affiliation with the intended recipient that would raise substantial questions about whether the selection of the recipient was made on the merits.”
Id. at 55-56 (quoting – ironically – Principles of Aggregate Litigation §3.07, comment b). Once again, bright line, prophylactic rules are best. The potential for conflict of interest is simply too great to allow any cy pres award to an entity with ties to the litigants or to the court.
At a minimum, courts should substantially discount cy pres distributions relative to direct payments to class members for purposes of calculating attorneys’ fees based on a percentage of the recovery.
In one paragraph, petitioner’s final argument is that the “indirect and attenuated” – if any – value of a cy pres settlement to any class member requires that such payments “should at least be heavily discounted in the fee calculation to better align incentives.” Petitioner’s br. at 56-57.
If even a quarter of these arguments succeed, then cy pres distributions of class action settlements will – quite rightly in our view – be cast into the proverbial dustbin of history. Perhaps Congress, or a state legislature for a state class action, could create such a remedy, but they haven’t. Our bottom line is that no authority currently exists to allow courts, with or without the connivance of counsel, to take money belonging to certain persons (here, absent class members) and give that money to other persons (here, lawyer-selected charities) without the express approval of the original owners.
As one might expect, the Frank case also produced a bunch of interesting amicus briefs. Since we spent much longer than we had expected on Ted’s brief, our rundown of the objector-side amici will be significantly briefer – but we’re providing links so anyone interested can read them in their entirety.
Of greatest interest, of course, is the position taken by the government itself – as to which we find a lot to like:
The cy pres question need not be reached because Spokeo casts substantial doubt on whether the class representatives suffered sufficiently significant injury to confer Article III standing. Brief at 11-15.
Cy pres as used in the trust area is irreconcilable with its use in class-action settlements. Id. at 16-17.
Cy pres raises serious concerns where class members receive no compensation. Id. at 18.
Cy pres raises serious concerns about collusion against the interests of absent class members. Id. at 19-20.
Cy pres raises serious concerns about conflicts of interest by counsel and even courts. Id. at 20.
Cy pres raises serious concerns about the creation of new, extra-statutory remedies. Id. at 20-21.
Cy pres is improper unless it redresses the specific injuries of the plaintiff class. Id. at 22-26.
Cy pres is improper when there is any non-arbitrary way of distribution to class members. Id. at 26-28.
Cy pres distributions should be discounted, ideally entirely, in calculating attorneys’ fees. Id. at 28-32.
In a nutshell, here are the highlights of other important amicus curiae briefs in Frank v. Gaos:
State Attorneys General – eighteen of them
Cy pres in consumer class actions diverts money away from injured consumers, aggravating the original problems, and should not be recognized. Brief at 4-8.
Cy pres settlements circumvent statutory and judicial class action standards in violation of the Rules Enabling Act. Id. at 8-11.
Once again, the Ninth Circuit is out of line. Id. at 11-13.
Cy pres-only settlements should be per se invalid. Id. at 13-16.
Cy pres awards should be disregarded in the calculation of attorneys’ fees. Id. at 16-20.
If class actions were better policed at the front end, by denying class certification to no-injury class actions in the first place, the problems with cy pres settlements would never have arisen. Brief at 5-11.
Cy pres settlements would not be needed if courts properly enforced Rule 23’s commonality and predominance requirements. Id. at 11-13.
Injury should not be presumed for purposes of class certification. Id. at 14-15.
Cy pres settlements are symptomatic of meritless, but expensive, class action litigation. Id. at 16-18.
Conflicts between class counsel and absent class members are inherent in cy pres settlements. Id. at 18-22.
If allowed at all, cy pres settlements should be strictly regulated. Id. at 22-26.
Cy pres awards are inherently inconsistent with Rule 23’s requirement that settlements be “fair, reasonable, and adequate.” Brief at 9-10.
Cy pres, as it previously existed in non-adversarial trust law, has nothing to do with adversary class actions. Id. at 11-14.
Cy pres is an improper exercise of judicial power under Article III of the constitution. Id. at 14-18;
Cy pres violates the Rules Enabling Act by permitting fines against defendants not recognized by substantive law. Id. at 18-20.
If otherwise permitted, cy would violate the Due Process rights of absent class members. Id. at 20-21.
Compelling diverse class members to finance speech by either plaintiff-side or defendant-side advocacy groups violates the First Amendment. Id. at 21-22.
The existence of a cy pres award indicates that the action itself cannot support class certification. Id. at 23-24.
Cy pres violates the Due Process and First Amendment rights of absent class members whose property is being taken and given to charities for the purpose of plaintiff-side advocacy. Brief at 4-7.
Constitutional rights could be better protected by requiring opt-in class actions. Id. at 8-10.
Cy pres inevitably leads to self-dealing and violation of professional ethics by class counsel. Id. at 12-15.
Class counsel use cy pres to increase personal gain at the expense of absent class members. Id. at 16-18.
Defendants utilize cy pres to lower settlement costs. Id. at 18-19.
Cy pres erodes judicial neutrality through conflicts of interest in selecting recipients. Id. at 19-20.
Zero dollar class actions cannot be “superior” to anything. Id. at 21-22.
There are always better alternatives to cy pres awards. Id. at 22-24.
Cy pres is a disguise for parties and courts to lobby for special benefits. Id. at 24-25.
Once again, the Ninth Circuit is out of line. Id. at 25-29.
Compelling diverse class members to finance speech by either plaintiff-side or defendant-side advocacy groups violates the First Amendment. Id. at 29-34.
Unlike cy pres in the trust area, which is legislatively recognized, cy pres in the class action context is not based on any recognized grant of power. Brief at 7-13.
Cy pres violates the Rules Enabling Act by modifying substantive legal remedies. Id. at 14-15.
Payments to charities are not a remedy recognized by substantive law. Id. at 16-21.
Cy pres is only allowable where recognized by substantive law. Id. at 21-23.
A class action that cannot deliver any relief to class members does not present an Article III “case or controversy.” Brief at 4-6.
Compelling diverse class members to finance speech by either plaintiff-side or defendant-side advocacy groups violates the First Amendment. Id. at 6-8.
Compelling diverse class members to finance speech by either plaintiff-side or defendant-side advocacy groups violates the First Amendment. Brief at 3-6.
Opt-out class actions violate the First Amendment. Id. at 6-10.
Cy pres converts Rule 23 class actions into a substantive remedial scheme. Brief at 2-8.
An all-cy pres settlement cannot be “superior” under Rule 23 standards. Id. at 9-16.
There are a couple of other briefs filed by persons with more narrow interests related to copyrights or internet privacy that we don’t think would be of sufficient interest to our members to bother with.
Finally, in accordance with the parties’ agreed-upon schedule, that appears to have been adopted by the Court, the pro-cy pres forces won’t start filing their briefs until the end of August. With that schedule, it is quite possible that oral argument will occur before the end of the year.